A Story Selling Gum

Joel Greenblatt

I find this very useful as a general approach in stock investing.

Excerpt from Joel Greenblatt lecture

A Story Selling Gum

I started in business school 25 years ago. What I know about investing other than reading financial statements, I learned on my own reading and making mistakes. Hopefully, I can give you the benefit of my experience.

A number of years ago, I was trying to explain to my son what I did for a living. He is 11 years old. I spoke about selling gum.

Jason, a boy in my son’s class, sold gum each day at school. He would buy a pack of gum for 25 cents and he would sell sticks of gum for 25 cents each. He sells 4 packs a day, 5 days a week, 36 weeks or about $4,000 a year.

What if Jason offered to sell you half the business today? What would you pay?

My son replied, "Well, he may only sell three packs a day so he would make $3000 a year."

Would you pay $1,500 now? Why would I do that if I have to wait several years for the $1,500?

Would you pay a $1? Yes, of course! But not $1,500. I would pay $450 now to collect $1,500 over the next few years, which would be fair.

"Now, you understand what I do for a living," I told my son.

I sit around trying to figure out what businesses are worth, and then I try to pay a lot less for them. I think you get the point.