Quote:
Originally Posted by Libertine
Near future = 1-3 years.
If there's no full recovery by that time, achieving decent growth in 10 years will be pretty hard. Basically, you'd have been better off just saving the money (calculating in risk).
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I think your points are fine ones. Every business decision has positives and negatives and we all assess the probability of the risks differently.
IMO, the whole point of buying a business so cheap is to protect yourself against such risks and misjudgments. In the example I gave at the beginning of the thread the sum of the discounted cash flows gives you a value more than 4x greater than the current price. If you assume that same company makes 10% less money in each of the next 3 years than it did in the prior year and say the company ends up 10 years from now with a Price to cash flow of 15 (conservative unless T bills rise above 6.5%) you are still going to get a 9% per year return. Maybe instead you end up at PCF of 20 and you would get a 13% average annual return. Both fine returns.
To me, the market prices of many public companies are far below underlying value. I compare it to this. Say there is a busy convenience store in your neighborhood that averages $100k per year profit. The company is for sale at $300k. Now that might be a fine price but there are probably other better options for sale. So you pass. Now say a year goes by and it becomes obvious that a recession is coming. The price is lowered to $200k. Still you pass. Another week goes by and suddenly the owner is selling the store for (PANIC!!!) $100k. One year's average profit! I figure, hell, it's going to be a tough year. Maybe even 2 tough years. But eventually the business will return to normal and I will be earning the price paid every year on profit. Great deal. now some might argue that maybe he will lower the price even further. Maybe you can get it for $85k in another few weeks. I don't know about that. the one year's profit looks pretty good to me. I'd take it. Of course in the stock market the multiples are different than they are for private companies. Instead of multiples of 2 and 3 year's earnings we are dealing with - in ordinary times - 15-20x earnings.