VALUE: After Hours (S08 E01): How Value Investors Use Intrinsic Value Without Predicting the Future

During their recent episode, Taylor, Carlisle, and Gary Mishuris discussed How Value Investors Use Intrinsic Value Without Predicting the Future. Here’s an excerpt from the episode:

Gary: And as far as self-driving, I think, look, it’s a risk, but it’s in that same category where, sure, self-driving, if it’s successful, reduces vehicle utilization, so presumably it decreases number of– the car park shrinks, presumably, I imagine. But again, in the next 10, 15 years, maybe it starts to kick in towards the second part of that range, but again, if you’re buying an investment with a big enough margin of safety, I don’t think you have to answer those kind of tough questions because let’s be honest, what do I know about EVs or self-driving that you or anyone else doesn’t?

Tobias: Yeah, it’s a question. It’s an interesting question, but I like the way you frame that. If you’re paying six times, you don’t need to think out much more than six or so years into the future because you get your money back in the short term.

Gary: This is like a mental model that really hit me over the head probably—So, I’ve been doing this for 25 years. About 10 years into this, I had this realization which is kind of shouldn’t be. It’s like an embarrassing realization because it’s like, “Well, Gary, why didn’t you realize this day one?” But the realization was the price asks the question. I teach a value seminar at Babson, and I always– I go through this example with them and I say, “Look, okay, you have a company, it’s been earning a dollar a share giving you a quarterly dividend of 25 cents. Okay. Let’s say the stock is at 25 cents. What is the question the price is asking?” And a lot of times, students are like, “What do you mean? What kind of question? The price isn’t asking. It’s silent, just a number,” but the price is asking, basically, will this company survive long enough to pay one more dividend?

Now, you bump the price up to a dollar. Well, it’s saying, “Well, we’ll survive for a year.” You bump it up to $10. Now, the price is asking. Maybe something like, “Will this business ever grow again 10 times earnings?” If the company grows, it probably should be worth more than that. And now, you bump it up to $20, now it’s asking, “Will this company grow double digits for five to ten years?” So, at each level, the question the price is asking is very different, but the company hasn’t changed, same company, but the question being asked of you as an investor changes quite a bit.

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VALUE: After Hours (S08 E01): How Value Investors Use Intrinsic Value Without Predicting the Future

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