Let us do a mathematical experiment here. A company earns $10 per share and out of that, pays a dividend of $8 per share. If one were to apply a 20 times multiple in the dividend stream going forward , the value of the dividends in perpetuity is $160. So we could make the argument here that the company is worth at least $160 if the dividend stream is fairly consistent. The $2 per share in retained earnings could lead to some real growth in the future. So if an investor decides to pay $100 per share for that company, that would be considered a good buy from an investor's stand point. (more…)
"All that glisters is not gold; Often have you heard that told: Many a man his life has sold But my outside to behold: Gilded tombs do worms enfold Had you been as wise as bold, Your in limbs, in judgment old, Your answer had not been in'scroll'd Fare you well: your suit is cold.' Cold, indeed, and labour lost: Then, farewell, heat and welcome, frost!"
I had to do this.
A quote from William Shakespeare. About how all that glitters is not gold. Or what seems to be gold on the outside may not be gold on the inside and what seems to be gold on the inside may not be readily apparent to others on the outside. The depth of this man's wisdom is timeless and such is William Shakespeare, a man remembered for his profound literary works.
This idea that not all glitters is gold can also be applied to sensible investing. The glamour stocks of today will be the down trodden of tomorrow due to the reversion to mean, a mental model borrowed from statistics.
I would have to say that in a small subset of glamour stocks, the above may not hold true. Some glamour stocks continue to be glamour stocks because of the strong moat which they posess. And this is the realm of Warren Buffet and Charles Munger. From my experience, it is very difficult to spot such opportunities. And even when you find a company that is moat-worthy , how does one determine the price to pay for such a company? That is absolutely the reason why Warren Buffet mentioned that to be successful in investing, one need only find 20 such companies in a single lifetime and sit on it. Personally, i have not reached that utopian situation. I am still working on it. But I have developed my own mental models to deal with this issue but that is beyond the scope of this article for now.