Interview with Professor Glen Arnold – Part 3 This is part 3 of a 5 part series. Read part 1, part 2, part 4, part 5. You can watch the video here: https://youtu.be/5vQDutu4PEo Professor Glen Arnold: Yes Read more…
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 investors are exposed to risk when investing in any form of asset class, be it equities, bonds or property. Risk is not this unknowable, esotheric concept that so many amongst us fail to recognise. Risk, according to Warren Buffet, really is defined as the probability of a permanent loss of capital. And taking a lesson from the world's greatest investor, I would think it unwise to define risk in any another manner. Perhaps, an example at this point would suffice to drive home a message on risk.
Company A & Company B
Let us focus on a thought experiment for a moment here. There are 2 companies, Company A and Company B. Company A has little to no debt . Company B however is a highly indebted company with a debt to equity value of more than 200%, decreasing revenue and operating income as a ratio to interest expense has deteriorated in the last couple of years . Company A has a price to book value of 0.7 while Company B has a price to book value of approximately 0.6 as well.
Would you buy Company A or B at this point? Now, bear in mind that Company B gives dividends while Company A also gives dividends. So which company would you buy? So on a dividend basis, let's take it that both companies differ only slightly and these differences are negligible. Since this is a thought experiment, let us simplify things that way.
Disney's Amazing Purchase
I find it hard to fathom that an idea in someone's mind could blossom into a business empire spanning more than 4 decades. That idea of a quirky universe filled with 17000 characters and a few thousand planets was borne out of the legendary film maker's mind, George Lucas. Like Harry Porter, its success would be considered by any means a positive black swan.
George Lucas's Big Bet
At a point in time when movie executives did not believe in the power of the franchise and its characters, George Lucas took a bet, and a big one at that . In 1973, instead of a pay raise offered to him, he opted to receive $50,000 and all the rights to all the sequels of star wars plus all the rights to the merchandising.
What fascinates me about George Lucas was that he wasn't in it for the money. He was thinking about protecting the creative integrity of his project from what I believe. As I read these articles about George Lucas, it sure reminds me of the "why" that one should stay true to himself and not be a follower merely another has attained success in a particular way. Those values sure do speak to me as a person, as an investor.
Back to George Lucas. Those decisions made a huge dent to his life. As the franchise of star wars grew exponentially, so did the sale of merchandise, earning George Lucas hundreds of millions of dollars. The moral of this short story so far is thus this : Stay true to yourself and express yourself honestly.