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Re: Valuation
> Does anybody have any thoughts on valuation?
> If you look at stocks, how do you personally > choose to determine value? If you look at > property investments, how do you determine > value? What is value? How do you value more > unusual things like contracts and deals? Hi Thomas, Here's the view I use.... The value of a business is determined by the estimated cash flows expected to occur over the life time of a business, discounted at an appropriate interest rate. - The Warren Buffett Way, by Robert Hagstrom, Jr., p. 264. Here's what it means in English, at least in a very simple example.... Let's say that I own a business which makes me $1000 a year in profit, like clockwork. Let's say, for the sake of our calculation, that the "life-time" of that business is 10 years. And to make it super-simple, let's say that there's no inflation and also no growth. Then, according to the above quote, the "worth" of the business is 10 x $1000 = $10,000. (10 years is the "life-time" of the business, multiplied by the "estimated cash flows" which here I've taken as the yearly profit. There's no discount since I've assumed no inflation, and I've also assumed no growth) Of course, in reality there are other investments you can put your money it, and there is inflation to take into account too. These would actually reduce the value of the business. Thomas, I know you have thought about this deeply.... It would be great if you'd share your insights. :) Cheers, Dien |
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