## Review of Seminar – Session 3

Nov 5th, 2005 by Martin Lee

Ok. Lunch was much, much better than tea break. At least it was provided. :)

I managed to eat my appetizer of salad and soup, main course inclusive of some seafood and oysters, and dessert of some fruits and pastries. With an extremely full stomach, I proceeded back to the seminar…

Session 3 started with a question, “How much would you pay for a machine that paid you $1 per year for 10 years?” There were different answers from the participants and most answers were within reasonable limits.

Other than using gut feel, this question is actually a simple financial mathematics problem involving the calculation of the present value of a series of cash flows. If you use a reasonable number for the interest rate, you should get a reasonable answer.

In the graph below, the straight line shows the value of a business while the curly lines shows the market value of the same business. What does this tell you?

“When you invest in stocks, always treat them as businesses. Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it.” Are you an investor or a speculator?

We were then taught Benjamin Graham’s simple formula for calculating the intrinsic value of a stock.

IV = Current Earnings x (8.5 + twice the annual earnings growth rate)

We were shown Robert’s own formula which was slightly modified to take into account the percentage. It didn’t made any sense to me but the calculations worked out fine with his formula. I suspect the Ben’s formula that he gave us wasn’t stated in the original form. Guess I will have to look it up in his book.

Now came to the much awaited part of the seminar. We were given some data and were asked to value a company . The person who got closest to the answer (the price that Warren actually paid) without going over would win a pair of tickets to the next Berkshire annual general meeting. There would even be a visit to one of the companies hosted by Charlie Munger. Wow!

I decided to base my answer using the present value of the earnings for the next 10 years. Time to take out my calculator. Ops..didn’t bring them. Ok, should still be able to survive since Warren doesn’t use any computers too. He uses paper arithmetic or at most just a simple calculator. I can always rely on my handphone then. HOW IN THE WORLD CAN YOU CALCULATE A COMPLICATED FORMULA INVOLVING THE POWER OF TEN USING YOUR HANDPHONE???

“Time’s up. Does anyone need any more time?” Running out of time, I decided to use the simple Benjamin Graham formula. Hmm..the answer seems a bit high and it can’t be that easy. Otherwise, everyone will end up with the same answer. Ok, I will discount it 50% to include the margin of safety. Maybe just add a bit to my final answer in case anyone uses the same method.

I handed in my answer grudgingly and went for the tea break session. They should have given us more time….