4.5: The Bottom Line

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Video - Audio - YouTube (Material for this section begins on slide 47.)

Okay now, once we have finished all our valuation calculations, what should we do? Should we really place much value in our predictions? The answer is an emphatic, “NO!” Rather, we should…

Hurl them into the vast ocean along with the ashes of our dead pets and relatives, or
Shred them into millions of little pieces and use them as confetti at our next party, or
Burn them in a huge bonfire as we dance naked under the full moon, or all three!

We know beforehand that as we make these calculations that there is a 99.99% chance that they will be inaccurate. So why do we perform them? We do these calculations to simply tilt the odds in our favor. These calculations help us identify companies that are prudent, long-term oriented investments. They won’t make us wealthy quickly, but they will make us wealthy. To quote a very wise, long-term investor, “I don’t have to win big. I just have to win.”

Instead of placing any significance in our predictions, after we have finished all our calculations and predictions and soothsaying and tea-leaf reading and magical prestidigitations, we should ignore out predictions and ask ourselves a very simple question: Do I want to own this company? Mr. Warren Buffett suggests asking yourself, “If I had the resources to buy the entire company, would I want to own it outright?” If the answer is yes, go ahead and buy 10 shares or whatever you believe is prudent or what you can afford. (Ah, he can buy the entire company and he often does!) In his excellent book, One Up On Wall Street (which you are going to read soon, right?), Mr. Peter Lynch detailed how after he had done all his research and calculations and placed them all in a three-ring binder, he would hold the three-ring binder up in front of himself and give himself the 60- to 90-second story about the company. Why did he want to buy or sell or hold the company? That usually sealed his decision, one way or the other.

Recall how Mr. Benjamin Graham wanted us to avoid any investment strategy that removed human judgment from the process? Your judgment is the ultimate valuation method. You will make some mistakes. You will make some very good choices. As time goes by, your experiences will hone your judgment skills and you will become excellent, prudent, long-term investors. Be kind to yourself and, as Mr. Benjamin Graham states, have the courage of your conviction.

We will let the famed investor, Mr. Seth A. Klaman, have the last word on valuation methods:

“The problem is that it is easy to confuse the capability to make precise forecasts with the ability to make accurate ones. Any attempt to value businesses with precision will yield values that are precisely inaccurate.” ‒ Margin of Safety, Seth A. Klaman