In his recent interview on the Ivey Business School 2021 Virtual Seminar, Francis Chou discussed the importance of buying companies where the intrinsic value is growing, rather than just buying below intrinsic value. Here’s an excerpt from the seminar:
If you’re asking me just based on my experience, it’s better to go with companies where the intrinsic value is growing. If you buy into a company where the intrinsic value is not growing, even if you buy it cheap, it may not work out the way you think.
You can just take an example. Let’s say something is worth let’s say 100 bucks. You think a fixed asset is $100 right now. If 10 years from now that fixed asset is still worth $100, you haven’t made any money right, even if you buy it at 50.
But if you have something that’s at $100, let’s say 100 today, but every five years it doubles, that is a 15% return. So 100 goes to 200, and another five years that 200 goes to 400. So 100 has gone to $400 at a 15% return.
So you see in 10 years 100 is worth 400. The other one, even if you buy it really cheap at 100, let’s say about 100 and you buy it at 50, it’s still hundred dollars. There the other one has gone… the intrinsic value has gone from 100 to $400.
But to go and buy into companies that are good companies management. My feeling is that you should be in a… be involved somewhat in companies, someone like I have run companies, have been involved in that, then you can see how the intrinsic value is growing.
So if you can be sure of a good company that is growing around 10% a year it’s better to go with a company that you can pay up let’s say 70-80% rather than trying to get it at 50-60% of the intrinsic value.
You can watch the entire interview here:
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