MF+9-24-2007+Buffett%27s+Capital+Riddle

MF+9-24-2007+Buffett%27s+Capital+Riddle - The Motley Fool:...

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The Motley Fool: Print Article http://www.fool.com/server/printarticle.aspx?file=/investing/. .. 1 of 3 9/25/07 9:06 PM Previous Page Buffett's Capital Riddle http://www.fool.com/investing/general/2007/09/24/buffetts-capital-riddle.aspx Emil Lee September 24, 2007 Here's a riddle for you. Say you could own one of two companies: Company A, which earns $2 million with $8 million in net tangible assets, and costs $25 million to purchase. Company B, which earns $2 million with $18 million in net tangible assets, and costs $18 million to purchase. Furthermore, let's assume both companies will have flat unit volume for the foreseeable future. Which one would you pick? A value investor's dream Hmm . .. let's think about this. If you pick Company B, you get more tangible assets, the same amount of earnings, and you're buying at a multiple of earnings of 9, versus 12.5 for Company A. Not only that, but wasn't Ben Graham, the godfather of value investing, a proponent of buying stocks at a discount to asset values? Yet as surprising as it may seem, the value investor's perfect company isn't the one you should pick. Company A is the right choice. Here's why. Inflation and capital returns
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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MF+9-24-2007+Buffett%27s+Capital+Riddle - The Motley Fool:...

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