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23-06-2013, 10:25 AM
A Story Selling Gum Told By A Value Investor
A number of years ago I was trying to explain to my son what I did for a living. He is 11 years old. I spoke about selling gum.
Jason, a boy in my son’s class, sold gum each day at school. He would buy a pack of gum for 25 cents and he would sell 5 sticks of gum for 25 cents each or $1.25 in total revenue for each pack he sells.
He sells 4 packs a day, 5 days a week, and 36 weeks in the school year or about $720 a year in pure profits. If he has 6 years until he graduates, that is about $4,320 in total profits he would make by the end of high school.
What if Jason offered to sell you half the business today? What would you pay?
My son replied, ―Well, he may only sell three packs a day so he would make $3000 a year. Would you pay $1,500 now? Why would I do that if I have to wait several years for the $1,500?
Would you pay a $1? Yes, of course! But not $1,500. I would pay $450 now to collect $1,500 over the next few years, which would be fair.
Now, you understand what I do for a living, I told my son.
I sit around trying to figure out what businesses are worth, and then I try to pay a lot less for them. I think you get the point.
A number of years ago I was trying to explain to my son what I did for a living. He is 11 years old. I spoke about selling gum.
Jason, a boy in my son’s class, sold gum each day at school. He would buy a pack of gum for 25 cents and he would sell 5 sticks of gum for 25 cents each or $1.25 in total revenue for each pack he sells.
He sells 4 packs a day, 5 days a week, and 36 weeks in the school year or about $720 a year in pure profits. If he has 6 years until he graduates, that is about $4,320 in total profits he would make by the end of high school.
What if Jason offered to sell you half the business today? What would you pay?
My son replied, ―Well, he may only sell three packs a day so he would make $3000 a year. Would you pay $1,500 now? Why would I do that if I have to wait several years for the $1,500?
Would you pay a $1? Yes, of course! But not $1,500. I would pay $450 now to collect $1,500 over the next few years, which would be fair.
Now, you understand what I do for a living, I told my son.
I sit around trying to figure out what businesses are worth, and then I try to pay a lot less for them. I think you get the point.