134 ShowMetheMoney
Less obviously, you coul duse all these tools—but in different
ways—for all three companies. That is, estimate dfuture earnings
and dividends can be made for all three (relatively easy for GE, less
so for Microsoft, an dvery har dfor Amazon.com).
If these companies are within your circle of competence, you
can do it. You can do it even if you are nervous about using the huge
number of valuation techniques that are discussed in innumerable
books or below because none of them will enable you or anyone else
to pinpoint with precision what the value of any business is.
At best, these techniques produce a range of values that depend
on your interpretation of history an dprognosis for the future. These
acts expose you an deveryone else to risks of error, an dthose risks
are precisely why Ben Graham insiste don getting a thick margin of
safety between the price pai dan dthe value one coul dreasonably
expect to get. Every star investor follows that principle.
In the most famous chapter ofThe Intelligent Investor, Graham
wrote: “In the ol dlegen dthe wise men finally boile d down the his-
tory of mortal affairs into the single phrase, ‘This too will pass.’ Con-
fronte dwith a like challenge to distill the secret of soun dinvesting
into three words, we venture the motto, MARGIN OF SAFETY.”^1
Commenting on this passage over 40 years later, Warren Buffett said
he still believes those are the right three words.^2
Getting a wide gap between the price you pay and the value you
buy is the cornerstone of intelligent investing because as Buffett
says, while “intrinsic value can be defined simply,” its calculation
“is not so simple.”^3 Graham invoke dthe margin of safety principle
to avoi dthe risk of error in calculating intrinsic value. An dwhile
Charlie Munger—Buffett’s business partner an dalter ego—has
quippe dthat he has never seen Buffett do an intrinsic value calcu-
lation, the principles that follow are part of the mind-set that enables
him not to.
ASSETS
The book value of a company is the excess of its total assets as
set forth on the balance sheet over its total liabilities an dany out-
standing preferred stock, also as set forth on the balance sheet. The
book value per share of a common stock of that business is simply
that amount divided by the number of common shares outstand-
ing.