Free cash flow-money that can be pulled out of the business-is expected to be $100,000 a year for the next 10 years. Further, let’s assume that the gas station can be sold for $400,000 after 10 years. To illustrate let’s imagine that toward the end of 2006, a neighborhood gas station is put up for sale, and the owner offers it for $500,000. He then goes on to explain this concept using the example of a gas station –
Per Williams, the intrinsic value of any business is determined by the cash inflows and outflows-discounted at an appropriate interest rate-that can be expected to occur during the remaining life of the business. Else, Confucius wouldn’t have said that life is really simple, but we insist on making it complicated.Īnyways, coming back to this chapter from Mohnish’s book, he expands on John Burr Williams’ concept of calculating intrinsic values by discounting future cash flows. Though I am sure a lot of readers would not like such a simplistic approach to calculating values, for our minds generally don’t accept things that are simple and rather search for things that are complex (which make us look and feel smart). I would recommend you read this book in its entirety, and especially this chapter for it explains one of the most critical aspects of the investment process i.e., intrinsic value calculation, in its simplest sense. One of my favourite chapters from the book is “Dhandho 102: Invest in Simple Businesses.” Here, Mohnish explains the concept of intrinsic value and also why, for most investors, it pays to identify simple businesses and then buy them at prices that provide sufficient margin of safety. The premise of Dhandho investing is, as is repeated time and time again in the book is simple – Heads, I win tails, I don’t lose much. Dhan-dho, literally translated, means “endeavors that create wealth.” The street translation of Dhandho is simply “business.” What is business if not an endeavor to create wealth?
Dhan comes from the Sanskrit root word Dhana meaning wealth. One of the best books I’ve ever read on investing, and one written in a simple language, is Mohnish Pabrai’s The Dhandho Investor.ĭhandho (pronounced dhun-doe) is a Gujarati word.
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