In essence, if your owner earnings projections were on spot, you would enjoy a 33% bonus in your overall return on investment over the 20 year projection period.

Theoretically, if you sold in 20 years at Fair Value, your return should be 16.7% annually.

Correct me if I’m wrong

Amit

1. Does FCF= Cash Flow From OP minus cash flow used in investing activity

2. the spread sheet formulas are too difficult (eg.npv(15%,B23:K23,B25:K25) K9

to understand as in if you could use simple terms such as , – , / , * it would be simpler for me to calculate

If you could atleast explain the Total value(B28) formula in easy terms ( ,-,/,*) it would be of great help as the other formulas i have somehow figured out

thanks in advance

Jazzy

No problem!

@ Joe:

True ofcourse; it won’t make a lot of difference, it’s just a different way to get a somewhat the same result

It’s six of one, half a dozen of the other.

Never thought of calculating it that way. I’ll keep that in mind. Thanks for sharing.

Also, I’ve been commenting here for awhile now, and was hoping you wouldn’t mind using your last initial so we don’t get confused. Thanks.

Nick (1)

I don’t see why you say I’m overcomplicating things and am lowering my room for error. The room for error stays exactly the same and the calculation of the discount uses the same primary school math as Joe’s method, so no overcomplicating whatsoever!

And I’m not lowering the amount of leeway at all, because I know that 25% discount in Joe’s way is more than 25% in my calculation!

The only point I was trying to make was that with the method I use, you get a more ‘true’ insight on how much your stock is underpriced. At one glance you can see the potential return the % the stock is underpriced.

My long post may have made it look more complicated than it was meant to be.

Really, we’re getting a margin of safety/room for error for our calculations.. not for our potential gains.

I don’t see the point in overcomplicating it and lowering your room for error.

your blog is a great source of value-investing information, I love it!

I do have one question about the Margin of Safety. In your JNJ excel sheet you use a 15% discount rate and then you want a 25% discount to the calculated value before you buy in. That 25% is your Margin of Safety.

You calculate the 25% Margin of Safety with the formula:

(1 – 0,25) x per share value

In my opinion that’s way more than a 25% discount. I measure the discount this way:

(intrinsic value – the value the company is trading for today) / the value the company is trading for today

So let’s say our estimated intrinsic company value is 100 million, it is currently trading for 75 million. Now if we use your 25% discount calculation:

(1 – 0,25) x 100 million = 75 million

We see that the company is trading at exactly 25% discount.

But if we use my calculation we get:

(100 – 75) / 75 = 33% discount.

Ofcourse the value of the company stays exactly the same and the discount calculation doesn’t matters that much. Still I think my calculation is more fair, because if the company would rise from it’s current value (75 million) to it’s intrinsic value (100 million) we would have a 33% gain, not a 25% gain.

( sorry for the long post, it got a bit out of hand )

Thanks,

Edward

p.s. great blog