Improving On Buffett And Desert Cat

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What some arguing against David are missing, however, is the following. If Stock X is trading at $50 and you estimate its "value" to be $70. But say, your threshold for buying is such that you'd only buy X if it traded at $45. Then it's entirely disingenuous to say that you think X is worth $70, because by your own action, you'd rather have $50 than a share of X. Clearly it's not worth $70 to yourself.

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This isn't really correct at all, for at least two reasons:

1) If you had the opportunity to flip a coin, and would recieve $2million for heads, and nothing for tails - or could take $999k guarenteed - which would you take? Just because most people would take the $999k guarentee, doesn't mean the flip isn't valued at $1million.


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The flip is certainly NOT valued at $1mil by these people. Its EV is $1mil. There's a difference.

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2) Presumably it takes a while for market price to reach IV (if ever). So while there may be 'value' in the stock, it will take too long to extract it, such that you could get better value elsewhere

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Which means that the cash is more valuable, hence, the investment isn't worth as much as the cash.

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Finally, I'm pretty sure the main reason why we pass up the purchasing of a $50 share with $70 IV is because we are hoping to find an even better bargain. We aren't choosing a $70 IV over $50 cash, but rather waiting to find $80 IV for that $50 cash. So it's really choosing $80 IV over $70 IV.

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If $50 in cash can buy $80IV and $80IV is more valuable than $70IV, then $50 is worth more than $70IV.

It's simple economics. When you can have A or B and you choose A, you're expressing a view that A is more valuable than B.

[Yoshi63]

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You're correct in that the way I explained my response was bad, and probably flat out wrong.

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If $50 in cash can buy $80IV and $80IV is more valuable than $70IV, then $50 is worth more than $70IV.

It's simple economics. When you can have A or B and you choose A, you're expressing a view that A is more valuable than B.

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Still, I don't believe this is good reasoning. $50 cash is only worth more than $70IV BECAUSE you can find $80IV elsewhere. If you had no access to any markets to invest, then $50 cash would only be worth $50.

Here's an example of what you're saying: It's as if you visit a garage sale, find an antique piece worth $1000 selling for $5, and are uncertain if you should buy it. You reason with yourself that the $5 cash equals the $1000 antique, thus the $1000 antique is only worth $5 (despite being able to return much higher).

I'm not sure if I explained that well, but I think the point is that when a value exists, simple economics don't apply as you described.

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You're correct in that the way I explained my response was bad, and probably flat out wrong.

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If $50 in cash can buy $80IV and $80IV is more valuable than $70IV, then $50 is worth more than $70IV.

It's simple economics. When you can have A or B and you choose A, you're expressing a view that A is more valuable than B.

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Still, I don't believe this is good reasoning. $50 cash is only worth more than $70IV BECAUSE you can find $80IV elsewhere. If you had no access to any markets to invest, then $50 cash would only be worth $50.


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But that's always true with cash - it's only valuable to the extent that it can be used to buy tangible things.

What I'm really saying is that when a rational long-term value investor says that X is really worth $70 but I won't buy it at $50 he generally means this: if you use the general discount rate that the market requires for an investment of this type (either as sum of parts or as a whole) you end up with the present value of $70. However, since if you discount the returns using his own required return, the present value is below $50. So he thinks it should be worth $70 to other people, but it's not worth $50 to him.

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Here's an example of what you're saying: It's as if you visit a garage sale, find an antique piece worth $1000 selling for $5, and are uncertain if you should buy it. You reason with yourself that the $5 cash equals the $1000 antique, thus the $1000 antique is only worth $5 (despite being able to return much higher).


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Not sure if I follow. If you think antique > $5, then you buy. If not, you don't. It's clear that the seller doesn't think it's worth $5 to him, if that's what you mean.