Improving On Buffett And Desert Cat

[Phone Booth]

[ QUOTE ]
Phone Booth-
You're correct in that the way I explained my response was bad, and probably flat out wrong.

[ QUOTE ]

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.

[/ QUOTE ]

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.


[/ QUOTE ]

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.

[ QUOTE ]
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).


[/ QUOTE ]

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.