easily when things go wrong. The liquidation preference for a civilization that's based on every person for themselves, my gain is your loss, let's all be rational, self-interested actors, and through that will emerge some kind of competitive but optimized world, is that when things go wrong, you see your neighbors
And there are a variety of different models or proxies that we can select. We can choose the liquidation value, we can look at the franchise value, the growth value, earnings power value, the acquirers multiple. We can use any number of these simple multiples, but we're not really getting the truth of the company.
cost. Now if it's below, then we go to the other extreme, which is liquidation value. And what is liquidation value? It basically means what is this company worth dead today?
And this is where most companies end up, unless we're in a 2008 financial crisis-type scenario, where there were a lot of companies selling for less than their liquidation value. And what you would look at here is how much is this company actually earning,
Where does conflict come in? and all of the liquidations that are necessary-- I mean, it was incredible.
and then get the company ready for sale. Get this company ready for sale and liquidation . So then they've got three or four years after the holding period to sell the company.
So what is it saying is we're in the market probably 16 times earnings for the S&P 500. Things trading at discount to readily ascertainable liquidation value, excluding property, plant and equipment.
was less than what you might have valued their real estate in Hyderabad. So the stock was trading below what would be just liquidation value on real estate. And this was a IT services company that was growing something like 70% a year, very high margins.
Graham authored a series of articles for Forbes Magazine where he pointed out some research that he had undertaken that said that of the 600 issues on the stock market at that time, 200 of them traded for less than their liquidation value. So they traded for less than what the shareholders in those companies could get out of them if they wanted to wind them up.
"The very first thing we do when we start to analyze a company is to ask ourselves how far the stock price would fall if we were wrong. It's not some back of the envelope calculation, but a full assessment looking at liquidation asset values and stressing the business model and valuation levels under any number of bad scenarios." "If the downside is more than 30% from today's price, it's unlikely we'll invest, regardless of the upside potential.
And certainly, for most businesses, you don't even need the capital. And I would also say that when you're buying businesses, let's say below liquidation value, for example, in my book,
You can either inflate-- whoops, you don't have a printing press. I like to call this the emetic response, American liquidationism.
And so I asked him about it because in 2011 Berkshire Hathaway, they can't buy Mickey Mouse companies. And the reason I was going through the "Japan Company Handbook" was I was looking at Japanese net-nets, companies trading well below their liquidation values and so on. And so I asked Warren why he was fooling around with the "Japan Company Handbook" and of course he puts on a poker face
and either the incumbent managers turn the company around or external managers are brought in. Less commonly, a sale or a merger, or some sort of liquidation . Some time later, behavioral researchers DeBondt and Thaler examined securities on the basis of a variety
and then he went out and he set up his own partnership. In the early days of his partnership, he was very much a Graham-type investor, looking at liquidation value. One of the early positions that he put into the fund was Sanborn Map.
So that's where we're going to basically eliminate the company from consideration if it's trading above its replacement cost. Now if it's below, then we go to the other extreme, which is liquidation value. And what is liquidation value?
And certainly, for most businesses, you don't even need the capital. For example, I sometimes experience buying a stock at a very role valuation, maybe below the liquidation value.