The Little Book: That Still Beats the Market

Chapter 4. Chapter Four

GREAT, FIGURING OUT WHAT A BUSINESS is worth isn't easy. After lots of guessing and estimating, maybe you get it right and maybe you get it wrong. But what if you could? What if you could figure out what a business was really worth? Is there something you could do with that information? Is there really a place like I promised in the first chapter, a place where you can buy a business for half its true value? A place where you can get $1,000 of value for only $500? You bet there is. But first, let's spend a few minutes in business school.

For the past fourteen years, I have taught an investing course to a group of graduate business students at an Ivy League university. Needless to say, this is a pretty smart group of students. Each year, on the first day of class, I walk in and open the newspaper to the financial section. Found there are pages and pages of tables with lots of numbers in tiny print. (Sounds great so far, right?) Anyway, posted in these tables is a list of company names, and next to each name is a bunch of prices.

"Call out the name of a big, well-known company," I say. The students come up with companies like General Electric, IBM, General Motors, and Abercrombie & Fitch. Actually, it doesn't really matter what companies the students shout out. My main point is so easy to make, any company name in almost any industry, large or small, well known or not, will do. The result is always the same.

I look in the paper next to General Electric and read ...