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The Dhandho Investor SUMMARY Chapter 7 Dhandho 102 Invest in Simple Businesses
What is the formula to determine the intrinsic formula? John Burr Williams defined it as intrinsic value of any business is determined by the cash inflows and outflows – discounted at an appropriate interest rate that can be expected to occur during the remaining life of the business. For an example: a gas station for sale at $500,000. After 10 years it can be sold for $400,000. Free cash flow $100,000 a year. If you use discounted cash flow, the gas station will have an intrinsic value of $775,000. The gap between the intrinsic value and the purchase price is where the profit lies. John Burr Williams 'definition may be simple but the calculation for it is not. The Dhandho way to deal with this is only invest in businesses that are simple. The most potent way is to buy simple businesses with simple theses for why you can win more lose less.
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