WarrenThe first investment primer, when would you guess it was written? The first investment primer that I know of, and it was pretty good advice, was delivered in about 600 BC by ESOP, and ESOP, you'll remember, said a bird in the hand is worth two in the bush. Incidentally, ESOP did not know it was 600 BC. He was smart, but he wasn't that smart. Now, ESOP was onto something, but he didn't finish. because there's a couple of other questions that go along with that. But it is an investment equation. A bird in the hand is worth two in the bush. He forgot to say exactly when you were going to get the two from the bush, and he forgot to say what interest rates were that you had to measure this against. But if he'd given those two factors, he would have defined investment for the next 2,600 years, because a bird in the hand is, you know, you will trade a bird in the bird in the hand, which is investing you lay out cash today. And then the question is, as an investment decision, you have to, you have to evaluate how many birds are in the bush. You may think there are two birds in the bush or three birds in the bush, and you have to decide when they're going to come out and when you're going to acquire them. Now, if interest rates are five percent, and you're going to get two birds from the bush in five years, we'll say, versus one now, two birds in the bush are much better than a bird in the hand now. So you want to, you want to trade your bird in the hand and say, I'll take two birds in the bush, because if you're going to get them in five years, that's roughly 14 percent compounded annually, and interest rates are only 5 percent. But if interest rates for 20 percent, you would decline to take two birds in the bush five years from now. You would say that's not good enough, because at 20 percent, if I just keep this bird in my hand and compounded, I'll have more birds than two birds in the bush in five years. Now, what's all that got to do with growth? Well, usually growth, people associate with a lot more birds in the bush. But you still have to decide when you're going to get them. And you have to measure that against interest rates, and you have to measure it against other bushes and other, you know, other equations. And that's all investing is. It's a value decision based on, you know, what it is worth, how many birds are in that bush, when you're going to get them, and what interest
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Warrenrates are. Now, if you pay $500 billion, and when we buy a stock, we always think in terms of buying the whole enterprise, because it enables us to, to, to, to, think as businessmen rather than as stock speculators. So let's just take a company that has marvelous prospects, is paying you nothing now, and you buy it at an evaluation of $500 billion. Now, if you feel that 10% is the appropriate rate of return, and you can pick your figure, that means that if it pays you nothing this year but starts paying next year, it has to be able to pay you $55 billion in perpetuity each year. year. But if it's not going to pay until the third year, then it has to pay you $60.5 billion in perpetuity, in perpetuity, to justify the present price. Every year that you wait to take a bird out of the bush means that you have to take out more birds. It's that simple. And I question in my mind, sometimes whether people who pay $500 billion implicitly for a business by buying 10 shares of stock at some price, I really thinking of the mathematical, the mathematics implicit in what they are doing. To deliver, let's just assume that there's only going to be a one-year delay before a business starts paying out to you and you want to get a 10% return and you pay $500 billion. That means $55 billion of cash. That they have to be able to disgorge to you year after year after year. To do that, they have to make perhaps $80 billion or close to a pre-tax. Now, you might look around at the universe of businesses in this world and see how many are earning $80 billion. billion pre-tax, or 70, or 60, or 50, or 40, and you won't find any. So it requires a rather extraordinary change in profitability to give you enough birds out of that particular bush to make it worthwhile to give up the one that you have in your hand.