The way I describe it is, I’d rather be transparentlywrong than opaquely right.And in this business, people want to be opaquely right.What I mean by that is, they willsay things that are so difficult for you to construe,that no matter what happens, they can say, I told you so.And it drives me crazy.So what I do is, I say, this is what I think the value of Appleis.And of course, I’m going to be wrong.But at least you can see where I went wrong.So this is a valuation I did of Apple in March, .Because every time a new earnings report comes out
,I re-value the company.So I’m due for one very soon, because Apple’s earningsreports just came out last week.What I’m trying to illustrate here though is,in traditional valuation, here’s how you value a company.You making best case.Basically, not even best case, youmake your expected value estimatesfor things like cash flows and growth and risk.point estimates.So I ask you what the growth is.You give me a number.You ask me what the risk is.You give me a number.But the reality, if you think about it,is, you face uncertainty.You have a distribution in your head,and I’m forcing you to give me a number.And part of you is saying,
it’s %, but it could be %.It could be %.And years ago, I can see why you were stuck.You had to do that, because we did nothave the tools to actually bring in uncertainty.I actually have Crystal Ball attached to my Excel.If any of you use Crystal Ball, it’sa simulation add-on to Excel.And what it allows you to do is entera distribution for your assumptions,rather than a single number.So if I’m writing a company like Apple,rather than give one number, I can give you a distribution.So rather than say, revenue growth is %, I can say,it’s uniformly distributed between % and %.And the more uncertainty you feel,the wider the distribution is going to be.And if any of you have done a simulation,here’s what happens.The computer goes and picks one outcome of each simulationand does a valuation.Crystal Ball’s default is , simulations.This is what my simulated value for Apple was in March of .What is that?How does that help me?The stock price was $.In my base case valuation, I got about $.So I could give you the base case value and say,I think Apple is undervalued.
But your defense will be, but you could be Adelaide Tax Accountants wrong.Of course, I could be wrong.But what the distribution shows you is how wrong I can be.And if I’m a decision-maker, I’d much rather base iton a richer set of information.Because here’s what I can tell you about Apple–I can give you an expected value, like I did before.I can also tell you, if you pay $, what the chance youare wrong upfront is.I can give you an ex ante probability.There’s a % chance you could be wrong.All I have to do is count the number of values below $.And I put up a distribution.And in March of , based on my valuation, I said,I know I can be hopelessly wrong on my inputs.
But based on the outcomes, it lookslike there’s a % chance– you see where the % comes from?The th percentile is about $.The stock is trading at $.Investing is a game of odds.And it looks to me, based on my assessments,that the odds are in my favor.And of course, this is an investmentthat’s worked out hopelessly well, in some cases.Hopelessly, well because the stock is now what?
