“Why should we look to the past in order to prepare for the future? Because there is nowhere else to look.” ― James Burke
Yesterday I ran into the American Express annual report from 1964 — follow this link to read it.
I then had an idea that I would read the annual report and try to come up with a reasonable intrinsic value range of the American Express business and then compare it to the purchase price paid by Warren.
Since I didn’t have a clue about the share price – no anchoring bias – I thought it would be interesting to see how my own calculation and reasoning regarding the intrinsic value stood up compared to the price of the business back in 1963 and 1964.
So what do I know at the moment that could influence me? How do I try not to be swindled by hindsight bias?
I know that…
- …American Express found itself in the middle of a fraud, the so-called “Salad Oil Scandal”,
- …Warren Buffett started researching the business fundamentals of the business,
- …Warren Buffett decided from the results of his research to put a great part of his partnership’s money at work by purchasing shares in the company when the price fell in the aftermath of the the scandal,
- …American Express is still doing business as of today,
- …the investment by Warren turned out to be one of his greatest.
I will try to imagine myself right in the 60′ (impossible, I know…) and from reading the annual report get me an understanding of the business of American Express back in 1963 and 1964. From the facts in the annual report I will then calculate a reasonable intrinsic value range per share and see at what price I myself would have been interested in purchasing shares in the business and becoming a part owner in it.
In step two, I will try to find out Warren Buffett’s purchase price and see where my own calculation stands compared to the price he paid.
I will then go back once again, this time to books and articles, to get a better understanding of what happened and how it all played out.
As a final step, I will go back to my own calculation of intrinsic business value per share to see if what I know and if my improved understanding of the Salad Oil Scandal would have had any impact on my thinking and my way of coming up with an intrinsic value.