In his 2008 shareholder letter Warren Buffett stated that “Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
In my earlier post Valuation of AMEX in 1964 (Part 2) I concluded with the following questions that I also left unanswered. “Does an intrinsic value of $60 per share seem reasonable? Or is it too high?”
I calculated an intrinsic value per share of approximately $60. But at the moment of my calculation, I did not know the historical share price of American Express during 1963-64. What I did know, was that the share price of American Express took a dive due to the Salad Oil Scandal and that Buffett put a great amount of his capital into the stock.
As Benjamin Graham liked to say “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” So the question was if Mr. Market did in fact overreact or not in the wake of the Salad Oil Scandal?
Source: Business Insider
My earlier valuation of AMEX updated with the share price low of $38 in January 1964 resulted in a margin of safety of approximately one third of the calculated intrinsic value per share. So, looking back we can probably understand why Buffett felt that the decline in the AMEX share price presented a great opportunity to buy into this business.
But, for this to be a real investment opportunity an investor would also have needed a conservative estimate of any potential liability arising from the Salad Oil Scandal. So, without a proper idea about any potential impact from this event, it would be hard to make an investment due to the fact that a thorough analysis was clearly missing.
In the next post I will take a look at what a reasonably and conservative estimate of any liability arising from the Salad Oil Scandal could look like.