This week on the InvestED we’re returning to our discussion of the investing perspectives of Mohnish Pabrai, specifically focusing on owner earnings. We’ll talk about what owner earnings can tell us about a business, and we will discuss the pros and cons of utilizing owner earnings when determining if you are buying a wonderful company.
In Episode 177 You’ll Learn:
What are owner earnings?
- Owner earnings refers to the amount of money the owner retains after all maintenance and expenses have been paid.
- Buffett coined the term in a 1986 shareholder letter.
- Owner Earnings is a type of cash flow.
- It is important to note that cash flow and owner earnings do not necessarily reflect the value of the business, but can be used to determine the price to pay.
Why should we be skeptical about owner cash flow?
- Financial representatives have the ability to manipulate these numbers which can skew the perceived value of a company
- This skewed perspective can lead investors to believe they are buying a wonderful business when they are not.
- By examining other numbers like owner earnings, we can begin to see a clearer picture of the price of a business
- Cash flow numbers do not represent maintenance costs and expenses to grow a business.
- By looking at owner earnings we can eliminate the costs of growth and maintenance, clarifying the price we should be paying
- This is only one of many numbers we should be looking at when determining the price and value of a company.
Danielle and Phil Recommend:
- Forbes Interview with Mohnish Pabrai
- Investing Between the Lines by L.J. Rittenhouse
- Invested by Phil and Danielle Town