MOI: When assessing a company’s discount to intrinsic value, do you find discounted cash flow analysis helpful or do you rely primarily on values that are readily ascertainable on a company’s balance sheet? What kind of discount to intrinsic value do you typically look for?
McElvaine: I am not a big discounted cash flow fan. I agree completely that in theory a DCF should capture the value of a firm. I am, however, suspicious over the inputs at any point in time. Ideally, I am looking for some idea of private market value or liquidation/breakup value at the time of purchase.
MOI: You have stated that your investment philosophy is “to make all the money on the purchase.” What makes the purchase decision easier or more profitable for you than the sell decision?
McElvaine: I have a tougher time calculating the margin of safety when things are going well. Having lived through the bad times with a stock, I guess I am a little suspicious when things start going well. I suspect my returns would have been better if I had been a little more willing to hang around once the recovery in a stock begins.