Three salesmen checked into their hotel room. The desk clerk charged them $30 for the room and each kicked in ten bucks. When the night clerk came in, he realized that they had overcharged for the room and it should have cost $25. He sent the bellhop back with five one dollar bills to refund the money. The men took a dollar each, (meaning that they had each paid $9 for the room) and tipped the bellhop the remaining two dollars.
So, here’s the problem. Each man paid $9 (and 3 X 9 = 27) and the bellhop got two dollars - that makes a total of $29
What happened to the other dollar?
Here’s one that most people can solve in less than five seconds (but most will be wrong):
A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost?
That’s also fine … the hotel gave $5 … $1 to each of the 3 guys, and $2 to the bellhop.
This is why I measure financial transactions and companies primarily using cash flows. Cash flows rarely lie. EBITDA can lie. Adjusted EBITDA lies by definition. even GAAP lies, sometimes it’s even required to lie.
Good morning. I am increasingly realizing (albeit admittedly too late) the importance of cash flows, especially in the current environment.
I understand that one wants to invest in companies with good free cash flow…However, is there some metric ( for example, I see PEG ratio < 3 is good for a growth stock…Is there something like that to compare between 2 stocks based on their cash flows)
$30 is a red herring. The room cost $25. Each salesman paid $9 which equals $27 and the bellhop stole $2. $27-$2=$25, the cost of the room, the number you should be reconciling to.
As pointed out by others, $.05+$1.05=$1.10.
Now, here’s one from a favorite book of mine, The Man Who Counted by Melba Tahan.
3 brothers received an inheritance of 35 camels, one-half to the eldest, one-third to the middle son, and one-ninth to the youngest. However, no matter how they tried, the camels could not be divided fairly. For example, half of 35 is 17 and a half camels and a one-third and one-ninth do not divide evenly either.
A wise man riding by on a camel listened to the brother’s problem and announced he had a solution!
He gifted his camel to the brothers so now they owned 36 camels. He said to the eldest, if you divide 36 in half, you now have 18 camels, more than the 17 and a half you were supposed to get. To the middle son he said you have one-third, or 12 camels, more than the 11 and two-thirds you were supposed to get. To the youngest he said you now have 4 camels, more than the 3 and eight-ninths camel you were supposed to have.
The brothers were thrilled as the each got more camels than they originally thought they would! They counted up the camels they received, 18+12+4 which equaled 34 camels. As they had 36 camels, they gave back the wise man his camel plus the extra camel as a gift for solving the problem.
The wise man rode off with his 2 camels and all were happy.
Heh heh … a half plus a third plus a ninth does not make 100%, there is leftover … for the clever guy to get something from nothing (not really nothing, but rather the gift of acumen of allocating capital, and, more importantly, convincing others to do it his way). Just like much of wall street.