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Does thinking like a business owner make cash flows more “free”?

When I was thinking about the issue of double counting of free cash flow, one query that I had was as such:- I understand that me in the position of the small stockholder is at the mercy of the management in terms of how free cash flow is deployed. Hence it is logical that I … Continue reading

Double counting of “free” cash flow in DCF

From my many previous posts, you can tell that I’ve been thinking for some time about this problem with the double counting of “free” cash flow that most people do with DCF, i.e. free cash flow that are re-invested are not truly free for discounting at the point in time in which they are earned. … Continue reading

Book Review: Expectations Investing by Alfred Rappaport and Michael Mauboussin

Rating: Mama desu Background: One book that I read probably 1-2 years ago. With all these stuff about efficient market hypothesis and stock prices fully reflecting all publicly available information, the book’s catchy caption “Reading stock prices for better returns” caught my attention, as to what you can glean from the current stock prices. Key … Continue reading

Projecting Earnings Again

Let’s consider a hypothetical situation: where the Earnings Growth Rate is fixed, and unaffected by ROIC/ROE/etc. This follows on from the train of thought that ROIC/ROE/etc. are not the determinants, but rather it is fueled by sales growth and the free cash flow margin. You can see this from this spreadsheet here: ROIC vs Earnings … Continue reading

Warren Buffett’s Discount Rate used in DCF

Buffett has been frequently quoted to use the long-term U.S. Bonds as his discount rate for doing his DCF calculations. At the 1997 Berkshire Hathaway meeting, Buffett was quoted to have said: “We use the risk-free rate merely to equate one item to another. In other words, we’re looking for whatever is the most attractive. … Continue reading

Quotes from Warren Buffett on DCF and NPV

I chanced upon this book The Real Warren Buffett: Managing Capital, Leading People by James O’Loughlin at the library today. Found a couple of good quotes from Buffett to capture in this blog. From Buffett’s 1992 annual report: “In the Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the … Continue reading

Relationship between Balance Sheet, Income Statement & Cashflow Statement when modeling

Bruce Wasserstein in his book Big Deal wrote about the relationship between the three financial statements: balance sheet, income statement & cashflow statement. I seem to be quoting time and again from this book, which speaks to how good the book is. Even though the book is very very thick (some 1000  pages), the writing … Continue reading

The Economics and Investibility of the Executive Search Industry

This is a post of a piece that was written on June 6, 2006, while performing some research on the executive search industry. The Economics The Executive Search market concentrates on searches for positions with annual compensation of $150,000 or more, which generally involve board level, chief executive and other senior executive positions. The industry … Continue reading

Dealing with Spikes for Trading Specs

I had a trading speculative stock (yeah, still  have a gambling streak in me) that spiked on Monday (9 July) for no apparant fundamental reason. Perhaps it was a short squeeze, or perhaps there is some fundamental news that’s not public-public yet. If its a squeeze, we should take the opportunity to sell out our … Continue reading

ROC vs ROE vs Return on NTA: a re-visit

So Joel Greenblatt uses ROC as defined in an earlier post, with the base being the tangible capital employed. Warren Buffett seems to use Return on NTA (RONTA), from his See’s Candies example in the Essays of Warren Buffett book. However he is often quoted as using ROE. [Quick recap: Net Tangible Assets = Total … Continue reading

Ways of Projecting Earnings

Ways of Projecting Earnings Estimate future earnings growth rate (e.g. calculate CAGR of historical earnings growth, or calculate CAGR of historical equity growth rate), project ahead. [Note: see previous post here to know why you can use equity growth rate.] Using ROIC / ROC / ROE on the base, adding back retained earnings back to … Continue reading

On Time of P/E Mean Reversion vs Time when Competitive Advantage ends

When the P/E will mean revert (let it be T_pe) is independent from when the competitive advantage period (CAP) ends (let it be T_cap). If (T_cap > T_pe), i.e. P/E mean reverts before the CAP ends, Then it doesn’t matter, it just means that the projected selling prices (using mean reversion and good earnings growth) … Continue reading

Buffett’s Method on Non-Cyclical and Cyclical Companies

Non-Cyclical Companies You know the earnings – they are predictable (hence the need to find companies with predictable earnings) The predictability of the earnings allows you to, at a particular time point, know/fix one of the variables (among two: E and P/E). You don’t know when the booms and busts will happen But you know … Continue reading

DCF for Cyclical Companies

I used to think that one can “average out” or “smoothen”/”flatten” the earnings of a cyclical company across one full cycle so as to do the valuation. I realise now that that is actually not correct. The “smoothening” process can only help you get the earnings figure at a particular point in time in the … Continue reading

Problems with DCF

Was reading a part in Bruce Wasserstein’s Big Deal on DCF, he highlighted 3 situations that are difficult to analyse using DCF:  A company with ‘hockey stick’ projections – a firm with mediocre historical performance that is projected to undergo a dramatic turnaround. The timing, scope, cash impact, and long-term stability of the turnaround plays … Continue reading

On the P/E range for Buffett’s Valuation Method

How do you know if the P/E range so far, is reasonable? Perhaps the range so far is in the top part of what will play out in the future? To ensure that the P/E range (lowest P/E to highest P/E) is reasonable, you need to find a company that has a long history and … Continue reading

More thoughts on DCF and Valuation

Most DCF calculations out there are wrong, specifically those that discount “retained earnings” in every single year. When an assumption is made about the earnings/FCF growth rate, that assumption comes with it an implicitly assumed payout ratio (i.e. an assumption on a certain amount of the earnings/FCF to be retained and reinvested). The payout ratio … Continue reading

Common Valuation Methods

Common Valuation Methods Discounted Cash Flow (DCF) Comparables (with market prices) Comparables (with transaction prices, e.g. M&A, LBO, etc.) Replacement cost of assets (remark: Tobin’s Q ratio uses this) Tangible Book Value Break-up Value Liquidation Value Real Option Value (future growth potential of the company depending on management decisions)

Books to write reviews on

Some books that I’ve read, have wanted to write reviews on, but haven’t managed to do so: The Five Rules for Successful Stock Investing by Pat Dorsey (Morningstar) Little Book of Value Investing by Christopher Browne Margin of Safety by Seth Klarman Intelligent Investor by Graham Dollar Crisis by Duncan Buffettology by Mary Buffett Essays … Continue reading

Books to obtain/read

Some books that I’d like to get a copy of / read: Market Wise by Brian McNiven A Wonderful Company at a Fair Price by Brian McNiven Poor Charlie’s Almanack – The Wit and Wisdom of Charles T. Munger The Dhandho Investor: The Low – Risk Value Method to High Returns by Mohnish Pabrai Mosaic: … Continue reading

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