The hottest Investment Substack posts right now

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Alternatives to the CAPM: Part 5. Risk Adjusting the cash flows

Musings on Markets • 0 implied HN points • 30 Apr 11
💰 Finance Investment
  1. You can adjust cash flows for risk in two main ways: estimating expected cash flows across scenarios and using certainty equivalent cash flows. Both methods aim to accurately reflect investment risk.
  2. Certainty equivalent cash flows account for risk by using a safer value an investor would accept instead of the expected cash flow. This helps to quantify how risk-averse someone is when valuing their investment.
  3. Risk adjusting cash flows isn't necessarily easier than adjusting discount rates. It's important to know when to apply simple methods, like focusing on safe cash flows or dividends, but also to recognize their limitations.

Alternatives to the CAPM: Part 4: Market-Implied cost of equity

Musings on Markets • 0 implied HN points • 30 Apr 11
💰 Finance Investment
  1. You can calculate the market-implied cost of equity using a simple dividend discount model, which helps you understand if a stock is fairly priced. This method allows you to figure out the expected return on a stock based on its price and future dividends.
  2. Comparing the market-implied cost of equity to a conventional one can help you decide whether to invest in a stock. If the market-implied cost is much higher than your estimate, it might mean the stock is riskier or less attractive.
  3. You can use the market-implied cost of equity for an entire sector so that you have a uniform measure for evaluating companies in that sector. This approach can make it easier to compare different companies without getting lost in individual risks.

Alternatives to the CAPM: Part 3: Connecting cost of debt to cost of equity

Musings on Markets • 0 implied HN points • 30 Apr 11
💰 Finance Investment
  1. It's easier to figure out the cost of debt because you can see the interest rate when borrowing. This makes it a more straightforward number to use when looking at a company's finances.
  2. You can estimate the cost of equity by comparing it to the cost of debt and factoring in the volatility of both stocks and bonds. If the cost of debt is 8%, the cost of equity might be higher, like 12%, if stocks are riskier.
  3. This method works best for big companies with significant debt. However, it has limits because equity risk and bond risk are different, so care is needed in using this approach.

Alternatives to the CAPM: Part 1: Relative Risk Measures

Musings on Markets • 0 implied HN points • 28 Apr 11
💰 Finance Investment
  1. The CAPM model has flaws and many people have shifted to using better methods for measuring risk and estimating returns. It's criticized for being too simple and for its dependence on past market prices.
  2. Multi Beta Models and Market Price based Models offer alternatives to CAPM by considering multiple factors or standard deviations instead of relying on a single market beta. These models are intended to improve return estimates but have their own complexities.
  3. Accounting information based models use a company's financial health as a measure of risk. They connect risk to fundamental business factors but can be misleading due to the way accounting numbers are reported.

Margin of Safety: An alternative risk assessment tool?

Musings on Markets • 0 implied HN points • 16 Apr 11
💰 Finance Investment
  1. Margin of Safety (MOS) is used at the end of the investment process, only after finding good companies and estimating their value. It's not helpful to think about MOS earlier in the process.
  2. MOS enhances risk assessment and intrinsic valuation but doesn’t replace them. You still need good estimates of value to use MOS effectively.
  3. The MOS should vary based on how certain you are about the intrinsic value. It's not a fixed number, as different stocks and situations come with different levels of uncertainty.
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Breach of Trust: Bank Valuation after the banking crisis

Musings on Markets • 0 implied HN points • 29 Mar 11
💰 Finance Investment
  1. Investors used to trust banks because they thought regulations kept them in check. Now, that trust is gone, and we can’t just assume all banks will act responsibly anymore.
  2. The way banks determine dividends and capital requirements has changed. We should look at expected growth and regulatory needs instead of just past dividends to judge their value.
  3. Banks need to be more open about their finances and risks. This means clearer details in their financial statements so investors can make better-informed decisions.

A tide in the affairs of men...

Musings on Markets • 0 implied HN points • 14 Mar 11
💼 Business Investment
  1. Luck plays a big part in business success, but it's what companies do with that luck that really matters. Successful businesses build on good luck and make it a stepping stone for more success.
  2. Good risk-takers know how to take advantage of lucky moments and also minimize their losses when things go wrong. They are prepared for the ups and downs of business.
  3. Every person will experience good and bad luck in their careers. How we respond to that luck can decide if we succeed or just get by.

Luck versus skill: How can you tell?

Musings on Markets • 0 implied HN points • 12 Mar 11
💰 Finance Investment
  1. It can be hard to tell if someone in finance is successful because of luck or skill. This confusion makes it tricky to reward them appropriately.
  2. In sports, it's easier to see skill because success is clear and happens often, while in finance, success is more subjective and can happen by chance.
  3. To find skilled investors or managers, look for those who are consistent in their success, transparent about their strategies, and humble enough to acknowledge the role of luck.

Equity Risk Premiums: The 2011 Edition

Musings on Markets • 0 implied HN points • 25 Feb 11
💰 Finance Investment
  1. The equity risk premium is how much more investors expect to earn from stocks compared to risk-free investments. It's influenced by how investors feel about the market.
  2. There are three main ways to estimate the equity risk premium: surveying people's opinions, looking at historical data, and calculating future expectations based on current stock prices.
  3. Which equity risk premium to use depends on your situation. If you’re assessing a company based on current market conditions, use today's implied premium; long-term investors can take a broader view.

Dividend Policy for the 21st century

Musings on Markets • 0 implied HN points • 18 Feb 11
💰 Finance Investment
  1. Companies are often hesitant to cut dividends because it sends a bad signal. They prefer to keep dividends stable, even if their earnings fluctuate.
  2. With more global competition and uncertainty, sticking to fixed dividends might lead to lower payouts as companies retain more cash for safety.
  3. There are alternative dividend policies, like tying dividends to earnings or cash flow, which give companies more flexibility and can reduce the risks of being locked into high payouts.

The Facebook Valuation!

Musings on Markets • 0 implied HN points • 05 Jan 11
💼 Business Investment
  1. You can sometimes estimate a company's value from a single investment, but it's tricky since other benefits might affect the real value.
  2. Some companies, like Facebook, choose to stay private to avoid public scrutiny and to keep certain details secret, which can have its advantages.
  3. Valuing a private company like Facebook requires access to financial data and future projections, but many factors can make this complex and uncertain.

Corporate finance in illiquid markets

Musings on Markets • 0 implied HN points • 29 Dec 10
💰 Finance Investment
  1. In illiquid markets, companies find it hard to access funds, which can limit their ability to take on new investments. Instead of focusing just on net present value, using a percentage return like IRR can help maximize their value.
  2. The mixture of debt and equity that minimizes costs can change in illiquid markets. If the equity market is less liquid, companies may want to increase debt, but if the debt market is illiquid, they might choose to decrease debt.
  3. Companies facing illiquidity may decide to keep more cash on hand instead of returning it to shareholders. This can lead to higher dividends and less reliance on stock buybacks, as investors favor cash during uncertain times.

Asset selection & Valuation in Illiquid Markets

Musings on Markets • 0 implied HN points • 26 Dec 10
💰 Finance Investment
  1. When picking assets, consider how liquid they are. More liquid assets are often a better choice for those needing quick access to cash.
  2. To evaluate illiquid assets, you can adjust their value down by using an 'illiquidity discount' or increase their risk by raising the discount rate.
  3. Using relative valuation involves screening for both cheap stocks and those that are more liquid, helping avoid investments in hard-to-sell assets.

Are complex models the answer?

Musings on Markets • 0 implied HN points • 01 Dec 10
💼 Business Investment
  1. Complex models can struggle when predicting unpredictable human behavior. Simple models might work better in uncertain situations.
  2. Small changes in a complex model can lead to large unexpected outcomes, a phenomenon known as the butterfly effect.
  3. When faced with uncertainty, it's better to simplify models by focusing on key variables and reducing complexity.

How do you evaluate risk taking?

Musings on Markets • 0 implied HN points • 19 Nov 10
💰 Finance Investment
  1. Risk taking should be judged not just by the outcome but also by the process and information available at the time. Good decisions can sometimes lead to bad outcomes, and bad decisions can lead to success.
  2. It's important to consider the side effects of risk taking, like how it impacts others. A decision might be profitable for one person but harmful to society as a whole.
  3. How we reward or punish risk taking now can influence future behavior. If taking risks is consistently rewarded, more people will take risks in the future.

Nassim Taleb and the Nobel Committee

Musings on Markets • 0 implied HN points • 19 Oct 10
💰 Finance Investment
  1. Nassim Taleb criticized the Nobel Committee for awarding finance prizes to certain economists. He believes their theories contributed to financial crises.
  2. Each economist, like Merton Miller and Harry Markowitz, had ideas that challenged common practices in finance. Their theories on capital structure and risk management still hold value.
  3. Real traders often ignore financial theories. They focus more on making deals and trades rather than the academic theories that some believe caused financial failures.

What if nothing is risk free?

Musings on Markets • 0 implied HN points • 24 Jul 10
💰 Finance Investment
  1. Risk-free investments are often assumed to exist, but government defaults challenge this idea. If governments can default, then no investment can really be guaranteed safe.
  2. The presence of a risk-free investment affects how people build their investment portfolios and manage companies. It allows investors to balance their risk without needing different types of assets.
  3. Without a risk-free investment, investors become more cautious and may charge more for risk. This can lead to lower prices for stocks and corporate bonds, affecting overall market stability.

Valuation Approaches...

Musings on Markets • 0 implied HN points • 20 Jun 10
💰 Finance Investment
  1. Valuation is fundamentally simple, but people often make it more complex than it needs to be. It's important to focus on the basics and not get caught up in unnecessary complications.
  2. Different consulting firms promote their own proprietary valuation methods, but they all link back to excess returns and providing an easier approach. The names and acronyms might sound fancy, but the core ideas are similar.
  3. When valuing a company, it's best to stick with an approach that you're comfortable with. The real challenge is estimating important factors like growth and risk, not finding a new valuation model.

What is "fair value"?

Musings on Markets • 0 implied HN points • 07 Jun 10
💰 Finance Investment
  1. Fair value is the real worth of an asset, aiming for unbiased and accurate valuation in accounting and legal contexts.
  2. In accounting, fair value means valuing assets correctly, but there are many complex rules that can complicate this process.
  3. Appraisers often have biases based on how they get paid, which can affect their estimates of fair value for businesses.

Currency Choices in Valuation

Musings on Markets • 0 implied HN points • 16 Apr 10
💰 Finance Investment
  1. You should value a company in the currency that is easiest for you to access information in. It shouldn't matter which currency you choose because the company's value should stay the same.
  2. Your discount rate is influenced by the currency you select, especially the risk-free rate, which varies with inflation. Always ensure your cash flows and discount rate are in the same currency.
  3. To avoid currency confusion, you can analyze in real terms, using real discount rates and cash flows. It's important to stick with your initial currency choice throughout the analysis.

Goodwill: Plug Variable or Real Asset?

Musings on Markets • 0 implied HN points • 31 Mar 10
💰 Finance Investment
  1. Goodwill shows up on a company's balance sheet usually after an acquisition. It's the difference between what a company pays for another company and the book value of that company's assets.
  2. Goodwill is there to make the balance sheet balance, reflecting the difference between historical asset value and current market value, as well as the potential for future growth.
  3. When valuing a company, goodwill can complicate things. It can affect earnings and book value, but in reality, it shouldn’t change how you view the underlying assets or the company itself.

Thoughts on the riskfree rate

Musings on Markets • 0 implied HN points • 06 Feb 10
💰 Finance Investment
  1. Understanding the risk-free rate is crucial for evaluating investments. You need to know what you can safely earn over time to make sound financial decisions.
  2. Typically, the US Treasury bond rate is used as the risk-free rate because it's considered default-free. However, there's still a chance that this could change, as even the US could face downgrades.
  3. Different countries have different risk-free rates based on their bonds. This means that to compare rates globally, we should account for expected inflation and default risks.

Macro Bets: A general framework..

Musings on Markets • 0 implied HN points • 23 Nov 09
💰 Finance Investment
  1. Making macro bets can be risky. You need a unique advantage, like having more patience or better trading skills than other investors.
  2. It's better to keep your macro bets simple. If you believe in something like rising gold prices, it makes more sense to directly buy gold instead of a related company that has other risks.
  3. The main danger with macro bets is being wrong about your prediction or the market not agreeing with you. With so many investors out there, standing out is tough.

Leveraged Buyouts

Musings on Markets • 0 implied HN points • 07 Oct 09
💰 Finance Investment
  1. Leveraged buyouts involve using a mix of debt and equity to boost a company's value, which can also affect taxpayers.
  2. Control is important; poor management can be turned around by changing investment and dividend policies.
  3. Going private can help companies make tough decisions without worrying about short-term stockholder pressures.

The dangers of relative valuation

Musings on Markets • 0 implied HN points • 27 Sep 09
💰 Finance Investment
  1. Relative valuation can be risky because if one company is valued poorly, it can affect the valuations of other companies that are based on it. This is especially true for big companies like Facebook.
  2. Using relative valuation without careful analysis can lead to mistakes and potentially create market bubbles. Just looking at averages can be misleading.
  3. A better approach to relative valuation is to consider differences between companies and analyze the data thoroughly. This way, it can provide useful insights rather than just being a lazy shortcut.

What is Twitter worth?

Musings on Markets • 0 implied HN points • 26 Sep 09
💼 Business Investment
  1. Investors valued Twitter at $1 billion based on comparisons to Facebook's earlier valuation of $6.5 billion, despite Twitter having fewer members. This shows how startups can be valued through relative comparisons.
  2. For Twitter to justify its $1 billion valuation, it needs to generate around $100 million annually. This could come from small fees or advertising, but many users might not pay for it.
  3. Currently, Twitter lacks a clear way to make money and could be seen as a trend. Investors might still see value if they think it connects them to a lot of potential customers.

Valuing Young Companies

Musings on Markets • 0 implied HN points • 19 Jun 09
💼 Business Investment
  1. Young companies often have limited data because they are just starting out. This makes it hard to accurately value them.
  2. These companies usually don't bring in much money yet, which can lead to big losses as they try to get established.
  3. Investors need to be careful with their money because many young companies fail. Only a small percentage survive long-term.

Who uses preferred stock?

Musings on Markets • 0 implied HN points • 22 Mar 09
💰 Finance Investment
  1. Financial service firms like preferred stock because it counts as equity for regulatory purposes. This helps them meet capital requirements even though it’s costly.
  2. Young and growth companies often prefer preferred stock because they are not making money. This way, they avoid the downsides of traditional debt and offer investors potential future benefits.
  3. The existence and use of preferred stock are significantly influenced by regulations and tax laws. Poor laws can lead companies to make unwise financing choices.

Dealing with Hybrids

Musings on Markets • 0 implied HN points • 19 Mar 09
💰 Finance Investment
  1. Hybrids are financial instruments that combine debt and equity, making them tricky to analyze. It’s best to break them down into their components to truly understand their value.
  2. Convertible debt is a common hybrid, where the lender can convert their loan into equity later. Treating it as just debt can mislead people into thinking it’s cheaper than it actually is.
  3. Preferred stock is a tougher hybrid to handle and needs special consideration. It often doesn't fit neatly into the debt or equity categories like other hybrids.

Alternatives to Regression Betas

Musings on Markets • 0 implied HN points • 15 Feb 09
💰 Finance Investment
  1. You can use relative standard deviations instead of regression betas to measure risk. This method looks at how a stock's volatility compares to the average volatility of other stocks.
  2. Option-based methods provide a forward-looking estimate of risk by using prices from traded options. However, this approach only works for companies with those options and bonds available.
  3. Accounting betas are calculated by looking at changes in a company's earnings compared to the overall market. They can be a stable alternative, especially for private companies, but their lagging nature can be a drawback.

Low riskfree rates...

Musings on Markets • 0 implied HN points • 02 Feb 09
💰 Finance Investment
  1. Riskfree rates in the US and Europe are very low right now, which makes valuing companies tricky. Using these low rates can lead to inflated company valuations.
  2. While riskfree rates are low, risk premiums and default spreads are high. This means we need to adjust other factors in our valuation to get accurate results.
  3. It's important to be consistent with all the numbers used in valuation. If you use today's low riskfree rates, you should also update growth and inflation rates to match the current economic situation.

Accounting Fraud

Musings on Markets • 0 implied HN points • 07 Jan 09
💼 Business Investment
  1. Self-interest is often more powerful than accountability in companies. When people face conflicts, they usually prioritize their own benefits.
  2. Good corporate governance is important to prevent fraud. Having a board that asks smart questions can help keep management honest.
  3. New accounting rules won't stop fraud. Companies often find ways to cheat around regulations, so being skeptical can save investors from losses.

Hard wired to deceive?

Musings on Markets • 0 implied HN points • 23 Dec 08
💰 Finance Investment
  1. Larger brains in primates, including humans, are linked to higher chances of deceit. So, you might be more at risk of being misled by smart investors.
  2. We tend to lie often and it's a normal habit. This means that investment pitches can be filled with half-truths.
  3. People feel guilty about lying but that doesn't stop them from doing it again. Getting away with a lie encourages more lying.

Enterprise value is negative... Is that possible?

Musings on Markets • 0 implied HN points • 08 Dec 08
💰 Finance Investment
  1. Enterprise value can be negative when a company's cash surpasses the combined market values of its debt and equity. This situation could create an arbitrage opportunity for investors.
  2. Calculating enterprise value can be tricky because it may not include all the company's debts, like lease obligations for retail firms.
  3. The cash figures used in enterprise value calculations can be outdated, which means they might not accurately reflect the company's current cash situation.

The New World Order: How this crisis affects valuation

Musings on Markets • 0 implied HN points • 21 Oct 08
💰 Finance Investment
  1. The risk of investing in stocks and corporate bonds has increased, affecting how we value them. There's a chance this is a temporary spike, but we might see higher risk levels for a couple of years.
  2. Global economies will slow down, impacting the growth and earnings of companies next year.
  3. Small companies may struggle or fail in this crisis, while larger companies with strong finances and advantages will likely come out ahead and be valued higher.

Mark to Market or Not to Mark to Market?

Musings on Markets • 0 implied HN points • 01 Oct 08
💰 Finance Investment
  1. Marking to market helps investors see the current value of assets, but it can be hard for accountants to keep up with everything they need to estimate.
  2. Fair value can mean different things depending on how you look at it, making it tricky to have a clear agreement on what it actually is.
  3. The rules for marking assets vary by type, leading to inconsistencies where some assets are more strictly valued than others, like securities versus loans.

Risk = Danger + Opportunity

Musings on Markets • 0 implied HN points • 17 Sep 08
💰 Finance Investment
  1. Risk includes both danger and opportunity. It’s important to see how they work together.
  2. In good times, everyone focuses on opportunities, ignoring the risks involved.
  3. In bad times, it’s easy to only see the dangers, but paying attention might reveal new opportunities.

Sam Altman is a CROOK

Top Carbon Chauvinist • 0 implied HN points • 13 Feb 24
🕹 Technology Investment
  1. Sam Altman is raising a huge amount of money, $7 trillion, which seems unreasonable because it costs much less to source hardware from existing suppliers.
  2. There are concerns about how Altman plans to use the money, especially since he isn't starting projects from scratch but relying on others for technology and manufacturing.
  3. Many believe Altman is more focused on making money for himself rather than addressing serious questions about the future of AI and technology development.

Top Fundraising Mistakes

Tech Ramblings • 0 implied HN points • 04 Sep 23
💼 Business Investment
  1. Raising too much money can lead to losing control of your company and diverting focus from your main product. It's better to raise just enough to reach your next goal.
  2. On the flip side, not raising enough can cause you to constantly seek more funding, which distracts you from building a great product and can lead to losing investor trust.
  3. Getting your valuation right is crucial. Too high can make future funding hard, while too low can mean giving away too much of your company and losing control.

How to get better at pitching fund selectors

Fund Marketer • 0 implied HN points • 19 Jun 24
💰 Finance Investment
  1. Using Generative AI can save a lot of time when creating drafts for legal documents. Lawyers at Ashurst found they could save up to 80% of the time on some tasks.
  2. The accuracy of AI-generated content can be surprisingly high compared to human output, but it still requires careful review. Lawyers found it hard to tell whether some AI outputs were made by a human or the AI.
  3. When pitching to fund selectors, having a clear story and understanding your audience is key. Many pitch decks fail because they don't address who their target customers are or why now is the right time for their proposal.