The hottest Valuation Substack posts right now

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Myth 4.3: The D cannot change (over time) in a DCF

Musings on Markets • 0 implied HN points • 04 Nov 16
💰 Finance Valuation
  1. Discount rates in a DCF can change over time, so don't think you need to stick with one forever. It's important to adjust them based on the company's growth and risks.
  2. Adjusting discount rates makes valuations more accurate, especially for young or transitioning companies. Big changes in these firms mean their risk should be reflected in the discount rate.
  3. To estimate changing costs of capital, begin with the current rate and make adjustments based on planned changes in the company's debt and business mix, moving towards stable growth if the company matures.

Myth 4.2: It's all about D in the DCF

Musings on Markets • 0 implied HN points • 04 Nov 16
💰 Finance Valuation
  1. Many people focus too much on discount rates when valuing investments, often ignoring cash flows and growth rates, which are just as important.
  2. Getting the discount rate wrong can lead to big mistakes in valuation, but the range of costs of capital is often quite similar across different companies.
  3. Instead of stressing over discount rates, we should prioritize accurately estimating future cash flows and growth, especially for younger companies.

Myth 4.1: If you don't like betas (or modern portfolio theory),you cannot do a DCF!

Musings on Markets • 0 implied HN points • 04 Nov 16
💰 Finance Valuation
  1. Discounted cash flow (DCF) analysis needs a discount rate, typically estimated using beta to assess risk, but not everyone agrees on using this method.
  2. Investors can use alternative risk measures if they don't like betas or modern portfolio theory, such as based on historical earnings or other company characteristics.
  3. It's important to recognize that while betas can help estimate costs of equity, there are other ways to evaluate risk that might better fit different viewpoints on investing.

Fairness Opinions: Fix them or Flush them!

Musings on Markets • 0 implied HN points • 14 Sep 16
💼 Business Valuation
  1. Fairness opinions are supposed to check if a deal is fair, but many appraisers do it poorly. They often rely on numbers from company management, which can lead to biased results.
  2. These opinions don't really protect shareholders like they were meant to. Instead, they're often just a way for boards to avoid scrutiny after a deal.
  3. To improve fairness opinions, there should be stricter rules and penalties for appraisers and managers who don't follow fair practices. This could help make the valuation process more trustworthy.

Keystone Kop Valuations: Lazard, Evercore and the TSLA/SCTY Deal

Musings on Markets • 0 implied HN points • 06 Sep 16
💰 Finance Valuation
  1. The Tesla and SolarCity deal raised serious concerns about potential conflicts of interest. Elon Musk was heavily involved in both companies, which made people worry about whether he was making decisions that were best for shareholders.
  2. The investment banks involved in valuing the deal, Lazard and Evercore, faced challenges in justifying the merger. They had to convince both sets of shareholders that the deal was a win for everyone, which is often a tough balancing act.
  3. The valuations provided by the banks were criticized for being poorly constructed and based on questionable assumptions. It seemed like they relied too much on management's cash flow forecasts without proper scrutiny, which raised doubts about their thoroughness and ethics.
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The School Bell Rings! It's Time for Class!

Musings on Markets • 0 implied HN points • 01 Sep 16
🚌 Education Valuation
  1. Teaching is about sharing a story. The teacher believes a good class follows a narrative that evolves over time and reflects personal experiences.
  2. Valuation isn't just about calculations; it's about developing a personal investment philosophy. The course emphasizes understanding intrinsic value and how to trust your own asset assessments.
  3. The class resources are open to everyone, allowing anyone to learn from the materials and lectures. It's encouraged to take time with the content – there's no rush!

Superman and Stocks: It's not the Cape (CAPE), it's the Kryptonite(Cash flow)!

Musings on Markets • 0 implied HN points • 24 Aug 16
💰 Finance Valuation
  1. CAPE might not be the best way to judge if stocks are too expensive. It doesn’t give a clear picture of market value or future performance when compared to simpler earnings measures.
  2. Investment success relies on what alternatives you have, like comparing stocks to bonds. With bond rates low, stocks might look tempting even at higher CAPE values.
  3. Cash flow is key to stock value. Companies returning more cash to shareholders than they earn could face trouble, which affects stock prices.

The Ride Sharing Business: Is a Bar Mitzvah moment approaching?

Musings on Markets • 0 implied HN points • 17 Aug 16
💼 Business Valuation
  1. Ride sharing is growing really fast and reaching more places than many thought possible. This rapid growth means that more people are using services like Uber and Lyft every day.
  2. Ride sharing is becoming global. What started in the U.S. is now popular in many countries, especially in Asia, where companies like Didi are leading the charge.
  3. The ride sharing market is changing a lot, with more options for users. Companies are trying new features like carpooling, pre-scheduled rides, and luxury options to attract different customers.

Investing and Valuation Lessons from the Renaissance

Musings on Markets • 0 implied HN points • 15 Aug 16
💰 Finance Valuation
  1. Investing requires faith, much like the builders of the Duomo had patience. You often need to trust your judgment and stick to your valuations, even when the market seems unpredictable.
  2. Many investment lessons are not new; they are just being forgotten and rediscovered. It's important to learn from past mistakes instead of assuming we're better than earlier investors.
  3. Combining storytelling and data is key in investing. Just as art and science can work together, being skilled in both narrative and numbers can lead to better investment decisions.

Icahn exits, Buffett enters, Whither Apple? Value and Price Effects of Big Name Investing

Musings on Markets • 0 implied HN points • 06 Jun 16
💰 Finance Valuation
  1. The entry or exit of famous investors, like Carl Icahn or Warren Buffett, can influence how people perceive the value of a stock. Their actions might suggest they have special insights about the company’s future.
  2. There are different types of investors, such as insiders, activists, traders, and value investors, and each one can impact stock prices and perceptions in different ways. Knowing who is buying or selling can help you understand the market dynamics better.
  3. It's important to trust your own investment judgment rather than just following what big name investors do. Confirmation bias can lead you to only see evidence that supports your beliefs, so staying true to your analysis is key.

DCF Myth 3.2: If you don't look, its not there!

Musings on Markets • 0 implied HN points • 23 May 16
💰 Finance Valuation
  1. Using simulations for financial valuations helps capture uncertainty. Instead of just using one guess for numbers, you can use a range to see different possible outcomes.
  2. Probability distributions are important in understanding risks and making better financial decisions. They can show how likely different outcomes are, which is essential for planning.
  3. Modern tools like Excel add-ons make simulations easier to run. You can use programs that help visualize the potential values of an investment based on various inputs.

DCF Myth 3.1: The Margin of Safety - Tool for Action or Excuse for Inaction?

Musings on Markets • 0 implied HN points • 03 May 16
💰 Finance Valuation
  1. The Margin of Safety (MOS) is a way to protect your investments by ensuring you buy assets at a price lower than their actual value. It helps investors feel safer by providing a buffer against mistakes or market fluctuations.
  2. MOS isn't a one-size-fits-all strategy. Different investments should have different levels of MOS based on how risky or certain they are. For example, a steady utility company may need less margin than a startup with uncertain prospects.
  3. Using MOS doesn't mean you can skip careful valuations. Good investing requires solid value judgments and understanding what you're buying, rather than just relying on a safety margin to make choices.

DCF Myth 3: You cannot do a valuation, when there is too much uncertainty!

Musings on Markets • 0 implied HN points • 02 May 16
💰 Finance Valuation
  1. You can still do valuations even when there's a lot of uncertainty. It's actually common to face unknowns in investing.
  2. Uncertainty can lead to bad decision-making like inaction or relying too much on others' opinions. Being aware of how uncertainty affects you is key.
  3. Having a clear story or narrative about a company helps during uncertain times. It can guide your decisions and make valuations feel more grounded.

The Disruptive Duo: Amazon and Netflix!

Musings on Markets • 0 implied HN points • 17 Feb 16
💼 Business Valuation
  1. Amazon and Netflix are changing the market game. Some people think their stocks are too expensive, while others believe they are just getting started with their growth.
  2. Both companies are willing to invest heavily now, betting that they will make profits in the future. They are focusing on growing internationally to attract more customers.
  3. Traditional accounting makes it look like these companies aren’t very profitable. But if we shift how we think about their spending, they could actually appear much more valuable than many realize.

A Violent Earnings Season: Pricing and Value Perspectives

Musings on Markets • 0 implied HN points • 08 Feb 16
💰 Finance Valuation
  1. Price and value are not the same. Price is what people are willing to pay, while value is based on a company's ability to make money.
  2. Earnings reports can heavily influence stock prices. Companies can see big swings up or down depending on whether they meet or miss expectations.
  3. Understanding the whole picture in earnings reports is important. Looking at various numbers is better than just focusing on earnings per share.

January 2016 Data Update 4: The Costs of Capital

Musings on Markets • 0 implied HN points • 14 Jan 16
💰 Finance Valuation
  1. The cost of capital is crucial for businesses as it helps determine where to invest. Companies need to know the minimum returns needed to justify their investments.
  2. It plays a key role in deciding the mix of debt and equity a company should use. Understanding this mix can optimize financial performance.
  3. Different sectors have varying costs of capital due to risk factors. It's important to use a cost of capital that reflects the specific risks of investments being considered.

The Compressed Tech Life Cycle: The Investor Challenge

Musings on Markets • 0 implied HN points • 21 Dec 15
💰 Finance Valuation
  1. Tech companies often look expensive when they're young and cheap when they're old, which can confuse investors. It's important to use the right methods for valuing these companies, instead of using outdated approaches.
  2. Just because a tech company seems good today doesn't mean it will still be a good investment tomorrow. Investors should regularly re-evaluate their tech stocks and sell if they become overvalued.
  3. Dividends might not be the best way for tech companies to return cash to shareholders. Stock buybacks can be more suitable for their changing needs and financial situations.

Winning at a Loser's Game? Control, Synergy and the ABInBev/SABMiller Merger!

Musings on Markets • 0 implied HN points • 23 Oct 15
💼 Business Valuation
  1. When a company buys another, they usually want to control it better, believe it’s undervalued, or expect to create synergies. Understanding these reasons helps in assessing a merger's potential success.
  2. Synergy can mean combining strengths for better growth, but it requires careful planning and true benefits to actually work out. Just hoping for it isn't enough.
  3. Sometimes even smart businesses can overestimate the benefits of a deal. It’s important to look closely at the numbers and not just rely on excitement or confidence.

The Ride Sharing Business: Playing Pundit

Musings on Markets • 0 implied HN points • 21 Oct 15
💼 Business Valuation
  1. The ride-sharing market is expanding quickly, attracting many new users and changing the traditional transport business. Companies like Uber and Lyft are experiencing huge revenue increases, but they also face fierce competition.
  2. Investors are boosting their expectations for ride-sharing companies, predicting high future earnings. However, some worry that these expectations might be too optimistic, leading to a 'big market delusion.'
  3. The future of ride-sharing could go in many directions, including becoming a monopoly, a low-profit game, or evolving with new technologies like driverless cars. Each scenario presents different challenges and risks for drivers and customers.

Dream Big or Stay Focused? Lyft's Counter to Uber!

Musings on Markets • 0 implied HN points • 19 Oct 15
💼 Business Valuation
  1. Lyft focuses on the US market, while Uber aims for global reach. This difference defines their business strategies and growth potential.
  2. Uber has a larger valuation compared to Lyft due to its big narrative, drawing investor attention and funding. Lyft, though smaller, may offer better investment value at its current price.
  3. Both companies face significant losses as they compete, but Lyft's focus could help it avoid the high costs and distractions associated with a broader global strategy.

On the Uber Rollercoaster: Narrative Tweaks, Twists and Turns!

Musings on Markets • 0 implied HN points • 12 Oct 15
💼 Business Valuation
  1. Uber's market has grown bigger than just urban rides. It's now reaching suburbs and even international markets, showing strong growth in places like Asia.
  2. The competition in the ride-sharing industry is tough. Companies are investing a lot to attract drivers and create new offerings, which is pushing costs higher.
  3. Uber faces regulatory challenges and changing cost structures. This means their profits may be lower than expected, and they might have to adjust their business model in the future.

No Mas, No Mas! The Vale Chronicles (Continued)!

Musings on Markets • 0 implied HN points • 26 Sep 15
💰 Finance Valuation
  1. Valuing companies in tough situations, like Vale, can give investors better returns if done right. Even when the market is uncertain, having a value estimate can still be useful.
  2. Political and country risks can have long-lasting effects on investments. Inconsistent political situations can make it harder to predict investment outcomes.
  3. The amount of debt a company holds can worsen its financial problems. High debt levels can limit a company's ability to recover from market downturns, making cautious investment essential.

Big Markets, Over Confidence and the Macro Delusion!

Musings on Markets • 0 implied HN points • 28 Aug 15
💼 Business Valuation
  1. Big markets can attract a lot of attention and investment, but just having a large market doesn't guarantee a company's success. Companies need to capture market share and generate profits to truly benefit from it.
  2. Overconfidence among entrepreneurs and investors can lead to unrealistic expectations. This collective overconfidence can create inflated valuations and lead to disappointment when reality sets in.
  3. Investors should be cautious in big markets. It's important to evaluate companies carefully and understand the price being paid, since there can be significant gaps between market prices and actual revenue potential.

My Valuation Class: The Fall 2015 Model Preview

Musings on Markets • 0 implied HN points • 24 Aug 15
🚌 Education Valuation
  1. Valuation is a skill, not just numbers or theory. It's like cooking or building things, where you get better by doing it rather than just studying the details.
  2. There's a big difference between valuing an asset and pricing it. Valuation looks deeper into the intrinsic value, while pricing is often about what the market will pay.
  3. You can value almost any asset, even if it seems tricky. By the end of a valuation class, you'll have the tools to value different types of assets confidently.

Narrative Resets: Revisiting a Tech Trio (Apple, Facebook and Twitter)

Musings on Markets • 0 implied HN points • 12 Aug 15
💼 Business Valuation
  1. Valuation is important: Understanding a company's worth helps you make smarter investment decisions. It's key to know when to buy or sell based on value, not just price movements.
  2. Flexibility in investment strategies: Don't stick to strict rules about which stocks to buy. Being open to investing in different sectors, even risky ones, can lead to good opportunities at the right price.
  3. Timing matters: Instead of just holding onto great companies forever, sell when their price goes too high compared to their value. Staying aware of market changes can help you maximize profits.

DCF Myth 2: A DCF is an exercise in modeling and number crunching!

Musings on Markets • 0 implied HN points • 08 Aug 15
💰 Finance Valuation
  1. Valuation is not just about numbers; it's about the story behind those numbers. A good valuation connects a company’s narrative to its financial data.
  2. In early-stage companies, the narrative drives value more than the numbers. As companies mature, the focus shifts to actual financial performance.
  3. Investors should look for significant changes in a company's narrative rather than just details like revenue or earnings per share. A strong story is essential for understanding a company's value.

Decoding Currency Risk: Pictures of Global Risk - Part IV

Musings on Markets • 0 implied HN points • 30 Jul 15
💰 Finance Valuation
  1. When valuing something, it's important to match the currency of your cash flows with your discount rate. This is because different currencies have varying expected inflation rates, which can affect both the cash flows and the discount rates.
  2. You should be careful when estimating expected growth rates and cash flows, as they need to reflect the same inflation assumptions used for discount rates. If they don't match, you might miscalculate a company's value.
  3. It's essential to separate your views on currency movements from your company valuations. A well-run company should be worth the same regardless of the currency used, as long as the valuation methods are consistent.

Pricing Country Risk - Pictures of Global Risk - Part III

Musings on Markets • 0 implied HN points • 29 Jul 15
💰 Finance Valuation
  1. Country risk should be considered in investment strategies. Riskier countries generally have lower price-to-earnings (PE) ratios compared to safer ones.
  2. Comparing different equity multiples can help find good investment opportunities. However, you must be careful as some outlier countries can skew the results.
  3. Using enterprise value multiples can be less affected by country risk, but may still not fully account for it. A good approach is to value and price companies together to make informed investment choices.

Valuing Country Risk: Pictures of Global Risk - Part II

Musings on Markets • 0 implied HN points • 29 Jul 15
💰 Finance Valuation
  1. Investors need to adjust cash flows based on country risk, which means recognizing how risks in different countries can affect expected earnings and cash flows.
  2. An alternative way to deal with country risk is by increasing the required return on investments to reflect the higher risk, which also lowers the asset's value.
  3. It's important to avoid double counting risks when making adjustments and to ensure that any changes made for country risk are clear and understandable to others.

Billion-dollar Tech Babies: A Blessing of Unicorns or a Parcel of Hogs?

Musings on Markets • 0 implied HN points • 11 Jun 15
💼 Business Valuation
  1. Unicorns are private companies valued over a billion dollars, and their numbers are increasing. This rise can be both good due to more investment options and concerning if it's just a bubble.
  2. Valuing unicorns isn't straightforward because capital investments and protections can distort their true worth. For example, investors might gain ownership stakes that adjust based on company value changes.
  3. While protections help investors feel secure, they can complicate the investment landscape. Both investors and founders should strive for clarity and balance to avoid overvaluing companies or risking too much equity.

The Value and Pricing of Cash: Why low interest rates & large cash balances skew PE ratios

Musings on Markets • 0 implied HN points • 27 May 15
💰 Finance Valuation
  1. Cash is often misunderstood in company valuations. It should be simply valued without complex models, but many investors mishandle it.
  2. Low interest rates and high cash balances impact price-to-earnings (PE) ratios. When cash makes up a large part of a company's value, it can distort their financial ratios.
  3. We need to separate cash from operational value when evaluating companies. This helps create a clearer picture of their actual performance and worth.

The Search for Investment Serenity: The Look Back Test!

Musings on Markets • 0 implied HN points • 20 Apr 15
💰 Finance Valuation
  1. Investors should regularly review their past investments to make better decisions. This means questioning whether to buy, hold, or sell based on current valuations.
  2. It's important to be open about mistakes and avoid emotional decision-making in investing. Being transparent can help you learn and improve your strategy.
  3. Having a balanced approach to investing is key. Too much faith can lead to ignoring potential issues, while too little can cause you to abandon good investments too soon.

The Small Cap Premium: Where is the beef?

Musings on Markets • 0 implied HN points • 11 Apr 15
💰 Finance Valuation
  1. The idea of a small cap premium suggests that smaller companies can earn higher returns than larger ones, but the evidence for this is getting weaker. Recent studies show that the historical data is mixed and may not support this premium anymore.
  2. Investors often assume that small companies are riskier and expect higher returns because of this. However, current market prices are not reflecting a higher expected return for small cap stocks compared to large ones.
  3. Many analysts keep using the small cap premium because it's a common practice, not necessarily because it’s the best approach. It's important to question its use and consider other ways to evaluate the risks related to smaller companies.

DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!

Musings on Markets • 0 implied HN points • 23 Feb 15
💰 Finance Valuation
  1. You can't calculate a DCF just with a discount rate and cash flow. It needs to be done carefully, considering many factors for accurate results.
  2. It's important that everything in a DCF is consistent, like using the same currency and type of cash flows. If things don’t line up, the result won't make sense.
  3. A good DCF should tell a convincing story about the business’s future, matching numbers with real expectations and market conditions.

How low can you go? Doing the Petrobras Limbo!

Musings on Markets • 0 implied HN points • 11 Feb 15
💰 Finance Valuation
  1. Petrobras had a major rise and fall in its market value, going from a top global oil company to losing over $200 billion due to poor management and political interference.
  2. The company's governance structure allowed the Brazilian government to maintain control while still raising funds from shareholders, leading to decisions that favored political gains over profitability.
  3. Investors should be cautious when companies are heavily influenced by government interests, as this can result in value destruction rather than shareholder benefits.

Blood in the Shark Tank: Pre-money, Post-money and Play-money Valuations

Musings on Markets • 0 implied HN points • 04 Feb 15
💰 Finance Valuation
  1. Pre-money and post-money valuations are important in venture capital. They help determine how much a business is worth before and after an investment.
  2. The ownership share an investor gets depends on the business's value and their bargaining power. A strong entrepreneur might keep more ownership if capital is easy to find.
  3. Pricing a business can be tricky and unclear. It's better to be transparent about how ownership rights are assessed to avoid confusion and ensure fairness.

Discounted Cashflow Valuations (DCF): Academic Exercise, Sales Pitch or Investor Tool?

Musings on Markets • 0 implied HN points • 01 Feb 15
💰 Finance Valuation
  1. Discounted cash flow (DCF) is a method to figure out what an asset is worth based on its expected future cash flows, adjusted for risk and time. It's more about the practice of valuation than complicated math.
  2. Many people find DCF intimidating because it's often overdone with unnecessary details or used as a sales tool. This can make it hard for others to trust or understand the process.
  3. Valuation is not perfect, and you'll probably make mistakes due to uncertainty. But that's okay; even experts struggle with predicting the future, and market values can change too.

Putting the D in the DCF: The Cost of Capital

Musings on Markets • 0 implied HN points • 19 Jan 15
💰 Finance Valuation
  1. The cost of capital is really important in finance and there are three main ways to understand it: as a cost of raising money, as an opportunity cost, and as a discount rate for valuing businesses.
  2. When figuring out a company's cost of capital, you need to look at the risk of the business, the debt it has, and how much investors expect to earn. It’s a detailed process but crucial for making good financial decisions.
  3. It's easy to get caught up in small details about the cost of capital, but what's more important is to focus on the actual cash flows of the business. Getting those numbers right can make a bigger impact.

Up, up and away! A crowd-valuation of Uber!

Musings on Markets • 0 implied HN points • 03 Dec 14
💼 Business Valuation
  1. Valuation isn't just about the numbers; it's also about the story behind those numbers. Your personal views and biases will shape how you value a company like Uber.
  2. Different narratives can lead to vastly different valuations. If you see Uber as having a huge market potential, you might arrive at a value much higher than someone who sees it more conservatively.
  3. It's important to update your narrative as new information becomes available. Successful investors often get the narrative right, even if their number crunching isn’t perfect.

Go where it is darkest: When company, country, currency and commodity risk collide!

Musings on Markets • 0 implied HN points • 20 Nov 14
💰 Finance Valuation
  1. Investing in companies with uncertain futures can lead to bigger rewards. While it may seem safer to choose stable companies, those come with less potential for finding great deals.
  2. Understanding various risks, like country, currency, and corporate governance, is crucial when valuing companies. These factors can greatly impact a company's success and its stock price.
  3. Higher commodity prices usually benefit mining and oil companies, but these markets are unpredictable. A thorough understanding of these cycles is necessary for wise investing.