The hottest Valuation Substack posts right now

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How much are you paying for growth?

Musings on Markets • 0 implied HN points • 29 May 12
💰 Finance Valuation
  1. There are different views on how much growth in a company is worth. Some think it's not worth much, while others believe it's priceless.
  2. To understand the value of growth, you look at what a company is earning now versus what it could earn in the future if it reinvests its profits.
  3. By comparing a company's market value to the value of its current assets, you can see how much of its price is based on expected future growth.

Facebook: Sowing the wind, reaping the whirlwind

Musings on Markets • 0 implied HN points • 23 May 12
💰 Finance Valuation
  1. Pricing is about what people are willing to pay, while valuation is about what an asset is truly worth. This difference is important in understanding investment decisions.
  2. Market momentum can be fragile and is often built on illusions. Investors may ignore signs of bubbles because they don't want to believe they are making bad choices.
  3. When momentum shifts, especially in social media stocks, investors might panic and sell, which can drive prices down even further than their true value. It's crucial for value investors to stay aware of these shifts.

Governments and Value III: Bribery, Corruption and other "Dark" Costs

Musings on Markets • 0 implied HN points • 30 Apr 12
💼 Business Valuation
  1. Corruption and bribery can seriously hurt a company's value, especially in countries where government officials are corrupt. Businesses often have to pay 'gratuities' to keep operating.
  2. In competitive markets like telecom in India, corruption can create uncertainty and lead to major financial losses. Scandals can affect both local and foreign companies differently.
  3. Addressing corruption in business can be challenging. It can be treated as an operating expense, seen as an implicit tax, or require higher returns to cover costs associated with corrupt officials.

Governments and Value II: Subsidies and Value

Musings on Markets • 0 implied HN points • 26 Apr 12
💼 Business Valuation
  1. Governments can help certain companies by providing subsidies, which can lower their financing costs and increase their overall value. These subsidies might come as below-market loans or tax breaks.
  2. There are different types of subsidies, including low-cost financing, tax benefits, price supports, and indirect subsidies. Each of these can positively affect a company's cash flows and valuation.
  3. When valuing a company, you can include these subsidies in your calculations or evaluate them separately. Understanding how long the subsidies may last is important for accurate valuation.

Governments and Value: Part 1 - Nationalization Risk

Musings on Markets • 0 implied HN points • 17 Apr 12
💰 Finance Valuation
  1. Nationalization can greatly affect the value of companies, especially in countries with unstable governments. Investors need to consider the risk of losing their ownership rights when valuing businesses in such places.
  2. To account for nationalization risk, investors can adjust their cash flow expectations or increase the required return on investments. This helps them understand how much risk they are taking.
  3. When valuing companies based on financial multiples, be careful, as firms in high-risk countries might seem cheap but can be risky investments. It's important to evaluate the real reasons behind these low valuations.
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Emotions, Intrinsic value and Dividend Clienteles: The Apple trade postscript

Musings on Markets • 0 implied HN points • 07 Apr 12
💰 Finance Valuation
  1. Emotions can play a big role in investing decisions. Sometimes people buy or sell stocks based on how they feel, not just on facts.
  2. The value of a company can change based on its investors. If a company attracts the wrong kind of investors, it could hurt its overall value.
  3. Management's ability to handle pressure from different types of stockholders is important. If they respond poorly to investor demands, it could negatively impact the company's future.

Apple: Know when to hold 'em, know when to fold 'em..

Musings on Markets • 0 implied HN points • 04 Apr 12
💰 Finance Valuation
  1. Apple's stock has become a momentum-driven play, meaning its value is based more on past performance than on any new information about the company. This makes it hard to predict future growth.
  2. Institutional investors now favor Apple, and they can quickly change their opinions. If many big investors like something, it might be time for individual investors to think twice.
  3. With the introduction of dividends, Apple is attracting a new kind of investor who may clash with long-term growth investors. This could create tension if things don't go as planned.

Equity Risk Premiums: The 2012 Edition

Musings on Markets • 0 implied HN points • 23 Mar 12
💰 Finance Valuation
  1. The equity risk premium is the extra return investors expect from stocks compared to safer investments. It shows how investors feel about risk and potential returns.
  2. Different methods exist to measure the equity risk premium, including surveys, historical data, and implied premiums. Each method can give different results, but future predictions are key.
  3. When valuing stocks or deciding on investment allocations, using the current implied equity risk premium is generally best. This keeps valuations grounded in today's market situation.

Facebook: Playing the "IPO pop" game?

Musings on Markets • 0 implied HN points • 23 Feb 12
💰 Finance Valuation
  1. Getting shares at the IPO price is tricky. Even if you bid, you might not get all the shares you want, which can lead to investing too much in overpriced stocks.
  2. Just because a stock usually pops on offering day doesn't mean it will this time. Bigger IPOs like Facebook might not have the same initial price jump as smaller ones.
  3. Timing your exit is crucial. Many IPOs don't perform well long-term, so it's often better to sell quickly after the offering if you want to make a profit.

The IPO of the decade? My valuation of Facebook

Musings on Markets • 0 implied HN points • 16 Feb 12
💰 Finance Valuation
  1. Facebook's growth has been huge, with revenues doubling every year for a while. The company seems to have a solid plan to continue growing, but there are questions about how long that can last.
  2. Operating profits for Facebook are impressive, but they might drop as the company tries to grow even more. Still, expectations are high for Facebook's financial performance compared to other companies like Google.
  3. Investing in Facebook comes with risks. While it has a lot of potential, the company is not set up to give shareholders much say in how it operates, which could be a red flag for some investors.

Options and Taxes: Is a "Facebook" tax next?

Musings on Markets • 0 implied HN points • 04 Feb 12
💰 Finance Valuation
  1. Mark Zuckerberg's large option exercise will lead to a huge tax bill for him, while Facebook benefits from a big tax deduction. This raises questions about how stock options are taxed.
  2. There's a disconnect between accounting and tax rules regarding options, leading to successful companies like Facebook getting bigger tax breaks than less successful ones like Cisco.
  3. Policymakers might consider changing tax laws to align with accounting rules, but that could create complexities for employees dealing with tax on unrealized options.

Snowmen and Shovels: Investing Lessons?

Musings on Markets • 0 implied HN points • 22 Jan 12
💰 Finance Valuation
  1. Investing can be divided into two main types: growth and value. Growth investors are like happy kids playing in the snow, while value investors are like the parents shoveling snow.
  2. Both growth and value investors need to be careful not to go to extremes. Each has something valuable to offer but can also miss important facts about the market.
  3. To value companies well, it's important to balance optimism and realism. This means thinking about how a company might perform in both good and bad situations.

Following up on Groupon

Musings on Markets • 0 implied HN points • 04 Nov 11
💰 Finance Valuation
  1. In investing, it's important to stay humble and be ready to rethink your assumptions. The market might have a different, more optimistic view of a company's growth.
  2. Discounted cash flow (DCF) analysis is not inherently biased against growth companies. It gives a true value based on projected cash flows, even if that feels conservative.
  3. Just because a stock has a high price doesn't mean it's worth that much. Many investors are focused on short-term gains and may buy stocks without understanding their true value.

Are you ready to value Groupon?

Musings on Markets • 0 implied HN points • 02 Nov 11
💼 Business Valuation
  1. Groupon's initial estimated value dropped from $20 billion to around $12 billion due to management's credibility issues and concerns over customer acquisition costs. This shows how important a company's reputation is in the market.
  2. The company's revenue saw a huge rise of over 300% from 2010 to 2011, but sustaining that growth will be a challenge. It's crucial to be careful when predicting future growth for businesses.
  3. The valuation suggests that investing in Groupon is also a bet on the economy as it can profit from tough economic times. This makes it a unique business model that depends on different economic conditions.

From revenues to earnings: Operating, financing and capital expenses....

Musings on Markets • 0 implied HN points • 15 Jun 11
💼 Business Valuation
  1. Groupon reported high revenues but also significant operating losses, raising questions about their accounting practices. It's important to understand how companies measure their profits and expenses.
  2. Groupon claimed it would be profitable by using 'Adjusted CSOI,' which excludes customer acquisition costs. This approach may mislead investors about the company's true profitability.
  3. Reclassifying expenses can make a company's earnings look better, but it can also hide the real costs involved in growth. Evaluating a company's return on investment is key to understanding its value.

There is an app for that....

Musings on Markets • 0 implied HN points • 09 Jun 11
🕹 Technology Valuation
  1. Technology has made valuing companies easier than it used to be. In the past, gathering data was a lot of work, but now apps can do much of it for us.
  2. The uValue app offers different models to help users value stocks and businesses effectively. It includes detailed and simple versions of valuation models, making it versatile for different users.
  3. The app is currently only available for iPads and has some initial errors that are being fixed. Despite being new, it has been tested on many types of companies and seems to work well.

Thoughts on intrinsic value

Musings on Markets • 0 implied HN points • 08 Jun 11
💰 Finance Valuation
  1. Intrinsic value is based on an asset's fundamentals like cash flows and risk. It's an estimate of what something is truly worth, independent of market prices.
  2. Only assets expected to generate cash flows have intrinsic values. Things like stocks and bonds have intrinsic values, while collectibles like art don’t really have one.
  3. Many experts focus on pricing based on how similar assets have sold before, rather than true value. This difference is important when valuing businesses or investments.

Dual share structure: The Google model spreads

Musings on Markets • 0 implied HN points • 20 May 11
💼 Business Valuation
  1. Google introduced a new way for companies to go public by using a dual share structure, allowing founders to keep more control through shares with extra voting rights.
  2. Voting rights are important because they let shareholders influence company decisions. However, many investors often overlook these rights if they believe the company is well-managed.
  3. Valuing stocks with different voting rights can be tricky. Usually, voting shares are worth more, especially in companies that aren't managed well.

Valuing young growth companies: A postscript on Linkedin

Musings on Markets • 0 implied HN points • 19 May 11
💼 Business Valuation
  1. Young growth companies can have different stages and potential. For example, LinkedIn was growing its revenue much faster than Skype at a similar time.
  2. Profitability is an important aspect to consider. LinkedIn was already making money, while Skype was still losing money.
  3. Market size matters when valuing a company. LinkedIn had a smaller market potential compared to Skype, which could compete in a larger telecom market.

Is Skype worth $8.5 billion? An exercise in valuing young, growth companies

Musings on Markets • 0 implied HN points • 18 May 11
💼 Business Valuation
  1. Valuing a young company like Skype is tricky because there are many unknowns. The worth of such a company can depend on factors like future revenue growth and operating margins.
  2. When investing in young businesses, it's important to look for a large market and strong competition barriers. These can help the company grow and succeed in a tough marketplace.
  3. Young companies need good financial health and a capable team to survive. Companies with less debt and strong cash reserves have a better chance of making it long-term.

The Little Book of Valuation

Musings on Markets • 0 implied HN points • 03 May 11
💰 Finance Valuation
  1. Valuation can seem complicated, but it's actually quite simple. The goal is to empower investors to learn how to value different types of companies themselves.
  2. Understanding the key factors that drive a company's value is crucial. Identifying these value drivers helps investors create better investment strategies.
  3. The book is designed to be accessible and easy to read, focusing on practical tools rather than overwhelming details. It aims to make valuation understandable for all investors.

Alternatives to the CAPM: Wrapping up

Musings on Markets • 0 implied HN points • 30 Apr 11
💰 Finance Valuation
  1. Ignoring risk in investments is a big mistake. You need your own way to measure and manage risk because investments have different levels of risk.
  2. Using numbers is important for valuing companies, but don't forget the stories behind them. The results in numbers should reflect the company's real situation.
  3. Keep your methods simple. A straightforward approach, like CAPM, can be useful, and it's important to question and refine your risk assessment regularly.

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

Musings on Markets • 0 implied HN points • 30 Apr 11
💰 Finance Valuation
  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 Valuation
  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.

Margin of Safety: An alternative risk assessment tool?

Musings on Markets • 0 implied HN points • 16 Apr 11
💰 Finance Valuation
  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.

Breach of Trust: Bank Valuation after the banking crisis

Musings on Markets • 0 implied HN points • 29 Mar 11
💰 Finance Valuation
  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.

Buffett and Black-Scholes

Musings on Markets • 0 implied HN points • 01 Mar 11
💰 Finance Valuation
  1. Warren Buffett believes the Black-Scholes model gives bad values for long-term options, which is a viewpoint that some disagree with.
  2. Buffett's opinions on option valuation may not consider newer methods that adjust the Black-Scholes model for better accuracy.
  3. You can still be a successful investor without knowing how to value options, as long as you avoid investments that rely heavily on them.

Equity Risk Premiums: The 2011 Edition

Musings on Markets • 0 implied HN points • 25 Feb 11
💰 Finance Valuation
  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.

How much cash is too much? Looking at Apple

Musings on Markets • 0 implied HN points • 19 Jan 11
💼 Business Valuation
  1. Cash balance should be compared to low-risk investments, not just operating costs. It's important to know how a company is using cash, since unnecessary risk can harm investors.
  2. Companies like Apple that effectively manage cash can be trusted to use it wisely. A good track record is key to determining how much cash is too much.
  3. Too much cash can lead to bad investment decisions, which could hurt company value. Keeping cash can be smarter than spending it poorly, especially if the company is performing well.

The Facebook Valuation!

Musings on Markets • 0 implied HN points • 05 Jan 11
💼 Business Valuation
  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.

Asset selection & Valuation in Illiquid Markets

Musings on Markets • 0 implied HN points • 26 Dec 10
💰 Finance Valuation
  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.

Valuation Approaches...

Musings on Markets • 0 implied HN points • 20 Jun 10
💰 Finance Valuation
  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 Valuation
  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.

Parent versus Consolidated financial statements

Musings on Markets • 0 implied HN points • 03 Jun 10
💰 Finance Valuation
  1. Parent company statements show only the parent’s results, while consolidated statements combine both the parent and its subsidiaries' financials. This can affect how investors view a company's worth.
  2. Consolidated statements leave out transactions between the parent and subsidiaries, giving a clearer picture of overall performance. This means some revenues might be excluded, which can look different from parent-only reports.
  3. When valuing a company, using parent company statements allows for flexibility across different businesses, while consolidated statements are helpful for understanding the whole group. The choice depends on how similar the parent and subsidiaries are.

Cash and Cross holdings

Musings on Markets • 0 implied HN points • 28 May 10
💰 Finance Valuation
  1. Companies like Adris Grupa and Apple hold significant amounts of cash, but the market's perception of that cash can vary. Sometimes, cash isn't valued equally and can be discounted if a company isn't performing well.
  2. Tata companies often have cross holdings, meaning they own shares in each other, which complicates their valuation. Investors need to consider multiple companies to accurately value one.
  3. In emerging markets, trusted family names historically provided a way for investors to make decisions due to limited information. However, as markets evolve, these cross holdings might not reflect the true value of individual companies anymore.

Currency Choices in Valuation

Musings on Markets • 0 implied HN points • 16 Apr 10
💰 Finance Valuation
  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.

Stock versus Flow: My thoughts

Musings on Markets • 0 implied HN points • 09 Apr 10
💰 Finance Valuation
  1. Balance sheets show a company's financial position at a specific time, but they can be misleading. Numbers like debt and cash can change significantly over time, making it hard to trust a single balance sheet.
  2. Flow statements, like the income and cash flow statements, show money coming in and going out over a period. These are generally more reliable for understanding a company's performance.
  3. To get a clearer picture of a company's financial health, look at quarterly balance sheets and current numbers instead of just year-end figures. This helps catch any manipulation or changes in financial status.

Goodwill: Plug Variable or Real Asset?

Musings on Markets • 0 implied HN points • 31 Mar 10
💰 Finance Valuation
  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.

Accounting inconsistencies

Musings on Markets • 0 implied HN points • 30 Mar 10
💼 Business Valuation
  1. Goodwill on balance sheets is often misleading; it doesn't truly represent value and can make financial statements look better than they are.
  2. Minority interests can confuse analysts because they represent liabilities rather than actual assets, which can distort financial evaluations.
  3. The accounting treatment of intangible assets and leases isn't consistent, leading to inaccurate measures of a company's true value and earnings.

Thoughts on the riskfree rate

Musings on Markets • 0 implied HN points • 06 Feb 10
💰 Finance Valuation
  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.