Having well-defined procedures is a start. For everything from acquisitions to annual budgets, when CFOs and management teams follow well-structured processes, more careful analysis takes place. Checks and balances kick in that can curb impulses and other destructive forms of fast thinking.
Sunday, July 21, 2013
Aswath Mohan on Valuation
-Some analysts determine operational cash to be 1-2% of revenues. Rest is treated as excess cash and used to reduce debt balance.
-It is safer to separate cash and marketable securities from operating assets and to value them individually. Thisis because we use operating income to estimate free cash flows to the firm and operating income generally does not include income fromfinancial assets. Once you value the operating assets, you can add the value of the cash and marketable securities to it to arrive at firm value.
-It is safer to separate cash and marketable securities from operating assets and to value them individually. Thisis because we use operating income to estimate free cash flows to the firm and operating income generally does not include income fromfinancial assets. Once you value the operating assets, you can add the value of the cash and marketable securities to it to arrive at firm value.
Tuesday, July 16, 2013
From Seth Klarman's 2007 MIT speech
-A steadily rising housing market erased fears of credit risk, since one’s credit really doesn’t matter if the collateral—in this case houses—is only going up in value
-Institutional selling of a low-priced small-capitalization spinoff,
for example, can cause a temporary supply-demand imbalance. If a company fails to declare an
expected dividend, institutions restricted to owning dividend-paying stocks may unload shares.
Bond funds allowed to own only investment-grade debt would dump their holdings of an issue
immediately after it was downgraded below BBB by the rating agencies. Market inefficiencies,
like tax selling and window dressing, also create mindless selling, as can the deletion of a stock
from an index.
-My firm’s approach is to seek situations where there is urgent, panicked or mindless selling.
-smart investors look to the market not as a guide for what to do but as a creator of opportunity.
-The best investors do not target return; they focus first on risk, and only then decide whether the projected return justifies taking each particular risk
-My firm’s approach is to seek situations where there is urgent, panicked or mindless selling.
-smart investors look to the market not as a guide for what to do but as a creator of opportunity.
-The best investors do not target return; they focus first on risk, and only then decide whether the projected return justifies taking each particular risk
Wednesday, July 03, 2013
Diversification reduces risk
If there is a bet on a flip of a coin : $100 becomes $120 on heads and becomes 0 on tails.
Value of bet is : 120 *0.5 + (-100) * 0.5 = 10.
Return is 10/100 but worst case is too risky (-100%)
If there are 10 coins, $10 bet on each, it becomes : $12 on each head and $0 on tails.
value of bet is 5heads and 5 tails : 10* (12 * 0.5 + (-10) * 0.5) = 10 = 10%
If it is 4H:6T : 4*(12 * 0.5) + 6*(-10)*0.5 = 24 -30 = -6 = -6%
-Lastly, O’Shaughnessy believes that proper diversification is a key factor in maintaining a profitable portfolio. He recommends at least 25 stocks in a micro-, small- or mid-cap portfolio and at least 10 in a large-cap portfolio.
-In case you were wondering, a strategy based on buying stocks with the worst 6-month returns and then holding for a year had an annualized return of 4.15 percent (compared to 14% for low p/s)! As stated in the book, “If you’re looking for a great way to underperform the market, look no further [than buying relative strength laggards].”
-Low P/S and P/B led to best returns. Adding a generic relative strength strategy based on a 6-month return factor with annual rebalances outperformed further.
Value of bet is : 120 *0.5 + (-100) * 0.5 = 10.
Return is 10/100 but worst case is too risky (-100%)
If there are 10 coins, $10 bet on each, it becomes : $12 on each head and $0 on tails.
value of bet is 5heads and 5 tails : 10* (12 * 0.5 + (-10) * 0.5) = 10 = 10%
If it is 4H:6T : 4*(12 * 0.5) + 6*(-10)*0.5 = 24 -30 = -6 = -6%
-Lastly, O’Shaughnessy believes that proper diversification is a key factor in maintaining a profitable portfolio. He recommends at least 25 stocks in a micro-, small- or mid-cap portfolio and at least 10 in a large-cap portfolio.
-In case you were wondering, a strategy based on buying stocks with the worst 6-month returns and then holding for a year had an annualized return of 4.15 percent (compared to 14% for low p/s)! As stated in the book, “If you’re looking for a great way to underperform the market, look no further [than buying relative strength laggards].”
-Low P/S and P/B led to best returns. Adding a generic relative strength strategy based on a 6-month return factor with annual rebalances outperformed further.
Greenblatt's little book notes
From Greenblatts little book that beats the markets
-If the gum shop earns 1.2M last year. 1M shares. How much to buy at? $12 seems good for 10% earnings yield. But main problem in investing is determining if we will get $1.2 per year going forward as well and if earnings could be higher going forward.
-There are many ways to define what makes a business good or bad- quality of products or services, loyalty of customers, value of its brands, efficiency of its operations, strength of competitors, long term prospects of a business.
-If it cost jason $400K to build each of his gum stores and if each store earned him $200K, he is earning a retun on capital of 50%.
-Buy at high earnings yield + high ROIC
-If the gum shop earns 1.2M last year. 1M shares. How much to buy at? $12 seems good for 10% earnings yield. But main problem in investing is determining if we will get $1.2 per year going forward as well and if earnings could be higher going forward.
-There are many ways to define what makes a business good or bad- quality of products or services, loyalty of customers, value of its brands, efficiency of its operations, strength of competitors, long term prospects of a business.
-If it cost jason $400K to build each of his gum stores and if each store earned him $200K, he is earning a retun on capital of 50%.
-Buy at high earnings yield + high ROIC
-Graham suggested that by buying a group of these bargain stocks, investors could safely earn a high return without worrying about a few bad purchases and without doing complicated analysis of individual stocks.
-Magic Formula : IT takes also stocks and ranks them based on earnings yield. It also takes the same list and ranks them on ROIC. Then the two ranks are added together for a final list that is ranked from highest to lowest combined score.
-Magic Formula : IT takes also stocks and ranks them based on earnings yield. It also takes the same list and ranks them on ROIC. Then the two ranks are added together for a final list that is ranked from highest to lowest combined score.