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Investment Wisdom from Others
galumay:
A collection of wisdom that has caught my eye, starting with one from Oaktree Capital, their memos are always worth a read,
Looking Right Can Be Harder Than Being Right
Fear of looking bad can be particularly debilitating to an investor, client or manager. This is because of how hard it is to consistently make correct investment decisions. Some of this comes from my last memo, on the role of luck.
First, it�s hard to consistently make decisions that correctly factor in all of the relevant facts and considerations (i.e., it�s hard to be right).
Second, it�s far from certain that even �right� decisions will be successful, since every decision requires assumptions about what the future will look like, and even reasonable assumptions can be thwarted by the world�s randomness. Thus many correct decisions will result in failure (i.e., it�s hard to look right).
Third, even well-founded decisions that eventually turn out to be right are unlikely to do so promptly. This is because not only are future events uncertain, their timing is particularly variable (i.e., it�s impossible to look right on time).
This brings me to one of my three favorite adages: �Being too far ahead of your time is indistinguishable from being wrong.�
http://www.oaktreecapital.com/MemoTree/Dare%20to%20Be%20Great%20II.pdf
Another favourite is from Bob, my dad, and he calls it the Matches Share Strategy - "Look for companies that have ripped you off and buy shares in them". It would have us all holding Telstra for a start so it cant be far wrong! I like Cabcharge for the same reason, any of the big banks, Woolworths...the list goes on!
galumay:
just saw this as someones sig on a forum,
A company is worth the PV of all future cashflows (forecast EPS) discounted for time and risk, nothing more or less.
1/PE = ROI. Money in the bank is about 6% ROI or PE of 16, but risk free.
Risk = high debt, commodity price sensitivity etc
I will have to have a think about that! First line is obvious, 2nd line i am a bit lost, 3rd, yep.
galumay:
Fascinating, some real learning in there,
http://www.fool.com.au/2015/02/19/the-most-successful-company-in-the-world/
galumay:
--- Quote from: galumay on February 14, 2015, 06:02:09 PM ---just saw this as someones sig on a forum,
A company is worth the PV of all future cashflows (forecast EPS) discounted for time and risk, nothing more or less.
1/PE = ROI. Money in the bank is about 6% ROI or PE of 16, but risk free.
Risk = high debt, commodity price sensitivity etc
I will have to have a think about that! First line is obvious, 2nd line i am a bit lost, 3rd, yep.
--- End quote ---
Ok, a bit more analysis! As I said first line is self explanatory,
1/PE=ROI, well i found this explanation,
"Return on investment (ROI) can be defined as earnings divided by the price of the investment. Thus, ROI is equivalent to the reciprocal of the P/E ratio. For example, the reciprocal of a P/E = 20/1=20, would be E/P=1/20=.05."
So a PE of 14.4 (market average), 1/14.4=0.07 which is 7%.
What he is saying is that the return on the investor's investment is about 7% in that case,
As interest rates are now nearer 3% than 6%, money in the bank has a P/E ratio of about 25 - but risk free.
I am really not sure what value this adds to thinking about an investment. On that basis I am deleting his middle line and saving the thought that,
A company is worth the PV of all future cashflows (forecast EPS) discounted for time and risk, nothing more or less.
Risk = high debt, commodity price sensitivity etc
galumay:
Just found this great interview, the philiosophy is so simple and clean, lots to absorb and apply here,
http://www.givernycapital.com/assets/documents/179/TWST_04_15_13_Giverny_Capital_.pdf?1386962107
Here is the most important bit, his IV calculation.
And as I said, we try to see what kind of earnings power they can have in five years, and what kind of p/e ratio would make sense. From there, intrinsic value has to be a very simple calculation. You don�t need computers to do it. For example, we think CarMax can earn $4 a share in five years. You put a 20 p/e ratio on it, so it�s an $80 target price in five years. If we can purchase the stock at $40 today, we should do OK. It�s as simple as that, when things go as planned. Of course, we try to make it a little more precise than that, but that�s the general idea.
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