Lehrskov

Yep :-)

Just a note on what some of the other commenters said here regarding the DCF: I absolutely agree that one of the weaknesses of the DCF is that the precision it seems to offer is mistaken for accuracy. Just because you go through X steps of assumptions and calculations and then get a result in the end doesn't mean that that result is true (if only it were so!). The strength, above combining quantitative layers, is simply that it provides a structured method of assumptions. But they are still assumptions. Damodaran actually mentions that he at one point historically noticed that he didn't trust his own DCFs and that he then changed approach to combining his DCFs with storytelling or, as I would call it, scenario forecasting for the development of the business. (check the GoogleTalk here: ) Okay WneverLose: next question! :-)

Hi WneverLOSE The traditional method is to use a 2-step (or multi-step) model where you assume different growth rates at different times in the future. STEP 1: assume future growth periods So you might fx assume that your 30% grower can keep up that rate for 4 years, then dropping to 15% for 10 years and then dropping to 3% from that time onwards. STEP 2: assume future margins and ROE/ROIC You then think about the future ROIC: will it increase, decrease or remain stable? If you have some operational leverage the ROIC might increase over time as your margins expand. If you assume competitors come gunning for your business then it might fall. Etc. Map this out along a timeline as well for each of your growth periods. STEP 3: assume future capital structure and cost Estimate/think about what future capital structure the company might use. Look at sector examples and estimate the cost of debt as it is (there is a lot of techniques involved in optimising WACC. Google is your friend). STEP 4: Calculate required reinvestment rate Given earnings and perhaps a leveraged capital structure you can now calculate the needed reinvestment rate. 30% growth assuming a stable 30% ROIC and no debt is = 100% reinvestment rate. A 15% growth rate at a 30% ROIC is a 50% reinvestment rate and so on. New debt naturally detracts from required reinvestment but lowers net margins due to interest expense. Given your Growth Timeline, your ROIC Timeline and your Capital Structure Timeline then the Reinvestment Timeline becomes calculable. Step 5: calculate net earnings for each year and discount back to today Pretty straight forward I hope, but given profit, debt and reinvestment you have excess earnings available, the present value of which is the value of your company. There will be more earnings available in the future but it will be discounted more. Step 6: apply a margin of safety. As you can see there are LOTS of assumptions in all the above steps. No way around this: better make them explicitly than hidden back in the dark recesses of your mind. Be critical of course. Generally the triad of Growth-Risk-Reinvestment has to add up: if growth and reinvestment is assumed high but risk low you really have to know why this is so (and vice versa around the triad). The margin of safety then is applied ON TOP of your conservative estimates. Then compare to price and buy if appropriate :-) Voila! /Ulrik

Hi everyone Lately I've been thinking about how to become a better investor. Whether it's teachable and replicable. And so on. So I hope you'll try this thought experiment to kick things off: - An investor you have solid respect for (say: Seth Klarman or Joel Greenblatt or whoever) offers to teach you one on one. - He will charge you $5000 for a week, but he is busy so you'll have to come up with the curriculum yourself. Question 1: Are you a buyer? Question 2: If yes, what would you ask him to teach? Thanks for playing :) /Ulrik P.S.: I added the money element to get you to not just mindlessly say yes just because you want to hang out with a superstar. Approach it rationally: would a weeks worth of teaching really be WORTH that money to you? P.P.S: I'll answer myself a little later, but I don't want to 'prime' the discussion with my own thinking up front.