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Need a book recommendation about Stock Valuation Methodologies


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Just to describe some of my background. I was a Corporate Finance Major in Undergrad (It's a blend of Intermediate Accounting and Finance). I went back to school for an MBA and a Masters in Finance. I was a CFA Level 1 Candidate, failed twice, ended up in the 90th percentile of those who've failed both times.

 

Through my academic career I've learned all about the Cash Flow models for projecting Cash and imputing Growth Rates into future projections, but to this very day I can do a zillion different analyses of a company's Financial Statements yet I cannot arrive at a methodology for what a ballpark Stock Price should be. Dividend Discount model has proved to be inefficient because of inconsistencies with Dividends. Comparables method is fine but it's entirely reliant on the type of market the security is in. And the Discounted Cash Flow model appears like it may be the one I'm most interested in learning but I'm the least familiar completing it from A-Z with a REAL set of Financials (and not some mock test example).

 

If anybody knows any books that they recommend about stock valuation methodologies I would greatly appreciate it. I prefer books that are more on the quantitative and scientific side. I don't need to read another book of general theory or "This is what a P/E ratio is." I'm well past all of that in my education.

 

Thanks in advance!

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Damodaran?

 

He has likers and haters. His models are a bit more complex than simplistic DCF. This has pros and cons (that reader/user should internalize).

 

I'm probably a bit more liker than hater though I don't use his framework and models.

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The CFA texts are great for simplifying DCF calculations.  I don't remember if it's L1 or L2.

 

The question is do you need to do a DCF to arrive at a value?  I remember cranking out all sorts of DCF valuations on companies and arriving at very precise values that could have been wildly off due to a change in one or two variables.

 

There was a Morningstar book that was great for understanding valuation.  It's probably 10 years old now, but it's an easier read.  It's the Five Rules for Successful Stock Investing by Pat Dorsey.

 

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Packer recommended to me (years ago now - wow) Shannon Pratt's valuation textbook. It was very comprehensive.

 

Personally I think the best way is practice. I don't really use a DCF in spreadsheet form, but I learn about the company, adjust the financials to reflect true economics, and figure out what I thinl that stream of cash flows will look like and what that is worth.

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Personally I think the best way is practice. I don't really use a DCF in spreadsheet form, but I learn about the company, adjust the financials to reflect true economics, and figure out what I thinl that stream of cash flows will look like and what that is worth.

 

What do you use to discount the Cash Flows? Expected growth? Some sort of IRR you arrive at?

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In my personal investing, I first calculate historical economic cash flows. Then I take a more qualitative approach: read/learn about the business and form an opinion on how stable I think are those cash flows, and do I think they will be growing or shrinking in the future. If I can't get a handle on that, game over.

 

From there it's then about whether the current valuation is cheap, reasonable, or high, as a multiple of the economic earnings I calculated previously.

 

I also think about, If the SP500 multiple is X, do I think this company is better or worse than the average company (and therefore deserves a higher/lower multiple)?

 

For example I had good fortune buying Philip Morris and 3M at market or less-than-market multiples about a year ago. I thought these had better than average business prospects, and the economic earnings multiple I calculated was less than the current SP500 multiple.

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I'd also recommend Aswath Damodaran's books, specifically:

 

Investment Valuation

https://www.amazon.com/Investment-Valuation-Tools-Techniques-Determining/dp/111801152X/ref=sr_1_7?ie=UTF8&qid=1499695675&sr=8-7&keywords=aswath+damodaran

 

Corporate Finance

https://www.amazon.com/Corporate-Finance-Practice-Aswath-Damodaran/dp/0471283320/ref=sr_1_10?ie=UTF8&qid=1499695675&sr=8-10&keywords=aswath+damodaran

 

 

There's some repeat in the books.  If you do just one do the first one. These are thick, several hundred page textbooks, with exercises at the end of each chapter.  They're essentially the books Damodaran uses to teach his classes.

 

Damodaran will take you through the theory of various valuation techniques and explain everything thoroughly. As a bonus you get Excel spreadsheet examples from which you can start making your own valuation spreadsheets.

 

Like another poster said, you'll need to take Damodaran with a pinch of salt.  Damodaran does hue to the academic side, so you'll see discount rates calculated to the second decimal point, etc..  That said, he's a great teacher.

 

 

Mike

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