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"Don't be fooled by the P/E"


Liberty
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It is, thanks, and Seilern is/was an interesting fund house (the key manager left and has started a very similar fund at CQS - it will be interesting to see who does better over the next 5 years).

 

I resisted this style of investing for years because... it seemed too easy/obvious.  And boy do I regret it.

 

Now I am nervous again, because it seems to have become almost groupthink, and while I accept great firms can be expensive and still do well, I also think that the Nifty 50 shows that there comes a price level where you have to wait a Long Time for them to outperform - and, y'know, in the long run, we're dead.

 

So I hold on for now to the Fundsmith/Lindsell Train/Akre/Seilern etc. way of doing things for now, but I would love to find some diversity.

 

It feels like value areas like Energy e.g. E&P could be on the turn, but such a specific bet requires luck on the timing.

 

And value funds have taken such a hammering for the past decade that it seems hard to identify who has still got the ability and hunger to really slay when value becomes a thing again.

 

 

 

 

 

 

 

 

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Quite interesting.

 

Are we to understand that held long enough any company's yield on purchase price will approach ROIC?

 

It seems the capital efficiency is one of the main engines of wealth creation, is this only because 'hard' resources are finite and usually must be financed by debt?

 

If a company uses debt so that ROE>>ROIC, should the calculations in the table in the article be adjusted because the shareholder's return - assuming no blow-up - is on the leveraged equity portion? Is there an adjustment to fair value P/E for leverage used?

 

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WACC includes debt financing costs.

 

That is correct, but does the WACC ( more precisely the debt component cost) adequately reflect the risk? I would argue no, because bond markets itself are in a bubble ( due to record low risk free rates and record low risk spreads )

 

Still , this is a highly useful way of thinking and proves again that ROIC is the one metric to rule them all.

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So if a company is some sort of leveraged buyout deal it starts with a low ROIC and the ROIC increases as debt is paid down up to the natural limit of the business?

 

Also what's the difference between ROIC and return on purchase price? Say a company has $1 of book equity and $40 billion in debt and a market price of $40 billion. One should calculate return on $80 billion or on $41 billion?

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