As part of our learning in Equity Valuations, we understood how to value cyclical companies, NBFC’s and Banks, using PE multiples and how to use Discounted Cash Flow method to find intrinsic value. Now let’s try to use Dividend Discount Model to value a company.
“A cow for her milk, a hen for her eggs, and a stock, by heck for her dividends.” – John Burr Williams, The Theory of Investment Value, 1938.
In the strictest sense, the only cash flow you receive from a firm when you buy a stock is the dividend. The simplest model for valuing equity is the dividend discount model. It is nothing but the value of a stock is the present value of expected dividends on it. While many analysts have turned away from the dividend discount model and viewed it as outdated and mostly use DCF, there are still many specific companies where the dividend discount model remains a useful took for estimating value. (Continue reading…)
Let me start this post by quoting Munger & Buffett quotes on Earnings potential.
“Over the long term, it’s hard for a stock to earn a much better return than the business
which underlies it earns. If the business earns 6% on capital over forty years and you hold
it for that forty years, you’re not going to make much different than 6% return – even if
you originally buy it at a huge discount. Conversely, if a business earns 18% on capital
over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell
of a result.”
- Charlie Munger, Vice-Chairman, Berkshire Hathaway (Continue reading…)
Starting from this, I want to make a series of posts on different valuation techniques we use to value the companies like,
1) Young companies
2) Growth companies
3) Mature companies
4) Cyclical companies
5) Commodity based companies
6) Declying companies etc
In my previous post I have already discussed, how differently we value Financial firms.
In this post, I am going to discuss on how to value cyclical company by taking Maruthi Suzuki as example.
Uncertainty and volatility are endemic to valuation, but cyclical and commodity companies have volatility thrust upon them by external factors. As a consequence, even mature companies have volatile earnings and cash flows.
It is always a challenge to value companies that have volatile earnings. (Continue reading…)
My own experience:
1) 20 days back, I got a call from home. Summary of that call is to arrange 1 Lac in 2 days.
– Done. Thanks to Emergency fund.
2) 5 days later, an unexpected and unstoppable expense of 60k.
– Done. Again thanks to Emergency fund.
3) Exactly 4 days later, Mother hospitalized (She is Fine now!) because of existing disease which is not covered by my Oriental Family floater.
– Handled it as well. Again thanks to Emergency fund.
On this occasion of Guru Purnima, I take this opportunity to thank all my Investment Gurus who taught me (and their is lot more yet to learn) and stood like a Light house in my Investment Journey.
In the investment world, some people think it is “cool” to say “I am a Value Investor”. But it is not so cool to follow it. Not at all. Infact it is a mindset that should be incorporated in the life style itself and not only in Investment related decisions.
One person who is the dean of Value Investing is “Ben Graham”. (Continue reading…)
Few days back I read an article which says about an experiment conducted at City University London (view the report here), where a group of monkeys (not the original monkeys but computer programmed) were given the task to choose couple of stocks and built a portfolio. Then they back tracked them to check how they performed vis-a-vis the market.
Inspired by this idea, I had conducted the same experiment on Indian stock markets. (Continue reading…)
That was exactly my feeling after reading some of the facts in the past few days which I am going to discuss below.
The heading of this post have 2 meanings:
1) How much as an individual I know?
2) How much as a retail investor community WE know compared to big players out there?
Companies, Promoters, Brokers, Auditors, Institutional investors etc, all these people have only one thing in their mind apart from making profit. It is to use every opportunity to take the money out from Retail investors pockets. (Not all companies, but most of them). This greedy nature of companies combined with the pressure to stay top in the competition allows them to do such things. They make use of every option they have, to show us that their books are stronger than actual. (Continue reading…)