1 New to investing?
2 Confused by #fintwit jargon?
3 Do we trust people presenting “valuation” to know what they don't know?
(Hint: “my-laser-eyed-golden-skin-ape-pic-is-worth-at-least-twice-your-diamond-skin-ape-pic” = relative pricing. Not valuation)
Follow #PiggyBack🧵
1/X
2 Confused by #fintwit jargon?
3 Do we trust people presenting “valuation” to know what they don't know?
(Hint: “my-laser-eyed-golden-skin-ape-pic-is-worth-at-least-twice-your-diamond-skin-ape-pic” = relative pricing. Not valuation)
Follow #PiggyBack🧵
1/X
Equity = Assets - Liabilities
But what asset and liability values are we going to use?
The answer as always: it depends on what we are going to use it for.
Here is a summary of equity metrics, from the most conservative:
2/X
But what asset and liability values are we going to use?
The answer as always: it depends on what we are going to use it for.
Here is a summary of equity metrics, from the most conservative:
2/X
Price/”Net-Net” Working Capital (P/NNWC)
Classic Graham/Dodd strategy
Assumes: Use only most liquid current assets, deduct subjective discounts.
Conditions (often missed in screens):
1) Not consuming assets (melting ice cube/negative cash-flow)
2) Historical profitability
3/X
Classic Graham/Dodd strategy
Assumes: Use only most liquid current assets, deduct subjective discounts.
Conditions (often missed in screens):
1) Not consuming assets (melting ice cube/negative cash-flow)
2) Historical profitability
3/X
Net-Net P/NNWC continued:
Pro: Diversified #netnet:s = good, aggressive mean reversion strategy w. downside protection in liquidation
Con: Few investable #netnets in efficient markets. Find decent quality by accepting other risks. E.g. #smallcap, less efficient geographies
4/X
Pro: Diversified #netnet:s = good, aggressive mean reversion strategy w. downside protection in liquidation
Con: Few investable #netnets in efficient markets. Find decent quality by accepting other risks. E.g. #smallcap, less efficient geographies
4/X
Price/Net Current Asset Value (P/NCAV)
A simpler but much less conservative #liquidation proxy than net-nets
Graham and Dodd described screening for 2/3 x NCAV stocks, but that is an arbitrary workaround.
In short: #Piggyback would advise against using NCAV standalone
5/X
A simpler but much less conservative #liquidation proxy than net-nets
Graham and Dodd described screening for 2/3 x NCAV stocks, but that is an arbitrary workaround.
In short: #Piggyback would advise against using NCAV standalone
5/X
P/NCAV continued:
Pro: Very fast, easy to calculate/#screen
Con: Not all current assets are worth 100% book. Especially not intangible current assets, if operations shut down. So no good liquidation estimate. Not good for “asset plays” in ignoring long-term, quality assets
6/X
Pro: Very fast, easy to calculate/#screen
Con: Not all current assets are worth 100% book. Especially not intangible current assets, if operations shut down. So no good liquidation estimate. Not good for “asset plays” in ignoring long-term, quality assets
6/X
Price/Tangible Book (P/TBV)
#PiggyBack's preferred book metric for quick screening for "asset play"-type #stocks to analyze further
Pro: Very fast, easy to calculate. In #screeners. Ignores intangible assets = partial #goodwill cleanup
Con: Other accounting flaws distort
7/X
#PiggyBack's preferred book metric for quick screening for "asset play"-type #stocks to analyze further
Pro: Very fast, easy to calculate. In #screeners. Ignores intangible assets = partial #goodwill cleanup
Con: Other accounting flaws distort
7/X
Price/Book (P/B or P/BV)
Go-to equity book value in academic literature
Pro: Very fast, easy to calculate/screen. Widely available long-term historical data. Easy to relate to multiples (P/E), popular #valuation models
Con: Very distorted by accounting including goodwill
8/X
Go-to equity book value in academic literature
Pro: Very fast, easy to calculate/screen. Widely available long-term historical data. Easy to relate to multiples (P/E), popular #valuation models
Con: Very distorted by accounting including goodwill
8/X
.#Accounting = rules-based, backward-looking records
Equity investor use:
1 Model input
2 For early hints of significant risks/opportunities
Accounting does NOT:
1 Assess investments' economic returns (above #costofcapital)
2 Offer book values estimates for #intrinsicvalue
9/X
Equity investor use:
1 Model input
2 For early hints of significant risks/opportunities
Accounting does NOT:
1 Assess investments' economic returns (above #costofcapital)
2 Offer book values estimates for #intrinsicvalue
9/X
To move from screening toward #valuation:
1 Collect, analyze more info
2 Make forward-looking assumptions
In other words, draw maps of what is likely to happen next. This makes us more confident of #intrinsicvalue in:
1 Balance sheets
2 Earnings power
3 Franchise growth
10/X
1 Collect, analyze more info
2 Make forward-looking assumptions
In other words, draw maps of what is likely to happen next. This makes us more confident of #intrinsicvalue in:
1 Balance sheets
2 Earnings power
3 Franchise growth
10/X
“Don’t tell me you buy companies at low P/E ratios and high dividends or whatever it is. That is not valuing the company, that’s just running screens. Maybe one in a hundred actually values companies.”
— @AswathDamodaran in recent @InvestLikeBest joincolossus.com/episodes/75305… ~50m
11/X
— @AswathDamodaran in recent @InvestLikeBest joincolossus.com/episodes/75305… ~50m
11/X
This distinction of “#valueinvesting” screening (factor tilt/tool to get to interesting market areas) vs investment valuation is made much clearer by @AswathDamodaran.
Highly recommend(!) the underfollowed @SubstackInc edition of “Musings on Markets” aswathdamodaran.substack.com
12/X
Highly recommend(!) the underfollowed @SubstackInc edition of “Musings on Markets” aswathdamodaran.substack.com
12/X
Now moving on to fundamental analysis that is not yet complete valuation.
Price / Reproduction Value:
1 Attempt to explain the cost for competitors to hypothetically "recreate" company's assets in place
2 Usually, by collecting/adjusting reasonable market price points
13/X
Price / Reproduction Value:
1 Attempt to explain the cost for competitors to hypothetically "recreate" company's assets in place
2 Usually, by collecting/adjusting reasonable market price points
13/X
Price / Reproduction Value (continued):
Pro: May highlight “hidden” values in complex capital structures
Con: May require considerable data sourcing effort. Not a complete fundamental valuation framework, lacks forward perspective + return on capital-cost of capital links
14/X
Pro: May highlight “hidden” values in complex capital structures
Con: May require considerable data sourcing effort. Not a complete fundamental valuation framework, lacks forward perspective + return on capital-cost of capital links
14/X
Price/Net Asset Value (NAV)
With NAV we have finally reached valuation(!)
Pro: Combine some consistent valuation framework + reasonable forward-looking assumptions. Then NAV is #intrinsicvalue estimate that may capture the fundamental #riskreward of the investment
15/X
With NAV we have finally reached valuation(!)
Pro: Combine some consistent valuation framework + reasonable forward-looking assumptions. Then NAV is #intrinsicvalue estimate that may capture the fundamental #riskreward of the investment
15/X
Price/NAV continued:
Con: Valuing #stocks is much more time/resource-consuming than pricing #stocks. Nor is it just applying some quantitative filter (like our favorite value stock screens)
#PiggyBack suggest investors focus their valuation efforts/research reading diet➡️
16/X
Con: Valuing #stocks is much more time/resource-consuming than pricing #stocks. Nor is it just applying some quantitative filter (like our favorite value stock screens)
#PiggyBack suggest investors focus their valuation efforts/research reading diet➡️
16/X
Price/NAV continued:
Perhaps obvious, but in #valueinvesting we benefit if our valuation, or research we read, focus on situations/themes that we:
* Have reason to believe may be mispriced
* Already have committed to (change our mind)
* Wish to learn more about (new idea)
17/X
Perhaps obvious, but in #valueinvesting we benefit if our valuation, or research we read, focus on situations/themes that we:
* Have reason to believe may be mispriced
* Already have committed to (change our mind)
* Wish to learn more about (new idea)
17/X
P/NAV continued:
Caveat 1 - Valuation does not mean:
1 Extremely complex or large models
2 Including the most info or establishing closest insider access
Such analysis will be highly detailed
If lacking common sense + probabilistic thinking it may also be very biased
18/X
Caveat 1 - Valuation does not mean:
1 Extremely complex or large models
2 Including the most info or establishing closest insider access
Such analysis will be highly detailed
If lacking common sense + probabilistic thinking it may also be very biased
18/X
P/NAV continued:
Caveat 2 - Valuation can be (badly) corrupted
Valuation models are mechanical. Assumptions can be corrupted to arrive at basically any NAV “needed”
Research with #conflictsofinterest/lack of independence?
Trust business/sector insights - NOT valuation(!)
19/X
Caveat 2 - Valuation can be (badly) corrupted
Valuation models are mechanical. Assumptions can be corrupted to arrive at basically any NAV “needed”
Research with #conflictsofinterest/lack of independence?
Trust business/sector insights - NOT valuation(!)
19/X
BEYOND VALUE - Ventures
In #stockmarket:s, #ventures tend to be found in high-valuation micro/small caps + tech
Usually:
1 Tech/business innovation
2 Early-stage/explosive growth
3 Some low-probability shot at future industry leadership
4 Outside #valueinvesting tool set
20/X
In #stockmarket:s, #ventures tend to be found in high-valuation micro/small caps + tech
Usually:
1 Tech/business innovation
2 Early-stage/explosive growth
3 Some low-probability shot at future industry leadership
4 Outside #valueinvesting tool set
20/X
BEYOND VALUE - “Fair” Market Folly
Market prices for liquid securities are set where demand meets supply for the day. This has nothing to do with long-term fundamentals or valuation
Pricing without valuation also means that we allow any level of short-run #overvaluation➡️
21/X
Market prices for liquid securities are set where demand meets supply for the day. This has nothing to do with long-term fundamentals or valuation
Pricing without valuation also means that we allow any level of short-run #overvaluation➡️
21/X
BEYOND VALUE - “Fair” Market Folly continued:
Eventually, we no longer value with common-sense fundamentals
Most participants:
1 Chase price #momentum
2 Use loose relative multiples (“my-laser-eyed-golden-skin-ape-pic-is-worth-at-least-twice-your-diamond-skin-ape-pic”)
22/X
Eventually, we no longer value with common-sense fundamentals
Most participants:
1 Chase price #momentum
2 Use loose relative multiples (“my-laser-eyed-golden-skin-ape-pic-is-worth-at-least-twice-your-diamond-skin-ape-pic”)
22/X
BEYOND VALUE - “Fair” Market Folly continued:
Other practitioners and promoters will still use valuation frameworks, like discounted cash flow models
But study “valuations” of high-fliers/glamour/#growthstocks carefully as they may rely on extremely aggressive assumptions
23/X
Other practitioners and promoters will still use valuation frameworks, like discounted cash flow models
But study “valuations” of high-fliers/glamour/#growthstocks carefully as they may rely on extremely aggressive assumptions
23/X
BEYOND VALUE - “Fair” Market Folly continued
Sometimes skeptical #valueinvestor:s are proven not just short-term, but downright wrong on high-priced #stocks.
Some speculative investments simply materialize into strong fundamentals, that grow beyond "high" current prices
24/X
Sometimes skeptical #valueinvestor:s are proven not just short-term, but downright wrong on high-priced #stocks.
Some speculative investments simply materialize into strong fundamentals, that grow beyond "high" current prices
24/X
BEYOND VALUE - “Fair” Market Folly continued:
Statistically, investors do however lose out over the market cycles by chasing the highest valuation "glamour" parts of the #stockmarket.
Markets do simply not seem to learn to not overvalue shiny, popular objects of their day
25/X
Statistically, investors do however lose out over the market cycles by chasing the highest valuation "glamour" parts of the #stockmarket.
Markets do simply not seem to learn to not overvalue shiny, popular objects of their day
25/X
BEYOND VALUE - “Fair” Market Folly continued:
Multiples >100x earnings, or worse revenue, call for extreme success. Do NOT accept them as likely on just “this time is different” storytelling.
#GreaterFool speculation is very different from valuing speculative investments
26/X
Multiples >100x earnings, or worse revenue, call for extreme success. Do NOT accept them as likely on just “this time is different” storytelling.
#GreaterFool speculation is very different from valuing speculative investments
26/X
This summarizes "Shades of Value" - a new investor intro to fundamental equity metrics/definitions commonly used in #valueinvesting.
We love to see more #stockmarket-readers of our free weekly PiggyBack Letter @SubstackInc:
piggyback.one/p/shades-of-va…
Thanks and very welcome!
X/X
We love to see more #stockmarket-readers of our free weekly PiggyBack Letter @SubstackInc:
piggyback.one/p/shades-of-va…
Thanks and very welcome!
X/X
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