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I use the most recent 5-10 years of earnings, assuming there isn't significant deviation therein. Line of best fit. Adjust for modest inflation. I haven't read

I use the most recent 5-10 years of earnings, assuming there isn't significant deviation therein. Line of best fit. Adjust for modest inflation. I haven't read any literature that suggests a better method, but would be inclined to discuss such techniques. I use the 10-year Treasury note as a risk-free rate, which results in a share price much too high due to historically low interest rates. I do not have a reasonable risk premium that I otherwise use, as I have not yet found a sensible contemporary measure of such a premium. I do know that investing with a desired 10% real return is a relevant figure, but I don't have many other data points on that. As a result, I use a 50% discount from the resulting price to provide a margin of safety. These are all roughly textbook constants that I use to serve as some mechanical "suggested basis [for] maximum appraisal for investment." I also perform these in an automated way with publicly available SEC data... I don't believe that it is supposed to be intellectually stimulating. I think it's boring, and I'm fine with that. There is no simple mechanical process that will allow one to appropriately incorporate trade information and adjust valuations as a result. You don't know until you see the reports. And most of the time, not really even then. I don't know what the BOM is for plenty of products. I don't need to research that. I don't enjoy analyzing companies that have too much at stake to produce their net earnings; even companies I personally enjoy I have a hard time convincing myself even with a fair value estimate that I'd like to own its common stock. I do appreciate your reply, though. I'm more interested in these discussions than ones simply claiming how supposedly great or immoral or how much potential a company has. If I want opinions to fuel speculative theories, I can go to Twitter.

danielmarkbruce 5y ago
There is a strategic change going on in the chip business. Blindly putting in the last 10 years with a couple adjustments isn't going to do it. Think of putting in the last 10 years for blockbuster, or newspapers, while in the late 90s. No good.
- shoo 5y ago
  you've identified one of the key weaknesses of this general valuation approach. trying to make forward-looking predictions extrapolating a decade or two out based upon backward-looking financial metrics may only make sense in situations where you have reason to believe that the conditions and dynamics that generated the past results will continue to persist for the next decade or two into the future (and it might not even make sense then)
  - danielmarkbruce 5y ago
    Yup. And it takes a lot of work and requires a lot of insight to sensibly conclude the conditions will stay the same. Ie, either way, it's not simple. Warren Buffett gives these folksy sounding quotes which make it seem so easy, but he's a fanatic who has been fanatically watching businesses in detail for 70 years... and he still gets it wrong sometimes.
    - shoo 5y ago
      here's another anecdote you might find entertaining: i invested in one company late last year based on an initial screen using this kind of extrapolation of historical financials, and a bit more reading through the company's annual reports to get a better feel of the business model. the business model seemed a little weird but the business' financials looked good, especially compared to the company's share price. since then i've updated my expectations and expect to earn about -80% to -100% return on invested capital. i failed to read symptoms of possible accounting fraud that were signaled in public disclosures on the company website at the time i invested, and a few months later directors have resigned and been replaced, the company has been delisted for failing to file quarterly financials, and the company has released the results of an accounting probe that has explained how the former directors fabricated all of the company financials, starting off with dating sales before goods were delivered to customers, and ending with making payments to the company from their personal accounts and registering the payments as if they were sales from external customers. part of operationalising this kind of valuation model into a profitable investment scheme also needs a supporting due diligence function, which in this instance i failed dismally at
    - shoo 5y ago
      Buffett also achieved enough scale where he could buy a controlling stake in some small public companies. Amidst some of the folksy quotes, a fair bit of money was also made by Buffett & co sending in a new manager to a freshly acquired business to perform the ugly work of shutting down and selling unprofitable segments of the business and firing the associated staff. As a tiny retail investor in public companies without the ability to engineer a control situation, this kind of thing is not possible to replicate.
- andrewmcwatters 5y ago
  I'd be very interested in hearing your valuation strategy and what your personal IRR is.
  - danielmarkbruce 5y ago
    I'm not the one claiming it's easy, I'm claiming it's really hard. So, my IRR is irrelevant.

danielmarkbruce 5y ago

There is a strategic change going on in the chip business. Blindly putting in the last 10 years with a couple adjustments isn't going to do it. Think of putting in the last 10 years for blockbuster, or newspapers, while in the late 90s. No good.

shoo 5y ago
you've identified one of the key weaknesses of this general valuation approach. trying to make forward-looking predictions extrapolating a decade or two out based upon backward-looking financial metrics may only make sense in situations where you have reason to believe that the conditions and dynamics that generated the past results will continue to persist for the next decade or two into the future (and it might not even make sense then)
- danielmarkbruce 5y ago
  Yup. And it takes a lot of work and requires a lot of insight to sensibly conclude the conditions will stay the same. Ie, either way, it's not simple. Warren Buffett gives these folksy sounding quotes which make it seem so easy, but he's a fanatic who has been fanatically watching businesses in detail for 70 years... and he still gets it wrong sometimes.
  - shoo 5y ago
    here's another anecdote you might find entertaining: i invested in one company late last year based on an initial screen using this kind of extrapolation of historical financials, and a bit more reading through the company's annual reports to get a better feel of the business model. the business model seemed a little weird but the business' financials looked good, especially compared to the company's share price. since then i've updated my expectations and expect to earn about -80% to -100% return on invested capital. i failed to read symptoms of possible accounting fraud that were signaled in public disclosures on the company website at the time i invested, and a few months later directors have resigned and been replaced, the company has been delisted for failing to file quarterly financials, and the company has released the results of an accounting probe that has explained how the former directors fabricated all of the company financials, starting off with dating sales before goods were delivered to customers, and ending with making payments to the company from their personal accounts and registering the payments as if they were sales from external customers. part of operationalising this kind of valuation model into a profitable investment scheme also needs a supporting due diligence function, which in this instance i failed dismally at
  - shoo 5y ago
    Buffett also achieved enough scale where he could buy a controlling stake in some small public companies. Amidst some of the folksy quotes, a fair bit of money was also made by Buffett & co sending in a new manager to a freshly acquired business to perform the ugly work of shutting down and selling unprofitable segments of the business and firing the associated staff. As a tiny retail investor in public companies without the ability to engineer a control situation, this kind of thing is not possible to replicate.
andrewmcwatters 5y ago
I'd be very interested in hearing your valuation strategy and what your personal IRR is.
- danielmarkbruce 5y ago
  I'm not the one claiming it's easy, I'm claiming it's really hard. So, my IRR is irrelevant.