4 ms·

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 ba

by 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.

by shoo 5y ago

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.