We are going to want to get a significantly higher return, obviously — in terms of cash produced relative to the amount we’re outlaying now — for a business than we are from a government bond. That has to be the yardstick at a base.
Opinions of fair value based on DCF calculations are necessarily inexact (rightly vague?). But, at least they at least ask the right question.
Since analysts’ reports are so important in our work of identifying and studying companies to invest in, we need to look at the strengths and weaknesses of these reports.
Price earnings ratios are a frail and shifting basis for determining fair value. They do not force investors to think through all the factors that go into a deep assessment of fair value.
These charts tend to exaggerate recent prices and understate older prices. As the time period increases the distortions of the chart increase.
There will be significant fluctuations in the price of individual stocks in one’s portfolio, but this is background noise. Against this noise the investor must monitor their portfolio to detect signs that the superb companies in their portfolio have not or are not deteriorating in character and quality. Where quality has deteriorated, the investor should not hesitate to sell.
Price earnings ratios are simply a rule of thumb. They can lead you astray. But what is worse, they are becoming less and less valid with every passing year.
One apportions investment positions or portfolio weightings according to one’s informed estimate of each stock’s probable return; it is the weighting that provides the highest geometric mean of outcomes; betting your beliefs.
Our subject is diversification and the blind reliance many investors place on the statistical correlation of prices. Correlation is not a term most people are familiar with. It is the mutual relationship between two or more things. In finance and investing it is most often thought of as price statistical correlation. Like much of statistics this can lead you down the garden path.