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How to Invest in Stocks: Quick Valuation method (Preamble 3)
Here is a critical question: have you ever thought of how price ratios vary with the economic cycle? The answer to this question helps define in some ways the values needed to do a quick valuation of stocks to get an approximate fair value. The most common ratio of Price to Earnings, Price to Books and Price to Sale have a correlation to the current part of the economic cycle through a change in multiple from its beginning to the end. It is noteworthy that this only happens if the company of choice has solid earning power. We have discussed the basis of establishing earning power in our previous videos. Capturing the behaviour of P.E. and P.S. in our formula helps unlock the door to quick and effective valuation.
How to Invest in Stocks: Quick Valuation Method (Preamble 2)
The business life cycle is the second step of the ladder to a faster valuation method. Understanding this concept is key to knowing what future possibilities of growth, decline or even stagnation may be. Based on these assessments, we can then put our understanding in number terms to help figure out where we would emerge. This goes on to buttress that he journey of value investing involves a series of common sense understanding and decisions to be able to figure the future worth of an enterprise if we were to part with our cash today.
How to Invest in Stocks: Quick Valuation Method (Preamble 1)
Previously, we established a worth for a company using the owner's earnning, a risk-free rate of Fed's 10-year note and other factors. At the end of the video, we said there is a faster and fairly sound method of doing the same thing. In the next few episodes, we shall lay key preambles for doing it before finally stitching them together. This is a Swiss Equiti quick distil method developed in-house to uncomplicate an already complicated field. So it is important to try and follow this particular video series to gain an understanding of how the process actually works.
How to Invest in Stocks: Business Worth Example
Understanding the future amounts of money owners of a business can earn is the key to all valuation estimates. This amount is often confused with dividends. No, it is not dividends. Rather, it is money the company has as left-over after paying its important bills. Some call it the free cash flow(FCF), but a truer picture is painted by owners earnings which differs a bit from FCF. In this video, we use the owner's earning, a risk-free rate of Fed's 10-year note and other key factors to establish a worth for a company. We also went further to calculate the margin of safety for this investment. The key question is there other ways to go about this is? Yes, there is. Our next video shall look into it.
How to Invest in Stocks: Valuations Part 2
In the previous video, https://youtu.be/zsiggUHA-pc , we introduced stock valuations. To further add flesh to the discussion, we have introduced a simple mathematical formula that would help us calculate the present value of our future expectation of a business after we have understood the earning power of that business. These simple explanations form the basis of any stock investment decision one is expected to make.
How to Invest in Stocks: Valuations Part 1
One day, a friend phoned you to say she would be coming to your place the following week for dinner. You know she does not like takeouts, so this gives you the opportunity to practice your culinary skills. In your mind's eye, you know what the perfect dish would be and so set about looking for the ingredients to make it. Then came the day of the dinner; Phew! your cooked food fell short of all expectations. A lot of things may have contributed to this outcome. Well, the future outcome of the meal is what valuation of businesses tries to guess. In other words, we try to see into the future to establish what the possible outcome would be for the business using the earning power we have established. We hope you enjoy the video explanation .
How to Invest in Stocks: When to be Greedy
On October 29, 1929, the world witnessed one of its worst economic disasters-the Great Depression. Prior to that moment, euphoria and irrational exuberance percolated throughout the economy. Recovery was painful and slow. Between that period and 2019, there has been a few booms and bust; most recent bust being that of 2008. As we have discussed in the previous video, when perceived reality drifts too far away from objective reality, there is a correction that helps close the gap. This correction creates an opportunity to be greedy. Yes, look back at 2008!
How to Invest in Stocks: Boom and Bust Cycle
As humans, we have our own bias resulting from our upbringing, environment, religion, sex, from what we read, the schools we attend and many more. In the book, Alchemy of Finance, George Soros argues that the interplay between Humans and Reality is affected by these inherent biases which create a pseudo-reality within us with which we then use to try change reality. This process creates a continuous loop until perceived reality goes too far from objective reality. This is unsustainable. And BOOM! Perceived reality then moved back to objective reality. Stock market boom and bust cycles follow this pattern, thus creating opportunities to benefit.
How to Invest in Stocks: Fraudulent EBITDA
Why do companies pay too much for acquisitions only to realise a few months or years down the line the price was expensive? Restructuring costs become a tool for regular write-downs. It was a joyous day for owners of Autonomy and HP as well as the middlemen when HP acquired Autonomy for $11 Billion in 2011. Fast forward to this day, the US Department of Justice has filed criminal charges against sellers of Autonomy whilst HP takes an $8.8 billion writedown on the acquisition. This and many other cases abound where the wrong valuation metric has been used with a resulting car-crash scenario in post-acquisition.
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