As stewards of corporate assets, it is in our shareholders' interest that we maximize value with correct timing and create frameworks and paradigms of the future that will guide business decisions. The accuracy of our predictions and educated guesses may ultimately spell the success or failure of the enterprise.
After reading Chapter 11: Security Analysis for the Lay Investor of Benjamin Graham's Intelligent Investor and the accompanying Commentary by Jason Zweig, I gained the following insights:
How you value your assets tell what kind of investor you are.
You can value an asset by its:
A) cost or book value,
B) estimated future cashflows or
C) market value.
If you focus solely on market value or the price a buyer is willing to accept, you are most likely to be a property flipper or stock trader.
However, if you focus on estimated future cashflows from the property, assess financial statements for book values assets and follow the general story of the company, then you are most likely to be a real investor who looks into fundamentals.
Warren Buffet is one such investor. I have read that Warren values a stock or a company like a piece of rental real estate property. He estimates future cash-flows (i.e. rental income) over a period of time he wishes to hold the asset, or how long he thinks the current level of income will be sustained.
He then factors in the advantages and disadvantages of the company. Following the story of the company, he looks at advantages like moats, competitive advantages (brand identity, monopoly, scale, secret formulas as intangible assets, and resistance to substitution), management, everything. He also looks at disadvantages. The habit of raising cash from financial activities make it appear as if profits are growing, when all they do are sell more stock or buy more loans. You also have to take into account a potential flood of new shares in the future. If the company is in the habit of "watering down" stock your future earnings will be diluted and divided among more shares. Also be wary of firms run by managers, for the managers, rather than the owners by paying themselves hefty paychecks, or perpetually selling their shares.
Finally once these are accounted for in the valuation of the future, Warren adds a margin of safety, an allotment for the risks seen and unseen into the future. Assets in the balance sheets such as surplus cash in the current accounts, and the book value of the assets may serve as a final safety net for investor.
Insights into the general market conditions will also prove useful. Hence a general understanding of the workings of the economy, its interactions with different socio-political conditions is required.
Recent developments have made me realize how the entire economy runs on confidence. Confidence in the prospects of business reflects in the stock market, foreign direct investments and currency. These affect inflation rates and interest rates, then affecting policy and spending. Finally it affects production, the broader economic indicators like GDP, the fiscal position of the country, and its global standing and perception, specifically credit ratings.
For the investor in fundamentals, it is always important to ask the question:
***Where do and where will profits come from?***
Study the sources of growth and profit. Estimate how long it will be sustained in the future. Follow the story of the source of profits and the story of the enterprise. Study factors to be discounted, the moat, competitive adventage. Then make your pricing!!
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