The Dangers of Blue-Sky Thinking

Great read on the importance of DCF ( Discounted Cash Flow) Models!

Wall Street and Beyond

Many investors I know reject the use of DCFs as a tool to value companies. The refrain I hear most often is “Well, a DCF is only as good as your assumptions – it’s too easy to manipulate the price target.” This is a truism, but that doesn’t make DCF a pointless exercise. It just means you need to spend time understanding whether the assumptions are reasonable ones.  Unfortunately the reason that many investors dismiss DCF methodology has more to do with laziness than anything else

In the wrong hands of course, a DCF can be a dangerous weapon. This is why you need to exercise caution, particularly when a DCF is used to determine a price target that isn’t justified on any other metrics. As a rule of thumb, where the current year P/E is over 20 you should maintain a higher level of skepticism.

Of all the assumptions…

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How to calculate the present value of a series of cash flows?

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Have you ever wondered how much is a certain financial asset or a business worth if you wanted to buy it today? If you ever tried to invest in something, I am sure you have thought through this process. Continue reading

The Two Most Important Pages Of Warren Buffett’s 50th Anniversary Shareholder Letter

Validea's Guru Investor Blog

Warren Buffett’s 50th anniversary letter to Berkshire Hathaway shareholders has now been analyzed by a myriad of pundits who have dissected just about every sentence of it. But, given that Buffett offers plenty of his trademark wisdom and wit in the 15-page communique, what are the most essential parts of the letter for investors? There’s plenty to pick from, but we think these two pages stand out.

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How to Spot an Economic Moat

Want to learn more about economic moats and how to recognize them? Read this article!

Wall Street and Beyond

“A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital” Warren Buffett

My most successful and long-lasting investments have always come about when I’ve invested in a company with a strong and enduring “moat”. Buffett worked out long ago that a company that’s able to sustain high returns over a multi-year period will generate outsized rewards for shareholders.

Many investors and analysts confuse a high ROIC with an economic moat. While a high ROIC can be an indicator of an economic moat, it’s dangerous to equate the two because more often than not the high ROIC is a result of temporary factors. The nature of capitalism is such that high returns are rarely sustainable. Other companies will notice those returns and capital will immediately be attracted to that industry.   If a business can earn a ROIC of 20%, why wouldn’t I invest capital in…

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