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  • McDonald's The Stock Is Ahead Of McDonald's The Company [View article]
    All I'm saying is that I don't want to buy it at $100.
    Apr 5, 2012. 08:19 PM | Likes Like |Link to Comment
  • McDonald's The Stock Is Ahead Of McDonald's The Company [View article]
    What numbers don't make sense?
    Apr 5, 2012. 08:17 PM | Likes Like |Link to Comment
  • There May Be Opportunity In HP [View article]
    1: $9,020
    2: $9,548
    3: $10,093
    4: $10,653
    5: $11,228

    Is it possible you didn't subtract off the net debt?
    Mar 29, 2012. 07:34 PM | Likes Like |Link to Comment
  • There May Be Opportunity In HP [View article]
    I think the wording in the article was unclear. Year 1 has 6% growth from 2011, the the growth rate decreases to 3% over 20 years, so year 2 has a growth rate of 5.85%, and so on.
    Mar 29, 2012. 12:39 PM | Likes Like |Link to Comment
  • Discounted Cash Flow: What Discount Rate To Use? [View article]
    The risk that I care about is the risk of the future cash flows not occurring or being less than I estimated. This risk has nothing to do with beta or the past stock performance or volatility. A company uses WACC to determine if a project will be profitable, and that's all well and good. But when you make an investment, you have a specific rate of return that you require. This should be your discount rate. Why would you discount at the company's WACC ( or whatever other CAPM-derived rate)? Why do I care about WACC if I require a specific return? If you can find anything wrong with my explanation of discount rate in this article (above the discussion of WACC), let me know.

    If you were offered a private company that generates $1 million per year in cash flow, the amount you would be willing to pay for that company depends on the rate of return that you require. It's no different for a publicly traded company. There is no "correct" discount rate. If I required a 10% rate of return I would pay at most $10 million for this hypothetical company. I would then apply a margin of safety to account for the risk of the cash flows not occurring, and that would give me the highest price I'd be willing to pay to achieve my return.

    You can calculate whatever you want from beta or CAPM or whatever and use that as a discount rate. You could also count the number of fingers that you have and use that as a discount rate. Both are equally valid discount rates. Neither one is "more correct" than the other. The danger is not understanding what a discount rate actually is.
    Mar 28, 2012. 06:26 PM | 2 Likes Like |Link to Comment
  • Discounted Cash Flow: What Discount Rate To Use? [View article]
    The biggest danger with using DCF is adjusting parameters until you get what you want. I always use the same discount rate and always demand a significant margin of safety. Consistency is the most important thing.
    Mar 28, 2012. 11:06 AM | 1 Like Like |Link to Comment
  • Buy Corning At A Discount [View article]
    Using your logic that something is worth what someone will pay for it, there would be no reason to sell in 2006. Why would you? People kept driving the price higher. That's like saying buying a nonprofitable tech company before the dotcom crash was fine as long as you sold before it happened. Good luck with that one.

    The problem with the P/E ratio is that EPS can easily be manipulated. You can have a company with a positive EPS that grows every quarter for years that is actually losing money because cash flows are negative. Earnings can go up because some asset that the company bought and paid for 10 years ago finished depreciating. That doesn't change the profitability.
    Mar 27, 2012. 01:34 PM | Likes Like |Link to Comment
  • Buy Corning At A Discount [View article]
    So your argument is "because it happened last year it will happen this year?" The problem with guessing how the P/E ratio will change is that more often than not you're going to be wrong. You're trying to guess what a large number of people are going to think over the next year. It's impossible to quantify the risk of being wrong.

    Remember when people bought houses at high prices based on how everyone else was valuing them? That didn't turn out so well.
    Mar 27, 2012. 01:05 PM | Likes Like |Link to Comment
  • Win An iPad In Seeking Alpha's 1 Million User Haiku Contest [View article]
    Different viewpoints
    Engaging conversation
    Victory for all
    Mar 27, 2012. 02:37 AM | Likes Like |Link to Comment
  • Buy Corning At A Discount [View article]
    Many people use the WACC as their discount rate, but it makes absolutely no sense to do so. WACC depends on cost of equity which depends on beta which is a measure of past correlation between the stock price and the market as a whole. Basing the value of a company on past performance of the stock doesn't make sense. Many people consider beta as a measure of risk, but it is only the risk of short term volatility in the stock price and has nothing to do with the risk of the company. A cash flow is a cash flow, regardless of the underlying stock performance. I use 15% because that is how much i value a future cash flow; it is my required rate of return. There is no "correct" discount rate, it depends on your expectation for the investment.

    Another problem with WACC: Imagine two identical companies, except one has half of it's capital structure as debt and the other is all equity. The company with more debt would be given a lower discount rate according to WACC, since the cost of debt is typically lower than the cost of equity. I would argue that the higher debt company carries more risk.

    I base the growth rate on the return on invested capital, and reduce it each year to a low long term growth rate since the further you project, the more uncertain you are. I think it is pointless to try to come up with more "exact" numbers based on competition, etc. for a company like Corning. I assume that Corning will continue to generate return on investment generally in line with the past. They've been a company for a very long time and have a long history of doing so. So it seems reasonable to assume that this will continue. Obviously, for a small company with short history this would be more dubious. And this is why Margin of Safety is important. It allows you to be occasionally be wrong and still achieve your desired rate of return.
    Mar 26, 2012. 02:18 PM | 2 Likes Like |Link to Comment
  • Cisco: The Danger Of Price Targets [View article]
    I don't believe beta has anything to do with the riskiness of the company. According to Yahoo finance, Cisco has a beta of 1.38 and Green Mountain Coffee Roasters has a beta of 0.68. I would argue that Cisco is much less risky an investment that GMCR. The riskiness is a property of the business itself, and fluctuations in stock price are irrelevant.

    If I only require a market rate of return, why not just invest in an index fund? Why bother with individual stocks? My goal is to find stocks that are almost certainly significantly undervalued. I don't need to find 100 stocks that meet my requirements. Sometimes there will be none. But by buying only at a large discount you eliminate much of the risk. Cisco is much less risky an investment at $18 than at $25. I don't expect the market P/E multiple to increase. What I expect is that in the long term stocks fluctuate around their fair value. What that fair value actually is is debatable. But I try to be consistent with my valuation method. Basing the value of future cash flows on past performance of the stock and capital structure, as many people do, makes no sense. If I told you "I'll give you $1000 a year for 10 years", how much would you pay for that cash flow? It depends on what you require as a rate of return. You then apply a margin of safety to account for the risk of me not paying you.

    Mar 23, 2012. 10:57 AM | 1 Like Like |Link to Comment
  • Cisco: The Danger Of Price Targets [View article]
    The capital asset pricing model makes some very big assumptions, similar to the assumptions made by the efficient market hypothesis. It relies exclusively on Beta to determine risk, which is calculated from the past performance of the stock. Why does the riskiness of future cashflows have anything to do with the past performance of the stock relative to the market? It doesn't make any sense.
    
    There have been many studies criticizing CAPM and showing that beta is a very poor indicator of future risk and returns. Here's an article with references that points out it's shortcomings:

    http://bit.ly/GIogLe

    The theory is built on assumptions that are completely ridiculous. I use 15% because that is my required rate of return on future cashflows.

    And here are some quotes regarding CAPM and beta from Warren Buffet and others:

    http://bit.ly/GOHHWt
    Mar 23, 2012. 12:08 AM | Likes Like |Link to Comment
  • Cisco: The Danger Of Price Targets [View article]
    I'm not suggesting that the stock will be $18 dollars at some point. I'm saying that if it is, i will probably buy it. It was $18 at the beginning of the year. It may never get that low again. Or it might be that low next week. Who knows.
    Mar 22, 2012. 06:57 PM | Likes Like |Link to Comment
  • Cisco: The Danger Of Price Targets [View article]
    I criticize price targets with no quantitative basis whatsoever. I provided a quantitative basis. Whether or not you agree with the numbers is something entirely different.

    Using beta to represent risk for something that is not a derivative doesn't make any sense. Volatility of a stock price has nothing to do with the value of a company. I treat the discount rate as a required rate of return and adjust for risk with a margin of safety.
    Mar 22, 2012. 06:53 PM | Likes Like |Link to Comment
  • Minimize Fees, Maximize Profit For Your Retirement Portfolio [View article]
    Yeah, representing fees as a percentage would probably illustrate the point a little better. Good point.
    Mar 22, 2012. 03:11 PM | Likes Like |Link to Comment
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33 Comments
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