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Christopher Waller
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I am a fundamental investor interested in both 'value' stocks and 'growth' ones. I base my investment principles on investors such as Benjamin Graham, Phil Fischer and Warren Buffett.
My blog:
The Third Person View
  • Comparison of Dow Jones and S&P
    Jun 12 11:06 AM | Link | Comment!
  • Pictures of a Silver Bubble?
    Putting the fundamentals aside for a second, let us compare these two charts:

    The first is Jean-Paul Rodrigue's 'Lifecycle of a Bubble', whilst the second is a chart of the price of silver from Kitco. You may notice that these two match up almost perfectly. The take-off occurred in early 2005, the first sell-off in 2008, a huge rise since 2010 and a subsequent blow off in 2011. 

    Whilst this pattern in itself does not mean that silver is in a bubble, it is something to be aware of. What is far more important is the psychology and emotions of those in the market. In this respect, there is cause for concern. Silver bulls have often talked about silver going to $100 or even $500, and whilst this may or may not be the case it certainly qualifies as ‘greed’. Furthermore, silver has enjoyed a media coverage recently that is normally reserved for its more illustrious cousin.

    All in all, whilst the fundamentals of silver may justify further rise in price, bulls should be aware that the psychology and emotions of the market are following a predictably bubblish pattern, and that a perfect “I told you so” scenario may be developing.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am long the ETF LSIL:LN
    Jun 02 6:14 PM | Link | Comment!
  • Calculating Real Free Cash Flows

    The present value of Free Cash Flows is perhaps the most commonly used method of valuation for any project. However, when used in stock market analysis the Free Cash Flow calculation can be very misleading.

    There are several definitions of Free Cash Flow, but this is the one I will be using: Free Cash Flow is the amount of the cash a company has left over from its operations after paying all of its expenses for maintenance. This cash can then be reinvested in the business or paid out to shareholders. As investors such as Warren Buffett argue, stock-holders are the owners of the business anyway, and therefore the Free Cash Flow generated should be treated in the same way whether it is paid out or reinvested.

    Unfortunately, this concept of Free Cash Flow poses several practical problems for calculations. Firstly, it differs from the academic definition of Free Cash Flow, which states that:

    Free Cash Flow = EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure

    The problem arises from the item ‘capital expenditure’. Whilst this term is often used by academics and CEOs alike, there are in fact too types of capital expenditure – Maintenance Capex and Growth Capex. When calculating Free Cash Flows, it is the Maintenance Capex figure that is important. Investors that simply use the Capex figure provided by a company’s Cash Flow Statement are therefore miscalculating Free Cash Flow.

    Nevertheless, the usage of Maintenance Capex also provides problems, as companies are not required under accounting laws to separate maintenance and growth expenditures. This means that investors are often left to estimate these figures. Whilst there are several methods of doing this, the necessity of estimation highlights the important of what Warren Buffett calls the ‘Circle of Competence’. Without a clear understanding of the business, it becomes practically impossible for an investor to determine the appropriate maintenance figure, thus rendering their Free Cash Flow calculations meaningless. This is why Buffett himself prefers simple and stable businesses such as Burlington Northern Santa Fe, where maintenance costs can be clearly identified over a significant period of time.

    Finally, investors should be aware that the Growth Capex figure can be negative. Theoretically, there is a sum of money that is necessary to maintain a business’s market position. If the total Captial Expenditure figure is below this, the business is effectively disinvesting. This is one of the most common tricks of management - to reduce Growth Capex in bad years, thus lowering the total Capital Expenditure figure and thus seemingly increasing Free Cash Flow. Alert investors should not be mislead.


    May 26 7:07 AM | Link | Comment!
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