@kcajc, I would be buying if I wasn't fully invested. If I sell any of my positions soon Cisco is on the top of my list. ]]>

@kcajc, I would be buying if I wasn't fully invested. If I sell any of my positions soon Cisco is on the top of my list. ]]>

I also agree that there may be a better way to incorporate the stock-based compensation. I'll have to think about the best way to do this.]]>

I also agree that there may be a better way to incorporate the stock-based compensation. I'll have to think about the best way to do this.]]>

The risk of the cash flow not occurring is based on the firm, but this is accounted for with the margin of safety. The riskier the cash flows the larger margin of safety.

You haven't pointed out any logical flaws in my reasoning in the article.

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The risk of the cash flow not occurring is based on the firm, but this is accounted for with the margin of safety. The riskier the cash flows the larger margin of safety.

You haven't pointed out any logical flaws in my reasoning in the article.

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I am not making the claim that management is not investing their cash flow efficiently. I made a point in the article saying that they are. All I'm saying is the the current market price is high relative to how much I think the company is worth based on how much cash they generate.

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I am not making the claim that management is not investing their cash flow efficiently. I made a point in the article saying that they are. All I'm saying is the the current market price is high relative to how much I think the company is worth based on how much cash they generate.

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All I've done is calculate the future value of cash flows discounted back to today. The growth rates I used are clearly stated. I don't see what's confusing about it.]]>

All I've done is calculate the future value of cash flows discounted back to today. The growth rates I used are clearly stated. I don't see what's confusing about it.]]>

3: $10,093

4: $10,653

5: $11,228

Is it possible you didn't subtract off the net debt?]]>

3: $10,093

4: $10,653

5: $11,228

Is it possible you didn't subtract off the net debt?]]>

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. ]]>

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. ]]>

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. ]]>

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. ]]>

Remember when people bought houses at high prices based on how everyone else was valuing them? That didn't turn out so well. ]]>

Remember when people bought houses at high prices based on how everyone else was valuing them? That didn't turn out so well. ]]>

Victory for all]]>

Victory for all]]>

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. ]]>

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. ]]>

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.

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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.

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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

]]>

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

]]>

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. ]]>

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. ]]>