Value Investing, Compounding and Lifelong Learning with Gautam Baid

[@animalspirit77]

great video

[@kevinsingh2815]

brilliant. thank you again.

[@ExcessReturns]

Thank you Kevin.

[@asegal4677]

Good interview! Question: It is still unintuitive to me why value investors consistently say, as was said here, that the value of a business equates to the sum of a business' future cash flows discounted back to the present using an appropriate discount rate. Where does the current balance of sheet of said company factor in to valuation in that equation?

[@ExcessReturns]

Many value investors do use the balance sheet (as well as the income and cash flow statements) to analyze stocks, but ultimately the value of a company is the expected future cash flows discounted back to today's dollars. The big challenge with that is you need to make a number of assumptions - level of profitability in the future, growth rates and the discount rate. All of these things are very, very difficult and are consistently changing due to many factors. While not exactly related to your question, this article on discounted cash flow and growth and value stocks may be interesting, as it shows some of the challenges with the DCF approach (mostly highlighting the risks with overvalued growth stocks). verdadcap.com/archive/discounting-death-and-the-demand-for-growth-stocks

[@asegal4677]

@@ExcessReturns Thanks! Where I am stumped is that I would think in common sense terms that the valuation of a business (even for DCF-centric investors) is at a minimum the sum of the DCF and the cash and cash-convertible assets on the books at the time of the valuation, less the debt on the books at the time of the valuation. Yet, this is rarely the formula value investors put forward when discussing valuation in theory, which is instead a DCF solely, as was done in this conversation for example. I should say that I do understand that in the long view of DCF for many companies the debt and cash are relatively small factors in the net valuation result but I still am not understanding why these elements fail to be mentioned so consistently. I feel like I am missing something obvious here?

[@ExcessReturns]

@@asegal4677 What you are describing is the enterprise value, or acquirers, multiple. Here is an article I wrote about the value investing strategy from Tobias Carlisle, the Acquirer's Multiple. I think this gets at most of what you are asking in terms of multiple that adjusts for what is on the balance sheet. blog.validea.com/finding-deep-value-stocks-with-the-acquirers-multiple/

[@asegal4677]

@@ExcessReturns Thanks for your reply! I have read the Acquirers Multiple. Great book. I think what Toby does there rather than resolving my concern only bolsters it, even though he is making a different point. Perhaps that is what you're saying. The book reinforces the point that a stock's actual share price is the sum of DCF plus assets minus debt. And what I am pointing out is that since value investors like Gautam are apt to compare the outcome of their DCF with the current share price to determine whether a stock is over or undervalued, the comparison is fundamentally erroneous as the share price in theory represents the equity value of the business as valued by the sum of all investors (i.e. the market) and is understood to be in theory DCF plus assets minus debt. Hence, it would appear that Gautam's statement that the value of a business is it's DCF is obviously false.

[@vidya014]

Mental Models: 1. “NetROCI (ROIC) & Net Income Growth are the Left and Right feet empowering each other in moving the Intrinsic Compounding.” ~ Total Reset ~ 2. “Dharmic Trīni-Karmāni Value Investing：达摩三业价值投资 意：The Voliation of the Stock Market is NetROCI. 话：The Speech of the Stock Market is Net Income Growth. 作：The Deed of the Stock Market is Intrinsic Compounding & Dividend Compounding.” ~ Total Reset ~