In this post, we discuss the distinction between returns on legacy vs. new investments and how they may be useful in assessing the impact of disruption. Last week, we wrote a post on what according to us is the biggest mistake that people commit while doing a DCF valuation. In that post, we took a … Continue reading A follow up to the “biggest mistake in a DCF”
Valuation is an exciting area and at the heart of it lies the often derided discounted cash flow (DCF) method of valuing businesses. Many people make only half-hearted attempts at a DCF valuation but do it anyway because: it sounds “cool” to do it; it gives the illusion of precision; and it can be used … Continue reading The biggest mistake in a DCF valuation
My thoughts on Prof. Sanjay Bakshi’s talk on “What happens when you don’t buy quality” In 2013, Prof. Sanjay Bakshi gave a seminal talk tilted, “What happens when you don’t buy quality”. The crux of the talk was that market participants are unable to delay gratification and thus, heavily discount cash flows occurring far into … Continue reading Is delayed gratification the primary reason why investors end up undervaluing high quality companies?
One of the tenets of modern finance is that risk is seen from the perspective of the marginal investor. In publicly traded firms, it is highly likely that the marginal investor is well diversified and hence concerned about only about market risk. It follows therefore, that all investors must also consider only market risk no … Continue reading Why do investors not get compensated for diversifiable risk?
Equity risk premiums are useful. But can they alone tell whether the market is over- or under-valued? We take a closer look in the below article... A fellow student in the online valuation class of NYU recently requested my thoughts on a report from a top bank regarding equity risk premiums (“ERP”). The crux of … Continue reading Can equity risk premiums predict market direction?
Here's a snapshot of how to estimate a risk free rate for India:
We recently came across a question on Quora about why Prof. Damodaran subtracts “depreciation from capex when computing the reinvestment rate of a business.” It further goes on to state the following: "In his book, [Prof. Damodaran] seems to argue that depreciation is a cash inflow that pays for a part of capex, but I don't … Continue reading Why net depreciation from capex for computing reinvestment rate