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
Is delayed gratification the primary reason why investors end up undervaluing high quality companies?
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[1] 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?
Why do investors not get compensated for diversifiable risk?
One of the tenets of modern finance is that risk is seen from the perspective of the marginal investor[1]. In publicly traded firms, it is highly likely that the marginal investor is well diversified[2] and hence concerned about only about market risk[3]. It follows therefore, that all investors must also consider only market risk no … Continue reading Why do investors not get compensated for diversifiable risk?
Risk free rate for India
Here's a snapshot of how to estimate a risk free rate for India:
Demonetization Blues: Mutual Fund Performance during the latest Correction
What had been a fairly decent year for the equity markets till September 2016 was marred by demonetization in the last two months of the year. The markets gave up most of the gains and ended up marginally positive for the year. Nifty 500 (the index which we feel represents the broader Indian market) reached … Continue reading Demonetization Blues: Mutual Fund Performance during the latest Correction
The Best and Worst of Mutual Funds in 2016
At Capital Surge, we actively track about 50 equity mutual fund schemes by various AMCs. These funds have been shortlisted based on their ratings on Morningstar. Below, we provide a review of the best and worst of mutual fund schemes in 2016. A word of caution – this summary is purely based on the schemes' … Continue reading The Best and Worst of Mutual Funds in 2016
Putting numbers to the Welspun scandal
Welspun India has been marred in a controversy over supply of fake Egyptian cotton to its US customers like Target and Walmart. Given this controversy, investors are running away from the company using adages such as 'there is never just one cockroach in the closet'. Investors using such adages as crutches without considering the monetary … Continue reading Putting numbers to the Welspun scandal
The Biggest Problem with Price-to-Sales Ratio
The problem of inconsistency and how it can lead to erroneous conclusions... Ratios (or multiples) are a popular tool that many analysts employ to identify cheap stocks. Similar ratios (such as a Price-to-Earnings, Price-to-Sales, etc.) are compared across firms and a company with a lower multiple is considered cheap relative to one that has a … Continue reading The Biggest Problem with Price-to-Sales Ratio
Estimating an Equity Risk Premium for India
Note: The concept of implied equity risk premium has been developed by Prof. Aswath Damodaran. In this article, we apply his methods to determine an implied equity risk premium for India. One of the most popular ways of valuing a company is to do a discounted cash flow valuation. According to this method, the value … Continue reading Estimating an Equity Risk Premium for India
Demystifying Internal Rate of Return
And why firms use it as a measure of investment performance... Note: The concepts discussed in this article are meant for those who have studied finance at some point If you've studied finance at any point in your life, you would have come across the concept of Internal Rate of Return ("IRR") - the rate at which … Continue reading Demystifying Internal Rate of Return