He laid down very similar principles a decade ago in his 1976 letter (Source: https://t.co/6Z5v0qEaIg)

What's amazing is how consistent he's been in following his philosophy even after nearly 5

1/ Howard Marks once said that before buying an asset, above anything, he wants to know “the amount of optimism that’s in the price.”

All investors can do this with a handy tool: The Reverse DCF.

I'll also leave a download link to my compact DCF Model at the end of this thread.

2/ We all know a regular DCF. But's what a "Reverse DCF"?

If we consider that a DCF is a Linear Equation, we could say the 'X' (The unknown variable) is the Intrinsic Value.

In a Reverse DCF, we start with the Market Price and try to find some other variable, say Sales Growth.

3/ Let's start by taking an example: VST Industries, a Cigarette-maker based in India.

I valued them on my blog a while ago. I'll be retaining the old assumptions, but using the latest financials.

So please note that the Valuation isn't accurate

4/ This is a "Regular DCF" of VST Industries. The Assumptions I've made indicate an Overvaluation.

The Intrinsic Value is Rs. 3,012, but the Market Price is Rs. 3,492.

Let's not dwell on whether this is correct, since we discussed earlier that this isn't an accurate Valuation.

5/ If we want to do a "Reverse DCF" instead, we need to pick a different variable to 'find'. Say, I will pick the Sales Growth numbers.

I will now remove the Sales Growth numbers from the Model and assume that Sales Growth is the same across the years for ease of calculation.

1/ There are a ton of books about Financial & Fundamental Analysis, Scuttlebutt and Technical Analysis. But there aren't many books 'taking risk'.

Among the few that exist, 'Zurich Axioms', written in 1985, is the best. Here are my key takeaways from the book.

2/ A bit about Max Gunther's (The Author) background. He was an Anglo-American journalist and writer, who wrote 26 Books.

His father, Franz Heinrich, was the New York Head of Schweizerischer Bankverein, which later merged into the famous Union Bank of Switzerland (UBS).

3/ The 'Zurich Axioms' were a set of unwritten rules followed by a informal group of Swiss Bankers and Traders who used to socialize around Wall Street after World War II. Mr. Heinrich was one of the founding members.

Max Gunter formalied these 'Axioms' by writing about them.

4/ There are 12 'Major Axioms' and 16 'Minor Axioms' (Corollary to the Major Axioms) in the book.

But remember, this is MY key takeaways from the book and not an exact summary. So you might find quotes, phrases and links inserted here and there by me (Not from the Author).

5/ Axiom #1: In order to earn returns, you must take risk. Risk will make you worry.

Risk-taking and worrying go hand-in-hand. If you're not worried about an investment, you're not taking risk.

Spend half your energy towards earning an income and the rest towards speculation.

1/ I've Valued 150+ companies using the Discounted Cashflow (DCF) Model. Far be it for me to say I am an expert. But if you've done this as much as I have, you start noticing certain patterns.

Here are 10 lessons I've learned from using the Discounted Cashflow Model.

2/ Every investment decision you make follows a Discounted Cashflow calculation.

You let go of X today to earn Y in the future. You wouldn't do that if you didn't expect to earn an expected amount of returns (r).

Nobody wants to let go of X and get back X years down the line.

3/ When you invest in a company, you hold claim over the Assets and the Profits of a Company. Without diluting your ownership, Assets and future Profits are generated out of one thing and one thing alone: Free Cash Flow to Firm.

FCFF is the treasure at the end of the rainbow!

4/ Combining the above two observations, a company may not always make Profits in the present. In fact, if it's a young company or in a new market, losses are a given.

Eventually though, future profits should be large enough to offset or overtake all the past losses in PV terms.

5/ For most companies, generating Returns falls in a spectrum: Have high Margins and generate lower Sales in relation to Capital Employed Vs. Turn Assets faster but have low Margins (Or somewhere in between).

For Indian context, compare the Business Models of D-Mart Vs. NESCO.

1/ Since "liquidity" has been the buzzword these days, here's an anecdote and a powerful lesson from history about printing unlimited amounts of money. Story time. #fintwit

2/ Our story begins with Mansa Musa or Musa I of Mali, an African king who consistently figures in the list of richest people in the world (Inflation-adjusted). One of his given names was 'Lord of the (Gold) Mines of Wangara'. Lest we forget, Gold was the 'Money' in those days.

3/ One fine day in 1324, Musa decided to go on a pilgrimage to Mecca. Of course, it was easier said than done. Mecca was ~8,500 Kms away from Timbuktu, Mali. Ultimately he did make that journey and it has been recorded in the script "The Chronicles of the Seeker" by Mahmud Kati.

4/ Famously, he took a ton of 'money' (Gold) with him to aid in his journey (Well in his defense, it was ~8,500 Kms). About 60,000 laborers and soldiers carried 2 Kgs each and their camels carried 13 Kgs each, bringing the tally to an estimated ~1,30,000 Kgs of Gold.

5/ Being a generous King, he donated Gold left and right to every poor person he saw on the way. Regions of Cairo, Medina and Mecca became instantly 'rich'. The estimated donation is ~32,000 Kgs of Gold or ~$2 Billion in today's estimate.

@contrarianEPS Interesting. In India, people who give such suggestions get sued for 100 crores.

1/ @mjmauboussin's book Expectations Investing is a masterclass in valuation & strategy

His framework uses price-implied expectations to assess companies, an elegant way to invert valuation

https://t.co/kESplMN3nW

To practice these concepts, I wrote a case study on Chipotle⤵️

2/ Chipotle is the leading fast casual restaurant chain across the US, with almost 3,000 owned & operated locations

They benefit from strong unit economics and a trusted brand

We'll discuss consensus estimates, competitive landscape, and expected

3/ We must first identify the price-implied expectations based on key value drivers

After finding the consensus estimates, investors can seek opportunities in the expectations - looking for a divergence from the market's assumptions

Let's start with Chipotle's sales growth

4/ Chipotle has grown revenues from $3.9B to $7.55B over the past 5 years, at a 5 year CAGR of 14.1%

Analysts estimate a 13.7% consensus growth rate based on 5-7% same store sales growth, 8% additional store openings per year, and steady digital sales contribution

5/ Next is operating profit margin, which measures profitability from core operations

Chipotle has slowly been growing its margin, now at 10.67%

Analysts expect high margins of 15.75%, with incremental profits from digital orders and unit-level margin growth contributing

If the Adani stocks trading at more than 50x sales are able to sustain for next 3 years, we will enter a new era of valuation.

And we have never entered in the new era of valuation before.

There was only one since the beginning.

If you know, you know.

@riteshmjn The market is always estimating longterm interest rate and inflation through Growth stocks.
Growth stocks are nothing but leverage bets on above two factors.
Be careful always betting on Growth stocks as there is huge embedded MACRO bet coupled with micro.
Stagflation, take care.

Rivian ($0 revenue, -$1.6 billion net income) now has a higher market cap than Starbucks ($29 billion revenue, $4.2 billion net income) and Target ($100 billion revenue, $6.3 billion net income).

$RIVN $SBUX $TGT

Data via @ycharts