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/ 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.

@abhishec_s @Sanjay__Bakshi The most rational course of action is to buy below your expected value, hold when it's between your expected value and overvalued zone and sell above overvalued zone (No in-betweens or holding extra cash).

But there are many impediments in executing each step.

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.

What is a Qualified Institutional Placement and what do I like about them (more to do with the QIP doc)

Time for a thread🧵🧵🧵🧵🧵🧵

What is a QIP?

A QIP or a Qualified Institutional placement allows a company to raise capital by issuing securities (by diluting equity) only to institutions.

Only Qib's or Qualified Institutional Buyers can participate in QIP's. This includes Mutual Funds, Foreign institutions

and Pension funds etc. (From my knowledge PMS' or any individual investor cannot participate in Qip's).

Just to give you an example:- Look at the investors who participated in the QIP of Saregama (750 crores)

Another example is the Qip of Deepak Nitrite in 2016 for the Phenol Project (size of the project was 1400 crores+)

The QIP witnessed participation from some of the top domestic institutional investors namely Reliance MF, Birla MF, ICICI Pru MF

Question arises, Why did SEBI allow for creation of QIP as an instrument for raising money?

QIP was introduced in the Indian Markets in 2006 by Sebi. As the regulator was concerned that the domestic companies were getting too dependent on raising money through

When you think a marquee leader in a sector is richly valued, discounts the distant future, is over
owned and has run its course, take a clean break.

Sell and go away. Don't seek lesser opportunities in weaker companies.

#DeepakNitrite valuation is most attractive in the space...

growth will be most explosive in the space...

A reminder of rule number one from @mjmauboussin

💥

If you understand just this one quote, it will transform your investing journey...

So powerful...

#investing #compounding