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Favourite valuation Techniques

Hey gang, just curious here what the consensus is. I know everyone has slightly different approaches, but I am mostly looking for those following a value-oriented style. What are your go-to valuation techniques, and do you find that they are useful?

For the broader population… what are your favourite metrics to look at? P/E relative to industry, understanding the underlying business, or no techniques at all (for those that prefer to live life with more whimsy)?

EDIT: Where is your favourite spot to find industry related data? Are there any free resources to access industry ratios, etc?

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DDM

Said no one ever.

Gordon growth seven stage model 

StageRight wrote:
Hey gang, just curious here what the consensus is.

I’m quite sure that there’s no consensus.

People will disagree.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
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Canadian Asset Liability Method.  IFRS 17 is comin’ down the pipe, tho…

“Mmmmmm, something…” - H. Simpson

breadmaker wrote:
Canadian Asset Liability Method.

CALM.

Yup … sounds Canadian.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Industry Comparables

I hate DCF

Stratton Oakmont method: throw little people at dartboards with stock symbols. 

¯\_(ツ)_/¯

some weights to comparables (earnings, ebitda multiples, etc) and dcf but most of the weights go to the mgmt style and the direction they are heading or planning to go…

@CFAbeatmeup, actually there are plenty of empirical research and back testing that have proved that throwing darts or randomly selecting a basket of stocks have equal chance of outperforming the market compared to active mgmt done by expensive dark suit wearing people with fantastic resumes…..Hence, some 95% of active funds fail to bear the market. I know the funds i”ve worked at never came close…but those funds managed close to billion in some cases and the owner made tens of millions at the cost of its investors who are pension fund beneficiaries and middle class Americans teachers, cops, firefighters unions and retirement funds and endowments…

Be yourself. The world worships the original.

infinitybenzo wrote:

Hence, some 95% of active funds fail to bear the market. I know the funds i”ve worked at never came close…but those funds managed close to billion in some cases and the owner made tens of millions at the cost of its investors who are pension fund beneficiaries and middle class Americans teachers, cops, firefighters unions and retirement funds and endowments…

Why would I want an actively managed bond fund to beat the S&P? 

Murphy’s Law technique.

I do not ask for the trust nor give it to you.

Sweep the Leg wrote:

infinitybenzo wrote:

Hence, some 95% of active funds fail to bear the market. I know the funds i”ve worked at never came close…but those funds managed close to billion in some cases and the owner made tens of millions at the cost of its investors who are pension fund beneficiaries and middle class Americans teachers, cops, firefighters unions and retirement funds and endowments…

Why would I want an actively managed bond fund to beat the S&P? 

not for bond funds….I am talking about equity funds…I have experience in us equities although we are generalist…we tend to focus on the big boys….I am not complaining…..it is my dream to one day become the guy who opens up a fund with okay performance but never shut down and make a few millions a year…milk them mgmt and incentive fees every year!!!

Be yourself. The world worships the original.

infinitybenzo wrote:

Sweep the Leg wrote:

infinitybenzo wrote:

Hence, some 95% of active funds fail to bear the market. I know the funds i”ve worked at never came close…but those funds managed close to billion in some cases and the owner made tens of millions at the cost of its investors who are pension fund beneficiaries and middle class Americans teachers, cops, firefighters unions and retirement funds and endowments…

Why would I want an actively managed bond fund to beat the S&P? 

not for bond funds….I am talking about equity funds…I have experience in us equities although we are generalist…we tend to focus on the big boys….I am not complaining…..it is my dream to one day become the guy who opens up a fund with okay performance but never shut down and make a few millions a year…milk them mgmt and incentive fees every year!!!

My point was your comment was either hyperbole or just inaccurate. People always say something similar to your comment - “X% of active managers don’t beat the market.” But, that’s a wildly misleading statement as most managers don’t use the “market” as their benchmark, nor do these claims state a time period. 

If you wanted to say 95% of actively managed U.S. Large Blend funds, net of fees, have underperformed the S&P 500 over the last 15 years, that’s something we can figure out. The real answer is much more complicated. Again, to use your example of pension funds, they would be using a separate account with much lower expenses so they’re basically impossible to track. If you just look at the 40 Act space, and you’re comfortable with survivorship bias always being an issue, the numbers that better reflect your sentiment come in anywhere from most do beat their bench (especially for less efficient areas like EM) to about a third beat their bench for U.S. large caps with large value doing slightly better than large growth.

yes, true….the funds i worked at used custom benchmark for each strategy. last fund, i worked on their flagship equity arb fund but each long and short position was separated further by market cap. so that one flagship fund was compared to more than 5 custom benchmarks….majority of them were very subjective and not very accurate at all..Don’t know the details because this part of magic falls in the hands of our ops team and IR team.

Except for the carried interest i received, all my retirement is in 401k which went into vanguard SP500 index.  I think I and many others for sake of simplicity compare the returns to SP500 because it’s part opportunity cost and part semi benchmark. I came into the workforce in 2009 and nothing can touch my 401k returns….none of the funds I’ve worked at come close to this amount….

So yes, i know where you’re coming from and agree with you.  But as an investor, if i can invest $___ into some hedge fund that does some real fancy stuff or i can invest in vanguard sp500 my concern is how much $$$ will/do i have at the end of the year…My past experience taught me that the non-sexy and simple SP500 will give me more money than the super fancy hedge funds…

As for pension or other insti funds…Our usual is 2% mgmt and 17% incentive but for pensions and endowments we give them a break on incentives….we take 15% incentive and cut the mgmt to 1.75% IF they agree to be locked for certain number of years greater than 5.

Be yourself. The world worships the original.

majority of active funds are really index funds with higher fees. most of them have like 90 positions. is that truly active?

but i find it funny when people say xx% of active funds underperform their benchmark, cuz im pretty sure, 100% of index funds underperform their benchmark by design. lol. the range of the performance is just wider for actives.

also net of fees return is the most important metric imo, that and std!

I love my cheese. I got to have my cheddar.

DDM in a sloping yield curve environment

EVA/MVA in a flat curve

Corrcet me if I'm worng

Usually your IBD is trying to kiss some company’s @ss, so they set a price target 20% above the current value. Then ER has to back solve for the model inputs that produce that price. It’s really more an art. 

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Nerdyblop wrote:

majority of active funds are really index funds with higher fees. most of them have like 90 positions. is that truly active?

never thought of it that way…truly thinking outside the box..the flag ship fund i was part of which was equity arb fund at the last HF i worked at had more than 100 positions and $600MM AUM.

maybe this is why we are bunch of underperform galores united. Have 10 positions and either you die quick and gloriously or live to be famous after monstrous gains.

Be yourself. The world worships the original.

infinitybenzo wrote:

Nerdyblop wrote:

majority of active funds are really index funds with higher fees. most of them have like 90 positions. is that truly active?

never thought of it that way…truly thinking outside the box..the flag ship fund i was part of which was equity arb fund at the last HF i worked at had more than 100 positions and $600MM AUM.

maybe this is why we are bunch of underperform galores united. Have 10 positions and either you die quick and gloriously or live to be famous after monstrous gains.

Alpha architect (IIRC) has a calculator to tell you the exposure of a fund. A lot of people then calculates the cost over just the active part to get a true cost. A lot of funds are the majority index with very little looking different. I think the colloquial word for this is closet indexer  But it is cool that there are quantitative ways to measure this https://tools.alphaarchitect.com

DCF and Comparables to contrast (here are the 10 to 20 fundamental metrics).

Also qualitative analysis.

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Sócrates

infinitybenzo wrote:

Nerdyblop wrote:

majority of active funds are really index funds with higher fees. most of them have like 90 positions. is that truly active?

never thought of it that way…truly thinking outside the box..the flag ship fund i was part of which was equity arb fund at the last HF i worked at had more than 100 positions and $600MM AUM.

maybe this is why we are bunch of underperform galores united. Have 10 positions and either you die quick and gloriously or live to be famous after monstrous gains.

i recall reading that having 15 positions capture nearly 70 to 90% of market risk! 

anyhow it does make sense to diversify fully as a manager since you dont want to be blamed for your stock picking while at the same time claiming to be a great stock picker. but dont expect your specific picks to have a large impact on your portfolio or outperform meaningfully esp net of fees.

I love my cheese. I got to have my cheddar.

I like to use a DCF to test the current stock price. For example, what assumptions do I have to make to spit out the current price. Are these assumptions reasonable, aggressive or conservative and what does that tell me about the current price? 

A LBO model can be fun for small cap stocks and obviously useful for privately held companies.