Personal Investing Advice

It is the duty of the equity analyst, more specifically the common stock analysts, to determine the value of a company, its intrinsic value relative to its current market capitalization and determine if their is a margin of safety in between these two values. Of course, this assumes you follow the traditional Graham & Dodd value strategy. Without getting into investing philosophy and sticking strictly to valuation, let’s consider the differences between some of the more popular strategies (all of these strategies assume statements have been reformulated so that operating and financing items have been separated):

Discounted Cash Flow Analysis:

Free cash flow (FCF) is calculated easily by finding the difference between Operating Income (OI) and the change in Net Operating Assets (^NOA or NOA1 - NOA2) or FCF = OI - ^NOA

The FCF forecast model uses FCF now and estimates into the future discounted by the Required Return on Capital (RC). The RC is calculated using the stock’s Beta, the risk free rate of return (usually 3 mo. t-bill), and a market risk premium (expected return on the market - risk free rate). This calculation is made however many years out the forecast is intended to extend to, maybe 3-5 years. So it looks like:

Value = FCF/RC + FCF2/RC2 + ….. + FCFn/RCn + CV

The last part of the formula, CV, is the continuing value, is an estimate of value for a finite forecast horizon of FCF’s. It is calculated as follows: FCFn+1/(RC-1) or if you forecast FCF to grow at a constant rate then FCFn+1/(RC-g), where g is 1 plus the forecasted rate of growth in FCF.

The problem with using discounted FCF is that it does not measure value added. FCF is a measure of stocks and flows. The analysis charges this flow of money with the required return on capital. Assume a company makes a large investment and as a result e (more…)

It is the duty of the equity analyst, more specifically the common stock analysts, to determine the value of a company, its intrinsic value relative to its current market capitalization and determine if their is a margin of safety in between these two values. Of course, this assumes you follow the traditional Graham & Dodd value strategy. Without getting into investing philosophy and sticking strictly to valuation, let’s consider the differences between some of the more popular strategies (all of these strategies assume statements have been reformulated so that operating and financing items have been separated):

Discounted Cash Flow Analysis:

Free cash flow (FCF) is calculated easily by finding the difference between Operating Income (OI) and the change in Net Operating Assets (^NOA or NOA1 - NOA2) or FCF = OI - ^NOA

The FCF forecast model uses FCF now and estimates into the future discounted by the Required Return on Capital (RC). The RC is calculated using the stock’s Beta, the risk free rate of return (usually 3 mo. t-bill), and a market risk premium (expected return on the market - risk free rate). This calculation is made however many years out the forecast is intended to extend to, maybe 3-5 years. So it looks like:

Value = FCF/RC + FCF2/RC2 + ….. + FCFn/RCn + CV

The last part of the formula, CV, is the continuing value, is an estimate of value for a finite forecast horizon of FCF’s. It is calculated as follows: FCFn+1/(RC-1) or if you forecast FCF to grow at a constant rate then FCFn+1/(RC-g), where g is 1 plus the forecasted rate of growth in FCF.

The problem with using discounted FCF is that it does not measure value added. FCF is a measure of stocks and flows. The analysis charges this flow of money with the required return on capital. Assume a company makes a large investment and as a result e (more…)

Private Equity (PE) investing has grown dramatically over the past 5 years, and the private equity funds have produced excellent returns for investors. Private Equity funds have become very popular and trendy “alternative investments” that many large investors (high net worth families and institutional investors) have felt like that had to be involved with. Private Equity funds try to acquire companies or businesses cheaply. They use lots of tax-deductible debt to leverage their returns, cut costs to try to improve the short and long-term profitability, and sell assets to take capital out. Sometimes they pay themselves a dividend out of company owned assets, and they eventually (2-5 years later) sell out to another buyer or take the company public at a higher valuation.

The favorable conditions that helped drive the recent private equity boom have changed dramatically over the past year. Future private equity returns will be much lower than they were over the past 5 years and could prove to be quite disappointing for many investors. I believe the private equity peak was 2006 and the first half of 2007. The Private Equity boom was driven by very cheap debt, a bull market in equities, a strong global economy, rising corporate profits, massive capital inflows into private equity, Sarbanes/Oxley reporting rules for public companies, and strong initial returns. Some of the large private equity companies are Blackstone, Carlyle Group, Kohlberg Kravis Roberts, Texas Pacific, Thomas H. Lee, Cerberus and Bain Capital.

Private equity historical returns:

Past returns in the large private equity funds have been very good, beating equity market returns. According to Fortune Magazine over the 10 years to mid-2006 (the likely peak for PE) returns on private equity averaged 11.4% vs. 6.6% for the SP500 stock market index. Longer-term (20-y (more…)

Within the investment world there are a variety of investment programs to place your money into. Many of these will give excellent results over the longer term and have been in operation for many years. A program is just another word for an establish method of investing.

Investment programs are usually put together by companies that have an interest in varied investment vehicles but can also devote their time and effort to a particular type of investment. Some programs also involve government participation and guarantee.

When looking for investment ideas, look to the historical performance of the managers and evaluate the previous results of their efforts. Such programs will often encourage investors to join management in applying their capitol to partly funded enterprises that require further asset development or project redevelopment. Investments are all detailed in the accompanying prospectus’s and can offer very good returns under capitol guarantee.

Some opportunities may involve local participation in community developments and are for the purpose of community development projects. These can be run by investor groups or local government. Developers of property often raise funds through structures that invite several investors to participate. These types of investment structures are often closed to general investors although expressions of interest may be sort by the average investor.

When researching this type of investment always look at the legal requirements behind the investment offer. Most investment offers that give shares or part rights in the investment have to past the scrutiny of the Australian Security and Investment Commission. These investments will also require legal documentation to be signed. Have the appropriate legal sources evaluate the documents and check for any fine print.

Search the various f (more…)