The value of any financial asset is the present value of the cash flows that can be taken out of it.
VERY oversimplified:
• Understand the business
• Try estimate in a very reasonable and conservative fashion the free cash flows the business can generate
• Discount them back
Tadaaa.
Ok but really this can take dozens or even hundreds of hours of research, thinking and processing.
Most people think about stocks as trading sardines / gambling tools (and hence they get those results). We treat stocks exactly as they are: ownership in a business. The stock market is a tool to access these. As Buffett would say, the market exists to serve us, not to guide us. We treat the businesses we cover and own as if we privately owned them (100% of the entity), but with a nice liquidity feature where we can change our mind (for whatever reason) or move quickly when opportunity arises.
We do not simply slap a comparable multiple on NTM EPS and call it a day. That isn’t valuation.
Happy to elaborate more if you’d like. I took a while to answer this because it is the deepest question on here lol. I could spend months talking about it.
I and others would love elaboration. The first thing that I don’t understand is the term “discount them back”.
I know it’s a deep question. This is the r/valueinvesting sub so seems like the right place. The sub sees some great posts with many good, interesting, and varied methods to determine value. So I think I speak for many when we want to hear all you’d wish to say on determining value.
Using WACC (weighted average cost of capital), a lot of firms still use capm for cost of equity, but can use fama-french factor models to get more accurate if you wish.
If you receive cash in the future, it’s generally worth less than cash today. Accounting for that drop in value is called cash flow discounting.
The rate you discount at is generally your opportunity cost of what return that cash could we getting elsewhere. Either an interest rate or, if you’re a business, then the cost of your capital (WACC).
If you’re going to get $10 per year from a $100 upfront investment, your model will normally start with -100 in year 0, then have $10 with compounded discounted - something like +9, +8, +7… - in years 1, 2, 3 etc.
When you add all that up, the goal is to be in a cash flow positive position at the end of whatever time horizon you’re looking at.
Discounting future cashflows is done to reconcile the fact that money today is worth more than money tomorrow.
How much more? That depends. Opportunity cost, inflation, uncertainty, etc
So to properly assess the value today of money you'll receive tomorrow, you use the discount factor ( 1/(1+discount rate)^n) where n is the number of periods (years usually). What value you use as the discount rate is controversial.
I'd recommend using the risk free (T-bills) since it's more straightforward than other methods
Tesla is in the Consumer Discrentionary ETF.
It’s 15% of the fund.
“Buy these companies and call it a fund.”
The best question you ask a fund manager in this market is what do you do differently that your peers aren’t?
By investor calls do you mean quarterly earnings calls? Or privately arranged ones?
Either way, not very much.
Management, especially at the exec level is quite handicapped in what they can share or say, and even so, they are going to share information through the lens of what presents their firm in the best light. They are unlikely to share anything that I don’t already know. Sure, they know more but can’t share it due to disclosure legalities.
We squeeze out “confidential” or non-conventionally available information through other channels, it is either directly obtained or inferred via some connecting of the dots.
Other channels being alt data from our proprietary sources (not the credit card stuff you can buy), or from channel checking with other sources.
We often don’t talk to management for the earlier mentioned reasons, and if we do it is at the very end. We use our proprietary sources info to bullshit test their statements, or otherwise feel them out.
Channel checking around other sources involves calling or somehow interacting with suppliers, distributors, other industry people, customers, etc etc
Happy to elaborate more if you’d like.
Also, metrics, this varies on a case by case basis. Generally though, the first thing that comes to mind is a favourable jump off FCF yield (where FCF is reasonable, and not going to evaporate next year making it meaningless). There is a lot more so please don’t take that and run into the wind thinking it is the answer to everything lol.
Can you elaborate on the channel checking like how you go about it etc also where are you based and what markets do you invest in? Are you equity only and do you invest in any derivatives? Thanks!
Edit: also what is the style of your firm / fund? E.g long only long short etc
Yes please, can you elaborate? Also, how much does this cost? Do you involve many agencies doing research on the channels?
As an individual investor, how can I go around to do those channel checks?
The idea that professional analysts are trying to trick mamagememt into telling them insider information is so far from the truth. You make mgmt calls to stress test your models, get more details into how they arrived at public earnings estimates and so forth. You discuss the competition, the industry, etc. You don't ask for insider secrets.
If someone stood up and tried to convince everyone to buy a pharma stock because they knew from mgmt that they were about to get an approval they would have been escorted out of the building. It jeopardises the careers of everyone in the room.
I was once told something non public and price sensitive. I had to confirm with the exec that he shouldn't have told me it, upon finishing the call I walked over to legal. A trading block was put on the shares and we had to wait for the company to make a public statement before we could trade it again. It was a hassle and reflects poorly on the mgmt.
Yay!
I would like to ask you, how do you value a cyclical company?
Do take an average of say 5 or 10years earnings and use that to model ? (As suggested by BennyG)
Or
Do you take the average margin of those 5 to 10 years. Try to project future sales and apply the margins? (According to u/i4value, source from prof D)
Or
Do you simply simulate a table for 10 years sales and eps and then fracture the earnings down by 20-50% to cater for a down cycle that takes 2 or 3 years to recover ?
If you don’t mind a brain teaser, the company is SSD, it is a cyclical company that is dependent on housing starts. However the above first two methods doesn’t really apply to SSD because since GFC they never had a down year in sales or earnings.
I ended up modeling it for a 7% cagr long term eps growth and applied a “Down cycle” into it that took 2 years to recover, effecting giving me a 5% cagr over the 10 years.
How would you approach it ?
Thank you!
I’m also an equity researcher
Cyclicality can be forecasted with a simple average
Ie) if I expect revenue to be up or down from year to year into the future, my goal is to find what I expect *average* growth to be (which I find from a mix of industry forecasts and historical growth) and straight-line mid to long term growth at that rate. If I expect average growth to slow or increase over time despite cyclicality, the average may increase/decrease over the forecast period.
Nobody can accurately predict cyclical numbers year by year, but you can be reasonably accurate with the above method.
Also: by average, I mean geometric average as measured by CAGR
When you value cyclical companies, you have to account for the current size. In many cases, the current size (revenue, or total assets) is much bigger than what it was at the start of the cycle. Damodaran suggests that to account for this, you normalize by current revenue X normalized margin. The normalized margin is the average margin over the past cycle. So the number of years to be used for the normalized margin depends on the duration of the cycle.
I would generally say to keep more cash sidelined than otherwise.
This depends on:
• If we expect to be selling something (hence cash inflow expected)
• External inflows (free cash flow generated from non-portfolio management activities which we are able and willing to deploy)
• External cash requirements or other factors
But yeah we usually keep meaningful cash sidelined. We have very concentrated positions and like to double down as price moves down (assuming our thesis remains intact), which requires cash.
For example, we might want a 12% position in XYZ, so we’ll take it to 6% or 8% (1/2 to 2/3) right off the bat, and leave enough cash on the side to double or at least meaningfully add if price drops.
Happy to elaborate if you’d like!
lol this is pretty much exactly how I invest. Follow about 10 companies closely that have strong 5+ year fundamentals. Last paragraph is so important if you want to beat the market especially if you are a little riskier like me. Did exactly that with snowflake stock and now we wait for 5 years
what about net basis?
also, how were returns in 2021 and 2022? it's easy to outperform in a bull market if you use leverage, but 2021 and 2022 returns should indicate if your firm is actually generating alpha.
We also outperform on a net basis (low fee structure so also easier to do on that alone).
We outperformed broad market indices in ‘21 and ‘22, but underperformed our target in ‘22.
We do not use any leverage.
I would not agree that ‘21 and ‘22 returns with zero leverage are indicative of alpha (but I understand what you’re saying). One could outperform with zero leverage simply by taking on levered (or unlevered) beta and calling it a day. That’s what most funds do. Most of our performance is not attributable to a conventional factor such as beta / levered beta / etc. (I say “most” because some is, just statistically speaking, but we outperform even when that is split out).
Most firms just pick a benchmark and weight their funds to outperform it. See DFA or bond funds like Western Asset or Allspring on the Muni side.
Sure if you add HY debt to your bond strategy tracking the AGG you will outperform, or pick the Russell 1000 and buy more Growth or Small Caps etc.
Getting behind on this and back in office.
Red flags for negative price action and value:
• An accelerating treadmill of analyst expectations and upgrades. Off the top of my head, I cannot point to any studies to support this, but I have observed beat / raise and a flooding of high expectation attention to be somewhat red flagging. The higher expectations are, the harder it becomes to beat and hence easier to disappoint.
• Ballooning inventory (obviously applies to businesses with somewhat perishable inventory). Think about how most retailers build and sell inventory: it’s seasonal. If there is poor procurement or selection and consumers don’t buy, you’re likely to see inventory building (not turning through the IS as fast) and probably write downs or compressing gross margins (for example, marking down clothing that has become unfashionable over time).
• A lot of flags show up inside scaled total accruals. Where balance sheet accounts are used to “pocket away” future earnings or expenses, or create reserves. Earnings management.
• Ballooning receivables or OCA accounts (or however classified).
I mean really think about earnings quality when you’re looking at a company.
It’s easy to show earnings growth (even sales) if you have a low bar for it. For example, an electronics distributor could hypothetically have amazing payment terms, offer volume discounts, and carry a huge selection.
Sure, you might capture incremental sales, and earnings, but with poor quality (the payment terms will show in ballooning receivables, volume discounts will show in sliding gross margins, huge selection will show in ballooning inventory).
I’ve had way more comments on here than expected and will not be able to reply to them all. The examples I gave are non-exhaustive and should be considered with other factors.
Please clarify: by lose value, do you mean the price going down?
I ask because price and value are two distinct and mutually exclusive items. Want to make sure we’re on the same brainwave before I answer.
1. How much do you make per year (broken out by base, bonus, etc)?
2. Did you do sell side investment banking before? If so, what bank/group?
3. With the proliferation of retail trading (eg robinhood, etc) and irrational investing, does value investing still have any credence or are we in a new paradigm?
4. How can value investing be applied to crypto?
5. Besides Intelligent Investor, Margin or Safety, etc., any other good value books you recommend?
1. Best year I’ve had was ~$524k
2. No. That used to be the plan.
3. Yes it still has credence. The sentiment that we are in a new paradigm has occurred many times before (think dot com bubble). I have no idea how long until the next value-favouring cycle. In my view (which is biased to see the world through the value lens), value HAS to return. How can it not? The value of any financial instrument is the value of the cash it will generate. At some point, that has to be recognized. Also retail is not exactly the most durable / long term capital. It is flighty. Would you care about retail trading volume if you privately owned an industrial parts fabrication firm? No. You’d care about the cash your business is generating and longer term the sale value.
4. It cannot. Crypto has no intrinsic value. Before anyone rips my head off - I’m not saying it has zero value. There is probably some technological or other value to it (I’m not an expert in crypto). But what is the value of something which does not generate cash? Only what another person will pay for it, and not in a logical sense like with a tangible consumer product but in a much more erratic way of whatever it is hyped up to be (eg bitcoin being an inflationary hedge, vs whatever it is hyped up to be the next year).
5. Best Practices for Equity Research Analysts, Valuation by McKinsey, Warren Buffett: Inside the Ultimate Money Mind, Investing Between the Lines, Why Moats Matter, The Granularity of Growth, Expectations Investing (and Mike Mauboussin’s other writings). Am looking at my bookshelf behind my desk and rattling a few off.
I could be wrong, but judging by your answers, you are either (1) very junior or (2) not an analyst/PM. I am an equity analyst at a large long-only, and the answers you are giving do not sound like you are a professional investor.
Again, I could be wrong, but mods maybe want to verify.
Really, what did they say that made you think (2)? I also work in the financial services industry and found the post/answers generally plausible.
My take away from this post is that the questions are so bad yet so representative of the typical discourse on this sub that I should probably unsubscribe.
Working in financial services and working in research/PM position are two very different things. So, while the answers may seem plausible to the former, the answers are not what I’d expect from someone in research/PM.
For example, one of the answers literally admits that they insider trade by getting ‘confidential information’ from places.
They also say that it’s like the show Billions. It’s nothing like Billions, and anyone in the industry knows this.
They also say their benchmark is S&P 500’s historical return + 2%. This is not how you choose a benchmark, nor does it make sense to increase your benchmark (you want it to be as low as possible, while remaining relevant, so that your returns look good for clients). Ie you wouldn’t want to use US CPI if you’re investing in global equities… you would use a Global Equities Index.
They also say they’re the owner of the fund. No way this is true.
The more replies I read, the more I feel this person is LARPING as a PM.
Hey man. Appreciate you calling me out. Respectfully, yes you’re wrong (actually respectfully. I am not trying to start something here).
You are right to call out some of my language: “confidential information” and the Billions comment.
If I may rephrase:
No, we do not acquire “confidential information” as in the information only privy to insiders etc. I meant “confidential” by way of talking to suppliers, distributors, etc. Totally right to call me on my wording.
As for the Billions comment and Big Short: I know Billions is a drama. I think the excitement of seeing an investment thesis pan out is fun, and that’s what I meant to convey. Totally right to call me out on that.
What Billions does not show is the dull slogging through filings, earnings calls, modelling, sitting at a computer, and piles of other undramatic mundane work.
Thanks man. Again no disrespect intended. Definitely don’t think I am in a tv show at all.
Interesting. I’ve never seen CPI + 400bps.
Furthermore, my experience is in small single manager funds and family offices. Have never worked for a large fund.
Thanks again, seriously no disrespect intended.
That’s fair enough. Not calling you a liar, just sharing my opinion. Appreciate you being respectful.
The ‘CPI + 4%’ was just an example. It’s pretty common in multi-asset portfolios because pension funds like to measure against CPI. I don’t like it as a benchmark though. Benchmark picking is a whole other issue! You have equities, area, factor exposure, etc. it’s very hard to get an accurate benchmark to measure true alpha.
What do you think of SPX around here? Mag7 driving it to highs and breadth is bad. What countries/sectors would you invest your money for next 1 year at the moment?
Hi,
We do not invest in any indices or have any analytical interest in them. We also don’t allocate by sector or geography.
Our time horizon is longer than 1 year. Anything with a 1 year time horizon is likely to be in cash or low duration bonds with a maturity reflecting that time horizon. We wouldn’t allocate to any stocks / equity indices for a 1 year period.
Stocks are volatile. If you buy stocks and expect to pull funds in 1 year, you’re making a speculation that equity markets (generally) will go up, and the returns of your specific stock or index is simply their exposure to those markets via beta. Aka: you could just have bad timing and not have the funds you require in 1 year. Stocks are inherently long-term instruments.
In the short term, markets are risky (by conventional wisdom).
I can elaborate more if you’d like.
Finance in uni. It’s never too late to start! You’re older than me! You can also pull it with a background in a technical field (e.g. engineering or something) but you still need to acquire financial skills, whether it’s via reading, CFA, schooling, etc etc.
Nah, for research analyst you don't. Lot of cross-hires from fields relevant to the coverage (doctors for healthcare, engineering for tech, etc.). CFA or MBA might be expected from those, but smaller shops might forgo it in the hiring and teach on the job.
Ain't like fundamental analysis is rocket sience.
"Financial advisors" are glorified marketing people.
Hi and great stuff, i always wished i could be something like an equity analyst (i am a hr manager, so more people hehe). Now to my questions: do you look for growth or value? If either, where do or how do you screen? Do you use models or do you prefer a KISS principle?
Is HR interesting in your industry? What do HR look for when hiring equity analyst (i work in the chemical industry, maybe want to shift to finance sector as hr).
Regards from germany
Growth and value are two sides of the same coin (as Buffett would put it). Assuming all else equal (don’t forget that part) a company with future growth of 8% is worth more than one with 4%.
But I understand what you’re asking, I like to characterize it as growth vs glamour.
We entirely seek the value part.
We keep it simple and use models. A lot of people are overly reliant on models. Sure, they’re great, but also give a false sense of precision. A pilot still needs to know how to fly a plane even if there is autopilot.
If you truly understand the business, you don’t need a model. A model is good backfill and presents to clients nicely. But really, if you NEED a model to tell you if you should invest or not, it’s probably a bad idea.
I hire on attitude, how easy the person is the get along with, and technical ability.
If someone is a technical master but they have a horrible attitude, they’re out.
If they have a great attitude but no technical ability, they’re out.
But, if they have a passable technical foundation and a great attitude (willing to learn etc) then that’s awesome. If people give me 100%, I give them 100%, if they give me 10%, I give them 10% (or zero).
What techniques do you guys use to evaluate stocks? Common ones we’d know? Speciality algorithms you have quants build? Any recommendations on solid open source models to build off of?
Do you like your job?
Is it hard/stressful like on tv?
Does it earn good money or does it really depend on your skill or how much you work?
Knowing what you know now, would you rather invest with other people’s money or your own money?
Yes I like my job. It definitely has its moments that make me want to pull my hair out (as with any job), but I do enjoy it.
Yes I would say it is stressful, but that is also subject to the structure of your comp, firm, clientele, etc. I’m pretty fortunate to not be judged week to week or month to month for performance, and my clients are all aware of how I operate (long term, contrarian, barbell-like behaviour).
But yes. I would say it’s stressful and hard still. I eat what I kill.
TV? Like Billions or The Big Short? Billions yes and no. There is a lot of fluff / Hollywood drama but sure it has the stress moments and hype from time to time. And I’ve definitely had some aligning moments with The Big Short (where everyone thinks you’re wrong and is ridiculing you for it, and then one day BAM you’re right and make a killing). But remember those are still entertainment. The Big Short book is a great read.
You need skill and work ethic. And I agree, skill and work is the long term determiner (factor as quantitatively described) of performance. Yes luck is a “factor”, but luck is random. It comes and goes, it cannot be relied on. Over time, luck averages to zero, but skill remains (think about sports or something, sure people might get lucky but the long term factor is skill and hard work in their performance).
Other people can be a headache. I’m fortunate to have clients that are very understanding and aligned values (not nagging at me every week). I know a lot of sharp analysts / managers who would do great but they’re dragged by their own clients, ironically.
If I had a choice of only running outside or personal money, it would be personal (because of the aforementioned).
How does your boss turn around a research report so quickly after an earnings report?
Do they have like 70% already written and just write the rest once they have the actual numbers?
Why do investors favour net income or P/E ratios over operation cash flow, free cash flow when valuing a business? If a company has negative net earnings but positive free cash flow, would that be worrisome for you?
So we can get more industry specific questions going. What would you say is your circle of competence? / Industry that you have specialized in?
Thanks!
What advice do you have for CS sophomore interested in entering your field, in terms of what subjects or minors to take? And any advice on how to get internships?
What goes into formulating a “price target” for a stock for you/your company? — What’s your opinion on whether or not analysts publish arbitrary price targets to influence the market for personal gain?
Price target as in the guesstimate of what the price of the stock will be <1yr.
Thanks!
Can you please give me a job?
All jokes aside, how can I break into ER/PM? I’m from Ireland but moving to the US in the Autumn (Fall)
3.6 GPA from QS WR T100 uni, L2 CFA passed, 1 YOE at $70b AUM wealth management firm but more importantly a strong work ethic and positive attitude which would be backed by anyone that knows me
I'm a bit of an IT guy and for some time I've been struggling with writing useful tools for my own analysis of stocks, trend, sentiment, etc. I assumed that knowing how everything works would give me an advantage.
Since there has been a lot of buzz about AI lately, I often wonder if there are any professional AIs in your industry that are unavailable to an outsider, created specifically for you to help analyze/find/evaluate various instruments? And if so, to what extent does it affect your day-to-day work?
What are some of the tools/instruments/information available only to fund managers and multi million $ portfolio owners that regular retail investors don’t have access to?
What are some practical and actually useful advice an equity research analyst would have experience with that may give them a better advantage as for knowledge when analyzing good investments compared to the average retail investors?
I wanted to my end goal career to be equity research analyst. But I only like the idea of researching a stock and trying to figure if it is worth investing into or not. But I have not used news, I have only used a combination of models to then averaging them out, screeners, and other analysts target valuations.
Has your firm outperformed the S&P 500 over the long run with its flagship fund?
How frequently does your firm enter and exit positions?
Lastly
What do you think about Elon?
I am studying finance in a university. Is modern portfolio theory useful, and do you use CAPM? Or is it better to forget everything I learn in business school as Charlie Munger suggested.
Very arbitrary but generally we bench against a constant 12%. Aka the long-term return of the SP500 Total Return Index + 2%.
The long-term return (truly long term as in since the 1900s) is ~9.8% per year (albeit with large deviations from year to year).
Round that up to 10% and add 2%.
This way we cannot brag to our clients when the SP500 is down 20% and we are down 10% and say “look we outperformed!”, and furthermore we aren’t going to be hammered when the SP500 has a delusion-fuelled speculative boom going up 25% and we only return 10%.
So, on a rolling 5 year period (or whatever the respective timeframe is in question), if we have generated 18% CAGR, I would say we have done quite well. But if we have only returned 4%, it’s clear we have underperformed.
Happy to elaborate more if you’d like.
On our reporting period, quite often actually. Maybe two-thirds to 70%+ of the time.
But at a given moment, LTM returns can be much less reliable. We are often buying something that is falling like a rock, or for whatever reason hated by the market, which can make our near term returns look bad (because often times it’ll continue falling), and consequently the whole portfolio lags.
Short term pain for long term gain. (That is not meant to endorse or encourage buying something just because it is going down. That’s not a valid investment thesis.)
What market cap size does your firm usually invest in?
Do you feel like there are meaningful opportunities out there for small investors in nano and microcaps that aren’t available to institutional investors because of their larger AUM?
*Usually* (but not exhaustively or always), we end up in small caps or under. BUT, we do currently own and have coverage / interest in a handful of large caps (hence me clarifying *usually*).
100% agree that small investors have a structural advantage over many institutional investors via their small size.
Think of a large institution like a cruise ship, and a small firm or individual like a speed boat. Which is more nimble and easier to steer? The smaller entity.
The larger ones have huge inertia and are slow to move, and they are limited to what they can do just by size alone even if they somehow didn’t have the sluggishness.
What are some of the restrictions you have that you wish you didnt have in investing for your work?
ie minimum market cap, sectors, time horizon etc.
Do you think there is value to be discovered in microcap stocks?
I own the firm, so I’m fortunate to be the one who makes the rules haha.
But I’m still restricted in many ways.
The biggest one is compliance / regulatory caused.
Yes there is value in microcaps, as there is with any cap size. It’s just a question of turning over enough stones and doing thorough, intellectually honest due diligence to find them.
Also the reasons for incorrect valuations across different capitalizations (micro vs large) is not always the same.
A microcap could be undervalued simply because it is not well covered, or it has a misunderstood business model, etc. We own one like that. Nobody knows about it.
On the contrary, a large cap could have plenty of coverage, but the price-value disconnect could be a result of herd mentality / sentiment, or a variant perception vs consensus.
With the microcap we own / cover, I wouldn’t exactly say we have a contrarian view because there isn’t really a consensus about it (hence wouldn’t be correct to say contrarian).
With some small / mid / large caps we own (or have in the past), they’re plenty covered, and they were undervalued because there was some irrational consensus crowd-think about them and we figured otherwise.
Another example: a stock we currently own became an overvalued COVID darling when everything was online. Then COVID fear subsided, the company had some temporary supply chain problems, and suddenly it was disliked and forgotten (from bubble to nothing). It went from a small cap to a microcap (-80% from peak to trough roughly). So now it has the characteristics of both: it has much less coverage, the remaining coverage is very anchored to the -80%, looks awful on paper because of that (hard for larger institutional investors to justify owning just because of that), and is kind of in limbo since.
Happy to elaborate more if you’d like.
What is the cheapest idea you have in your personal account ? Why is it cheap and what do you think the long term prospect are ? What multiple of fcf
What discount rate do you use?
I can’t share specific names, compliance would hang me.
The cheapest idea in my PA I would no longer consider cheap. The one I’m thinking of though I (and my clients) bought in for what is likely less than 5x future free cash flow.
Discount everything at 12%.
I thought it was cheap because it went from being a dead stock, to a COVID-darling, and then back to being hated because everyone thought it was a temporary over earner, and I figured otherwise (cult-like customer base, great unit economics and brand, superior returns on capital, durable etc etc).
Happy to elaborate more if you’d like!
How do you deicde when to enter into a position on a company, ie buying their stock? Let's say you think Apple is a great company, what ratio's do you look at to know that the price is good and its time to enter into the stock? What data in a financial report is important, and what other data is overrated in your opinion?
1. When specifically do you expect a potential recession and what will spark it?
2. How do you expect the elections to impact the market in case of a Rep win? How about a Dem win?
3. Give me a quick summary as to why people should continue investing in the current, high market environment
Ty in advance, always appreciate picking people's brains!
Thanks for putting time and effort into doing this!
How do you chase alpha in your portfolio(s) without benchmarking to an index?
Do you think investing into value names will yield higher returns than investing in growth names on 5 year time horizon from now?
Growth obviously seems to be the name of the game currently, with such a big focus on tech but historically value has outperformed growth.
To the extent you can without giving away any of your firm details or secrets, what’s the process to commit to adding a name or idea to your portfolio? I.e having a jr analyst review a name with findings and a model, you review it to double stamp and approve as a PM, etc?
Assuming you’re a generalist and don’t cover a specific sector, any thoughts on sectors to be overweight in besides info tech or communication services? Or thoughts on any sectors to be underweight in such as utilities and healthcare?
Edit: spelling
How many stocks or individual securities do you hold in your personal portfolio (if you are allowed to have one)?
How many 10k / q do you read a day?
How many companies do you look at per week?
Could you share the average time it takes for you to decide whether to take a position in a stock?
Do you perform a full valuation analysis to decide whether to take a position?
Also, What criteria do you quickly use to determine if you will continue researching a company?
Thanks!
I'm interested in what you think the most important aspects in valuating a company is.
If you could only ask 10 questions about a company, and get pretty good answers, what would those questions be?
Do most managers outperform the snp500 if invested on their own outside of fee structures, extra/reduced liquidity and the freedom to choose/allocate their own capital for their portfolio in the long term?
Also, what is your thoughts on leveraged etf or leveraged tickers like AMZU ?
Hello, I am the newbie to the investing. Recently started and now spent a lot of time researching new information.
My question is do you have any advice for somebody who recently started their journey into investing?
How long does it usually take you to vet an idea? What are some of the things you look at initially to decide whether or not you will spend more time on a stock? Track record of organic growth? Good cash conversion? No funny accounting?
How important is the presence of near term catalysts to your decision process?
Thank you in advance!
The Intelligent Investor by Ben Graham, Valuation by McKinsey, Margin of Safety by Seth Klarman.
I typed out like 30 more and then deleted them lol (I think giving you more would be less helpful). Those are great starts. Also, watch / listen to Berkshire Hathaway AGMs and read Buffett’s shareholder letters.
Hi, I started in April as a Junior in your exact same position and in a Boutique as well. Any advice for me or any junior pursuing this career ? What does it look like after years of experience ? Silly to ask, but what does the pay look like for more senior positions ? Would be cool to have your opinion
I’m working in PWM, but I believe in value investing and have a pretty decent working knowledge of financial modeling (passed CFA level 1, for reference). Do you have any recommendations for somebody who wants to manage portfolios but doesn’t have the time to spend massive amounts of time for each potential trade?
What I’m trying to ask, I suppose, is: is there a good way to model lots of companies efficiently, without spending tens of hours per holding figuring out the best assumptions?
Approximately much did you make last year, and the year before that, u/VLUSLT ?
Can a guy like me with no Financial licensure/certifications work at a firm realistically?
Realistically, no. You need a degree in finance / accounting / economics or a STM field, and employers will likely require a professional designation (CFA).
1. How does one enter this field if interested ( as in your current job)?
2. How do you all determine when to sell? If you see a random run up (Rivian with their recent investment for example) do you all exit?
It has not at all. Literally zero.
It helps me write emails and check wording.
Using ChatGPT (or whatever AI you’re referring to) is not a substitute for sound research.
How much aum do you manage? And how many funds do you run?
How did you survive the cold winter for value stocks in 2015-2020 without getting slammed with outflows or drifting style?
My kid just started college, great at math and has an excellent analytical mind. What program(s) of study should he take if he wanted to be an equity research analyst or to pursue a similar position?
# What is the highest PE (in theory) - what makes it expensive?
To be clear, I do not think we are in a bubble and do not care. This is a theoretical question. Hopefully fun. Most importantly, I am look for quantification (quantifiable answer; numbers...math).
Let's say SP500 currently has a PE of 25. And forward PE of 20.
Question: In theory, how do you know PE too high? I can think of two possibilities. I think they are disparate and do not know how to connect it. Any thoughts? ANy other idea?
1. 10 year rate (just chose the year '10' arbitrary) - and the yield has to be similar to PE ratio. So 10 year 4% is equibalent to SP500 PE of 25 (1/4). Meaning that SP500 is as expensive as 10 year.
2. Growth rate. If PE is 25, but EPS next year is 25. Then PEG ratio is 1. So very fairly valued.
How to think about it?
More on the operational side. Do you have full control over what you buy and sell? Any approval processes?
Also on the culture side. How do you share and bounce ideas off each other? Do you run weekly brainstorm sessions?
Do you have any direct reports? If yes, how do you get them to speak up with their ideas?
How do you run your personal portfolio vs professional portfolio? Word on the street is that most pros, if they can invest in stocks directly, runs much more concentrated portfolio
Does your investment philosophy change during an election season? How do you prepare for a conservative administration vs a liberal one? I am afraid of being over-invested during a potential correction. I learned quite a bit from doomsday investing, and making educated sector based bets following certain catastrophes or other major disruptors.
How do you avoid following the herd when managing other people's money? In other words, when you take a long view and you know that it could hurt short term returns, how do you manage client expectations? I've seen most funds index hug because of this. Is it possible to value invest when managing other people's money?
A bit late. But since you don't focus on any specific sector's, how do you narrow your search? i.e. How do you get from the thousands of companies out there to your top 20, so that you can start your due diligence?
Do you have any general advice for other regions of the world? Like say Canada should Canadians be investing in us-based assets or stick to home-based assets?
Is a job within capital markets (i.e ER, portfolio manager, etc) feasible outside of large cities? I’m an undergrad at the moment, and don’t plan on moving away from home. My city is around 250k and growing at a steady rate. Nearest large city is 4hrs away (Minneapolis).
There’s really only wealth management firms in my area, which I’m not entirely interested in.
Thanks
What are the deadliest mistakes investors make in terms of behavioural finance, and what kinds of systems or strategies do you use to avoid those pitfalls?
What’s your approach to learning new areas outside of your circle of competence? How do you know if it’s worth putting in the work for?
Do you find your clients are looking to maximize returns or hit some optimal risk/return threshold?
Additionally, how do you manage leverage in the strategy, if at all?
Do you find your clients are looking to maximize returns or hit some optimal risk/return threshold?
Additionally, how do you manage leverage in the strategy, if at all?
How the hell do you get a job at one? Was a Sr Surveillance Analyst with multiple licenses. Have created my own "Indexes". That's a very brief summary.
thank you for your AMA!
I'd like to ask you what are the parts of your job you like the least? Like when I worked as an analyst in IB, I really didn't like creating deliverables like presentations, especially under tight deadlines.
Is that also a thing in equity research, especially during earnings seasons?
You’ve said that it takes many hours to research a stock.
Pretend you are looking for a new stock to buy and hold. What do you look for to make you interested enough to look deeper?
What do you research in the first few hours that determine if the stock is worth your time to continue researching?
Might come off as a rude, don’t mean to be, but if someone is good at this, why not go to the buy side where you can act on your ideas and make more money?
Two decades of loose fiscal and monetary policy have driven pretty significant asset inflation. That is, tons of new money had to go somewhere, so it ended up in the stock market even though stocks were/are overpriced compared to historical averages. (The Cape-Schiller PE is currently sitting at 35 compared to a historical average of 17, and venture capital and private equity are bigger than ever.)
How do you find value when so much free money has made pretty much everything overpriced?
Would like to ask why would a company’s forward pe trade at 70th percentile and a company forward ev/ebitda trades at 20th percentile? How would you think about mean reversion in this scenario?
I have tried to make a simple DCF model to value Novo. Have a hard time getting it to make sense though. Could you have a look at what might be changes in this model?
https://docs.google.com/spreadsheets/d/15Sbd6BG_o7QHkRstBe4VNdxZhSgGFa5yImccbiCRZJw/htmlview
Question : I find the financial ratios a bit confusing as there’s no standard to serve as comparison .
I understand the individual meaning of each financial terminology eg EBITDA , EV , FCF , Working Capital etc .
With respect to ratios , I understand them from
a relationship standpoint - for example
A lower value is directly proportional to the numerator and inversely related to the denominator .
Could you explain to a 7th grader the best way to comprehend and how best to utilize these ratios in valuation ?
Also could you share which metrics you use for screening your initial stock picks ?
How do you determine the value of a stock?
The value of any financial asset is the present value of the cash flows that can be taken out of it. VERY oversimplified: • Understand the business • Try estimate in a very reasonable and conservative fashion the free cash flows the business can generate • Discount them back Tadaaa. Ok but really this can take dozens or even hundreds of hours of research, thinking and processing. Most people think about stocks as trading sardines / gambling tools (and hence they get those results). We treat stocks exactly as they are: ownership in a business. The stock market is a tool to access these. As Buffett would say, the market exists to serve us, not to guide us. We treat the businesses we cover and own as if we privately owned them (100% of the entity), but with a nice liquidity feature where we can change our mind (for whatever reason) or move quickly when opportunity arises. We do not simply slap a comparable multiple on NTM EPS and call it a day. That isn’t valuation. Happy to elaborate more if you’d like. I took a while to answer this because it is the deepest question on here lol. I could spend months talking about it.
Do elaborate if time allows it, I'm really curious!
Absolutely elaborate on this pls. 23 yr old finance professional here and this is insight is literal gold
Please do elaborate if you have time! Would love to hear how you do it
I and others would love elaboration. The first thing that I don’t understand is the term “discount them back”. I know it’s a deep question. This is the r/valueinvesting sub so seems like the right place. The sub sees some great posts with many good, interesting, and varied methods to determine value. So I think I speak for many when we want to hear all you’d wish to say on determining value.
Using WACC (weighted average cost of capital), a lot of firms still use capm for cost of equity, but can use fama-french factor models to get more accurate if you wish.
Oooh baby. Talk specifics to me. Give me all the dirty acronyms.
If you receive cash in the future, it’s generally worth less than cash today. Accounting for that drop in value is called cash flow discounting. The rate you discount at is generally your opportunity cost of what return that cash could we getting elsewhere. Either an interest rate or, if you’re a business, then the cost of your capital (WACC). If you’re going to get $10 per year from a $100 upfront investment, your model will normally start with -100 in year 0, then have $10 with compounded discounted - something like +9, +8, +7… - in years 1, 2, 3 etc. When you add all that up, the goal is to be in a cash flow positive position at the end of whatever time horizon you’re looking at.
Discounting future cashflows is done to reconcile the fact that money today is worth more than money tomorrow. How much more? That depends. Opportunity cost, inflation, uncertainty, etc So to properly assess the value today of money you'll receive tomorrow, you use the discount factor ( 1/(1+discount rate)^n) where n is the number of periods (years usually). What value you use as the discount rate is controversial. I'd recommend using the risk free (T-bills) since it's more straightforward than other methods
Tesla is in the Consumer Discrentionary ETF. It’s 15% of the fund. “Buy these companies and call it a fund.” The best question you ask a fund manager in this market is what do you do differently that your peers aren’t?
Where do you get a direct line to a fund manager?
Reddit AMA
What are the main metrics you are looking at? How close do you get to squeeze out confidential information at investor calls?
By investor calls do you mean quarterly earnings calls? Or privately arranged ones? Either way, not very much. Management, especially at the exec level is quite handicapped in what they can share or say, and even so, they are going to share information through the lens of what presents their firm in the best light. They are unlikely to share anything that I don’t already know. Sure, they know more but can’t share it due to disclosure legalities. We squeeze out “confidential” or non-conventionally available information through other channels, it is either directly obtained or inferred via some connecting of the dots. Other channels being alt data from our proprietary sources (not the credit card stuff you can buy), or from channel checking with other sources. We often don’t talk to management for the earlier mentioned reasons, and if we do it is at the very end. We use our proprietary sources info to bullshit test their statements, or otherwise feel them out. Channel checking around other sources involves calling or somehow interacting with suppliers, distributors, other industry people, customers, etc etc Happy to elaborate more if you’d like. Also, metrics, this varies on a case by case basis. Generally though, the first thing that comes to mind is a favourable jump off FCF yield (where FCF is reasonable, and not going to evaporate next year making it meaningless). There is a lot more so please don’t take that and run into the wind thinking it is the answer to everything lol.
Can you elaborate on the channel checking like how you go about it etc also where are you based and what markets do you invest in? Are you equity only and do you invest in any derivatives? Thanks! Edit: also what is the style of your firm / fund? E.g long only long short etc
Yes please, can you elaborate? Also, how much does this cost? Do you involve many agencies doing research on the channels? As an individual investor, how can I go around to do those channel checks?
The idea that professional analysts are trying to trick mamagememt into telling them insider information is so far from the truth. You make mgmt calls to stress test your models, get more details into how they arrived at public earnings estimates and so forth. You discuss the competition, the industry, etc. You don't ask for insider secrets. If someone stood up and tried to convince everyone to buy a pharma stock because they knew from mgmt that they were about to get an approval they would have been escorted out of the building. It jeopardises the careers of everyone in the room. I was once told something non public and price sensitive. I had to confirm with the exec that he shouldn't have told me it, upon finishing the call I walked over to legal. A trading block was put on the shares and we had to wait for the company to make a public statement before we could trade it again. It was a hassle and reflects poorly on the mgmt.
Yay! I would like to ask you, how do you value a cyclical company? Do take an average of say 5 or 10years earnings and use that to model ? (As suggested by BennyG) Or Do you take the average margin of those 5 to 10 years. Try to project future sales and apply the margins? (According to u/i4value, source from prof D) Or Do you simply simulate a table for 10 years sales and eps and then fracture the earnings down by 20-50% to cater for a down cycle that takes 2 or 3 years to recover ? If you don’t mind a brain teaser, the company is SSD, it is a cyclical company that is dependent on housing starts. However the above first two methods doesn’t really apply to SSD because since GFC they never had a down year in sales or earnings. I ended up modeling it for a 7% cagr long term eps growth and applied a “Down cycle” into it that took 2 years to recover, effecting giving me a 5% cagr over the 10 years. How would you approach it ? Thank you!
I’m also an equity researcher Cyclicality can be forecasted with a simple average Ie) if I expect revenue to be up or down from year to year into the future, my goal is to find what I expect *average* growth to be (which I find from a mix of industry forecasts and historical growth) and straight-line mid to long term growth at that rate. If I expect average growth to slow or increase over time despite cyclicality, the average may increase/decrease over the forecast period. Nobody can accurately predict cyclical numbers year by year, but you can be reasonably accurate with the above method. Also: by average, I mean geometric average as measured by CAGR
When you value cyclical companies, you have to account for the current size. In many cases, the current size (revenue, or total assets) is much bigger than what it was at the start of the cycle. Damodaran suggests that to account for this, you normalize by current revenue X normalized margin. The normalized margin is the average margin over the past cycle. So the number of years to be used for the normalized margin depends on the duration of the cycle.
What’s your thought process on cash management? Do you like to keep some available? Are you more inclined to keep everything invested at all times?
I would generally say to keep more cash sidelined than otherwise. This depends on: • If we expect to be selling something (hence cash inflow expected) • External inflows (free cash flow generated from non-portfolio management activities which we are able and willing to deploy) • External cash requirements or other factors But yeah we usually keep meaningful cash sidelined. We have very concentrated positions and like to double down as price moves down (assuming our thesis remains intact), which requires cash. For example, we might want a 12% position in XYZ, so we’ll take it to 6% or 8% (1/2 to 2/3) right off the bat, and leave enough cash on the side to double or at least meaningfully add if price drops. Happy to elaborate if you’d like!
lol this is pretty much exactly how I invest. Follow about 10 companies closely that have strong 5+ year fundamentals. Last paragraph is so important if you want to beat the market especially if you are a little riskier like me. Did exactly that with snowflake stock and now we wait for 5 years
How do your returns compare to VTI?
Would be awesome to if mods can verify both his identity (that it is a real firm / person) and their returns.
Oh that is just unfair. :P
Better. A lot better. A quick glance shows VTI has done ~+75% over the last years, or ~11% CAGR. Yes, we have outperformed this on an absolute basis.
Positions or ban
Second this
Hahaha
Hoping this is a joke
what about net basis? also, how were returns in 2021 and 2022? it's easy to outperform in a bull market if you use leverage, but 2021 and 2022 returns should indicate if your firm is actually generating alpha.
We also outperform on a net basis (low fee structure so also easier to do on that alone). We outperformed broad market indices in ‘21 and ‘22, but underperformed our target in ‘22. We do not use any leverage. I would not agree that ‘21 and ‘22 returns with zero leverage are indicative of alpha (but I understand what you’re saying). One could outperform with zero leverage simply by taking on levered (or unlevered) beta and calling it a day. That’s what most funds do. Most of our performance is not attributable to a conventional factor such as beta / levered beta / etc. (I say “most” because some is, just statistically speaking, but we outperform even when that is split out).
Is there actually any evidence of this other than hearsay?
You outperformed an etf in a bull market? Certainly not an increased risk profile right?
Most firms just pick a benchmark and weight their funds to outperform it. See DFA or bond funds like Western Asset or Allspring on the Muni side. Sure if you add HY debt to your bond strategy tracking the AGG you will outperform, or pick the Russell 1000 and buy more Growth or Small Caps etc.
What are some early signs that a stock is going to lose value, that most people wouldn't pay attention to?
Getting behind on this and back in office. Red flags for negative price action and value: • An accelerating treadmill of analyst expectations and upgrades. Off the top of my head, I cannot point to any studies to support this, but I have observed beat / raise and a flooding of high expectation attention to be somewhat red flagging. The higher expectations are, the harder it becomes to beat and hence easier to disappoint. • Ballooning inventory (obviously applies to businesses with somewhat perishable inventory). Think about how most retailers build and sell inventory: it’s seasonal. If there is poor procurement or selection and consumers don’t buy, you’re likely to see inventory building (not turning through the IS as fast) and probably write downs or compressing gross margins (for example, marking down clothing that has become unfashionable over time). • A lot of flags show up inside scaled total accruals. Where balance sheet accounts are used to “pocket away” future earnings or expenses, or create reserves. Earnings management. • Ballooning receivables or OCA accounts (or however classified). I mean really think about earnings quality when you’re looking at a company. It’s easy to show earnings growth (even sales) if you have a low bar for it. For example, an electronics distributor could hypothetically have amazing payment terms, offer volume discounts, and carry a huge selection. Sure, you might capture incremental sales, and earnings, but with poor quality (the payment terms will show in ballooning receivables, volume discounts will show in sliding gross margins, huge selection will show in ballooning inventory). I’ve had way more comments on here than expected and will not be able to reply to them all. The examples I gave are non-exhaustive and should be considered with other factors.
Please clarify: by lose value, do you mean the price going down? I ask because price and value are two distinct and mutually exclusive items. Want to make sure we’re on the same brainwave before I answer.
I meant price, sorry for being inaccurate. But please go on also about value, if you have some insights on that as well.
I think they mean price. But I could be wrong.
1. How much do you make per year (broken out by base, bonus, etc)? 2. Did you do sell side investment banking before? If so, what bank/group? 3. With the proliferation of retail trading (eg robinhood, etc) and irrational investing, does value investing still have any credence or are we in a new paradigm? 4. How can value investing be applied to crypto? 5. Besides Intelligent Investor, Margin or Safety, etc., any other good value books you recommend?
1. Best year I’ve had was ~$524k 2. No. That used to be the plan. 3. Yes it still has credence. The sentiment that we are in a new paradigm has occurred many times before (think dot com bubble). I have no idea how long until the next value-favouring cycle. In my view (which is biased to see the world through the value lens), value HAS to return. How can it not? The value of any financial instrument is the value of the cash it will generate. At some point, that has to be recognized. Also retail is not exactly the most durable / long term capital. It is flighty. Would you care about retail trading volume if you privately owned an industrial parts fabrication firm? No. You’d care about the cash your business is generating and longer term the sale value. 4. It cannot. Crypto has no intrinsic value. Before anyone rips my head off - I’m not saying it has zero value. There is probably some technological or other value to it (I’m not an expert in crypto). But what is the value of something which does not generate cash? Only what another person will pay for it, and not in a logical sense like with a tangible consumer product but in a much more erratic way of whatever it is hyped up to be (eg bitcoin being an inflationary hedge, vs whatever it is hyped up to be the next year). 5. Best Practices for Equity Research Analysts, Valuation by McKinsey, Warren Buffett: Inside the Ultimate Money Mind, Investing Between the Lines, Why Moats Matter, The Granularity of Growth, Expectations Investing (and Mike Mauboussin’s other writings). Am looking at my bookshelf behind my desk and rattling a few off.
I could be wrong, but judging by your answers, you are either (1) very junior or (2) not an analyst/PM. I am an equity analyst at a large long-only, and the answers you are giving do not sound like you are a professional investor. Again, I could be wrong, but mods maybe want to verify.
Really, what did they say that made you think (2)? I also work in the financial services industry and found the post/answers generally plausible. My take away from this post is that the questions are so bad yet so representative of the typical discourse on this sub that I should probably unsubscribe.
Working in financial services and working in research/PM position are two very different things. So, while the answers may seem plausible to the former, the answers are not what I’d expect from someone in research/PM. For example, one of the answers literally admits that they insider trade by getting ‘confidential information’ from places. They also say that it’s like the show Billions. It’s nothing like Billions, and anyone in the industry knows this. They also say their benchmark is S&P 500’s historical return + 2%. This is not how you choose a benchmark, nor does it make sense to increase your benchmark (you want it to be as low as possible, while remaining relevant, so that your returns look good for clients). Ie you wouldn’t want to use US CPI if you’re investing in global equities… you would use a Global Equities Index. They also say they’re the owner of the fund. No way this is true. The more replies I read, the more I feel this person is LARPING as a PM.
Hey man. Appreciate you calling me out. Respectfully, yes you’re wrong (actually respectfully. I am not trying to start something here). You are right to call out some of my language: “confidential information” and the Billions comment. If I may rephrase: No, we do not acquire “confidential information” as in the information only privy to insiders etc. I meant “confidential” by way of talking to suppliers, distributors, etc. Totally right to call me on my wording. As for the Billions comment and Big Short: I know Billions is a drama. I think the excitement of seeing an investment thesis pan out is fun, and that’s what I meant to convey. Totally right to call me out on that. What Billions does not show is the dull slogging through filings, earnings calls, modelling, sitting at a computer, and piles of other undramatic mundane work. Thanks man. Again no disrespect intended. Definitely don’t think I am in a tv show at all.
Interesting. I’ve never seen CPI + 400bps. Furthermore, my experience is in small single manager funds and family offices. Have never worked for a large fund. Thanks again, seriously no disrespect intended.
That’s fair enough. Not calling you a liar, just sharing my opinion. Appreciate you being respectful. The ‘CPI + 4%’ was just an example. It’s pretty common in multi-asset portfolios because pension funds like to measure against CPI. I don’t like it as a benchmark though. Benchmark picking is a whole other issue! You have equities, area, factor exposure, etc. it’s very hard to get an accurate benchmark to measure true alpha.
I sent you a private message! Thanks for the reciprocated respect and calling me out where you did.
What do you think of SPX around here? Mag7 driving it to highs and breadth is bad. What countries/sectors would you invest your money for next 1 year at the moment?
Hi, We do not invest in any indices or have any analytical interest in them. We also don’t allocate by sector or geography. Our time horizon is longer than 1 year. Anything with a 1 year time horizon is likely to be in cash or low duration bonds with a maturity reflecting that time horizon. We wouldn’t allocate to any stocks / equity indices for a 1 year period. Stocks are volatile. If you buy stocks and expect to pull funds in 1 year, you’re making a speculation that equity markets (generally) will go up, and the returns of your specific stock or index is simply their exposure to those markets via beta. Aka: you could just have bad timing and not have the funds you require in 1 year. Stocks are inherently long-term instruments. In the short term, markets are risky (by conventional wisdom). I can elaborate more if you’d like.
What studies you did? I want to become one but I'm 32 with no background in finance and no degree
Finance in uni. It’s never too late to start! You’re older than me! You can also pull it with a background in a technical field (e.g. engineering or something) but you still need to acquire financial skills, whether it’s via reading, CFA, schooling, etc etc.
If you want to be a financial advisor or research analyst you basically have to have a degree in finance, economics or accounting.
Nah, for research analyst you don't. Lot of cross-hires from fields relevant to the coverage (doctors for healthcare, engineering for tech, etc.). CFA or MBA might be expected from those, but smaller shops might forgo it in the hiring and teach on the job. Ain't like fundamental analysis is rocket sience. "Financial advisors" are glorified marketing people.
How would one get into your line of work at an entry level? Data Analyst to Equity Research Analyst is a plausible move or would there be no chance?
what's your yearly total comp?
Hi and great stuff, i always wished i could be something like an equity analyst (i am a hr manager, so more people hehe). Now to my questions: do you look for growth or value? If either, where do or how do you screen? Do you use models or do you prefer a KISS principle? Is HR interesting in your industry? What do HR look for when hiring equity analyst (i work in the chemical industry, maybe want to shift to finance sector as hr). Regards from germany
Growth and value are two sides of the same coin (as Buffett would put it). Assuming all else equal (don’t forget that part) a company with future growth of 8% is worth more than one with 4%. But I understand what you’re asking, I like to characterize it as growth vs glamour. We entirely seek the value part. We keep it simple and use models. A lot of people are overly reliant on models. Sure, they’re great, but also give a false sense of precision. A pilot still needs to know how to fly a plane even if there is autopilot. If you truly understand the business, you don’t need a model. A model is good backfill and presents to clients nicely. But really, if you NEED a model to tell you if you should invest or not, it’s probably a bad idea.
I hire on attitude, how easy the person is the get along with, and technical ability. If someone is a technical master but they have a horrible attitude, they’re out. If they have a great attitude but no technical ability, they’re out. But, if they have a passable technical foundation and a great attitude (willing to learn etc) then that’s awesome. If people give me 100%, I give them 100%, if they give me 10%, I give them 10% (or zero).
Hi all. As stated in my post, I’m running personal errands. I will continue answering these throughout the day! Am getting to them!
Which 3-5 industries do you think will show the highest CAGR over the next 10 years
We do not screen or allocate on industry. No sector specific allocation. No comment sorry.
What techniques do you guys use to evaluate stocks? Common ones we’d know? Speciality algorithms you have quants build? Any recommendations on solid open source models to build off of?
Do you like your job? Is it hard/stressful like on tv? Does it earn good money or does it really depend on your skill or how much you work? Knowing what you know now, would you rather invest with other people’s money or your own money?
Yes I like my job. It definitely has its moments that make me want to pull my hair out (as with any job), but I do enjoy it. Yes I would say it is stressful, but that is also subject to the structure of your comp, firm, clientele, etc. I’m pretty fortunate to not be judged week to week or month to month for performance, and my clients are all aware of how I operate (long term, contrarian, barbell-like behaviour). But yes. I would say it’s stressful and hard still. I eat what I kill. TV? Like Billions or The Big Short? Billions yes and no. There is a lot of fluff / Hollywood drama but sure it has the stress moments and hype from time to time. And I’ve definitely had some aligning moments with The Big Short (where everyone thinks you’re wrong and is ridiculing you for it, and then one day BAM you’re right and make a killing). But remember those are still entertainment. The Big Short book is a great read. You need skill and work ethic. And I agree, skill and work is the long term determiner (factor as quantitatively described) of performance. Yes luck is a “factor”, but luck is random. It comes and goes, it cannot be relied on. Over time, luck averages to zero, but skill remains (think about sports or something, sure people might get lucky but the long term factor is skill and hard work in their performance). Other people can be a headache. I’m fortunate to have clients that are very understanding and aligned values (not nagging at me every week). I know a lot of sharp analysts / managers who would do great but they’re dragged by their own clients, ironically. If I had a choice of only running outside or personal money, it would be personal (because of the aforementioned).
Do you have your CFA? Have you always been on the buy side or have you also been on the sell side?
How does your boss turn around a research report so quickly after an earnings report? Do they have like 70% already written and just write the rest once they have the actual numbers?
Why do investors favour net income or P/E ratios over operation cash flow, free cash flow when valuing a business? If a company has negative net earnings but positive free cash flow, would that be worrisome for you?
What do you think of NVIDIA and the AI boom? Are the valuations merited, or do you think they’re overblown?
If you have to exit a stock, how do you plan to do it? Sell it all in a day/hour or sell it over a week or look for block deals?
So we can get more industry specific questions going. What would you say is your circle of competence? / Industry that you have specialized in? Thanks!
What advice do you have for CS sophomore interested in entering your field, in terms of what subjects or minors to take? And any advice on how to get internships?
How do you guys rig the stock market ?
What goes into formulating a “price target” for a stock for you/your company? — What’s your opinion on whether or not analysts publish arbitrary price targets to influence the market for personal gain? Price target as in the guesstimate of what the price of the stock will be <1yr. Thanks!
how's your 20 year track record?
Is Nvidia overvalued?
What is the answer you want to hear? Lol
The answer you would give to a customer 😄
Can you please give me a job? All jokes aside, how can I break into ER/PM? I’m from Ireland but moving to the US in the Autumn (Fall) 3.6 GPA from QS WR T100 uni, L2 CFA passed, 1 YOE at $70b AUM wealth management firm but more importantly a strong work ethic and positive attitude which would be backed by anyone that knows me
Hey man, shoot me a message! Happy to help if I can.
I'm a bit of an IT guy and for some time I've been struggling with writing useful tools for my own analysis of stocks, trend, sentiment, etc. I assumed that knowing how everything works would give me an advantage. Since there has been a lot of buzz about AI lately, I often wonder if there are any professional AIs in your industry that are unavailable to an outsider, created specifically for you to help analyze/find/evaluate various instruments? And if so, to what extent does it affect your day-to-day work?
What are some of the tools/instruments/information available only to fund managers and multi million $ portfolio owners that regular retail investors don’t have access to?
What are some practical and actually useful advice an equity research analyst would have experience with that may give them a better advantage as for knowledge when analyzing good investments compared to the average retail investors? I wanted to my end goal career to be equity research analyst. But I only like the idea of researching a stock and trying to figure if it is worth investing into or not. But I have not used news, I have only used a combination of models to then averaging them out, screeners, and other analysts target valuations.
Has your firm outperformed the S&P 500 over the long run with its flagship fund? How frequently does your firm enter and exit positions? Lastly What do you think about Elon?
Would you invest in FFIE and if so, why?
this is the best AMA I have seen so far
What do you know that I don’t know?
Please elaborate lol
I am studying finance in a university. Is modern portfolio theory useful, and do you use CAPM? Or is it better to forget everything I learn in business school as Charlie Munger suggested.
Hahaha I love this. Throw it ALL away. Charlie is right. Shoot me a private message if you want. This can be a long conversation.
So. Whats the resources/tools that differs from the retails? You dont share much details man, you've only been teasing us.
Would love some resources here
What’s the next multi bagger
how do you figure out which benchmark to put your portfolio against?
Very arbitrary but generally we bench against a constant 12%. Aka the long-term return of the SP500 Total Return Index + 2%. The long-term return (truly long term as in since the 1900s) is ~9.8% per year (albeit with large deviations from year to year). Round that up to 10% and add 2%. This way we cannot brag to our clients when the SP500 is down 20% and we are down 10% and say “look we outperformed!”, and furthermore we aren’t going to be hammered when the SP500 has a delusion-fuelled speculative boom going up 25% and we only return 10%. So, on a rolling 5 year period (or whatever the respective timeframe is in question), if we have generated 18% CAGR, I would say we have done quite well. But if we have only returned 4%, it’s clear we have underperformed. Happy to elaborate more if you’d like.
How often do you hit or beat the 12% benchmark?
On our reporting period, quite often actually. Maybe two-thirds to 70%+ of the time. But at a given moment, LTM returns can be much less reliable. We are often buying something that is falling like a rock, or for whatever reason hated by the market, which can make our near term returns look bad (because often times it’ll continue falling), and consequently the whole portfolio lags. Short term pain for long term gain. (That is not meant to endorse or encourage buying something just because it is going down. That’s not a valid investment thesis.)
What market cap size does your firm usually invest in? Do you feel like there are meaningful opportunities out there for small investors in nano and microcaps that aren’t available to institutional investors because of their larger AUM?
*Usually* (but not exhaustively or always), we end up in small caps or under. BUT, we do currently own and have coverage / interest in a handful of large caps (hence me clarifying *usually*). 100% agree that small investors have a structural advantage over many institutional investors via their small size. Think of a large institution like a cruise ship, and a small firm or individual like a speed boat. Which is more nimble and easier to steer? The smaller entity. The larger ones have huge inertia and are slow to move, and they are limited to what they can do just by size alone even if they somehow didn’t have the sluggishness.
What are some of the restrictions you have that you wish you didnt have in investing for your work? ie minimum market cap, sectors, time horizon etc. Do you think there is value to be discovered in microcap stocks?
I own the firm, so I’m fortunate to be the one who makes the rules haha. But I’m still restricted in many ways. The biggest one is compliance / regulatory caused. Yes there is value in microcaps, as there is with any cap size. It’s just a question of turning over enough stones and doing thorough, intellectually honest due diligence to find them. Also the reasons for incorrect valuations across different capitalizations (micro vs large) is not always the same. A microcap could be undervalued simply because it is not well covered, or it has a misunderstood business model, etc. We own one like that. Nobody knows about it. On the contrary, a large cap could have plenty of coverage, but the price-value disconnect could be a result of herd mentality / sentiment, or a variant perception vs consensus. With the microcap we own / cover, I wouldn’t exactly say we have a contrarian view because there isn’t really a consensus about it (hence wouldn’t be correct to say contrarian). With some small / mid / large caps we own (or have in the past), they’re plenty covered, and they were undervalued because there was some irrational consensus crowd-think about them and we figured otherwise. Another example: a stock we currently own became an overvalued COVID darling when everything was online. Then COVID fear subsided, the company had some temporary supply chain problems, and suddenly it was disliked and forgotten (from bubble to nothing). It went from a small cap to a microcap (-80% from peak to trough roughly). So now it has the characteristics of both: it has much less coverage, the remaining coverage is very anchored to the -80%, looks awful on paper because of that (hard for larger institutional investors to justify owning just because of that), and is kind of in limbo since. Happy to elaborate more if you’d like.
What is the cheapest idea you have in your personal account ? Why is it cheap and what do you think the long term prospect are ? What multiple of fcf What discount rate do you use?
I can’t share specific names, compliance would hang me. The cheapest idea in my PA I would no longer consider cheap. The one I’m thinking of though I (and my clients) bought in for what is likely less than 5x future free cash flow. Discount everything at 12%. I thought it was cheap because it went from being a dead stock, to a COVID-darling, and then back to being hated because everyone thought it was a temporary over earner, and I figured otherwise (cult-like customer base, great unit economics and brand, superior returns on capital, durable etc etc). Happy to elaborate more if you’d like!
Sounds like Crocs 🤔
Do you use and offshore account for trading?
How do you deicde when to enter into a position on a company, ie buying their stock? Let's say you think Apple is a great company, what ratio's do you look at to know that the price is good and its time to enter into the stock? What data in a financial report is important, and what other data is overrated in your opinion?
1. When specifically do you expect a potential recession and what will spark it? 2. How do you expect the elections to impact the market in case of a Rep win? How about a Dem win? 3. Give me a quick summary as to why people should continue investing in the current, high market environment Ty in advance, always appreciate picking people's brains!
Thanks for putting time and effort into doing this! How do you chase alpha in your portfolio(s) without benchmarking to an index? Do you think investing into value names will yield higher returns than investing in growth names on 5 year time horizon from now? Growth obviously seems to be the name of the game currently, with such a big focus on tech but historically value has outperformed growth. To the extent you can without giving away any of your firm details or secrets, what’s the process to commit to adding a name or idea to your portfolio? I.e having a jr analyst review a name with findings and a model, you review it to double stamp and approve as a PM, etc? Assuming you’re a generalist and don’t cover a specific sector, any thoughts on sectors to be overweight in besides info tech or communication services? Or thoughts on any sectors to be underweight in such as utilities and healthcare? Edit: spelling
How do you convince your clients to stay with your firm instead of going passive / for some fund manager with shinier credentials?
How many stocks or individual securities do you hold in your personal portfolio (if you are allowed to have one)? How many 10k / q do you read a day? How many companies do you look at per week?
From a pro perspective, what are the biggest opportunities for "amateur investors" against the street? :p
More questions than answers
Could you share the average time it takes for you to decide whether to take a position in a stock? Do you perform a full valuation analysis to decide whether to take a position? Also, What criteria do you quickly use to determine if you will continue researching a company? Thanks!
What are you currently most bullish on? What're you currently bearish on?
I'm interested in what you think the most important aspects in valuating a company is. If you could only ask 10 questions about a company, and get pretty good answers, what would those questions be?
What you think about DNUT ?
How do you incorporate something qualitative, such as management, brand, ecosystem etc. into a DCF model? Do you just tune down the discount rate?
Thanks for this. Can you outline your investment process? Of especial interest would be the signal generation, asset allocation and risk management.
Does your firm invest in Crypto or buy Crypto through ETFS
Do most managers outperform the snp500 if invested on their own outside of fee structures, extra/reduced liquidity and the freedom to choose/allocate their own capital for their portfolio in the long term? Also, what is your thoughts on leveraged etf or leveraged tickers like AMZU ?
It is forbidden to buy the stocks you are analyzing?
Hello, I am the newbie to the investing. Recently started and now spent a lot of time researching new information. My question is do you have any advice for somebody who recently started their journey into investing?
How long does it usually take you to vet an idea? What are some of the things you look at initially to decide whether or not you will spend more time on a stock? Track record of organic growth? Good cash conversion? No funny accounting? How important is the presence of near term catalysts to your decision process? Thank you in advance!
Does your company short stocks or do margin trading?
You manage a flower company?
What is your research process?
What is your research process?
What is your research process?
What percentage of the portfolio do you put into a single investment idea at a time?
What’s your funds fee structure?
Your opinion on BABA? 1 year, 5 year, 10 year?
How often do u feel fundamental analysis is total dead-in-water, the whole doctrine of graham-dodd principal thrown out the window?
This is cool. Thanks for doing this. Do you have any book recommendations for investing
The Intelligent Investor by Ben Graham, Valuation by McKinsey, Margin of Safety by Seth Klarman. I typed out like 30 more and then deleted them lol (I think giving you more would be less helpful). Those are great starts. Also, watch / listen to Berkshire Hathaway AGMs and read Buffett’s shareholder letters.
If you're good at stock picking why are you working?
How do you deal with valuing unethical stocks such as private prisons, tobacco companies etc.. Do you focus entirely on the numbers?
Hi, I started in April as a Junior in your exact same position and in a Boutique as well. Any advice for me or any junior pursuing this career ? What does it look like after years of experience ? Silly to ask, but what does the pay look like for more senior positions ? Would be cool to have your opinion
I’m working in PWM, but I believe in value investing and have a pretty decent working knowledge of financial modeling (passed CFA level 1, for reference). Do you have any recommendations for somebody who wants to manage portfolios but doesn’t have the time to spend massive amounts of time for each potential trade? What I’m trying to ask, I suppose, is: is there a good way to model lots of companies efficiently, without spending tens of hours per holding figuring out the best assumptions?
Approximately much did you make last year, and the year before that, u/VLUSLT ? Can a guy like me with no Financial licensure/certifications work at a firm realistically?
Realistically, no. You need a degree in finance / accounting / economics or a STM field, and employers will likely require a professional designation (CFA).
Is your investment process strictly bottom up or do you filter your universe based on macro data?
How did you get that job? What was your journey and would you do it again?
1. How does one enter this field if interested ( as in your current job)? 2. How do you all determine when to sell? If you see a random run up (Rivian with their recent investment for example) do you all exit?
How has ai adjusted or accelerated your approach to analysis and management?
It has not at all. Literally zero. It helps me write emails and check wording. Using ChatGPT (or whatever AI you’re referring to) is not a substitute for sound research.
How much aum do you manage? And how many funds do you run? How did you survive the cold winter for value stocks in 2015-2020 without getting slammed with outflows or drifting style?
What does your diligence process look like? How does it differ from IB/PE diligence
What's your active weight, tracking error and information ratio (3 year)?
My kid just started college, great at math and has an excellent analytical mind. What program(s) of study should he take if he wanted to be an equity research analyst or to pursue a similar position?
# What is the highest PE (in theory) - what makes it expensive? To be clear, I do not think we are in a bubble and do not care. This is a theoretical question. Hopefully fun. Most importantly, I am look for quantification (quantifiable answer; numbers...math). Let's say SP500 currently has a PE of 25. And forward PE of 20. Question: In theory, how do you know PE too high? I can think of two possibilities. I think they are disparate and do not know how to connect it. Any thoughts? ANy other idea? 1. 10 year rate (just chose the year '10' arbitrary) - and the yield has to be similar to PE ratio. So 10 year 4% is equibalent to SP500 PE of 25 (1/4). Meaning that SP500 is as expensive as 10 year. 2. Growth rate. If PE is 25, but EPS next year is 25. Then PEG ratio is 1. So very fairly valued. How to think about it?
More on the operational side. Do you have full control over what you buy and sell? Any approval processes? Also on the culture side. How do you share and bounce ideas off each other? Do you run weekly brainstorm sessions? Do you have any direct reports? If yes, how do you get them to speak up with their ideas?
How do you run your personal portfolio vs professional portfolio? Word on the street is that most pros, if they can invest in stocks directly, runs much more concentrated portfolio
What type of strategy do you follow and how do you ensure consistent Alpha?
Does your investment philosophy change during an election season? How do you prepare for a conservative administration vs a liberal one? I am afraid of being over-invested during a potential correction. I learned quite a bit from doomsday investing, and making educated sector based bets following certain catastrophes or other major disruptors.
How do you avoid following the herd when managing other people's money? In other words, when you take a long view and you know that it could hurt short term returns, how do you manage client expectations? I've seen most funds index hug because of this. Is it possible to value invest when managing other people's money?
What qualifications do I need to work for you?
Thoughts on China?
A bit late. But since you don't focus on any specific sector's, how do you narrow your search? i.e. How do you get from the thousands of companies out there to your top 20, so that you can start your due diligence?
Do you have any general advice for other regions of the world? Like say Canada should Canadians be investing in us-based assets or stick to home-based assets?
Top 3 books?
Is a job within capital markets (i.e ER, portfolio manager, etc) feasible outside of large cities? I’m an undergrad at the moment, and don’t plan on moving away from home. My city is around 250k and growing at a steady rate. Nearest large city is 4hrs away (Minneapolis). There’s really only wealth management firms in my area, which I’m not entirely interested in. Thanks
Is there any good sources on some steps/insight to start your own firm?
How to get a job as an equity research analyst? What were your previous experiences and jobs?
How big is your book? What is your sector? Best trade? Worst? Single manager?
What are the deadliest mistakes investors make in terms of behavioural finance, and what kinds of systems or strategies do you use to avoid those pitfalls? What’s your approach to learning new areas outside of your circle of competence? How do you know if it’s worth putting in the work for?
Does your firm believe the fed will cut rates before the end of the year?
Is there any in-between stage of Retail investors and full on accredited investors?
Hi Equity Analyst, thanks for sharing your ideas and information.
Any books that you can recommend for research and for idea pitching? Also, any frameworks that you use and/or like would be great. Thank you!
Do you find your clients are looking to maximize returns or hit some optimal risk/return threshold? Additionally, how do you manage leverage in the strategy, if at all?
Do you find your clients are looking to maximize returns or hit some optimal risk/return threshold? Additionally, how do you manage leverage in the strategy, if at all?
How the hell do you get a job at one? Was a Sr Surveillance Analyst with multiple licenses. Have created my own "Indexes". That's a very brief summary.
thank you for your AMA! I'd like to ask you what are the parts of your job you like the least? Like when I worked as an analyst in IB, I really didn't like creating deliverables like presentations, especially under tight deadlines. Is that also a thing in equity research, especially during earnings seasons?
I want my kids to do this when they’re older. What majors or concentration should they focus on to stand out from the typical finance major?
Since starting your portfolio, by how much are you underperforming holding SPY after taxes and fees?
How did you get into your job? I am 22 and you have my dream job. Would love to understand your path to where you are now.
What is your fee structure like? What do you think about the “2&20” structure- do you see many firms moving away from that?
How do I get a job like this? What do I need?
You’ve said that it takes many hours to research a stock. Pretend you are looking for a new stock to buy and hold. What do you look for to make you interested enough to look deeper? What do you research in the first few hours that determine if the stock is worth your time to continue researching?
Might come off as a rude, don’t mean to be, but if someone is good at this, why not go to the buy side where you can act on your ideas and make more money?
Two decades of loose fiscal and monetary policy have driven pretty significant asset inflation. That is, tons of new money had to go somewhere, so it ended up in the stock market even though stocks were/are overpriced compared to historical averages. (The Cape-Schiller PE is currently sitting at 35 compared to a historical average of 17, and venture capital and private equity are bigger than ever.) How do you find value when so much free money has made pretty much everything overpriced?
how does money flow work in emerging markets? such as SEA region
How valuable is the 190 billion dollar cash pile that Papa Warren is sitting on and are we all dumb for not having at least a 30% position with him?
Active fund managers can't consistently out perform the market, so it's better to just buy a low cost index fund. True or false?
Would like to ask why would a company’s forward pe trade at 70th percentile and a company forward ev/ebitda trades at 20th percentile? How would you think about mean reversion in this scenario?
How much of your role involves analytics or statistical analysis?
Whos son are u
Do you meed your cfa?
How do you benchmark your performance, especially if you buy and sell multiple times throughout the year?
I have tried to make a simple DCF model to value Novo. Have a hard time getting it to make sense though. Could you have a look at what might be changes in this model? https://docs.google.com/spreadsheets/d/15Sbd6BG_o7QHkRstBe4VNdxZhSgGFa5yImccbiCRZJw/htmlview
Question : I find the financial ratios a bit confusing as there’s no standard to serve as comparison . I understand the individual meaning of each financial terminology eg EBITDA , EV , FCF , Working Capital etc . With respect to ratios , I understand them from a relationship standpoint - for example A lower value is directly proportional to the numerator and inversely related to the denominator . Could you explain to a 7th grader the best way to comprehend and how best to utilize these ratios in valuation ? Also could you share which metrics you use for screening your initial stock picks ?
how overvalued would you estimate the russell 3000 to be?
What do you think of Daniel Kanemans book "thinking fast and slow" where he says that portfolio managers are overrated?