This 3-part post is all about following best practices for selecting the optimal valuation method…namely the one that’s going to derive a price target more accurate than consensus.
As noted in Part 2 of this 3-part series, there are limitations to every valuation method, but some are better than others. For years I had been looking for an information source that quickly summarized the best method(s) to use under each circumstance, but couldn’t find one. So I created the flow chart below.
The idea is to start at the top of the flow chart and work your way down as far as possible, to get closer to the methods that measure free cash flow. Note the blue shapes are single-period multiples-based methods whereas the tan shape, DCF, is a multi-period cash flow method.
Callout: The further you can go through the flowchart, the closer you are to valuing the company’s free cash flows.
Continue reading "How to Select the Optimal Valuation Method to Build Better Price Targets (Part 3 of 3)" »
I was in the process of working on an article
about why fund sponsors were failing the
funds and their pension beneficiaries. The
article was going to focus on the role
sponsors take in the management of the
fund, identify their shortcomings and
propose solutions. Coincidentally, I
was watching The Daily Show with Jon
Stewart one night while his guest, Wall Street Journal reporter Ellen Schultz, was promoting her new book. “Retirement Heist” talks about the deliberate mismanagement of pension funds for the benefit of the sponsor and their executives. The next day I stopped by the bookstore and picked up her book. Once I began reading, the focus of my own article shifted from solely looking at the role of fund sponsors in the management of pension funds to also consider the sponsors’ place in society and the long-term consequences of their short-term focus.
Continue reading "Why Fund Sponsors Are Failing" »
Investors are presented with a barrage of marketing material from funds and
managers trying to raise capital, and
what all these reports have in common is
that they all focus on performance. That
is not surprising considering the
relatively large number of funds available with the few strategies being
used, managers feel they can only
differentiate themselves through performance. Attend enough sales presentations and you will have heard how “my long-short equity strategy has consistently outperformed the market and that is why you need to invest with us.” By the way, the “Past performance is no indication of future results” is usually said with much less gusto.
This is not to disparage managers and funds alike but rather to help investors identify the good managers whose past performance is more than likely a good indication of their future performance. Although a thorough performance evaluation requires the skill set of a performance specialist, any investor can begin such an evaluation by questioning one simple and important component of the performance marketing material, which is the benchmark.
Continue reading "Don’t Overlook Benchmarks" »
Is it a bad idea to make predictions in your investment commentary because clients will slam you when you’re wrong? Whenever you make predictions, you run the risk of being wrong. But being wrong isn’t a problem, in my mind, if your prediction reflects good thinking.
Lesson from my winning prediction
Accurate predictions alone don’t make you seem smart. I remember the time I participated in a betting pool with members of an investment policy committee. I had to predict where a certain number—probably the 10-year Treasury rate—would be one quarter later.
Continue reading "Are financial predictions too risky for investment commentary writers?" »
In my prior post I discussed the importance of identifying the optimal valuation method, which includes researching the valuation method used by most other equity analysts who cover the sector and stock being researched.
In this entry, I delve into the pros and cons of the most popular valuation methods. To ensure I wasn’t missing one of the more popular valuation methods, I researched the topic and came across two studies, one from the U.S. and one from the U.K. Given that buy-side analysts don’t publish their reports, these studies relied entirely on sell-side analysts and therefore they may not be representative of buy-side analyst’s work. The studies were conducted independent of one another and therefore shouldn’t be viewed comparatively. Instead, they provide an idea of the top 5 valuation methods used by equity research analysts in their respective markets. Having been based in London for part of my career, I can verify DCF is more extensively used in Europe than in the U.S.
Continue reading "How to Select the Optimal Valuation Method to Build Better Price Targets (Part 2 of 3)" »
The End of Banking: Money, Credit, and the Digital Revolution. 2014. Jonathan McMillan.
Announcing the demise of the financial system as we know it has become popular in the aftermath of the Great Recession. In fact, the Financial Times has dedicated an entire series to the topic, aptly named Death of Banks, wherein author Izabella Kaminska chronicles the downfall of traditional banking.
A recent book called The End of Banking goes one step further: In addition to carefully explaining how the financial sector maneuvered itself into the financial crisis of 2007–08, it presents several unconventional ideas to do away with regulatory capital arbitrage that sticks taxpayers with the bill for bankers’ risk taking. The book proposes a fairly straightforward policy framework that promises to reduce shadow banking, decentralize financial services from too-big-to-fail banks, improve regulation, and realign the private and the public sector with transparent monetary policy.
Continue reading "Book Review: The End of Banking By Manuel Stagars, CFA, CAIA, ERP" »
In a prior post I noted all stock picking best practices (or “tips”) can be put into one of the four elements of our TIER™ framework (see image below).
If you’re asking “why should I care?”, I’d reply that the best stock pickers have a consistent philosophy and methodology for picking stocks. If you already have one, that’s great, but if you’re looking for one, you might want to start here and make modifications to fit your style or investment philosophy. This 3-part series focuses on the “T” of the TIER™ framework shown below.
Continue reading "How to Select the Optimal Valuation Method to Build Better Price Targets (Part 1 of 3)" »
In his latest book, The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, Gregory Curtis goes beyond a traditional study on investment policy, asset selection and monitoring, and risk management of and the fiduciary issues involved in wealth management by thoroughly investigating the aspects of stewardship of the wealth of prosperous families. Curtis is the chairman and founder of Pittsburgh-based Greycourt & Co., a wealth advisory firm that serves high-net-worth families and select endowments on a global basis. This book builds on his Creative Capital: Managing Private Wealth in a Complex World. It provides a moral, ethical, economic, and investment compass for the wealthy.
Continue reading "The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors" »
Worried about your bonds? You’re not alone.
In speaking with our investors in recent weeks, the most universal theme by far was concern over their bond holdings. Historically low interest rates coupled with the prospect of the first Fed rate hike since 2006 (“rising rates”) were causing anxiety. And most importantly, the average bond fund was down in the first half of the year. There’s nothing more fear inducing to investors than short-term losses.
Continue reading "When Fear of Bonds Exceeds Fear of Stocks" »
Global Investment Performance
Standards, better known as GIPS, are a
voluntary set of standards established to
create transparency in the calculation and
presentation of performance. From
improving the credibility of compliant investment firms to providing clients the ability to fairly evaluate the performance of these firms, GIPS has arguably become the gold standard in investment performance. As client awareness has risen, demand for GIPS is pushing investment firms in becoming compliant in order to maintain their competitiveness. While this is a positive in an industry that sorely needs standards that encourage fairness and credibility, it would be short sighted for firms to stop at GIPS when it comes to their performance. We must remember that performance is not a part of GIPS but rather it is GIPS that is a part of performance. Meaning that, in the ever-growing field of investment performance, stopping at GIPS would rob a firm of maximizing the benefits of performance that go beyond GIPS.
Continue reading "Going Beyond GIPS " »
I am not perfect. I don’t have all of the answers for how to best simplify the complex sentences that abound in investment commentary and related publications. However, we would all benefit if the smart investment professionals could communicate more clearly and economically.
To spur conversation, I’m posting some before-and-after versions of sentences inspired by what I’ve read in online and printed investment pieces. Most of my tweaks are minor. They don’t dramatically ratchet up the sentences’ effectiveness. However, their simplicity means that they demonstrate techniques that would be easy for anyone to implement.
If you’re trying to improve your writing skills, I hope that you’ll find some inspiration. If you’re a veteran writer or editor, perhaps you can suggest better alternatives.
Continue reading "Can YOU simplify investment commentary better than this?" »
The global trend toward wage inequality may be driven by a rise in the share of people employed by the world’s largest companies, suggest Professor Holger Mueller and his co-authors, Paige P. Ouimet of the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School and Elena Simintzi of the University of British Columbia’s Sauder School of Business, in their new working paper, “Wage Inequality and Firm Growth.”
Using a proprietary data set of employee pay at a broad cross-section of UK firms (both private and public) from 2004 to 2013, the researchers examined how the wage differences between jobs of differing skill levels within a single firm (“within-firm skill premia”) varied between firms and over time. They found that the wage differences between high-skill and low- or mid-skill jobs increased with firm size. As company size grew (measured by either number of employees or sales – both had the same results), the wages paid for high-skill jobs increased significantly, while the wages paid for low- or mid-skill jobs remained the same or decreased slightly. For example, the highest-level job at a company in the 75th percentile of company size carried a wage 280 percent greater than the highest-level job at a company in the 25th percentile. The result of this phenomenon is that as firms grow larger, a divide widens between the high-level and both the mid- and low-level job wages, driving greater wage inequality.
Continue reading "Growth of Large Companies May Be Driving Wage Inequality" »
Ok, your resume and cover letter have gotten your foot into the door – exactly what they are supposed to be used for. As for getting the job – well that's entirely up to what happens during the interview.
Do your research! And be prepared.
Prior to the interview, you need to do research on the organization and the position your are interviewing for. Only by doing your research can you ask and respond to questions in an intelligent and informed manner. The research will also allow you to assess how you “fit” with your potential employer.
Continue reading "Interviewing Tips" »
The New Economics of Liquidity and Financial Frictions is a book about a new branch of economics that is largely a synthesis of macro and finance. In many ways, it is a radical departure from the older, frictionless approach still prevalent in economic textbooks and most of academia. This book provides a new understanding and approach to asset pricing, risk measurement and management, central banking policy, and the overall working of today’s economy, including questions of financial stability.
Continue reading "Review: The New Economics of Liquidity and Financial Frictions by David Adler" »
The use of accounting measures and disclosures in bank contracts and in regulation suggests that the quality of banks’ financial reporting is central to the efficacy of market discipline and non-market mechanisms in limiting bank debt and risk overhang in good economic times, as well as mitigating the consequences of risk overhang that could compromise the stability of the financial system in downturns. Professors Viral Acharya and Stephen Ryan examine how research on banks’ financial reporting, informed by the financial economics literature on banking, can generate insights about how to enhance the stability of the financial system.
Continue reading "Banks’ Financial Reporting and Financial System Stability by Prof. Viral Acharya" »