14-10-2010, 11:32 AM
(This post was last modified: 14-10-2010, 11:33 AM by thinknotleft.)
Hi Musicwhiz
Your question depends on how high I wish to set my discount rate to be and my margin of safety (MOF) to be. Taking a discount rate of 10% and a high MOF, I think paying not more than a 2x book will be good for a 20% ROE business. (Don't ask how I derive at this result -- it's just a very rough guesstimate. )
Higher ROEs (if sustained) businesses may warrant an increasing higher P/B ratio (it's a non-linear process. Don't ask how I get this thought -- Derive yourself.)
Insofar, I have not encountered research supporting your hypothesis. Will be glad if you can point me to such research supporting
a) High ROEs or FCFs now imply high ROEs or FCFs 10 years later.
b) High ROEs or FCFs, for past 10 years, imply high sustained ROEs or FCFs for next 10 years.
( (a) and (b) are quite testable if one has the data.)
Instead, I have encountered article(s) supporting my hypothesis -- not many high ROEs now will maintain its ROEs years later. For example, Michael Maboussin's article titled 'ROIC Patterns and Shareholder Returns'.
Interestingly, a person who is devoid of emotions will not be able to make decisions (which includes investing decisions).
Personally, I do not strive to be neutral in my analysis. Rather, I try to know what's the weakness and assumptions in my analysis.
Quote:So let's say you can find a business which does return >20% ROE for 10 years consistently, does this mean you would pay a premium over book value for it? And how high is your threshold before you will think it's not worth paying for?
Your question depends on how high I wish to set my discount rate to be and my margin of safety (MOF) to be. Taking a discount rate of 10% and a high MOF, I think paying not more than a 2x book will be good for a 20% ROE business. (Don't ask how I derive at this result -- it's just a very rough guesstimate. )
Higher ROEs (if sustained) businesses may warrant an increasing higher P/B ratio (it's a non-linear process. Don't ask how I get this thought -- Derive yourself.)
Quote: historical financials do give a good peek at the Company's business model and hence track record which one can use to reliably project into the future. Barring exceptional circumstances or Acts of God or political upheavals, I should say a Company which generates very good FCF and high ROE should continue to do so.
Insofar, I have not encountered research supporting your hypothesis. Will be glad if you can point me to such research supporting
a) High ROEs or FCFs now imply high ROEs or FCFs 10 years later.
b) High ROEs or FCFs, for past 10 years, imply high sustained ROEs or FCFs for next 10 years.
( (a) and (b) are quite testable if one has the data.)
Instead, I have encountered article(s) supporting my hypothesis -- not many high ROEs now will maintain its ROEs years later. For example, Michael Maboussin's article titled 'ROIC Patterns and Shareholder Returns'.
Quote: For investing, my personal belief is one should not be a pessimist; neither should one be an optimist. Instead, one should strive hard to be a realist, and always a business analyst. A realist should look at the world through an objective and rational lens, and be as neutral as possible in his analysis (devoid of emotional factors).
Interestingly, a person who is devoid of emotions will not be able to make decisions (which includes investing decisions).
Personally, I do not strive to be neutral in my analysis. Rather, I try to know what's the weakness and assumptions in my analysis.