This is one of the best explanations of investing and how to outperform you will ever find. Breaks down the fundamentals in a way reminiscent of Warren Buffett. Amazing episode by Geoff and Andrew. Keep up the good work on these podcasts. 👍
Another question is "Isn't Asset Play considered as a type of bet for change?" It is betting on the management to wake up and do something to activate the hidden value. In the extreme case it might stay low forever for unknown reason where market simply doesn't notice about it. Warren Buffett decided to take a board member seat of sanborn map so that he can have a say on the value but not gave his life line to the market. For sure it is not a replacement of management and turn around but it still requires some works unless you use Walter Schloss' approach to use the law of large number to make yourself statistically favorable on "management would do something"
I don't think asset plays necessarily require a change. It can simply involve waiting for the market to recognize and revalue the investment. I think this happens quite often with mid and large cap stocks in efficient markets (such as USA). But it probably requires activism for smaller and obscure stocks.
@@SivaramVelauthapillai I agree with you and that's the why I describe the situation "extreme". It also depends on your definition of margin of safety, I would prefer to have control if I am gonna to put a significant portion of my portfolio on asset play. But if I am only betting on the market to recognize the situation the amount I am willing to put is significantly less and I would tend to use Ben Graham's approach to bet a lot of them and make myself statistically favorable.
What could you pay for a company that is scaling up fast and where you can see marigns improve over time? If FCF or earnings are growing faster than revenue is that always just a function of scale advantages?
I don't quite understand the part about the calculation of 1 / 0.08 = 12.5 cents on retained earning. My thinking is like this: Suppose EPS would grow from 1 to 1.01 next year, and by the required hurdle rate of 8%, The already invested capital would generate EPS 1 next year, so that means I only need (0.01 / 1.08) ~= 0.93 cents per share of extra capital deduct from earning to fund the 1 cent EPS growth. (Assuming ROE = ROIC here) It looks like the retained earning only need to be 0.93 cents per share but not 12.5 cents. Do I miss anything?
First of all sorry for my English. I'm from Spain, it't 3am and I've been trying to understand it for almost an hour. But I finally did it! The example they use is directly related to the "one dollar test" of Buffett. If a company invests $1000 with a CostofCapital of 10% for a factory that generates $80 in Earnings, the Market factory would be valide at $800 ($80/0.10) and u would fail the $1 test (8001000). The equilibrium where value is neither created or destroyed would be 1000=100/0.1 In the video they change "investment" (the $1000 I used) for "reinvestment" of Earnings (12,5 cents) pay more than 12,5cents (in this case the company should not pay for it's growth/reinvest more than 12,5 cents (12,5 = 1/0.08)(or as in the previous example u would not pay more than $1000 for $80 Earnings at 10% COC --> 1000=80/0.08) TAKE INTO ACCOUNT NOW I'M USING 8% COC where as before I was using 10%. Example: If the company reinvests 15 cents --> 15=1/X --> X=0.06 --> As 6% is lower than the 8% discount rate (Sandy return) U WOULD BE DESTROYING VALUE!
I disagree on remark regarding paying debt down does not make sense. You can improve Intrinsic value by decreasing leverage, because investors will not see company so risky, in terms of sensitivity to interest rate changes, thus lower beta, and as a result lower wacc.
