<\/p>\n
\u201cWhat do you see, son\u201d? Asked Guru Dronacharya. \u201cOnly the bird\u2019s eye, Sir\u201d, replied Arjun.<\/em><\/span><\/p>\n -the Mahabharat<\/em><\/span><\/p>\n We all have grown up listening to this Mahabharat<\/em>\u00a0 story on importance of focus<\/strong>. Whether its archery or investing, great achievements demand undivided focus. The bird\u2019s eye equivalent in long term investing<\/em> that demands undivided focus is company\u2019s<\/strong> intrinsic value <\/strong>(or economic worth, in simpler terms). For, only that can help us decide if a company is undervalued or overvalued versus its stock price. Everything else, is noise.<\/span><\/p>\n To recall, a company\u2019s intrinsic value is the present value of its future free cash flows. Two broad components of intrinsic value calculation are (1) future free cash flows (i.e. cash earnings less<\/em> investments) and (2) future<\/em> interest rates to discount those cashflows to their present values (aka<\/em> discount rates).<\/span><\/p>\n Assessing intrinsic value, thus, requires looking into the future \u2013 for both cash flows and discount rates. Unlike Arjun\u2019s bird in the<\/em> Mahabharat<\/em> that is still and clearly visible, intrinsic value is therefore a moving and hazy bird<\/strong>.<\/span><\/p>\n Future cashflows:<\/u> Either due to their nature or our current ignorance, we cannot imagine future cash flows of most of the companies. It\u2019s futile to even attempt their intrinsic value calculations. For, in archery parlance, we cannot even see the bird. Nonetheless, there is a sub set of companies where we can. Mostly these companies provide essential, under-penetrated or non-substitutable products\/ services competitively and are run by able and honest management. They are expected to see reasonable revenue growth and high returns on capital. Here is where we limit ourselves looking.<\/span><\/p>\n Future interest rates<\/u>: For intrinsic value purposes we are concerned, not with interest rates of next quarter or year, but with long term<\/em> future interest rates. Just as assuming very low long term future interest rates is mistaken (last 10 years), so is assuming very high long term interest rates (temptation today). We need to assume moderate interest rates over long term in our intrinsic value assessment. Given that 30-yr Indian government securities are yielding around 7% today (2024), 4% is too low, and 15% too high for discount rate. Anywhere between 10%-12% sounds okay, today.<\/span><\/p>\n We need to place all incoming information in above backdrop. Discipline<\/strong> to limit ourselves to sound companies and focus<\/strong> on their intrinsic values that correctly embeds future cashflows and long term<\/em> future interest rates will allow us to ignore noise and take right investment actions.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":" \u201cWhat do you see, son\u201d? Asked Guru Dronacharya. \u201cOnly the bird\u2019s eye, Sir\u201d, replied Arjun. -the Mahabharat We all have grown up listening to this Mahabharat\u00a0 story on importance of focus. Whether its archery or investing, great achievements demand undivided focus. The bird\u2019s eye equivalent in long term investing that demands undivided focus is […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[19,3],"tags":[],"class_list":["post-1161","post","type-post","status-publish","format-standard","hentry","category-investment-mistake","category-investment-process"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/posts\/1161","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/cedcapital.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1161"}],"version-history":[{"count":3,"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/posts\/1161\/revisions"}],"predecessor-version":[{"id":1164,"href":"https:\/\/cedcapital.in\/index.php?rest_route=\/wp\/v2\/posts\/1161\/revisions\/1164"}],"wp:attachment":[{"href":"https:\/\/cedcapital.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1161"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/cedcapital.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1161"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/cedcapital.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1161"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}