The book has also shaped Preston and Stig's investing strategy, and the core principles are the very same that The Investors Podcast is built upon. Actually, Stig is so excited about the book that he decided to create a chapter by chapter video course of The Intelligent Investor, and you can learn more about the course here: www.theinvestorspodcast.com/the-intelligent-investor-video-course IMPORTANT: We would like to remind the TIP Community to beware of cyber scams & phishing attacks. We have received reports of fake accounts claiming to be affiliated with The Investor's Podcast Network or posing as one of our hosts. Please help us report those suspicious accounts. We will never reach out to you for any business or investment opportunity. Stay vigilant!
Signed up for TIP Finance, the intelligent investor, Intrinsic Value course & how to invest in ETF's - Brilliant and worth every cent! I've learnt so much and make use of this website daily! Well done guys and thank you. Your teaching instills a set of tools to ensure solid choices and long term gains.
Question: You mentioned that the yield on the S&P500 is an appropriate discount rate to determine intrinsic value. Well, the yield on the S&P today is, like, 4%. But if I use 4% I end up with a nonsensical intrinsic value. What am I doing wrong? Specifically I am valuing LKQ by plugging in the following numbers... free cash flow = $147.4, average annual growth rate of free cash flow = $41.29, short term = 10 years discount rate = 4%, growth in perpetuity = 3%, shares outstanding - 309 The resulting intrinsic value per share is $1466.57 at a 4.00% annual discount rate (huh??? doesn't make sense. The stock trades at $32 and I don't think I have a $1400 margin of safety here.) But if I use a 15% discount rate (the minimum return I want), I end up with a more believable intrinsic value of around $57 per share. By the way, I have become a big fan of your website, TH-cam channel and book. Great material!!!
You have to use the following components to come up with the Discount Rate for a Stock: The Risk Free Rate + The Market Risk Adjustment + The Country Risk Adjustment + The Industry Risk Adjustment. See Valuation by Dr. Aswath Damadoran.
Preston, share your concerns. I assume you're also of the Austrian School of Economic thought. I agree with the nuanced definition of investor versus speculator, but I don't believe risk is automatically commensurate with reward and one CAN use value techniques with technicals to trade for "high returns" (5-15%) in shorter time horizons, thus resulting in a more vigorous annual return but lower risk versus reward b/c trade can be allowed to run longer based on fundamentals should the technicals fail.
Right on about the qualitative side which was essentially not there in his work. It does deserve a discussion on its own. How bargains based on qualitative catalysts in the market like the recent scandal with Wells Fargo can provide opportunities despite the quantitative side operating at sound principles. It is rare, but it does deserve a discussion on its own.
***** i think in the audiobook version, he wrote something about this is a book about the expertise of book value instead of momentary opportunity. would that then be classified as speculation or intelligence? i believe that it'd be a bit of both but i would love to hear your guys' opinions.
Have added way to much confusion to this and have misunderstood the "risk-free" and the "discount rate", these are 2 very different things that you speak of interchangeably. Buffett is 100% correct, the 10 year is the best baseline for the risk free rate, it would be absurd to use the S&P yield, due to the fact it fluctuates and is NOT risk free. The discount rate is an entirely different concept. The risk free rate is a layer in the consideration of it.
@40:00 regarding the discussion between using the discount rate, Buffett uses the 10 year treasury because for one it is a long term investment and two, it is considered "risk free". The S&P 500 is not risk free, you can have 30-40% market crashes and it can take years for the market to reach the original levels. What if you need the money next year or the year after? It's a bad investment then. The 10 year treasury will pay out risk free forever and that is what you need to discount by. A long term risk free asset.
If you discount by the risk-free rate of return you can only hope to buy the stock at a price where you earn the risk-free rate of return over the holding period. I don't think Preston's reasoning is correct. Your personal opportunity cost is the correct discount rate to use. If you are thinking of selling money invested in 30 year govt bonds then your opportunity cost is the 30 year bond rate. If the resulting intrinsic value exceeds the purchase price you buy.
@@kahlschlag17 You should check Antonacci's Dual Momentum. T10 would be a good benchmark for one to decide whether or not to invest in equity. If this shows that is a good call to go for equity, using SP500 as a benchmark would allow for a better selection of which company to buy, if one wants to pick a particular share. I mean, otherwise dont spend time trying to find a better thing, just buy an ETF and you are exposed to get returns better than the initial benchmark - T10 without adding the risk associated with stock picking.
@@kahlschlag17 they are 2 separate concepts that preston has conflated and confused listeners, you dont discount by the risk free rate. The risk free rate is a component of the discount rate.
Hi Buffett using 10year treasury because that’s the interest rate which is likely to be in the coming years (which is what affecting the revenue or borrowing cost for the company). If interest rate is higher company is less likely to keep the same free cash flow, while if you use 10year treasury rate and if interest rate remain within that range then company is more likely to generate that free cash flow you have calculated
Preston - I would agree that the Shiller yield is a better discount rate than the 10-year treasury. But, I think that a risk premium should be built in to consider the business and sector risks of owning a single stock. Additionally, the Shiller yield is assuming today's market earnings shouldn't be higher than past earnings. Although Shiller adjusts for inflation, hasn't the market growth in earnings outpaced inflation? Bottom-line, I would want a higher discount rate than even the Shiller yield.
Correct me if I'm wrong but it seems they are confusing the discount rate with the risk free rate. This is an important difference. The 10 year treasury should be used as the risk free rate and then you need to add in a risk premium to get to your discount rate. When interest rates increase, your discount rate will also increase. When interest rates are very low, like they are now, you may want to use the long-term average of 5 to 6 percent for the risk-free rate and then add in a risk premium based off of the firm's risk level to get your discount rate. The discount rate can also be viewed as your minimum expected return. If you are only willing part with your capital for a 12 percent return or higher, then your discount rate should be at least 12 percent.
Just wanted to add one point on discount rates, that buffet once said in his annual meeting that there is threshold of discount under which he does not invest no matter what is treasury yield same can be reflected through his investment.
I think it's the best book ever written. I completely understand the book. I thought the book was a easy read. Here is my background: I have a degree in Economics from MIT and a degree in Finance from Harvard. I read two newspapers and annual reports daily. A couple of weeks ago, I went to the Berkshire Hathaway Annual meeting in Omaha, Nebraska. In fact, I have gone every year for the past 5 years. I have a strong background in mathematics. The only TV channels I watch are Bloomberg and CNBC. I do not have a social life. I am a Data Scientist for a company. I am 30 years old.
I will risk believing 50% of what you’ve said: reading 2 news papers daily, do not have a social life, and 30 yrs old. Dang it.. im being speculative again!!
The book has also shaped Preston and Stig's investing strategy, and the core principles are the very same that The Investors Podcast is built upon. Actually, Stig is so excited about the book that he decided to create a chapter by chapter video course of The Intelligent Investor, and you can learn more about the course here: www.theinvestorspodcast.com/the-intelligent-investor-video-course
IMPORTANT: We would like to remind the TIP Community to beware of cyber scams & phishing attacks. We have received reports of fake accounts claiming to be affiliated with The Investor's Podcast Network or posing as one of our hosts. Please help us report those suspicious accounts. We will never reach out to you for any business or investment opportunity. Stay vigilant!
Signed up for TIP Finance, the intelligent investor, Intrinsic Value course & how to invest in ETF's - Brilliant and worth every cent! I've learnt so much and make use of this website daily! Well done guys and thank you. Your teaching instills a set of tools to ensure solid choices and long term gains.
Greatest TH-cam video of all time.
Question: You mentioned that the yield on the S&P500 is an appropriate discount rate to determine intrinsic value. Well, the yield on the S&P today is, like, 4%. But if I use 4% I end up with a nonsensical intrinsic value. What am I doing wrong? Specifically I am valuing LKQ by plugging in the following numbers...
free cash flow = $147.4,
average annual growth rate of free cash flow = $41.29,
short term = 10 years
discount rate = 4%,
growth in perpetuity = 3%,
shares outstanding - 309
The resulting intrinsic value per share is $1466.57 at a 4.00% annual discount rate (huh??? doesn't make sense. The stock trades at $32 and I don't think I have a $1400 margin of safety here.)
But if I use a 15% discount rate (the minimum return I want), I end up with a more believable intrinsic value of around $57 per share.
By the way, I have become a big fan of your website, TH-cam channel and book. Great material!!!
Here we are 5years later, if you sold it by January of 2018 you will have done alright. It's still only at 52 now.
You have to use the following components to come up with the Discount Rate for a Stock: The Risk Free Rate + The Market Risk Adjustment + The Country Risk Adjustment + The Industry Risk Adjustment. See Valuation by Dr. Aswath Damadoran.
Preston, share your concerns. I assume you're also of the Austrian School of Economic thought. I agree with the nuanced definition of investor versus speculator, but I don't believe risk is automatically commensurate with reward and one CAN use value techniques with technicals to trade for "high returns" (5-15%) in shorter time horizons, thus resulting in a more vigorous annual return but lower risk versus reward b/c trade can be allowed to run longer based on fundamentals should the technicals fail.
Great show guys! Make this book sound simple!
Right on about the qualitative side which was essentially not there in his work. It does deserve a discussion on its own. How bargains based on qualitative catalysts in the market like the recent scandal with Wells Fargo can provide opportunities despite the quantitative side operating at sound principles. It is rare, but it does deserve a discussion on its own.
*****
i think in the audiobook version, he wrote something about this is a book about the expertise of book value instead of momentary opportunity.
would that then be classified as speculation or intelligence? i believe that it'd be a bit of both but i would love to hear your guys' opinions.
Thank you for making this valuable forum.
Have added way to much confusion to this and have misunderstood the "risk-free" and the "discount rate", these are 2 very different things that you speak of interchangeably. Buffett is 100% correct, the 10 year is the best baseline for the risk free rate, it would be absurd to use the S&P yield, due to the fact it fluctuates and is NOT risk free. The discount rate is an entirely different concept. The risk free rate is a layer in the consideration of it.
I guess I thought the 10 year bond rate was subtracted (or discounted) from the projected return. I will have to listen to Buffet again.
Fantastic summary with practical insights 🙏, thank you!
@40:00 regarding the discussion between using the discount rate, Buffett uses the 10 year treasury because for one it is a long term investment and two, it is considered "risk free". The S&P 500 is not risk free, you can have 30-40% market crashes and it can take years for the market to reach the original levels. What if you need the money next year or the year after? It's a bad investment then. The 10 year treasury will pay out risk free forever and that is what you need to discount by. A long term risk free asset.
If you discount by the risk-free rate of return you can only hope to buy the stock at a price where you earn the risk-free rate of return over the holding period. I don't think Preston's reasoning is correct. Your personal opportunity cost is the correct discount rate to use. If you are thinking of selling money invested in 30 year govt bonds then your opportunity cost is the 30 year bond rate. If the resulting intrinsic value exceeds the purchase price you buy.
@@kahlschlag17 You should check Antonacci's Dual Momentum. T10 would be a good benchmark for one to decide whether or not to invest in equity. If this shows that is a good call to go for equity, using SP500 as a benchmark would allow for a better selection of which company to buy, if one wants to pick a particular share. I mean, otherwise dont spend time trying to find a better thing, just buy an ETF and you are exposed to get returns better than the initial benchmark - T10 without adding the risk associated with stock picking.
@@mustavogaia2655 I wouldn' touch it with a 6 foot barge pole.
@@kahlschlag17 they are 2 separate concepts that preston has conflated and confused listeners, you dont discount by the risk free rate. The risk free rate is a component of the discount rate.
Hey man I live in maryland. I was wondering if you guys have any meetings or groups on investing
Hi
Buffett using 10year treasury because that’s the interest rate which is likely to be in the coming years (which is what affecting the revenue or borrowing cost for the company).
If interest rate is higher company is less likely to keep the same free cash flow, while if you use 10year treasury rate and if interest rate remain within that range then company is more likely to generate that free cash flow you have calculated
How does one get started ? Whats the name of the book?
The website for book guide is not up and running
Preston - I would agree that the Shiller yield is a better discount rate than the 10-year treasury. But, I think that a risk premium should be built in to consider the business and sector risks of owning a single stock. Additionally, the Shiller yield is assuming today's market earnings shouldn't be higher than past earnings. Although Shiller adjusts for inflation, hasn't the market growth in earnings outpaced inflation? Bottom-line, I would want a higher discount rate than even the Shiller yield.
Correct me if I'm wrong but it seems they are confusing the discount rate with the risk free rate. This is an important difference. The 10 year treasury should be used as the risk free rate and then you need to add in a risk premium to get to your discount rate. When interest rates increase, your discount rate will also increase. When interest rates are very low, like they are now, you may want to use the long-term average of 5 to 6 percent for the risk-free rate and then add in a risk premium based off of the firm's risk level to get your discount rate. The discount rate can also be viewed as your minimum expected return. If you are only willing part with your capital for a 12 percent return or higher, then your discount rate should be at least 12 percent.
Like the sounds and contents!
Great Author always writes great things to improve standard of living ...
better than havard business school.
Just wanted to add one point on discount rates, that buffet once said in his annual meeting that there is threshold of discount under which he does not invest no matter what is treasury yield same can be reflected through his investment.
Thanks
I think it's the best book ever written. I completely understand the book. I thought the book was a easy read.
Here is my background: I have a degree in Economics from MIT and a degree in Finance from Harvard. I read two newspapers and annual reports daily. A couple of weeks ago, I went to the Berkshire Hathaway Annual meeting in Omaha, Nebraska. In fact, I have gone every year for the past 5 years.
I have a strong background in
mathematics. The only TV channels I watch are Bloomberg and CNBC.
I do not have a social life.
I am a Data Scientist for a company. I am 30 years old.
I hope you have alot of cash at least...
I will risk believing 50% of what you’ve said: reading 2 news papers daily, do not have a social life, and 30 yrs old. Dang it.. im being speculative again!!
Damn, give this cookie a man
x5914sT7d931Hw 8C41A7g3M0s6x4 please can i have ur facebook i need somehelp in data science
@@ziggs3043 S/he said they don't have a "social" life :P
💫
6:28
Fake guru ad on intelligent investor education video. Wow what a generation we are in.
???????????
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Your Name is “Brodersen”?? Do you know that Its a 100% Danish name
Ja det gør han