There is no end to the number of blogs and Youtube videos that convince retail investors they too can be experts. But what, really, is the value of that information?
There are three reasons earnings-based analyses are so popular in the investing world, even among some quasi-professionals, despite the fact that Discounted Cash Flow analysis is the preferred model for valuation across the entire industry1:
- Earnings is the most readily available company metric on the internet.
- Ratios are simple; analyses are complicated.
- This information is cheap.
Beyond Time Value of Money, there's no more valuable information you're going to get from browsing the internet for free. You can get access to certain types of research reports from Schwab and other discount brokerages, but it's not "free". You've deposited money with and given order flow to these institutions, on which they in turn generate income. But this is still relatively low value information compared to real, thorough equity research (it's often called "Due Diligence" here). These reports cost money, and they're compiled by people with years of education and expertise, which in turn cost money.
So I'm sitting here next to a stack of just four books from my college years a quarter century ago:
- Fundamentals of Financial Management by Eugene F. Brigham.
- Management Accounting by Anthony Atkinson & Rajiv Banker (my professor).
- Smith and Roberson's Business Law.
- Security Analysis by Dodd and Graham.
The fourth is by far the cheapest of them, because it's more widely used than in academia. But together, these four books would today cost, in their hardcover editions, $1000... and that's just four introductory textbooks. Nevermind the 4-5 years of school I had studying the soup-to-nuts of business management and, at the end of it, writing a thesis for a strategy formulation and implementation class that utilized all of the other learned disciplines in the development of a single, semester-long business case.
Very little of what analysts know in practice is something that can be distilled to the average investor without all of the years of underlying context. Expecting you to digest this and beat the market would be like telling you to take a 5xxx or 7xxx level finance course and expecting you to place in the top 5% of the class, at a top 5% school.
So this is what really goes into business valuation exercises of any real worth. Which is another way of saying: If you didn't pay for it, chances are it's not that valuable.
*****
- Brigham, Eugene. Fundamentals of Financial Management: Seventh Ed., p. 196.
In fact, of all the concepts used in finance, none is more important than the time value of money or discounted cash flow (DCF) analysis.
Submitted September 19, 2021 at 01:11PM by th3cr1t1c https://ift.tt/3nORaaL
