How do you value a Company and its Shares?
Apple, Amazon, Tesla, Microsoft – great companies perhaps, but are they great investments? While there are a variety of investment styles an investor might apply, investing over any reasonable period ultimately boils down to a simply reality – if you overpay for a stock you are likely to get stung, and if you underpay then odds are you will profit. Therefore, to stack the deck in your favour when investing, the ability to value a company is vital.
The Company Valuation Playbook introduces you to the industry-standard tools used by professionals globally to value companies and their shares. These valuation tools can be applied by anyone, no matter their experience. All you need is a computer, the internet, and a bit of common sense.
A must read for the aspiring investor
Alexandra Altinger, CEO, J O Hambro Capital
Smart, methodical and practical
Stephen Pearson, CIO, Jupiter Asset Management
1. Qualitative Analysis – Learn the key forces that shape a company’s outlook
2. Quantitative Analysis – Understand how to read, interpret and standardise financial statements
3. Fact finding – Discover how to dig out information on a company, disclosure requirements and voting opportunities
4. Projecting Returns – Acquire the skill to develop an objective forward looking forecast, ranging from a simple headline guestimate right through to a full three-statement financial model
5. Estimating Risk – Master the ability to build up a required return using the risk free rate and risk premium
6. Intrinsic valuation – Discount company cash flows to generate a valuation based on shareholder return
7. Relative valuation – Uncover how to standardise the valuation of peer companies, then adjust and apply to a valuation target
SPECIAL VALUATION SITUATIONS
8. Mergers & Acquisitions – Understand the process and adjustments when valuing a company as part of a merger or acquisition (M&A)
9. Leverage Buyouts – Incorporate additional debt assumptions when dealing with highly leveraged transactions (LBO’s)
10. Start-up – Modify the relative and intrinsic valuation approach to make it applicable for companies with little or no history
11. Banks – Determine the key variables, limitations and adjustments required when valuing a bank
12. Profiting from insights – Learn how to manage a large universe of opportunity, and the considerations to take into account when taking a long or short position
13. Behavioural biases – Study how to avoid the many behavioural biases which create avoidable investment errors
IR magazine: https://www.irmagazine.com/author/charles-sunnucks
Abundant Culture Podcast: https://abundantculture.co/ep117-valuing-public-companies-with-charles-sunnucks/
Investor Connect Podcast: https://investorconnect.org/investor-connect-charles-sunnucks-author-of-the-company-valuation-playbook/
Free Financial models
Fear not, its not all about excel spreadsheets and discounted cash flows! But, for those that have a hankering to really 'up-their-game' and invest like a professional, feel free to download and have a play around with the attached models. These included 3-financial statement forecasts, plus a discounted cash flow based valuation
Top 10 favourite investment related books
This is by no means an exhaustive list - there are plenty of other great works! However, the following titles in my view, will have an especially profound impact on how you interpret events and evaluate investments.
A Short History of Financial Euphoria – John Kenneth Galbraith
A short history of financial Euphoria reviews the major speculative episodes of the last three centuries, from "Tulipomania" in 1636 to Black Monday in 1987 and numerous examples in between. The book illustrates the unbroken cycle of boom and bust which economies undergo, and demonstrates that money and intelligence are not necessarily linked.
Accounting for Growth - Terry Smith
Terry Smith provides a ruthless exposure of the accountancy practices which are used to give a falsely rosy picture of a company’s health, and bewilder the investing public.The author of this book argues that it is time for attention to refocus on balance sheet movement, and above all, cash.
The Blackswan - Nassim Nicholas Taleb
Nassim defines a black swan as a highly improbable and unpredictable event with a massive impact. The book details how we concentrate on things we already know and time and time again fail to take into consideration what we don’t know. We are, therefore, unable to truly estimate opportunities. Taleb explains everything we know about what we don’t know, and offers simple tricks for dealing with black swans and benefiting from them.
Antifragile - Nassim Nicholas Taleb
Just as human bones get stronger when subjected to stress and tension, many things in life benefit from stress, disorder, volatility, and turmoil. Taleb describes this as ‘antifragile’, and explains how to gain from disorder and chaos while being protected from fragilities and adverse events.
The House of Rothschild – Niall Ferguson
Niall Ferguson uncovers the secrets behind the legendary Rothschild banking dynasty, one of the most fascinating families of modern times. He reveals the family's vast political network, which gave it access to and influence over many of the greatest statesmen of the age.
The Liquidity Theory of Asset Prices – Gordon Pepper
The liquidity theory of asset prices explores the belief that at the core of liquidity there is a force which exerts individuals to effect a financial transaction when they would not otherwise do so. Understanding this force of compulsion is a key to understanding a financial market when it appears to be behaving irrationally and avoiding costly mistakes.
How the mighty fall and why some Companies never give in – Jim Collins
How do the mighty fall? Can decline be detected early and avoided? How far can a company fall before the path toward doom becomes inevitable and unshakable? How can companies reverse course? – In this book Jim Collins confronts these questions, providing helpful insights and advice.
Blue Ocean Strategy - Renée Mauborgne and W. Chan Kim
Written by two professors at INSEAD, Blue Ocean Strategy describes the market universe as being split by ‘blue oceans’ and ‘red oceans’. Red oceans are all the industries in existence today – the known market space. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. A blue ocean is an analogy to describe the wider, deeper potential to be found in unexplored market space.
The Greatest Trade - Gregory Zuckerburg
The Greatest Trade Ever is the story of how hedge fund manager John Paulson realised that the sub-prime housing bubble was going to burst, making $15 billion for his fund and more than $4 billion for himself in a single year. It's a tale of folly and wizardry, individual brilliance versus institutional stupidity.
Black Box Thinking – Matthew Syed
Written by Matthew Syed, the book is about how the single greatest obstacle to progress is failing to learn from ones mistakes. The book provides interesting examples into how often in practice this simple principle is neglected, and the avoidable adverse effects that it creates.
Not included in the list as they are less directly related to investment philosophy and style, but other worthwhile reads include: ‘Crowd Funding’ by Modwenna Rees-Mogg, ‘Elon Musk’ by Ashley Vance, ‘Alibaba The House That Jack Ma Built’ by Duncan Clark, and ‘Steve Jobs’ by Walter Isaacson
Top 10 Investment Quotes
Below are a couple of quotes that I think do well at capturing some key investment principles, insights and observations.
"The most contrarian thing of all is not to oppose the crowd but to think for yourself." — Peter Thiel
“In many ways, the stock market is like the weather in that if you don’t like the current conditions all you have to do is wait a while.” – Low Simpson
‘There are two times in a man's life when he should not speculate: when he can't afford it, and when he can.’ – Mark Twain
“Prudence is not avoiding danger, but calculating risk and acting decisively. Make mistakes of ambition and not mistakes of sloth.” – Niccolo Machiavelli
“Investors should purchase stocks like they purchase groceries, not like they purchase perfume.” – Benjamin Graham
‘Revenue is vanity, profit is sanity, but cash flow is king”
“The desire to perform all the time is usually a barrier to performing over time.” – Robert Olstein
“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett
"If you don't study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards." – Peter Lynch
‘One of the funny things about the stock market is that every time one man buys, another sells, and both think they are astute.’ –William Feather
About the author
Charles Sunnucks is a professional investor. A former fund manager at Jupiter Asset Management, he has lectured at The University of Cambridge, made multiple TV appearances commenting on markets, and actively co-managed a London stock exchange listed investment trust. University educated in China, he speaks fluent Chinese, and is both a Chartered Financial Analyst, and a Chartered Alternative Investment Analyst.
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