Free Financial models

Fear not,  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.

Image by Glenn Carstens-Peters

Top 10 investment books

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.

Others

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

Office Building

Top 10 Investment quotes

Below are a couple of quotes that 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

 

  

 

Reading To Your Dog

Free Financial models

Fear not,  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.

Image by Glenn Carstens-Peters

Free Financial models

Fear not,  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.

Image by Glenn Carstens-Peters

Frequently asked questions - Investing

How long does it take to value a company and its shares?


Typically, 5 minutes to 5 days for publicly listed companies. Some professionals will commit far longer, especially if the company is private and information not readily available.

Timing will come down to experience, how well you know the company, the type of company, and how accurate you want to be.

At its simplest, you can just jump onto a free finance platform such as Google or Yahoo finance, and make a rough determination based on its valuation ratio’s relative to its peer group. This is a very clunky means of valuing a company, and further diligence is advised, however it is a fast approach if time is constraint.

At the other end of the spectrum, is intrinsic valuation. This typically involves a financial model and a discounted cash flow output. It is a far more academically pleasing form of valuation, helps avoid some of the errors common to relative valuation, and is often applied by industry professionals. Importantly, it helps frame a company’s value in terms of its longer-term outlook. Intrinsic valuation can be done within a week, but some analysts will prefer to gradually get to know a company and its management, track its progress, and develop a valuation opinion over months or even years.




What do I need to value a company?


In theory, you only need a pen, paper and calculator, in practice, the use of the internet and an excel spreadsheet makes life infinitely easier.

Free websites such as Yahoo Finance or Google Finance do a great job at aggregating data and providing financial ratio outputs to use as the basis of a rough relative valuation. Other key sources of information include going direct to a firm’s financial filings and if available, an investor presentation.

For those wanting to dig deeper, and develop a financial model, excel allows you to create a ‘live’ document that can be easily updated as new information becomes available. While excel documents and formulas might feel daunting, there is a quick learning curve to get your head around the basics.




Why value a company?


For most people and organisations, the answer will be to make an investment decision or provide investment advice. This can be highly profitable and range from an individual buying a share in a company, to one firm acquiring another. Warren Buffett and George Soros are amongst the many investors that have built substantial fortunes taking a fundamental approach to investment analysis.

Company valuation can also be helpful if you need to audit a person’s wealth, and there is no accessible ‘market price’ at hand, (likely the company is private). This can be important for tax purposes, death settlements and divorce.




What is the difference between price and value?


Warren Buffett famously wrote in a 2008 letter to shareholders ‘price is what you pay, value is what you get’. Notably the two are not the same, and if you can pay a below value price when buying a company’s shares then you can heavily stack the deck in your favour when it comes to investing. This is true of any company, no matter its size, quality, or growth outlook.




What is the difference between investing and speculating?


Definitions vary, but to build-on Warren Buffett’s reflections, investing is when your focus is on the asset itself, while speculating is when your focus is on the price action.

Buffett notes that an investment decision is “one where you look to the asset itself to determine your decision to lay out some money now, to get some more money back later on”. For example, “When I buy a stock, I don’t care if they close the stock market tomorrow for a couple of years because I’m (ultimately) looking to the business—Coca-Cola, or whatever it may be, to produce returns for me in the future from the business”.

The emphasis when ‘speculating’ meanwhile is on the price action rather than the value of the investment itself. For instance, taking a position in a company based on the forecast that its upcoming earnings will be a positive surprise and drive the stock price up. Arguably of course, speculating is nonetheless a form of investment. Warren however draws the distinction that “calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”




How many companies should I invest in to be diversified?


This has been a field of lively academic debate. The consensus is broadly that the risk reduction benefits of diversification are largely realised at 20-30 holdings. Thereafter, you can achieve additional gains, but these are far more marginal.

Notably, diversification is not simply a number game. If you diversify across 30 companies with very similar risk and return characteristics, that is not nearly as powerful as investing across 30 very different companies. For example, to reduce risk exposure to the oil price, invest in one firm that benefits from a high oil price, and one that would benefit from a low oil price, rather than two oil companies. The return correlation between investments is therefore an important variable in determining the overall risk exposure of a portfolio.




What is the difference between the buyside and sell side?


The buyside refers to investors - those that buy and sell financial instruments (debt/equity/derivatives). Buyside participants include private equity firms, family offices, hedge funds, and asset managers. The largest buyside firms include Blackrock, Vanguard and Fidelity.

The sell side refers to those that create and promote financial instruments (again, debt/equity/derivatives). The sell side is frequently broken down between M&A advisory, brokers, equity research. The largest sell side firms include Goldman Sachs and JP Morgan, (although both also have buyside arms.)




What qualifications are there for investment professionals?


The most well-known and highly regarded professional qualification for an investor is the CFA (Chartered Financial Analyst) designation. It is a brutal set of exams, with three separate levels, each level taking around 300 hours to pass successfully. The CFA institute says that it takes on average a candidate four years to become a licensed CFA.

The CFA designation will be a substantial boost in terms of credibility, however in terms of practical on-the-job knowledge, it is less valuable. The challenge is that the exams are largely multiple choice, and often the curriculum can feel like it is being ‘taught-to-test’ rather than for actual application. Nonetheless, if you are keen to get your ‘foot in the door’ at an investment firm, becoming a candidate for CFA level 1 is an excellent first step.

Another financial investment certification is the CAIA (Chartered Alternative Investment Analyst) designation. CAIA has two sets of exams, and typically takes candidates around 200 hours of study for each level. The content is more interesting; however, it is far less recognised than CFA and is geared more towards non-traditional investment classes. Certifications with a far lighter workload include the FMVA (Financial Modelling Valuation Analysis)) certification, and the IMC (Investment Management Certification).

None of these certifications come ‘cheap’. CFA level one for example requires a $450 enrolment fee, and $700 for exam registration, (not including study courses etc.). The FMVA certification is the most affordable at $497 for the whole course.





Man at Desk