It’s a Team Game, Stupid!

investing-forumCricket is a religion in our country. Is there anything else that binds the whole nation together? Is there anything else that generates so much passion within each individual? Right from the street side hawker to five star restaurant, from small work table to corporate corner office, from normal tree side primary schools to world class management institutes, cricket allows us to speak a common language. Everybody understands this language.

And yet, we forget that it’s a team game. It’s a game where every individual has to do its part and perform his role. In our wins, we forget negative, while in loss we demonize individuals. We forget somebody has to score runs, somebody has to catch in the field, and somebody has to take wickets. In this game, we tend to applause showmanship (even when if it is without any substance), while hard work just becomes a regular talk and not celebrated.

Our team had a dream run from middle of 2000 to 2004. In this we all applause certain leader for the team who is takes off his shirt in enemy territory, but we do not seem to remember folks who worked tirelessly to make it happen. We continuously praise this certain leader, without recognizing that he had an excellent team mates who always bailed him out. He had two great batsmen of this era and one great bowler who were always ready to standup and make the contribution. Continue reading rest of this article…

Fair Value Estimate – Discounted Cash Flow Method

monthly-dividend-portfolio-review1In my stock analysis process, among others, one of the methods I use to estimate fair value of a given stock is using 15 year discounted cash flow (DCF). At a fundamental level, what DCF does is, it uses future cash flow estimates and then discounts it to determine the present value. Let us discuss both of these parameters.

Future cash flow estimate: There are myriad of different ways to estimate future cash flow of any corporation. These are based of EPS, free cash flow, operating cash flow, net profit, pre-tax profit, etc. I am not qualified to judge or make any comment on the correctness or appropriateness of using any of above parameters. I believe based on a specific objective any or all could be correct. I look at DCF methodology from my own investing situation and objectives.

I am a long term dividend investor and hence, I use estimates of cash flow from dividends. In addition, I also include an estimation of cash I would receive from selling the stock after 15 years.

Discount Rate: This is the rate at which future cash flow is discounted to determine present value. The general practice is to use cost-of-capital that is available in any given market. I have observed that, typically, discount rate is in the range of 12% to 18% depending upon individual scenarios.

In my calculation, I tend to use 12% in most cases.  Continue reading rest of this article…



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