6: Richer Wiser Happier, Everything is a DCF model, and The Process from Mr. Saban.
Interesting Reads
Richer, Wiser, Happier by William Green. I can’t put it down. From the book:
I’ve come to think of the best investors as an idiosyncratic breed of practical philosophers. They aren’t trying to solve those abstruse puzzles that mesmerize many real philosophers, such as “Does this chair exist?” Rather, they are seekers of what the economist John Maynard Keynes called “worldly wisdom,” which they deploy to attack more pressing problems, such as “How can I make smart decisions about the future if the future is unknowable?”
Everything Is a DCF Model by Michael J. Mauboussin.
The ideas behind a DCF model have been around for a very long time. Warren Buffett, chairman and chief executive officer of Berkshire Hathaway, suggests they were introduced more than 2,500 years ago: “ . . . the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).
The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was ‘a bird in the hand is worth two in the bush.’ To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush— and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.”
Aesop knew that everything is a DCF model.
Michael’s paper really drove home the point for me. See for me, I view everything as a spectrum of value. There is no growth vs value, it’s all value. (Might turn this into an article later when I get ahead with analyses).
Learning
I thought I was familiar with the concept until I came across this article by Nicholas Yoder Nick Yoder. Nick does a great job of relating the Kelly Criterion to investing. A truly wonderful write-up.
Resources & Tools
Multiple Expansion is a gift that I found through Christopher Olliney. From their website:
“This is a collection of educational resources and random musings from several investment bankers and private equity professionals.
High-quality training materials for the financial services industry are hard to come by. Our goal is to give back to the community through this blog, sharing educational resources and bits of wisdom learned the hard way.”
For Fun
The Perfectionist is a old 60-minutes interview with coach Nick Saban. Now, I don’t know a whole lot about Nick but the first 3 minutes has some gems:
Interviewer: “Why are you so tough on people?”
Saban: “Well, I don’t know if that’s fair that I’m really ‘tough’ on people. We create a standard for how we want to do things. And everybody has got to buy into that standard or you really can’t have any team chemistry. You know, mediocre people don’t like high acheivers and high acheivers don’t like mediocre people.“
Watch it and pay attention to the process and tell me it doens’t apply to investing. Truly amazing.
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