Li Lu’s Foreword to Poor Charlie’s Almanack

First, the series on Valuation will fire back up shortly: I ended up going to NYC for 5 days last week and the wheels fell off the study wagon… meaning I fell rapidly behind on my actual homework in the Valuation course so I’ve been frantically trying to catch up, thus no update since the last post on the Risk Free Rate. I came across this English translation of the foreword to the Chinese version of Poor Charlie’s Almanack by Li Lu. You can find it on this link through the internet archives, but I thought I’d post it here in case it ends up disappearing. Everything below is a copy and paste from the original article. Enjoy!

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Valuation: The Risk Free Rate

Now that we’ve introduced ourselves to the concept of Valuation and reviewed the idea of Intrinsic Valuation yesterday, we’re finally at the point we move into deriving a discount rate. Just like the term “Intrinsic Value” the concept of the “Discount Rate” is tossed around in finance/investing circles like a hot potato: everyone seems to mention how important it is, but are opaque about just how you go about deriving one. You’ve heard Warren Buffett proclaim that the intrinsic value of an asset is the cash flow that an asset will generate between now and Judgement Day, discounted back to the present at an appropriate discount rate. While this is all fine and dandy, it’s never revealed to us mere mortals what the discount rate is. I think these next few sections on Valuation in the coming days might shed light on that for you. Today, we focus on one component of the discount rate: the Risk Free Rate.

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Valuation: Intrinsic Value

Now that we have the introduction to valuation out of the way (and the random thoughts on mean reversion and R&D capitalization), it’s time to move onto the concept of intrinsic value. Intrinsic value is a concept that is thrown around a lot in finance, especially the value investing niche. However, while the concept is thrown around like a frat bro yelling out YOLO every 5 minutes, it’s never clearly defined for those who are new to the game. Hopefully this session clarifies it a little bit and gives you an idea of what intrinsic value means and how you start going about calculating it. The actual calculating will come in later sessions and this one will just give you an idea of how to go about setting up the framework to estimating intrinsic value later on.

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Valuation: Random Musings on Mean Reversion and Capitalizing R&D

So the way the Valuation course works is that all materials are available online – lecture videos and slides – and it’s an entirely self-driven process. Every couple weeks, however, we are able to get an hour of one-on-one with Professor Damodaran and ask him any questions that might be on our minds regarding the course. This week, there were 2 interesting points that caught my attention: the notion of mean reversion in the markets and why you should capitalize R&D expenses.

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Valuation: An Introduction to Valuation

I told you guys last month that I signed up and paid money like a sucker to do a semester long Valuation course through NYU with Aswath Damodaran. Why a sucker? Because Damodaran provides all of this courses and materials through his website for anyone to take for free. Honestly, follow the link and you can take any course he teaches entirely for free. It’s an incredible resource. However, like most people, I never got around to doing the Valuation course available for free because… it’s free. When things are free, they tend to constantly get shifted down in the priority list of things to do because you reason that you can do it anytime because… it’s free. That’s a recipe for never doing anything. So I paid up to motivate myself to actually go through with learning this material. Since my first quiz is coming up, I figured I would do a brain dump of the topics covered so far for my own review. If you find it interesting, great.

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You Had $2.5 Million and You Did WHAT!?

I saw this on reddit and had to post this here in case it ever gets deleted by the reddit user in shame. This man got $2.5 million in inheritance a few years ago and he has literally burned it all through day trading. It is mind numbing. The uncle who bequeathed him all these riches must be turning in his grave. It goes without saying that this is exactly what you do not want to be doing with your money. I hope you can savour the extreme irony in how his uncle lived frugally and invested steadily for decades to make his millions and how his idiotic nephew blew it all in a few dumb years. Below is a full cut and paste of this reddit post with some edits to highlight some of the most absurd passages. Let this be a cautionary tale in greed and hubris. You can’t make this stuff up (however, it is the internet, and reddit in particular, and upon further research, I can’t ascertain whether this is true or the greatest troll job of all time – take it for what you will).

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