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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A Quick and Dirty, Back-of-the-Envelope Method for Valuing Berkshire Hathaway

the intrinsic value of berkshire hathawayBerkshire Hathaway is a bit of an anomaly when it comes to conducting a valuation of the business. On the one hand, it is an incredibly complex, and often times secretive, operation where getting exact details of quantitative data can be incredibly difficult. For example, if you peruse the annual reports or 10Ks, the income statement will be presented in a very general sense but not provide details on each individual business unit. However, on the other hand, Warren Buffett has dropped a ton of hints along the way in his annual letters on what he believes is the intrinsic value of the business. Seeing as the most recent annual report has recently come out, Berkshire is on my mind. So let me give you an introduction on how to do a quick and dirty calculation to figure out the intrinsic value of Berkshire Hathaway.

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