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I gave a presentation last night for several University of Houston MBA students about Financial Statement Analysis and career opportunities in the investing industry.
I gave a presentation last night for several University of Houston MBA students about Financial Statement Analysis and career opportunities in the investing industry.
I began with a review of my own professional journey, which has been a fun, autonomous, and very untraditional career.
How to Value a Stock
We then talked quite a bit about how to value a stock.
The simplest method is to just follow along with Wall Street’s expectations. A ton of trading is done simply on whether or not a company beats or misses consensus estimates. A “Peanut Galley” approach would simply be to look for companies who consistently outperform Wall Street’s expectations.
A slightly more detailed approach is evaluating earnings multiples. Valuation multiples compare a company’s stock price to its fundamentals — essentially how “expensive” of a multiple investors are willing to pay for every dollar of revenue, earnings, or cash flow.
“Value Point” investing starts by finding the companies you’d like to invest in, and then adding additional stakes to them as they become better values over time.
The third and most complex valuation method is to construct a discounted cash flow model.
A DCF involves forecasting a company’s future free cash flows and then discounting them back to the present using an appropriate discount rate. Doing so can be very time-consuming, and DCF models are very sensitive to the inputs and the assumptions that are used.
We dug deeper into specific examples of Rocket Lab and Duolingo. For each, building the DCF involved estimating future revenues, operating expenses, and capital expenditures over a 15 year time horizon — and then discounting them back to come up with a price target for the stocks today.
Thinking Long Term
But I also encouraged the students to think of investing as a marathon rather than a sprint. Compounding wealth takes time and you’ll get better in every year of the journey.
Some years like 2025 will be very good. Others like 2022 will be very challenging.
But stay the course. Your future self will thank you if you’re diligently adding new money and are methodically improving your process.
To demonstrate this, I shared my professional investment newsletter performance results.
The newsletters I have run – Motley Fool Explorer and then 7investing – both followed a very simple process: Invest in one new stock every single month. I’ve essentially done this in each month of the past decade. (In last night’s example, we assumed adding a fixed amount of $1,000 per month.)
Even this simple strategy has done a great job of compounding capital over time: An average return of 64% for the Explorer picks and 96% for the 7investing ones.
And just imagine if we’d let the Explorer picks ride and to participate in this fantastic recent bull market? Or if you’d taken larger stakes in your favorite and highest-conviction companies, where you put $3k or $5k upfront into high-flyers like NVIDIA (which I first officially recommended in March 2016) or Palantir (November 2020) or Rocket Lab (August 2021)? Or if you’d added more frequently to your biggest winners?
The stock market is here to empower your financial future. It will open doors for you to buy a new home, to take some fun vacations, to make a career change, or to retire early.
Take advantage of it being available to you!
