New Video: V6: The Discounted Cash Flow (DCF) Method

In order to value an overall company, perhaps the single most rigorous method, is to look at all of the cash flows - over the life of the company and discounting them back to a value for these cash flows today. One can either look at the cash flows to the overall company (and subtract the value of the debt on the balance sheet to arrive at a value for the equity of the company), or one can start by looking at the cash flows to equityholders.

This method is rigorous in that it aims to capture a lot of information about the company, far into the future. These cash flows are inherently very difficult to predict, and also, they then need to be discounted at an appropiate discount rate which reflects their risk.

New Video: V5: The Dividend Discount Model (DDM)

As long as we hold a stock, the only cash flow that we receive is the dividend, that the company pays out of it earnings/net income (the remainder is retained earnings). This method of valuing stocks looks at the value of the stock as the value of the cash flows that we can expect to receive as dividends. Some companies don't pay dividends and one can has to make significant assumptions about dividends into the future (which clearly have a big impact on the calculated result) - so like all of the methods, it is not always applicable and certainly not without assumptions and disadvantages - but it does take mean looking and thinking about the real expected cash flows and is certainly a method often used and often spoken about.

New Video: V4. The P/Book Ratio

In this fourth video on valuation, the P/Book ratio is discussed. Like all of the valuation methods, it has advantages and limitations - and perhaps more importantly, times when it might be relevant and times when less so - more for companies that have tangible book values that can be determined and where the assets are more tangible and relevant to the companies productive capacity ultimately, less so for companies where the book value does not capture value such as goodwill or a brand that might also not be reflected in the balance sheet.

New Video: V3: The Price/Sales Ratio

Early stage companies often do not have earnings, or have negative earnings or they have earnings that at changing so much that they are not considered a useful measure. Furthermore, earnings can be affected by depreciation policy or even one-off extraordinary expenses or gains that might depress or inflate earnings.

In all of the above situations, the Price to Sales Ratio might be a more useful, or complemenetary valuation tool. The characteristics of the P/Sales ratio are discussed in this video.

New Video: V2. The P/E Ratio

The first valuation method is detailed in this video - the P/E ratio. Often referred to and spoken about - it is certainly worth knowing what this valuation method involves - in terms of both advantages and disadvantages.

New Video: V1B. Remarks on Valuation

Given the arguments for market efficiency, a few more remarks on valuation are worth making - particularly in light of the fact that valuation is important to understand, but not something that can be used to gain an extraordinary return if market efficiency arguments hold true.

New Video: Introduction to Valuation

This is the first in a series of videos that will discuss some of the most popular valuation methods that are often referred to.
The aim of this series is to highlight what the valuation methods involve - given arguments for market efficiency, the value of individual investors actually relying on publicly available information to make individual stock decisions is questionable - nonetheless knowing what the valuation methods involve and some of their characteristics and drawbacks is clearly useful.

New Video: Introduction to Diversification

Diversification is one of the most important concepts of saving and investing - it clearly has a lot to do with not putting all of one's eggs into one basket. In this introductory video on diversification, what diversification means and some important considerations are introduced.

New Video: Following the Crowd and the Role of Expectations

Blindly following the crowd can lead to some of the worst investment decisions - something everyone is expecting in the future is also often already reflected today.

Smart investors spend a lot of time trying to figure out things that might not be expected or priced in - that is also a reason why financial literacy and therefore not having to believe everything one hears is so important.

Often one can read headlines like 'this market is expected to rise strongly for the coming year' or 'this stock will perform strongly'. If everyone, or a very large percentage of the market participants, expect the same thing, then often that future expectation is already priced in today.