Buying Quality Using Discounted Cash Flows

Valuation matters to me.  In fact, I’m particularly fond of one of the many aphorisms coined by Warren Buffett:  “Price is what you pay, value is what you get”.  With that in mind, I read an article this week in Barron’s suggesting Under Armour could double from its current price (thanks to @chriswmayer).  Eye catching for sure.  The company has been beaten down recently, and isn’t particularly expensive, but this wasn’t always the case:

“Under Armour must have been overvalued back in 2005, when it sold at a P/E of 90 and had a price-to-sales multiple of 6.3. Despite what looked like a crazy valuation, it is up nearly 500% since 2005, even after the huge pullback in the past year.”

I’d have struggled to buy at 90 times earnings and over 6 times sales, but are there circumstances in which I would pay a higher price?  Yes.  I’d pay a higher price for perceived higher value, and one way to determine value is through free cash flows.

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The Diverse Nature of Diversification

There are a number of benefits to being a private investor of modest means.  You have greater liquidity.  You can sell in and out of positions with little to no trouble.  You’re not beholden to your investors.  Small positions can drastically improve the performance of your portfolio.  And performance targets, if you have them, are set by nobody but yourself.  Absolute return investing at its finest.  I’m happy with all of that.  But one area I struggle with is diversification.

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When Markets are High, Valuation Matters


The current CAPE ratio for the S&P 500 is the third highest valuation on record, beaten only by the extremes of 1929 and 2000.  US-based investors appear to be standing at the precipice, potentially peering into the abyss.  Yet at the same time, UK markets look far cheerier, with a CAPE ratio of 15.4 only marginally above the long term average.  All is good for us Brits, isn’t it?

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Happy Second Anniversary to the Portfolio

Second Anniversary

If you’re a fan of British comedy Only Fools and Horses, you’ll likely be familiar with the character of Trigger, and his infamous broom.  Trigger was a road sweeper, and a man very proud of the fact he’d had the same broom for 20 years.

Trigger: This old broom’s had 17 new heads and 14 new handles in its time.

Sid: How the hell can it be the same bloody broom then?

Trigger: There’s the picture. What more proof do you need?

This little exchange perfectly illustrates the concept known as Theseus’s Paradox.  Can an object that has had all of its component pieces replaced still be considered the same object?

We are coming up on the second anniversary of the inception of my portfolio, during which time the constituent parts have changed somewhat.  Performance has changed, too.

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