Long informative videos are a great thing. If someone doesnt have the patience to listen and learn, they hardly deserve to reap the rewards. Epic video my friend, please keep them coming! :)
Incredible video, you have really impacted my investing journey by setting me on the right path from day one. Because of you I have avoided so many pitfalls for rookie investors and have learned more than I could have ever imagined. God bless you Hamish, you are the best investing channel on youtube by a mile
Thanks Hamish! It's very difficult to find this kind of videos. You give me the answer to my question about WACC. Can you record a video with some book recommendation?
Absolute pleasure, your videos are amazing. I completely agree that CAPM model is too difficult to calculate a discount rate, I always advise my client's as business valuer to use a number depending on the business trade and CF slopes.
Thank you for the spreadsheet! What if the company has negative cash flow? and what do we need to do in order to estimate a reasonable positive cash flow for DCF to work?
Thanks a lot for the valuable informatie. Very helpful indeed. What does it mean if the cashflow exceeds the net income? I have a company that has mostly 0 capex spending. The PE ratio is 12, but if I use your sheet and calculate cashflow growth, the buy price looks very good. Is it possible to suggest stocks to you? Kind regards
There are plenty of resources out there explaining what these thing mean. If you keep reading, it will start to make sense. Its a financial model just like the doctors used models for predicting the Corona virus. They both have the same inputs. 1. They start with a base number For the Corona virus is was how many people currently have the virus. For a business it's how much money the business currently makes. 2. You estimate a growth rate. In the case of Corona they called it the infection rate and multiple rate. For each person infected, they spread it to 2-3 other people. In business, they try to grow the business and make more money. The amount they earned this year is hopefully less then what they will earn next year and the year after that. 3. Discount these future numbers (that have grown) back to today. In the case of the virus, they looked at how many people will get infected in the next year and how many will die from it. In business you ask, "what is the SUM of everything this company will make from now until it closes and what's it worth to me right now." Models are models. It's just a story (base number, growth rate and discount rate) told using numbers. Hope this helps.
In this UA-cam video, the creator discusses the concept of terminal value and its significance in intrinsic value calculations for stock market investments. The key points and takeaways from the video are as follows: 1. **Introduction to Terminal Value**: Terminal value is a crucial component in estimating the intrinsic value of a business. It helps determine the future cash flows a business can generate beyond a specified growth period, which is typically ten years in the creator's analysis. 2. **Purpose of Terminal Value**: Terminal value is essential for assessing the total future cash flows a business will produce over its entire remaining life. This is significant because intrinsic value is the sum of all these future cash flows, discounted at an appropriate rate. 3. **Two-Step Calculation**: Intrinsic value calculations involve two steps: the growth period (typically ten years) and the terminal value. During the growth period, estimated growth rates for cash flows are applied. 4. **Common Terminal Value Approach**: The most common approach used for terminal value in stock market investments is the "exit multiple terminal value." This method involves adding a multiple (e.g., 10x) to the cash flow or earnings in the tenth year, assuming the business can be sold for that multiple at the end of the growth period. 5. **Flaws of Exit Multiple Terminal Value**: The creator highlights two major flaws in the exit multiple approach: - It shifts from analyzing future cash flows to relative analysis, comparing multiples across businesses in an industry. - The choice of a fixed multiple (e.g., 10x) is arbitrary and may not suit all businesses, as some will continue growing, while others won't. 6. **Perpetuity Terminal Value**: The creator recommends using a perpetuity terminal value method, assuming no growth beyond the growth period. The formula for this method is straightforward: divide the tenth year cash flow by the discount rate (required rate of return or risk-free rate) to calculate future value and then discount it back to the present. 7. **Benefits of Perpetuity Terminal Value**: This method is more conservative, assuming that a business continues producing cash flows but doesn't grow after the growth period. It aligns with a value investor's approach to analyzing businesses. 8. **Calculation Example**: The creator demonstrates how to calculate the terminal value using the perpetuity terminal value formula and how it contributes to the intrinsic value or buy price of a stock. By understanding the concept of terminal value and opting for a perpetuity terminal value approach, investors can make more informed decisions about the value of a business, considering its long-term cash flow potential.
Hi ...I have to ask what should we do about face value of stock? When our buy price is let's say $30 and face value is 10 and another stock has same buy price by our spreadsheet but face value is 1 what should we do? Should we always consider face value 1?
Hello ! :) (a) In the Second and Third Method of Estimating Terminal Value , You Used a Perpetuity/Perpetuity Growth Formula to Asses the present value ( at the Tenth Year ) of a Sequence of Cashflows ( i.e. , the Series of 10th year cash flows without any Growth into infinity or With a Growth Rate "G" assumed ) by using a discount factor , Say "Z" . (b) Next you discounted back the same Estimate to present day by using present day risk free Interest rates , Say "P". I couldn't Understand the part about the discount rate , "Z" , which you used to Estimate the perpetuity value at the tenth year . (Question)》Where and/Or How would I Get or estimate that rate "Z" ?? Thank You :)
Hi Hamish, great video. You've stated you only attempt to project cashflows ten years into the future, but you'll be reassessing your investments with each new financial year, won't you? So the horizon will always be ten years in the future (assuming you don't decide to sell and redeploy the capital).
Hey Hamish, always love and appreciate your work. I am just wondering when you calculate the buy price in your spreadsheet, the formula is like =NPV($B$9, D2: M2, O2), O2 is the terminal value on your spreadsheet. From that formula, why we discounted the rest of the cash flow as year 11, isn't it mean that the cash flow is for the rest of the business life other than year 11? I am a bit confused here. Hope you could help me out a little bit.Thanks.
please why you discount the terminal value to the 11th year ? I think it should be discounted to the 10th year . I mean : TV/(1+r)^10 because the time distance of the terminal value from the persent time is ten years only.
I agree with you we should discount N=10 not 11 The formula NPV=cf1/(1+r)^1 + cf2/(1+r)^2+.....+ cf10/(1+r)^10 + P11called Terminal value/(1+r)^10 P11=Cf10(1+g)/(r-g) Or P11=cf10/r
Very thorough. But over the past year you seem to have changed your method of calculating buy price. Can you teach us what made you change your thinking?
Thank you very much for the intrinsic value template! Very much appreciated, it really helps a lot. I have a question: Do you consider model 1-2 (lowest growth value) kind of like a "margin of safety"-buy price? Just wondering, because I can se from my other attempts at calculating intrinsic value, that your model 1 gives more or less same result as my 50% Margin of Safety, model 2 gives my 30% margin of safety, and model 3 more or less gives the same results as my Fair value numbers. So does that mean that everything above model 3 can be concidered a high (maybe too high) stock price?
Hi Hamish! In your model one of the inputs is clearly the potential growth rate of the business.. but that rate is based on the potential upside on earnings. Now, you use that rate to growth the FCF (another input of your model). It is correct to assume that the FCF could growth at the same levels that earnings do? Or am I missing something else. Thanks for your videos and material! :)
You can see the company’s performance in the past 5 or 10 year and compare the % of the free cash flow as and income and always take the most conservative number to apply in the next 5 year of free cash flow that you are going to estimate that means may be in 2015 the fb had a 9% free cash flow over its income in 2016 maybe had 14 , in 2017 12 , in 2018 15 in and so on until the last year 2019 and you want to be conservative and you are going to estimate the future cash flow in the next 5 year as a 9% over the income and you will be able to come out with a pretty accurate estimate in free cash flow , Hamish is a smart guy but in this video there are many misleading information
What type of Growth do you rely the most to be able to come out with a 10 years projection of the free cash flow, what l want to say by the type of growth is that you sad the company will grow at 10%yoy where this 10% come from . From a boost in its roe , roa . I would like to know that
Thanks for that, Hamish! Will this new model give us lower buy prices for ALL companies? Should we still be using 22% with this new model? I would think the margin of safety would be lower now, as the model has been made more efficient.
Hamish I really enjoy theses type of videos. I know you mentioned before you want to produce content like this even if it means you don’t get as many views but just remember that it’s the Quality not quantity want. And I think your doing a great job, I really don’t like channels such Cooper Academy who just harps on about Warrens 17-19% return alllllllll the Time, then move on to Charlie Mungar, then bill gates and then started again with Warren Buffetts portfolio. It’s just for views and no context rush channel. But channels like yours and PPCIan who teaches about actual context to investing
Thanks so much. I watched a half dozen videos, but yours is the first that explained TV in terms that I can understand.
The video I have been waiting for. Thanks Hamish.
Long informative videos are a great thing. If someone doesnt have the patience to listen and learn, they hardly deserve to reap the rewards.
Epic video my friend, please keep them coming! :)
best explanation i’ve seen so far
Such valuable info, THANK YOU
A well explained topic. Thank you.
Once again, you cut through all the bullshit and get to the meat of it! Thank you sir
Finally... Terminal value. Thank you so much
Incredible video, you have really impacted my investing journey by setting me on the right path from day one. Because of you I have avoided so many pitfalls for rookie investors and have learned more than I could have ever imagined. God bless you Hamish, you are the best investing channel on youtube by a mile
Fantastic! Glad to have helped you Aaron :D
Excellent video as always! Love it
Good lesson.Thanks Hamish
Great video! Super interesting! Please keep up the good work Hamish!
Excellent! Just excellent!!
Thanks for the new spreadsheet!
Your content is so helpful. Thank you Hamish
Thanks Hamish! It's very difficult to find this kind of videos. You give me the answer to my question about WACC. Can you record a video with some book recommendation?
thank you!
Brilliant video Hamish! Thanks so much for doing this! You have been officially subscribed :D
Hi, I would really like to use your spreadsheet too but many features don't work and I don't understand why. Could anyone help me out? Thank you
Thanks for the spreadsheet. It will help us a lot.
You're very welcome!
Absolute pleasure, your videos are amazing. I completely agree that CAPM model is too difficult to calculate a discount rate, I always advise my client's as business valuer to use a number depending on the business trade and CF slopes.
Excellent video as always Hamish,waiting for your video on micro and small caps
Thank you for the spreadsheet!
What if the company has negative cash flow? and what do we need to do in order to estimate a reasonable positive cash flow for DCF to work?
I don't try to project future cash flows of businesses with negative cash flow
Great content! Tx
Thanks!
Very nice video.
wow came across this video and it's absolutely amazing! Just curious how are these three formula deducted? would be extremely helpful!
Thanks a lot for the valuable informatie. Very helpful indeed. What does it mean if the cashflow exceeds the net income? I have a company that has mostly 0 capex spending. The PE ratio is 12, but if I use your sheet and calculate cashflow growth, the buy price looks very good. Is it possible to suggest stocks to you? Kind regards
I just hope I can understand this video in one to two years
There are plenty of resources out there explaining what these thing mean. If you keep reading, it will start to make sense. Its a financial model just like the doctors used models for predicting the Corona virus. They both have the same inputs.
1. They start with a base number
For the Corona virus is was how many people currently have the virus. For a business it's how much money the business currently makes.
2. You estimate a growth rate.
In the case of Corona they called it the infection rate and multiple rate. For each person infected, they spread it to 2-3 other people. In business, they try to grow the business and make more money. The amount they earned this year is hopefully less then what they will earn next year and the year after that.
3. Discount these future numbers (that have grown) back to today.
In the case of the virus, they looked at how many people will get infected in the next year and how many will die from it. In business you ask, "what is the SUM of everything this company will make from now until it closes and what's it worth to me right now."
Models are models. It's just a story (base number, growth rate and discount rate) told using numbers.
Hope this helps.
@@HardWorkPays0ff Makes sense, thanks
No one on the internet explains it like you do. Can you please make more company analysis videos?
In this UA-cam video, the creator discusses the concept of terminal value and its significance in intrinsic value calculations for stock market investments. The key points and takeaways from the video are as follows:
1. **Introduction to Terminal Value**: Terminal value is a crucial component in estimating the intrinsic value of a business. It helps determine the future cash flows a business can generate beyond a specified growth period, which is typically ten years in the creator's analysis.
2. **Purpose of Terminal Value**: Terminal value is essential for assessing the total future cash flows a business will produce over its entire remaining life. This is significant because intrinsic value is the sum of all these future cash flows, discounted at an appropriate rate.
3. **Two-Step Calculation**: Intrinsic value calculations involve two steps: the growth period (typically ten years) and the terminal value. During the growth period, estimated growth rates for cash flows are applied.
4. **Common Terminal Value Approach**: The most common approach used for terminal value in stock market investments is the "exit multiple terminal value." This method involves adding a multiple (e.g., 10x) to the cash flow or earnings in the tenth year, assuming the business can be sold for that multiple at the end of the growth period.
5. **Flaws of Exit Multiple Terminal Value**: The creator highlights two major flaws in the exit multiple approach:
- It shifts from analyzing future cash flows to relative analysis, comparing multiples across businesses in an industry.
- The choice of a fixed multiple (e.g., 10x) is arbitrary and may not suit all businesses, as some will continue growing, while others won't.
6. **Perpetuity Terminal Value**: The creator recommends using a perpetuity terminal value method, assuming no growth beyond the growth period. The formula for this method is straightforward: divide the tenth year cash flow by the discount rate (required rate of return or risk-free rate) to calculate future value and then discount it back to the present.
7. **Benefits of Perpetuity Terminal Value**: This method is more conservative, assuming that a business continues producing cash flows but doesn't grow after the growth period. It aligns with a value investor's approach to analyzing businesses.
8. **Calculation Example**: The creator demonstrates how to calculate the terminal value using the perpetuity terminal value formula and how it contributes to the intrinsic value or buy price of a stock.
By understanding the concept of terminal value and opting for a perpetuity terminal value approach, investors can make more informed decisions about the value of a business, considering its long-term cash flow potential.
Hi ...I have to ask what should we do about face value of stock? When our buy price is let's say $30 and face value is 10 and another stock has same buy price by our spreadsheet but face value is 1 what should we do? Should we always consider face value 1?
Hello ! :)
(a) In the Second and Third Method of Estimating Terminal Value , You Used a Perpetuity/Perpetuity Growth Formula to Asses the present value ( at the Tenth Year ) of a Sequence of Cashflows ( i.e. , the Series of 10th year cash flows without any Growth into infinity or With a Growth Rate "G" assumed ) by using a discount factor , Say "Z" .
(b) Next you discounted back the same Estimate to present day by using present day risk free Interest rates , Say "P".
I couldn't Understand the part about the discount rate , "Z" , which you used to Estimate the perpetuity value at the tenth year .
(Question)》Where and/Or How would I Get or estimate that rate "Z" ??
Thank You :)
Hi Hamish, great video. You've stated you only attempt to project cashflows ten years into the future, but you'll be reassessing your investments with each new financial year, won't you? So the horizon will always be ten years in the future (assuming you don't decide to sell and redeploy the capital).
How do I calculate the terminal value multiple?
Hey Hamish, always love and appreciate your work. I am just wondering when you calculate the buy price in your spreadsheet, the formula is like =NPV($B$9, D2: M2, O2), O2 is the terminal value on your spreadsheet. From that formula, why we discounted the rest of the cash flow as year 11, isn't it mean that the cash flow is for the rest of the business life other than year 11? I am a bit confused here. Hope you could help me out a little bit.Thanks.
please why you discount the terminal value to the 11th year ? I think it should be discounted to the 10th year . I mean : TV/(1+r)^10 because the time distance of the terminal value from the persent time is ten years only.
I agree with you we should discount N=10 not 11
The formula NPV=cf1/(1+r)^1 + cf2/(1+r)^2+.....+ cf10/(1+r)^10 + P11called Terminal value/(1+r)^10
P11=Cf10(1+g)/(r-g)
Or
P11=cf10/r
Very thorough.
But over the past year you seem to have changed your method of calculating buy price.
Can you teach us what made you change your thinking?
I got my reply in the contents of another video.
Thank you very much for the intrinsic value template! Very much appreciated, it really helps a lot.
I have a question: Do you consider model 1-2 (lowest growth value) kind of like a "margin of safety"-buy price?
Just wondering, because I can se from my other attempts at calculating intrinsic value, that your model 1 gives more or less same result as my 50% Margin of Safety, model 2 gives my 30% margin of safety, and model 3 more or less gives the same results as my Fair value numbers. So does that mean that everything above model 3 can be concidered a high (maybe too high) stock price?
Do you add a margin of safety of 50% to your buy price of discounted cash flows of 22%?
Hi Hamish!
In your model one of the inputs is clearly the potential growth rate of the business.. but that rate is based on the potential upside on earnings.
Now, you use that rate to growth the FCF (another input of your model). It is correct to assume that the FCF could growth at the same levels that earnings do? Or am I missing something else.
Thanks for your videos and material! :)
You can see the company’s performance in the past 5 or 10 year and compare the % of the free cash flow as and income and always take the most conservative number to apply in the next 5 year of free cash flow that you are going to estimate that means may be in 2015 the fb had a 9% free cash flow over its income in 2016 maybe had 14 , in 2017 12 , in 2018 15 in and so on until the last year 2019 and you want to be conservative and you are going to estimate the future cash flow in the next 5 year as a 9% over the income and you will be able to come out with a pretty accurate estimate in free cash flow , Hamish is a smart guy but in this video there are many misleading information
would the perpetual growth rate not be infinite then if it continues making money forever.
Instead of discounting the y10 cash flow. Couldn’t you just use the y10 npv cash flow ?
What type of Growth do you rely the most to be able to come out with a 10 years projection of the free cash flow, what l want to say by the type of growth is that you sad the company will grow at 10%yoy where this 10% come from . From a boost in its roe , roa . I would like to know that
Thanks for that, Hamish!
Will this new model give us lower buy prices for ALL companies?
Should we still be using 22% with this new model?
I would think the margin of safety would be lower now, as the model has been made more efficient.
Hamish I really enjoy theses type of videos. I know you mentioned before you want to produce content like this even if it means you don’t get as many views but just remember that it’s the Quality not quantity want. And I think your doing a great job, I really don’t like channels such Cooper Academy who just harps on about Warrens 17-19% return alllllllll the Time, then move on to Charlie Mungar, then bill gates and then started again with Warren Buffetts portfolio. It’s just for views and no context rush channel. But channels like yours and PPCIan who teaches about actual context to investing
A lot of bla bla bla ... Just make a video of 5 minutes and explain it simple...