Market Efficiency Definition and Implications
Market efficiency means different things to different people. To those who are true believers in efficient markets, it is an article of faith that defines how they look at or explain market phenomena. To critics, it indicates an academic notion of infallible and supremely rational investors who always know what the true value of an asset is. In this section, we would like to first define what we believe an efficient market is and then follow it up with implications for investment strategies. In...
The Passive Screener
There are many investors who believe that stocks with specific characteristics - good management, low risk and high quality - outperform other stocks, and that the key to investment success is to identify what these characteristics are. While investors have always searched for these characteristics, it was Ben Graham, in his classic books on security analysis with David Dodd , who converted these qualitative factors into quantitative screens that could be used to find promising investments. In...
A Broader Measure of Cash Flows to Equity
There are two significant problems with the use of just dividends to value equity. The first is that it works only cash flows to the equity investors take the form of dividends. the spreadsheet that contains the valuation of Coca Cola. It will not work for valuing equity in private businesses, where the owners often withdraw cash from the business but may not call it dividends, and it may not even work for publicly traded companies if they return cash to the equity investors by buying back...
B The Fundamentals Behind Multiples
One reason commonly given for relative valuation is that it requires far fewer assumptions than does discounted cash flow valuation. In my view, this is a misconception. The difference between discounted cash flow valuation and relative valuation is that the assumptions that an analyst makes have to be made explicit in the former and they can remain implicit in the latter. It is important that we know what the variables are that drive multiples, since these are the variables we have to control...