"Thoughts on Valuation" (1997, Mauboussin) this one is straight to the point, and busts several market myths...stuff u see people get wrong every day 1. the market is short-term oriented, or "unsophisticated" or "irrational"...this is a myth. 2. EPS and EPS growth are what drive stock prices...also a myth. theres other topics in here, he goes into CAP which is a good term/framework u can use forever...I will pull a few highlights capatcolumbia.com/Articles/R… 1. how you can grow EPS and destroy growth (like Bezos' example) "Let’s pretend I am an unlimited source of capital. Everyone in this room can come to me and I will give you all the money you want. There is just one catch: the expected return on the capital I give you, not the explicit return, but the implicit return, is 10%. Now, let’s say you can go out and reinvest the money I give you at 8%. I give you capital with a 10% “cost” and you reinvest it at an 8% return. Now here is the question. What is your earnings per share growth going to be for this venture? The answer is, It is going to be anything you want it to be! All you have to do is keep coming back to me for more money, reinvest it, and you will generate earnings growth at whatever rate you choose. Clearly, the more rapidly you grow earnings the worse off you are, because you are investing below the required rate of return. That may make sense, but how does it apply to the real world? The answer is that the primary source of capital for most companies is retained earnings. (Roughly 75% of investments are funded internally.) Retained earnings have an implied opportunity cost—that is what shareholders could earn on that capital if they invested it in other ventures of similar risk—but most managers think of retained earnings as “free” money. Hence, managers who take cash generated by the business and reinvest it at below appropriate rates of return in order to drive earnings per share are doing their shareholders injustice. Mind you, investing in projects that do not earn the costs of capital may drive earnings per share growth, but will clearly destroy value. This type of investing goes on every day in corporations around the world." 2. the market sells off "EPS accretive" M&A Here are some other illustrations in the last few months that demonstrate the earnings/value dichotomy. Tyco International—which has been a very good performing stock, by the way—announced in March it was acquiring a company called ADT. Tyco is in the building supply business, ADT is a leading home security company. It came in as a white knight. The acquisition is structured as stock-for-stock—formally called a pooling of interest. It is a mathematical truism when a high P/E company buys a low P/E company, EPS for the acquiring company go up. This point is axiomatic. This was also the case for Tyco and ADT. The day of the announcement, ADT stock was up 18%—no big surprise. Tyco suggested that the deal should result in EPS accretion of about 8%. The stock, however, declined 3% in a flat overall stock market. So earnings per share went up, the stock went down, and the company witnessed a 4 P/E point multiple contraction. This underscores the important point that P/E multiples are not a determinant of value, but rather a function of value. 3. what's in a multiple? a lot On Wall Street, the typical valuation formula is EPS x P/E = value. We just talked about earnings and how they can be misleading. Now we go to this thing called the P/E multiple. We are asking the P/E multiple to reflect growth, capital intensity, risk, quality of management, and competitive advantage. We are heaping a lot of responsibility on one number and we argue that it is practically impossible to know what that right number is. --that bolded sentence is very important...very common question/pushback from new investors "why can't I just do a 2027 multiple, or 2030 multiple" etc because u are obscuring all that shit, plus terminal value assumptions, into one number. like you may as well just throw a dart. u arent doing real valuation work, ur just pretending these assumptions don't exit. in a DCF, all those assumptions are made explicit - capex, roic, fcf, everything that moves stock prices...u model those and add confidence intervals/scenarios/probabilities where ur uncertain. as opposed to just saying, "15x 2027 EPS." like closing ur eyes and saying, poof, doesn't exist the only shortcut (which everyone uses) is thinking directionally...a stock price = cash flows and multiple. so if u say a stock at $100, is worth $50, u have to explain...are cash flows going down 50%? or is the multiple going down 50%? or some combo? and why? (keeping in mind that the multiple captures all those variables laid out above) ask LLMs if any of this isnt clear (multiple vs DCF) -- I'm not going to argue with you on how you think the sky is orange instead of blue, and LLMs will get this right. 4. short-termism myth "The next myth is that the market is very short-term orientated. This one is a favorite of the business press, and is a theory in which many CEOs indulge. What is the evidence for “short-termism?” First, stocks react to quarterly earnings per share. Next, money mangers are evaluated every 90 days so they have to run fast to make sure their portfolio is well positioned for the short term. Finally, there is a disproportionate focus on next quarter’s earnings per share. This is particularly endemic to the sell side." --someone is going to push back and say, "the market can be irrational" yes, it can, its not perfect - "the market has predicted 9 of the last 5 recessions" its still far more right than it is wrong. and the degree to which u understand this, tends to be linear to ur years of experience mauboussin goes into examples of how the market is long term focused, but u can see that regardless - why is spacex worth a trillion dollars despite that theres no FCF for 5+ years? because the market plays the long game. maybe its worth $2T, or $1T, or $500B, we'll see...but there's clearly a lot of value in there. and on the flip side, u can see how AI/Claude has lopped off the terminal value of software stocks - those are long-term considerations, its not about next qtr being at risk, its 5-10 years out. again, I'm not gonna argue with u here, go hit LLMs with ur opinions and views. buffett 101: a stock is worth all the cash flow it will produce from now until kingdom come, discounted back at some rate appropriate to the business, risk, opportunity cost, 10-yr (he has many answers re: disc rate...but the point stands) go argue w buffett, dont argue w me 5. cont - time horizon "The next canard is that the market is “unsophisticated” or in some instances “irrational.” Allen Greenspan and Warren Buffett have recently contributed to this myth. Sumner Redstone, the CEO of Viacom, recently said that his stock price is depressed because the stock market is irrational; people don’t get it. All these portfolio managers, who are out to make money in a competitive setting, are collectively irrational. That is a difficult one to buy. What does happen is a company makes an acquisition, tells the world it’s a great strategic deal, and is shocked when the stock is down 2% or 3%. Now in some cases the market doesn’t get it because the market doesn’t have the appropriate information. In that case, it is incumbent on the company to provide the relevant information so as to allow investors to make the right decision. Collectively, the market gets it a lot more times than it doesn’t get it." 6. CAP 🧢 "Now we come to the last component of the value-based model and it is a critical one. This idea is what takes the DCF from the classroom into the real world. It takes it from theory to practice. Most MBAs have not been subjected to anything like this before, yet it is really the key to securities analysis. It’s something we call competitive advantage period (CAP). CAP is defined as the period of time a company can generate excess returns on its incremental investments. It is based on the idea that competitive forces ultimately drive your excess returns down to zero, meaning the business earns the cost of capital. The ability to extend excess returns for as long as possible is the basic concept of competitive advantage. This is how competitive advantage is tied into this framework. Generally, when companies or investors run a cash flow model they go out five or ten years. Why is that? Because that’s how many fingers you have. Literally, we live in a decimal world because that is how many fingers we have! What you really want to do is link the competitive position of your business and/or industry to an economically sound competitive advantage period. CAP can be defined by three major variables. The first is the current return on capital—the higher the better. The second is the rate of industry change—if you are in a fairly dynamic industry where things are changing quickly, investors tend to shorten the competitive advantage period. And third, which is related to the first two, is the barriers to entry; the higher the barriers to entry, the longer the competitive advantage period tends to be." -- Summary there's more in there, but u will notice that like everyone u know, everyone u follow, is doing all this shit wrong. mauboussin and buffett have it right, u do not have to question anything they've written, nor argue with someone who says "buffett has it wrong" ok pal here is the best path though. independently consult LLMs, make sure you understand all of this front to back, get all ur q's answered...develop your own understanding of this and then after that, u can either tune the crowd out entirely (since u have confirmation ur logic is sound), or u can try and correct people when u see them doing it wrong. the latter will have u laughing, people will spend hours arguing in defense of some point of view which they literally just made up and where an LLM within 2 seconds wouldve said "dude lol. no." so idk, arguing with strangers on the internet is like Caligula declaring war on the ocean....u are never gonna win, its a neverending battle. do your own homework and trust in LLMs, they are laser-sharp on topics like this -- fundamental equity analysis and basic market theory -- and will have u operating with some semblance of confidence. "don't follow the crowd, they're lost." buena suerte 🫡