acanthurus wrote: ↑
Tue Jan 16, 2018 11:35 am
onourway wrote: ↑
Tue Jan 16, 2018 11:08 am
And even people who have the experience to do this kind of analysis don't have much of a track record of out-performance. There are simply too many unknowns even when you have reams of data.
Financial modeling is actually really hard work, so much so I'd probably prefer to be a farmer.
I think the qualitative side of things is much easier for people to discuss, so that's what people discuss. It just has very limited value without a valuation assigned.
I think the Bogleheads go to extremes in their beliefs about efficient markets. Many hedge funds or analysts don't have a long-term horizon. They have to update clients every quarter with how money is doing, so they are constantly chasing stocks or sectors that are designed to give superior short-term performance, which is very tough to do. It's possible to identify undervalued companies, but not based on financial 'modeling'.
Financial "modeling" doesn't work because if the input is garbage, the output is garbage. For many companies, there is no way to reliably forecast cash flows ten years into the future. With a conglomerate like GE, it is even more unlikely that one can do it. I think people have to ask themselves what the company is worth in a reasonable worst-case scenario, i.e. if profits don't grow, if particular lines get shut out completely, etc., and then ask what the company is worth in that scenario. Analysts who spit out sensitivity analyses with detailed modifications based on interest rate variables or revenue growth, etc. - most of that is useless.
In 99% of the cases, the market price wont be compelling no matter what numbers you plug in. But sometimes, just sometimes, you will find a stock that is trading at some extreme depressed value that doesn't make sense, and you don't have to know precisely if it's fairly valued at $100 or $80 or $60 if the market is offering it to you at $30. If someone was trying to sell you a diamond in the store, you wouldn't be able to tell if it was worth $1000 or $10,000, but if you could get it for $100, you'd likely win the bet.
The interesting thing about financial markets is that occasionally, you find companies like that. Last year, I found a company with 2.6x more cash than its market capitalization, and was trading at 0.4 of its book value. Understand what that means. It means a third-party seller could have paid the market price for the entire company, then immediately claim back the cash, and still be left with the company for free. It's like asking you if you would be willing to pay $100 for a wallet with $260 cash in it. Of course you would. And you'd get the wallet for free. This is an example of the markets not being efficient.
Why did no one on Wall Street buy the firm? Because no one was interested in such tiny companies! Analysts are confined largely to mid-cap and large-cap companies. So the individual investor is free to pick up small-cap bargains, and even better, they are less complex to analyze as they aren't big companies. And even when analysts follow smaller companies, they are trying to set a target price for a few months ahead - which is impossible to do.