Hello, I'm Jian Yang.

Q: Why do stocks have a multiple (i.e., P/E, P/FCF, EV/NOPAT)?

A: Owning a business means you’re ultimately entitled to your share of the residual cash it generates from now till judgement day (unless ofc, you choose to sell it later). The multiple mostly reflects how much future cash flow investors think the company will earn, and this is affected by what they determine to be the longevity and growth of the company’s earning power, as well as the risks involved.

Q: How do stocks become multi-baggers (i.e., stocks whose price appreciates by multiples)?

A: The two main engines for share price appreciation are earnings growth and multiple expansion. Let’s simplify by keeping things constant. Suppose a lemonade stand earns $1 in Year 1, and $1 in Year 2, and $1 every year after that. Year-over-year, and $1 in Year 2, and $1 every year after that. Year-over earnings growth is 0%. If investors collectively determine, through market forces, that the P/E is to be 10, the price of this lemonade stand company will remain at around $10, assuming everything else stays constant. Now consider what happens if the P/E increases to 20 by Year 5. Over 5 years, the company appreciates in price from $10 ($1 * 10) to $20 ($1 * 20). That makes for a CAGR of ~15% a year (rule of 72: it doubles roughly every 5 years). So multiple expansion alone can make you a wealthier owner of the company.

The same scenario applies to earnings growth, where you keep multiple effects constant (i.e., keep it at a P/E of 10 in Year 5), and set earnings growth per year at ~15%. You’ll notice that your earnings have about doubled in 5 years, and if you multiply the same P/E of 10 by it, you’ll get a similar doubling in the price of the company.

So far it’s all quite straightforward, as we witness a linear relationship between the share price and either the multiple or earnings, assuming the other is kept constant in each thought experiment. Here’s where the twin engines of share price appreciation become more than a simple additive relationship. So far, we have understood that Price of the company in any year = Earnings Multiple (aka P/E) * Earnings (which is affected by earnings growth). If, by the time you intend to sell the company (aka Year 5 / 5 years from now), both the earnings multiple and earnings have grown and are now p% and q% higher respectively in Year 5 than they were in Year 1, this means that (1+r) Y1 Company Price = (1+p) Y1 Earnings Multiple * (1+q) Y1 Earnings.

Simplifying, this implies that (1+r) = (1+p)(1+q). r, which is your percentage increase in share price from Year 1 to Year 5, becomes p + q + p * q. Now this p * q is the secret ingredient. It creates an additional multiplicative effect. So next time you think earnings grew 10% from Year 1 to Year 5 and P/E increased 10% from 10 to 11, the share price doesn’t just increase by a linear 10% + 10% = 20%. Instead, it grows by 21%. If we increase the inputs slightly to a 15% increase in earnings and the earnings multiple, we get 32.25% (15% + 15% + (15% × 15%)). Notice how that extra 2.25% purely comes from the interaction between the two engines.

All this is really pointing towards the core idea behind value investing and finding stocks that return 1x/2x/5x/10x/100x: Find companies trading below what they are worth (Price < Value) and, ideally, buy them early while their earnings are still growing significantly. It’s important to note here that the definition of cheap is highly debated, and the accurate assessment of value is what separates a rookie from a professional. An earnings multiple is often criticised for being a simple and potentially misleading gauge of value when used alone.

Never forget that this multiplicative effect is as terrifying on the way down as it is rewarding on the way up.

If a company experiences a 30% drop in earnings (q = -0.30) and a simultaneous 30% contraction in its multiple (p = -0.30), the math doesn’t result in a linear 60% loss. Instead, plugging it into our formula:

r = (-0.30) + (-0.30) + (-0.30 × -0.30)

r = -0.60 + 0.09 = -0.51

The share price plummets by 51%.

If the drop is a more severe 50% cut to both earnings and the multiple, the destruction is massive:

r = (-0.50) + (-0.50) + (-0.50 × -0.50)

r = -1.00 + 0.25 = -0.75

You lose 75% of your capital. When both engines reverse, they work against you simultaneously, leaving you with a fraction of your wealth after what may have initially seemed like a standard business slowdown.

This is especially prevalent in stocks that are trendy or that have already seen a sharp price appreciation. While it’s true that such sentiment upshifts are often due to underlying improvements in the business, they can get blown out of proportion by momentum, opportunistic traders and gullible retail investors. If something seems like a no-brainer based purely on backward-looking price charts, chances are that some of the best days to invest in the company may already be over, in the short term at least. There are, of course, as is always the case, exceptions to this idea.

Remember: Sentiment is fickle. This also means that some of the best opportunities to invest in a company often appear when things are uncertain, uncomfortable and there is little evidence in the price charts to back the idea up. The hint is instead hidden in the business operations.

Q: How do professional investors estimate what a company is worth?

A: What I’ve seen professional investors do is that, after conducting a deep dive into the company’s history, operations and management (aka understanding the business almost as well as if they owned it), they proceed to construct a detailed financial model for a few years into the future. They typically label these future columns with an “E” for “estimate” or “expected”. Then, based on their deep understanding of the company, they predict how each line item might turn out in the future.

It’s probably important to note here that, as any student of probability theory knows, the more precisely you try to predict, the more variables you try to get right, and the further into the future you try to forecast, the less likely you are to be correct.

However, this exercise allows the investor to further deepen their understanding of the company, identify the key drivers of future business performance, and see what could potentially jeopardise the company in the future.

The exercise is ultimately meant to arrive at a more informed, and hopefully more accurate, estimate of the future cash flows that the company is likely to churn out, assign a reasonable earnings multiple at the end of the prediction period (unless the model forecasts into perpetuity), and allow the investor to better monitor the stock when future earnings reports come out.

All this helps the investor understand what the business is likely worth today and whether its current market price is trading at a discount to that estimated value.

The final product of this analysis is often an estimate of the investment’s expected IRR for your portfolio. In other words, based on your assumptions, how much is this stock likely to increase in value each year from your current entry price? This estimate is based on the future cash flows and value of the business, rather than simply extrapolating its past share price performance.

Q: What is a hurdle rate?

A: Investors also have what we call a hurdle rate, which is the minimum yearly return that the investor is willing to accept for a stock to be included in their portfolio.

This can be as simple as identifying what your financial goals are. If you want to double your money every 5 years, you need a hurdle rate of roughly 15% (rule of 72: 72 / 15 = ~5).

Having a clear hurdle rate, and the discipline to stick to it, helps prevent you from buying investments that may be good businesses but are unlikely to generate the returns your portfolio requires.

LLMs function as translators from human language to computer code. A translator must understand the speaker’s intention, but a translator can never replace the speaker.

Notes and key takeaways from CNA: The habits draining your energy at work and how to fix them.

TL;DR

Midday crashes are rarely caused by sleep debt alone. They are mostly triggered by heavy lunches, eating at your desk, scrolling on breaks, and constant notifications.

3 Key Fixes

1. Fuel Right and Leave Your Desk: Swap heavy carbs for protein and vegetables, and step away from your workspace during lunch.
2. Active Rest Over Scrolling: Re-energise with a 5-minute walk or eye break (20-20-20 rule) instead of social media.
3. Control Inputs: Shift caffeine intake to earlier in the day and mute non-essential notifications to reduce mental fatigue.

I recently watched Christopher Nolan’s The Odyssey, and here are some quotes that I loved:

The clearest view of a man is from below.

This made me go wow and reminded me of the common saying: judge a man by how he treats those less fortunate than him.

You’re a man who think he can control his own fate, but you can’t. You just have to live it.

The most we want is what the most we can’t have, and what the most we can’t have is what we already had and lost.