Quick observations that do not need a full-length article.
Capture the minds of the masses, and you control the actions of leaders. The majority is usually right thanks to collective intelligence, but the crowd is still effortlessly manipulated by half-truths, emotional arguments, and groupthink.
“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” - Mark Twain
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.
tldr: Share price appreciation is driven by twin engines: earnings growth (q) and multiple expansion (p). Because (1+r) = (1+p)(1+q), their combined impact is multiplicative (p * q), making it rewarding on the way up and ruthless on the way down. Professional investors value businesses by modelling future cash flows and expected IRR to find stocks trading below intrinsic value, then filter for those meeting their portfolio's hurdle rate (minimum required annual return) to stay disciplined.
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.
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.
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.
We only accept what we think we deserve.
Our standards, choices, and boundaries are a direct reflection of our internal sense of self-worth. When we raise our expectations of what we are worthy of, what we choose to tolerate naturally changes as well.
I missed you today, but no one knew.
I didn’t cry tears and I didn’t look blue.
Nobody thought I seemed slightly askew.
I walked all through the day thinking all about you.
I missed you today and nobody could tell.
I felt heavy and sad, but I covered it well.
I laughed out loud at jokes, didn’t once undersell.
Barely got through the day and I hurt like hell.
I missed you today, but I did it so quiet.
No one knew I was selling, but made everyone buy it.
Thought of you every second, didn’t try to deny it.
It might have seemed small, but to me it felt giant.
I missed you today from the morning to night.
From my dawn alarm clock till I closed both my eyes.
You drove with me to work, helped me turn out my lights.
It looked like a breeze, but it felt like a fight.
I missed you today and it made me wonder.
If I feel like this, then there must be others.
Making grief look like sunshine when it feels like thunder.
How many I spoke to also gained full thunder.
I missed you today and will every day too.
Still discreetly miss theirs and I’ll softly miss you.
We’ll see all the colours of the black and white hue.
And that is just something that grief will do.
This poem is from an Instagram reel, and it resonated deeply with me.
Wouldn’t it be great if AI could generate videos using other videos as references? That way, the movement in generated videos could resemble real life more closely. For example, imagine a generated video of your dog moving just as she does in real life.
Such a joy to watch videos like this. Ikea’s philosophy reminds me of Costco.
Terravest just bought back 1% of outstanding shares after the fiasco with Charles Pellerin caused a sharp contraction in share prices.
Recall this snippet from Chris Waller’s writeup on TerraVest:
Terravest also buys back stock from time to time, viewing the attractiveness of a buyback as about judging the return from its stock rising to intrinsic value vs the more certain return from making an internal investment. The company has not been afraid to aggressively buy back stock when it is trading well below intrinsic value, buying back 36% of shares outstanding in 2012.
Management has better insight into returns than outside shareholders, and this management will do what it takes to get the highest returns.
DCF valuation with wishful inputs is as good as saying “if I’m able to make a million dollars by year 5, I will be a millionaire.”
Valuation framework by Joel Tillinghast (from Big Money Thinks Small):
Determine the Discount Rate (using the Gordon Growth model):
Discount Rate = FCF Yield + FCF Growth RateRearranging this gives:
FCF Yield = Discount Rate - FCF Growth RateCalculate the Reinvestment Rate: Use Return on Equity (ROE) to identify the portion of earnings that must be reinvested to achieve FCF growth:
Reinvestment Rate = FCF Growth Rate / ROEDetermine the FCF Fraction of Earnings: The remaining portion of earnings that represents free cash flow:
FCF Fraction = 1 - Reinvestment RateCalculate Value: Use the FCF Yield derived in step 1 to value the FCF fraction of earnings:
Value = (Earnings * FCF Fraction) / FCF YieldOr expressed as an implied P/E multiple:
Implied P/E = (1 - Reinvestment Rate) / FCF YieldComparison is the thief of joy, yet it is woven into the very fabric of society. Think of rankings at work, in sports, and in advertisements, where we are constantly reminded of what we lack and taught what we should want. It is time we realise that what is valuable to others may not be the same for us. Our unique lived experiences shape our mindsets and determine what holds value. Joy, sorrow, and success are deeply personal and build upon one another. Every one of our actions today can be explained by a causal link to a past memory that has shifted our way of thinking.
The next time social media, our friends, or even our loved ones compare us with others, we ought to take a step back and introspect. We must remind ourselves that they are evaluating us through their own lenses and experiences, not ours. Stop living your life based on what someone else has determined to be a life well-spent. That’s their business, and that’s how they should live their lives if they choose to. We ought to be indifferent. Every decision has a value and a trade-off as we define it.
It’s important that we determine today what is of value to us; knowing our destination will help us make sense of the journey.
This quote beautifully put into words what I had in mind for a while:
“Most people do not think. They repeat. They adopt the opinions of those around them, wear them like borrowed clothes, and call it a worldview. And when you dare to think for yourself, really think, they will not admire you for it. They will resent you. Because your refusal to conform is a mirror they did not ask to look into. The unexamined man does not hate you because you are wrong. He hates you because somewhere beneath the noise, he suspects you might be right.” - Anonymous
P.S. Someone attributed this to Nietzsche, but I can’t seem to find evidence backing it, so I’ll keep it as anonymous.
Life is what happens in the in-between. We have convinced ourselves to live for big moments such as graduations, promotions, and travel, but what we end up feeling most nostalgic about are the little moments that seem insignificant in the present but make up a large part of the story looking back. Do not neglect what you have in the present by constantly occupying your mind with thoughts of the future.