Topic 11 - BMGT 343: Investments Prof. Anna Obizhaeva...

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1 Stocks Valuation Anna A. Obizhaeva BMGT 343: Investments Prof. Anna Obizhaeva Office: VMH 4428 Phone: (301) 405-7934 Email: obizhaeva@rhsmith.umd.edu Section 0101 T Th 9:30-10:45 am in VMH 1336 Section 0201 T Th 11:00-12:15 pm in VMH 1336 Section 0301 T Th 12:30-1:45 pm in VMH 1336 Office Hours : Thu 3:00-4:00 pm or by appointment Stocks Valuation Anna A. Obizhaeva Valuation of Stocks Topic 11: Valuation of Stocks
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2 Stocks Valuation Anna A. Obizhaeva Outline for Topic 11 Value Investing DCF Model Inputs for DCF Formula Valuation in Practice Stocks Valuation Anna A. Obizhaeva General Overview So far, we have considered several investment philosophies: 1. The Portfolio Selection Theory It shows that investors choose this asset over that, carefully balancing risk against expected returns, and arranging their choices into optimal combinations called efficient portfolios. 2. The Efficient Market Hypothesis It claims that securities are priced correctly. Thus, there is no hope for investors to consistently earn abnormal returns. Today, we will cover another (sometimes very successful) model of investment policies, called value investing .
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3 Stocks Valuation Anna A. Obizhaeva 1. Value Investing Value investing was proposed by Benjamin Graham and David Dodd. In Graham’s book “The Intelligent Investor” (1949), he recommended to invest in stocks trading below their tangible book value (if this discount of “margins of safety” are large enough). One of the world’s most prominent value investor is Warren Buffett . He is a chairman of Berkshire Hathaway. His legend has swelled to mythical proportions. So, how did he do it? Stocks Valuation Anna A. Obizhaeva Berkshire Hathaway This picture shows the price dynamics of Berkshire Hathaway: (in 1965 year, the price was $12) Compound return 1965-2008 is 20.3% (S&P500 is 8.9% ).
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4 Stocks Valuation Anna A. Obizhaeva How Does Buffett Select Businesses? Buffett is eager to hear about business that meet the following criteria: Large purchases (at least $75 million of pre-tax earnings), Demonstrated consistent earning power, Business earning good interest on equity while employing low debt, Good management in place, Simple businesses, An offering price. Stocks Valuation Anna A. Obizhaeva Main Principle Buffett (and other value investors) looks for securities with prices that are unjustifiably low based on their intrinsic worth or fair value. He has the following investment rule: Buy, if Price < < Fair Value Most often intrinsic worth is estimated by analyzing a company's fundamentals . Buffett chooses stocks solely on the basis of their overall potential as a company. Holding these stocks as a long-term play, he seeks the ownership in quality companies, which are extremely capable of generating earnings .
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5 Stocks Valuation Anna A. Obizhaeva Main Principle (cont’d) Stocks are securities which are issued by companies. We can
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This note was uploaded on 12/02/2011 for the course BMGT 343 taught by Professor Staff during the Fall '08 term at Maryland.

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Topic 11 - BMGT 343: Investments Prof. Anna Obizhaeva...

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