{"id":2614,"date":"2022-01-20T11:39:46","date_gmt":"2022-01-20T11:39:46","guid":{"rendered":"http:\/\/www.assetmultiplier.co.in\/blog\/?p=2614"},"modified":"2022-01-20T11:39:46","modified_gmt":"2022-01-20T11:39:46","slug":"dont-cut-it-too-fine","status":"publish","type":"post","link":"https:\/\/www.assetmultiplier.co.in\/blog\/2022\/01\/20\/dont-cut-it-too-fine\/","title":{"rendered":"Don\u2019t cut it too fine!!"},"content":{"rendered":"

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Intelligent investing rests on three tenets- Anand Sridharan reminds investors that i<\/strong>ntrinsic business value, Margin of safety and Mr Market are three tenets that matter. If we truly understand the essence of Ben Graham\u2019s three tenets, we\u2019re done. There\u2019s nothing else to sensible investing. View stock as a business. Roughly gauge what it\u2019s worth. Since world is all messy, don\u2019t cut it too fine. Keep some cushion. View nutty counterparties as entertainment, unless they offer something actionable based on the above.<\/p>\n

Two tenets \u2013 intrinsic business value & margin of safety \u2013 are inseparable.<\/strong> It wouldn\u2019t even occur to Mr Sridharan to ask the question \u201cWhat\u2019s the value of this business?\u201d. The actual question that he asks is \u201cAround what buy-price am I fairly sure that I\u2019m getting a decent deal?<\/strong>\u201d.<\/strong> The second question blends intrinsic business value and margin of safety to help me reach an actionable decision. My guesstimate of business value will have wide error bars. The range maybe 100 to 150. Whatever be that number, I never do an artificial separation of value and safety margin. At all times, prudent investors don\u2019t fuss about intrinsic business value, apart from being cognizant of a broad range that\u2019s reasonable for a particular business.<\/p>\n

This is why simple works better than sophisticated.<\/strong> In any real-world, reliable sense, DCF is nonsense. It is a sophisticated tool for impostors to delude themselves and others. We suck at forecasting and have no way to reduce risk to a number. A mental model that integrates margin of safety and intrinsic business value nudges us to focus on being roughly right, not precisely wrong. It is why the best investors spend a lot of time ensuring that businesses are predictable, and little time making actual predictions. Simple valuation methods suffice for businesses where cashflows and risks are relatively knowable.<\/p>\n

Ongoing charade is even more flawed than it seems<\/strong> – What\u2019s helpful to practitioners is a buy-price that offers reasonable certainty of getting more than what we pay for. This goal is achieved through a mindset that views value and safety in unison. Investors get habituated to methods that yield neither value nor safety without such a mindset.<\/p>\n

Source- Buggy Humans in a Messy world by Anand Sridharan<\/strong><\/p>\n

AM Comments: –<\/strong><\/p>\n