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Kindle Notes & Highlights
by
Mihir Desai
Read between
May 14, 2019 - March 14, 2020
finance
it’s all about information and...
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it created a new generation of products ranging from the iPod to the iPhone to the iPad.
there were failures to innovate and to create a sustainable business model.
value creation is neither simple nor straightforward.
and this is the brutal truth—finance is hard, and sometimes the best equity analysts and investors get it wrong.
compares a company’s book value and its market value via the market-to-book ratio.
Book value is simply an accounting of the capital that shareholders have invested in a company,
market value measures how much a company is worth according to th...
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The relationship between returns on investments and costs of capital isn’t the only factor that will have an impact on the amount of value creation.
they must beat their cost of capital.
they must beat their cost of capital for many years.
they must reinvest additional profits at high rate...
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firms have two types of capital providers—lenders who provide debt capital and owners who provide equity capital.
the costs of capital are a function of the returns that investors expect.
investor’s expected return becomes the cost of capi...
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equity is a residual claim with a var...
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fixed return that has priority fo...
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Investors, like most of us, are risk averse. It’s human nature.
obligations of the US government that mature in thirty days,
obligations of the US government that mature in thirty years,
common stocks for small ...
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common stocks for large ...
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One helpful rule of thumb is that two-thirds of observations will fall within one standard deviation of the average.
Costs of debt comprise the risk-free rate plus a risk premium for credit risk.
diversification provides a powerful way to manage risks because as you diversify,
you can maintain expected returns and reduce risk—the only free lunch in finance.
there is some volatility you can never fully diversify away; it is called systematic risk or the risk of holding the market.
More precisely, if a company has a beta of 1, it generally moves in sync with the market; if the market goes up by 10 percent, then the company’s stock is likely to go up by 10 percent.
Yum!’s restaurants—KFC and Taco Bell—sell relatively inexpensive food.
Yum! is fairly insulated from the variability of the economy.
High-beta companies expose shareholders to larger amounts of systematic risk that they can’t diversify away.
investors charge them a higher cost of equity.
negative beta company, the costs of equity are going to be low. They might even be negative, which means that their WACC will be lower, which means their values will be higher. When the market goes up, this asset will perform poorly. When the market does poorly, this asset will do really well.
the beta is the slope of the line.
It’s important to recall that these costs of equity are also the expected returns to the investors,
As betas increase, expected returns increase.
Alpha is the source of value creation, as isolating it means you’re delivering greater-than- expected returns
The appropriate cost of capital isn’t a function of who is investing but rather a function of what you’re investing in. Risk is embedded in the asset, not the investor.
equity betas,
debt betas,
asset ...
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beta is a measure of the correlation between an instrument’s returns and the market’s.
asset beta, which measures how the operating assets co-move with the market’s returns.
The behavior of the assets relative to the market doesn’t change ...
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When there’s no debt or very little debt, equity betas look a lot like asset betas.
The cost of capital is not about who you are. It’s about what you’re investing in.
Valuation is difficult because you have to consider everything about a company—its intellectual property, its strategy, its competitive landscape, and so on—and translate that into numbers and then forecast those numbers into the future.
identified where value comes from and the specific recipe for value creation. Companies have to beat their cost of capital.
The sine qua non of value creation is beating the cost of capital.
