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Charlie Munger famously said: “All intelligent investing is value investing - acquiring more than you are paying for. You must value the business in order to value the stock.”
So if you're interested in value investing, learning how to value a business is probably one of the most important skills to develop.
I put together a two-part video series covering the basics of business valuation. The goal is to make the concepts practical and easier to follow, using real company financials rather than just theoretical examples. It continues the educational series I posted previously - 'buy good companies, don't overpay, do nothing' - and it is is focussed on the second step 'don't overpay'
Part 1. Valuation Multiples
The first part looks at the valuation multiples investors use every day, but goes beyond simply defining P/E, P/B, or EV/EBITDA. I start with P/E and explain what the multiple actually represents and what you're paying for when you buy a stock at a particular earnings multiple. Then I work through P/B, P/S and EV/EBITDA, showing how to calculate each multiple from a company's actual reported financials and, more importantly, what each multiple is telling you about the business.
From there, I show how to use multiples to arrive at an implied valuation rather than simply saying “the stock trades at 20x earnings.” I discuss e.g. how a company's current multiple compares with its own 10-year historical range, how you can estimate an implied share price if the multiple moves toward a historical average, how to compare a company's valuation with its peers, why two companies trading at the same P/E can represent very different investments and some of the limitations and pitfalls of relying on multiples
The goal is to move from 'this stock trades at 15x earnings' to actually understanding what you're paying for and what that valuation implies.
Part 1: [https://www.youtube.com/watch?v=\_3\_U5W-b7KQ](https://www.youtube.com/watch?v=_3_U5W-b7KQ)
Part 2. Intrinsic Valuation
The second part moves from relative valuation to intrinsic valuation - estimating what a business could be worth based on the cash flows it can generate over its lifetime.
I build a DCF (discounted cash flow) model using Apple's actual financial filings and walk through the key assumptions behind the valuation, including, growth, margins and discount rate - talked about in this sub almost every day. I also show how sensitive the valuation can be to changes in these assumptions.
I also briefly introduce other intrinsic valuation approaches, including dividend discount models (DDM) and excess returns models, and discuss why different businesses may call for different valuation methods.
Finally, I bring valuation multiples and intrinsic valuation methods together to show how different approaches can lead to different, but still reasonable, estimates of value - because valuation is a range, not a single precise number.
Part 2: [https://www.youtube.com/watch?v=nJQ2BO\_Q35A](https://www.youtube.com/watch?v=nJQ2BO_Q35A)
Hopefully this is useful for anyone looking to better understand the valuation concepts that come up regularly in this sub, and gives you a better foundation to follow the discussions, challenge ideas, and contribute your own perspective.
Feedback welcome. Not investment advice. DYOR.