the golden rule of valuation

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1、Chapter4thegoldenruleofvAluAtionCommitthefollowingdefinitiontomemory:Thevalueofanassetisthesumofthecashflowsitcreatesonbehalfofitsownersoveritseconomiclife.Contrarytopopularopinion,valuationiseasy.Onedoesnotneedamaster’sdegreeinaccountingortobeanexpertinfinancialstatemen

2、tanalysistocom-petentlyvalueacompanyandestimateafairvaluerangeforastock.Theonlythingapersonneedsistointernalizetheprecedingsentenceandunderstandthehandfuloffactorsthataffectthecashflowsofafirmovertime.Thischapterfocusesondevelopingatheoreticalframeworkusingthegoldenruleo

3、fvaluation—whichyouhavealreadymemorized—andlooksateachpartofthatsimpledefinitionphrasebyphrase,witheachphraseadifferentsectionofthechapter.Thesectionsareasfollows:1.TheValueofanAsset:Hereweofferaspecificdefinitionforanas-setanddiscussthedistinctionbetweenvalueandprice.2.

4、CashFlowsGeneratedonBehalfoftheOwners:Specifieswhichcashflowswewillmeasurewhenvaluinganasset.3.TheCompany’sEconomicLife:Breaksthelifeofthefirmintothreestagestohelpmakethevaluationprocesseasierandmoretransparent.Forthosenewtothesubjectofvaluation,Ipresentanadditionalsecti

5、onthatprovidesoverviewsofspecifictopicssuchastimevalueof7778 • TheIntelligentOptionInvestormoneyanddiscountrates,butevenbeingunacquaintedwiththesetermsrightnowwillnotbeahandicap.Businessisessentiallyacollectionofverysimpletransactions—pro-ducing,selling,andinvestingexces

6、sprofits.Inmyexperience,oneofthebiggestinvestingmistakesoccurswhenpeopleforgettothinkaboutbusi-nessintermsofthesesimpletransactions.Havingafirmgraspofvaluationisanessentialpartofbeinganin-telligentoptioninvestor.ThebiggestdrawbackoftheBSMisitsinitialas-sumptionthatallsto

7、ckpricesrepresentthetruevaluesofthestocksinquestion.Itfollowsthatthebestopportunityforinvestorscomeswhenastock’spresentpriceisfarfromitstrueintrinsicvalue.Inordertoassesshowattractiveaninvestmentopportunityis,wemusthaveagoodunder-standingofthesourceofvalueforafirmandthef

8、actorsthatcontributetoit.Thesearethetopicsofthischapterandthenext.Intermsofourintelligentoptioninvestin