How To Invest Lesson 4 - Using Discounted Cash Flow (DCF) Analysis to Value Stocks
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Transcript of How To Invest Lesson 4 - Using Discounted Cash Flow (DCF) Analysis to Value Stocks
![Page 1: How To Invest Lesson 4 - Using Discounted Cash Flow (DCF) Analysis to Value Stocks](https://reader036.fdocuments.us/reader036/viewer/2022062300/558467a7d8b42a7f1d8b5189/html5/thumbnails/1.jpg)
Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved.
In this WealthLift video lesson, you will learn:
• What is "Discounting”?
• How do I use discounting to find undervalued stocks?
• What is a margin of safety?
Lesson 4: Using Discounted Cash Flow Analysis to Value Companies and Stocks
![Page 2: How To Invest Lesson 4 - Using Discounted Cash Flow (DCF) Analysis to Value Stocks](https://reader036.fdocuments.us/reader036/viewer/2022062300/558467a7d8b42a7f1d8b5189/html5/thumbnails/2.jpg)
Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved.
Lesson 4: What is Discounting?
• $1 today is worth more than $1 promised tomorrow
• Promise of money in the future means you get no interest on the money in the meantime & have the uncertainty of whether you’ll actually get the money
• A promise of $1000 a year from now has a present value of less than $1000.
![Page 3: How To Invest Lesson 4 - Using Discounted Cash Flow (DCF) Analysis to Value Stocks](https://reader036.fdocuments.us/reader036/viewer/2022062300/558467a7d8b42a7f1d8b5189/html5/thumbnails/3.jpg)
Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved.
Lesson 4: What is Discounting?
Discount Rate
Similar to an interest rate you demand for getting money in the future instead of now
Discount Rate = Risk-Free Interest Rate + Risk Premium
Discount Rate = 4% Risk-Free Interest Rate + 7% Risk Premium
= 11% Discount Rate
![Page 4: How To Invest Lesson 4 - Using Discounted Cash Flow (DCF) Analysis to Value Stocks](https://reader036.fdocuments.us/reader036/viewer/2022062300/558467a7d8b42a7f1d8b5189/html5/thumbnails/4.jpg)
Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved.
Lesson 4: What is Discounting?
We can calculate present value of any money promised in the future
Present Value = Promised Amount ÷ (1 + Discount Rate)No. of Years
Present Value = $1000 ÷ (1 + 0.11)5
= $593.45
Discount Rate
![Page 5: How To Invest Lesson 4 - Using Discounted Cash Flow (DCF) Analysis to Value Stocks](https://reader036.fdocuments.us/reader036/viewer/2022062300/558467a7d8b42a7f1d8b5189/html5/thumbnails/5.jpg)
Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved.
Lesson 4: How do I use discounting to find undervalued stocks?
• By buying a stock, you are being promised future payments in the form of earnings by the company
• Fair stock price is equal to sum of all the present values of all future payments
• Using discounting of future earnings to price a stock is known as discounted cash flow analysis, or DCF
![Page 6: How To Invest Lesson 4 - Using Discounted Cash Flow (DCF) Analysis to Value Stocks](https://reader036.fdocuments.us/reader036/viewer/2022062300/558467a7d8b42a7f1d8b5189/html5/thumbnails/6.jpg)
Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved.
Lesson 4: How do I use discounting to find undervalued stocks?
• Adding present values of all future earnings of a company is a complicated calculation
• Instead, you can use the WealthLift DCF Valuation calculator to calculate a fair stock price
• Calculator found on article lesson page of WealthLift Lesson 4
![Page 7: How To Invest Lesson 4 - Using Discounted Cash Flow (DCF) Analysis to Value Stocks](https://reader036.fdocuments.us/reader036/viewer/2022062300/558467a7d8b42a7f1d8b5189/html5/thumbnails/7.jpg)
Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved.
Lesson 4: What is a Margin of Safety?
Benjamin Graham, American economist and professional investor
“ … the best book about investing ever written."
![Page 8: How To Invest Lesson 4 - Using Discounted Cash Flow (DCF) Analysis to Value Stocks](https://reader036.fdocuments.us/reader036/viewer/2022062300/558467a7d8b42a7f1d8b5189/html5/thumbnails/8.jpg)
Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved.
Lesson 4: What is a Margin of Safety?
• No one can predict the future perfectly
• Estimates of future company profits are at best an educated guess
• Included a margin of safety in stock valuations
Margin of Safety = ($50 Valuation – $40 Stock Price) ÷
$40 Stock Price
= 25% Margin
Graham only invested with a 40-60% Margin
![Page 9: How To Invest Lesson 4 - Using Discounted Cash Flow (DCF) Analysis to Value Stocks](https://reader036.fdocuments.us/reader036/viewer/2022062300/558467a7d8b42a7f1d8b5189/html5/thumbnails/9.jpg)
Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved.
In the next WealthLift video lesson, you will learn:
• How do brokerage commissions and fund management costs affect my investment returns?
• What are ETFs and how can they minimize my trading costs?
• How should I choose a stock brokerage?
Congratulations – Lesson 4 Completed