How To Invest Lesson 4 - Using Discounted Cash Flow (DCF) Analysis to Value Stocks

Lesson 4: Using Discounted Cash Flow Analysis to

Value Companies and Stocks

In this WealthLift presentation, you will learn:

• What is "Discounting”?

• How do I use discounting to find
undervalued stocks?

• What is a margin of safety?

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Transcript

1. 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
2. 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.
3. 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
4. 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
5. 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
6. 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
7. 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."
8. 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
9. 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