DM – Q2 Portfolio Commentary

Checking the math – One of the most fundamental operations that students learn at business school is how to estimate the value of an asset based on the cash flow it generates. In this calculation, an appropriate current price is derived by “discounting” income streams at a given rate, often the prevailing bond yield of appropriate maturity or the return that the individual requires to commit capital to the investment. All else equal, if the asset can be acquired for less than that figure, the investor should go ahead; if not, he or she may want to look elsewhere. This method can be used to gauge fair price for income producing real estate, privately held businesses, listed stocks, and just about anything generating (or expected to generate) ongoing earnings. We can also use the technique to get a sense of where an entire equity index is trading relative both to its underlying fundamentals and how investors have valued those characteristics in the past.

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