From: Business Insider
Ray Dalio has been called “Wall Street’s Oddest Duck” for his highly unusual approach to management, but no one has ever questioned his brilliance.
He turned his company Bridgewater Associates into the world’s largest hedge fund, with $160 billion in assets, and amassed a personal fortune estimated at around $15.2 billion.
Dalio runs Bridgewater according to the theory of “radical transparency,” which means that all meetings and interviews are recorded and archived, and any level of employee is encouraged to criticize another if necessary. Every Bridgewater employee is given a copy of the 123-page manual he wrote on leadership.
It includes a section in which Dalio outlines the habits he believes took him from a lower-middle class childhood to one of the most powerful people in finance. We’ve summarized them below:
1. Working for himself and not just doing what others wanted him to do
Dalio writes that he hated school as a boy because he could not find practical applications for things he was forced to memorize. He decided that he wanted to be successful, requiring him to be motivated. And to be motivated, he had to work for himself.
He started delivering newspapers, mowing lawns, and caddying, and at the age of 12 he made his first investment in the stock market.
“All the work I ever did was just what I needed to do to get what I wanted. Since I always had the prerogative to not strive for what I wanted, I never felt forced to do anything,” Dalio writes.
2. Coming up with the best independent opinions he could to advance his goals
When he started investing as a kid, he began cutting out coupons from issues of Fortune magazine that could be mailed in for annual reports for Fortune 500 companies. He gathered as many as possible and took an amateur shot at figuring out the market.
It’s the same attitude he’s taken toward managing his employees. At this point, he’s used to Bridgewater being called cultish and weird, but he’s consistently responded by saying that the employees who work there naturally fit into the firm’s unique culture. And it’s certainly been working for them.
3. Surrounding himself with smart people and learning from the way they thought
Dalio says that as a novice investor, he started the habit of asking the opinion of anyone he deemed a somewhat savvy investor — his stockbroker, the people he caddied for, and even his barber.
“I never cared much about others’ conclusions — only for the reasoning that led to these conclusions,” he writes. “That reasoning had to make sense to me. Through this process, I improved my chances of being right, and I learned a lot from a lot of great people.”
4. Being wary of overconfidence and limiting exposure to high-risk situations
Dalio has grown Bridgewater so tremendously because he lowers his risk as much as possible before making a decision.
“Sometimes when I know that I don’t know which way the coin is going to flip, I try to position myself so that it won’t have an impact on me either way. In other words, I don’t make an inadvertent bet. I try to limit my bets to the limited number of things I am confident in,” he writes.
5. Reflecting on how he made decisions and figuring out why they led to either success or failure
A major portion of Dalio’s manual is dedicated to decision-making and analysis of results. He says that learning to appreciate failure early on was very valuable for him:
I learned that each mistake was probably a reflection of something that I was (or others were) doing wrong, so if I could figure out what that was, I could learn how to be more effective. I learned that wrestling with my problems, mistakes, and weaknesses was the training that strengthened me. Also, I learned that it was the pain of this wrestling that made me and those around me appreciate our successes.
What can I say about Apple Inc. (NASDAQ:AAPL) that hasn’t been said?
Everyday there are between 3-5 “new” and lengthy articles of the company. Not to mention all the news articles that flood the internet.
For me, Apple is an investment where I do very little to follow it.
Of all the companies I own, Apple is last on my list of stocks to review.
And when I do, it’s mostly just the numbers.
A giant the size of Apple can’t change in a quarter or even a year. Although the company is a fast and dynamic, it takes well over a year before a decision made by Tim Cook makes it out to the market.
When I first bought Apple in late 2012, the only thing I was concerned about was valuation.
My initial reasons for investing in Apple were simple and can still be summed up in the same 4 points.
- Downside protection: balance sheet protects the business from going bankrupt. If I can find a net net with a dying business with AAPL’s balance sheet metrics, I would be all over it. So why wouldn’t I buy Apple Inc. (NASDAQ:AAPL)?
- Better than the S&P: A bet that AAPL will perform better than the market over a couple of years.
- Better than cash: I started the year with about 50% in cash. Cash makes up 1/3 of AAPL’s market cap. In other words, if AAPL was a hedge fund, I transferred my US dollars into AAPL dollars for AAPL to manage. With their management, pricing power and business strength, they are able to invest money in ways I cannot dream of.
Priced for doom:Current valuations predict AAPL has zero growth remaining. (This has improved today)
For the most part, Apple still fits the same mold. The expectations have increased but continue reading and you’ll see that it’s still undervalued.
Before the split, I said that it wasn’t worth $460 ($65 post split).
And it certainly wasn’t worth $530 ($75 post split).
It’s taken at least 2 years for the market to get over its pessimism.
The only area that I have an advantage with Apple is knowing when to buy and sell.
The checks will be done using reverse valuation methods which is one of my favorite ways to gauge the value level of a stock.
Reverse DCF of Apple
To do a reverse DCF, enter the latest numbers into the equation to figure out the growth rate.
Normally, you do a DCF by entering the growth rate to get the intrinsic value.
But do the opposite by fiddling around with the growth to make the intrinsic value and current price match. That’s when you know you’ve hit the market expected growth rate.
With the current share price at $108, using 9% discount rate and the latest FCF figure of $49.9b, the expected growth rate comes out to 5%.
From the looks of it, the market still hasn’t caught on to the value because 5% growth is much to low.
Reverse EPS Model Using Graham’s Formula
Let’s take another look from an earnings angle instead of cash flow.
Here’s the reverse EPS Ben Graham Model.
The beauty with any valuation model is that you can use it for reverse valuations.
It’s not just the DCF that has a reverse method.
Any model can be applied in reverse to get the market expectations.
They even do this with accounting, so it’s still surprising reverse valuations are not widely used for investing.
A few things to note regarding the numbers in the image above.
- I’ve update the 20 year AA corporate bond rate to 3.91. If you use the OSV analyzer, you should update it occasionally.
- I’m using the analysts EPS estimate as I’m looking for the market expectations and the analysts are the market consensus.
After fiddling around with the growth rate to get the intrinsic value to match the current price, the growth rate again comes out to 5.5%.
Mighty similar to the 5% from the reverse DCF.
Reverse EBIT Multiple Valuation Check
Now let’s move even further up the income statement by inverting the EBIT multiples to see what the market expectations are.
This one is messier so hang in there instead of just glossing it over.
To see what multiple the current stock is trading at, enter the latest revenue, cash and equivalents, and off balance sheet numbers.
For Apple, since they have most of their cash listed under other long term assets, you’ll need to break open the SEC filing to get the real number. And while you’re at it, do a CTRL+F for “off balance sheet” and it will take you to additional debt that is on the books but not on the balance sheet.
Then simply check various multiples to see which one causes the current price and the valuation price to match.
In this case, the conservative multiple of 10x EBIT gives a number very close to the current price.
When I use the current real EBIT multiple of 12 (rounded up from 11.6), the value comes out to be $124.
If you look at the past 5 years at the EBIT multiple Apple has been trading at, it’s insanely low when you consider the products and the potential expansion of its ecosystem.
Apple Pay alone could increase the value of Apple by a couple of multiples so it’s surprisingly that the current EBIT multiple of 12.5 is the highest its been in 5 years.
Reverse Absolute PE Model
This model was created by Vitaliy Katsenelson, author of Active Value Investing.
The attractiveness of this model is that it focuses on an absolute method of using multiples.
What I mean by that is that when you use PE multiples, it’s used to compare industry competitors. But what if the market is hot and everything is trading at 25x or 30x. Relative comparisons make it seem like it’s fairly valued because everything else is trading around the same levels.
But with this method, since you can look at the stock independently, it makes it possible to focus on a single stock for valuation purposes without messing it up with competitors numbers.
The Katsenelson Absolute PE model shows that the current price is equivalent to a PE of 12 with a 7% expected EPS growth rate.
The current PE is 17 by the way.
So again, this model is also signalling that the current price is still cheap compared to the value.
Reverse Earnings Power Value
The only real improvement seen with any of the models is the earnings power value method.
The main point to note here is that an EPV model ignores all growth.
And back in March, the EPS and the current price clearly showed that the market was expecting nothing out of Apple.
This was then.
This is now.
After adjusting for the cash on hand and off balance sheet liabilities, the EPV has finally dropped below the current price.
What does that mean?
The market is expecting growth out of the company.
What the EPV model doesn’t do is tell you how much growth. So to keep it simple, use it as an indicator of cheapness.
So What’s It All Worth Then?
Even at $108 and hitting all time highs, it’s still cheap. My main assumption is that Apple Inc. (NASDAQ:AAPL) will be able to grow at 10%.
Here’s my graphical view of Apple at this point.
The intrinsic value range comes out to be $125 to $150.
I’m ignoring the NCAV, total net reproduction cost and EPV values as the first two are balance sheet related numbers and EPV doesn’t factor in any growth.
The average valuation target is then $138, but just round up to $140.
That’s still an upside of 30% with very realistic numbers. I’m not projecting to the moon and my numbers are based on low growth numbers to begin with.
Here’s a better look at the valuation targets. Click any of the buttons below to view the image. If you don’t have any social media accounts, make sure you sign up with your email as the full content is always unlocked via email and you’ll also get valuation templates as a bonus.
Don’t be fooled into thinking that Apple is going to rise 80% like it did during its glory days.
But Apple still offers a great place to park your money with very little risk.
To know more about each of the models used in this article, check out the post on 8 of the best stock valuation methods to value any stock.
Want to get value stocks on your own without all the hassle of manual inputs or trying to build your own models? Then check out our service with the OSV analyzer.