Add training workflow, datasets, and runbook
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Part II
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A sound intellectuAl
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frAmework for
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Assessing vAlue
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After reading Part I, you should have a very good theoretical grasp on
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how options work and how option prices predict the future prices of stocks.
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This takes us partway to the goal of becoming intelligent option investors.
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The next step is to understand how to make intelligent, rational es-
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timates of the value of a company. It makes no sense at all for a person to
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invest his or her own capital buying or selling an option if he or she does not
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have a good understanding of the value of the underlying stock.
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The problem for most investors—both professional and individual—
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is that they are confused about how to estimate the value of a stock. As such,
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even those who understand how the Black-Scholes-Merton model (BSM)
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predicts future stock prices are not confident that they can do any better.
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There is a good reason for the confusion among both professional and
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private investors: they are not taught to pay attention to the right things.
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Individual investors, by and large, do not receive training in the basic tools
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of valuation analysis—discounted cash flows and how economic transac-
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tions are represented in a set of financial statements. Professional investors
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are exquisitely trained in these tools but too often spend time spinning
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their wheels considering immaterial details simply because that is what
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they have been trained to do and because their compensation usually relies
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on short- rather than long-term performance. They have all the tools in the
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world but are taught to apply them to answering the wrong questions.
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