32 lines
1.8 KiB
Plaintext
32 lines
1.8 KiB
Plaintext
78 • The Intelligent Option Investor
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money and discount rates, but even being unacquainted with these terms
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right now will not be a handicap.
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Business is essentially a collection of very simple transactions—pro-
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ducing, selling, and investing excess profits. In my experience, one of the
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biggest investing mistakes occurs when people forget to think about busi-
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ness in terms of these simple transactions.
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Having a firm grasp of valuation is an essential part of being an in-
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telligent option investor. The biggest drawback of the BSM is its initial as-
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sumption that all stock prices represent the true values of the stocks in
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question. It follows that the best opportunity for investors comes when a
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stock’s present price is far from its true intrinsic value. In order to assess
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how attractive an investment opportunity is, we must have a good under-
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standing of the source of value for a firm and the factors that contribute to
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it. These are the topics of this chapter and the next.
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In terms of our intelligent option investing process, we need two
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pieces of information:
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1. A range of future prices determined mechanically by the option
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market according to the BSM
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2. A rationally determined valuation range generated through an in-
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sightful valuation analysis
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This chapter and the next give the theoretical background necessary to de-
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rive the latter.
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Jargon to be introduced in this chapter is as follows:
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Asset Structural constraints
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Demand-side constraints Supply-side constraints
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Owners’ cash profit (OCP) Expansionary cash flow
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Free cash flow to owner(s) (FCFO) Working capital
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The Value of an Asset
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The meaning of asset , in financial terms, is different from the vernacular
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meaning of “something I’ d be upset about if it broke or was stolen. ” In
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financial terms, an asset is anything that can be owned that (1) was created |