Category Archives: Chuck Carnevale
In part one of this two-part series I focused primarily on calculating the intrinsic value of a common stock based on an analysis and review of historical information and data. Although I strongly believe that there is much that investors can learn by studying the past, I even more strongly believe that since we can only invest in the future, that it is also implicit that we embrace a rational method of forecasting.
One of the most widely-accepted and utilized methods of valuing a business in today’s world of modern finance is discounted cash flow (DCF) analysis. Obviously, in order to calculate valuation, practitioners must rely on mathematical formulas. However, the challenge with utilizing mathematical formulas to determine the net present value (NPV) of a future stream of income is in determining the proper inputs. Consequently, the accuracy of our result is subject to the principle “garbage in garbage out.” In other words, our calculations will only be good as the data inputs we use when running our formulas.
Of all of the many sound investing principles that legendary teacher and investor Ben Graham put forward, he believed that his concept of “margin of safety” was the most important of all. This investment lesson was so deeply ingrained into the mind of Ben Graham’s most famous student, Warren Buffett, that he created his two most important rules of sound investing. Rule number one: Never lose money. Rule number two: Never forget rule number one. Clearly, both of these renowned sages understood the importance of minimizing risk, especially when investing in equities. The following quote from Ben’s famous book The Intelligent Investor corroborates and summarizes my point: