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Today's links:
Making sense of multiples - interview with Michael Mauboussin (Link)
"Popular multiples, including P/E and EV/EBITDA have a number of limitations but the main one is that they fail to account for capital intensity—be it working capital, capital expenditures, or acquisitions. That means that two businesses can have the same growth in earnings or EBITDA but very different capital needs. The company that needs less capital to grow will be more valuable because there will be more cash available to distribute to shareholders.
...Your job as an investor is to figure out when the market’s expectations are unduly high or low. One analogy is betting at the horse race track. You don’t generate excess returns by picking winners; you win by figuring out which horse has odds that misspecify the horse’s chances of winning."
...and if you're interested in reading his research paper on valuation multiples on a cold winter day (Link)
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Mauboussin also happens to be the author of one of George's favourite investing books:
Expectations Investing: Reading Stock Prices for Better Returns
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Because we can't get enough of George, this is what the back of his business card looks like:
George Droulias, CFA
Masters in Power of Compounding
