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Hey VLS,

I wrote some posts on MDP boards recently. You can check the last 2. It has some more details.

I have learnt to practice relative valuation methodology using simple metrics. I have a general disregard for absolute methods not because they are non-sensical but just because I can't use them well enough and I haven't seen anyone else at TMF (other than the 2 geniuses - literally - at MFO) use these methods consistently profitably. The relative valuation methodology seems to work rather well for a wide variety of situations and consistently. It allows an amazing degree of operational space flexibility.

Basically, you buy any stock you fancy regardless of market price at a quantum you can afford to lose and not be unhappy. For me, it is a range of $200-$1000. If I perceive risk to be high I go for the lower end of the range. The value and price at that point becomes your starting line of valuation. Each investor can thus build his/her own starting point and come out good for the same stock!

What is value? To me it is a mix of relevant numeric metrics such as (P/E or P/B or P/S) AND (Risk perception or Growth prospects). Free cash flow must support the company's debt and dividend obligations. I rarely come across situations where this last rule on Free cash flow fails me. The rule allows one to invest in companies with high debt too so it is more flexible than it seems. Exceptions include net cash heavy firms with cash accumulated from operations rather than investing activities.

The work begins for subsequent positions. I try to buy subsequent positions in small steps when my perceived value relative to the price has improved by 20-30% relative to my last purchase. This technique allows me to average UP as well as DOWN on the market price making the so "average down" quite flexible. The percentage is meaningless when the un-quantifiable aspect of value is at play. For example, I learned more about the company and feel more comfortable about the business than I first did. I call it improvement in value although nothing changed in the real world. I feel really more comfortable and I add more. Of course this cannot happen many times. The numerical aspects of the valuation take over. This can happen in any order. A good example is EBIX, I purchase 3-4 positions as the numerical value kept improving in leaps and bounds (stagnant share price, falling price and rising cash) and later when business started becoming big and I understood more of it via CEO interviews on its complex business I felt more comfortable and added more. With Apple, AMZN and NFLX, I averaged up on the price but down on the perceived value to price ratio.

Hope this helps.

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