Valuation Based Investment Strategy

Explanation
• 1. What is Value
• 2. What is Speculation
• 3. Valuation model
• 4. Renatech’s approach: relative value
• 5. Marchov Chain and conditional probability
• 6. valuation level ( standard deviation)
Ray Dalio
How Economic Machine Works – Macro and Debt Cycle

CREDIT! DEBT!

TRANSACTION

ASSET LIABILITY
Credit Crunch Phenomenon
 Fiscal Policy Monetary policy
4 trillion of Covid
spending still dripping
into economy with
consumers still spending
their last 500 billion or so.
The trick is when to time
the end of it. 4th quarter is
best guess.

Consistency of policy ---certainty

 Time value of money some thoughts
• 1) Wealth of Nations （ Adam Smith) Value’s been
created continuously—wealth creation
• 2) Central Bank keep printing IOUs and diluting
savings, nominal has to go up due to over-printing,
inflation rate is compound
inflation tax
• 3) Opportunity cost of capital/arbitrage
opportunity for capital
• 4) Not really related to speculation cycle
• 5) Capital markets especially stock market function
as value container in the LONG run just as
antiquities
• 6) Capacity constraints GDP grows by 6% over
year is unrealistic
• Number game
• Ratio matters
• Margin for error
• Economic moat/political
connection/etc
• Important assumption with dollar
cost averaging: value
• Compound is conditional
• National GDP grows at 2-6% annually
and there’s constraints
• A stock trading at 100, what’s the
difference it makes that
A) start averaging down from 80 ( 5%
each time)
B) start averaging down from 20 ( 5%
each time)
Stock market cycle: Monetary policy VS
growth
15% are 10 baggers
 Micro Investing : How to find 10 baggers
• Starting from Fundamentals
• Valuation framework
• Economic Moat, business models and financials
 • Concepts: market value, financial
asset( capital), DCF, yield, required rate of
return, bonds, preferred shares, common
shares, PE ratio

Study Goals
• Formulas: bond valuation; preferred stock
valuation; common stock valuation( No
growth, constant growth model,)
 LOGIC AND Why crypto coins are not

STRUCTURE assets?
 • Market value
• Intrinsic value: Value is
based on FUTURE EXPECTED
cash flows generated from
the assets a firm holds
• Short term: bidding machine
• Long term: Weighing
machine
• “Thin Market” ( Illiquid Stock
Case #)
• Other value: break up value;
relative value; net present
value
Market • Bubble Effect
MaMaValue
 YIELD
• Required Rate of Return
• RRR, interest rate, yield, expected
rate of return, real rate of return
• The Required Real Rate of Return
• Inflation Premium
• Risk Premium: ( i.e. spreads added
to swap)
1) Default risk
2) Liquidity risk
3) Maturity risk
4) Re-investment risk
 • Interest or coupon
• Maturity
• Face/par value
Valuation of Bonds • Yield to maturity(Y)
• Difference between interest/coupon and
Yield to maturity
• Bond Trading Scene#
• Pb= Price of the bond
• I t = Interest Payment
• P n = Principal payment at maturity
• t = Number of corresponding to a
period
• N = Total number of periods
• Y = Yield to maturity(required rate of
return)
• Annuity
• NPV of stream of cash flow
Time and Yield to Maturity

Inflation Premium Required Rate of Return = Real rate of

return+ inflation premium+ risk premium
The consensus around the rise in yields is that the market is pricing in
higher levels of Treasury debt issuance to fund post pandemic deficits,
along with the Fed’s QT program.
 Time to Maturity
• Bond
• On the run – off the run treasuries arbitrage
• Duration ( sensitivity ）
• Convexity( speed of sensitivity/duration change ）
• 1 unit interest rate(basis point) change can lead % bond price change
• Calculate YTM
• Semiannual coupon
• One Main theme during “monetary tightening cycle”—short
expensive stocks/companies with heavy long duration fixed income
assets on the book –will suffer from high interest cost( high leverage)
Case: Lehman brothers/ FNMA/ MF Global/ SVB / AAIM /CFG/ C
(--unrealized PNL )
• 1) Liquidity Squeeze
• 2) Overleverage
• 3) Bill Gross and PIMCO
• 4) Bond Daily Trading ( Front
running and expectation )
• 5) Bond Quotes: OTC( Over
the counter, electronic)
• 6) 87.5 tn SSA bonds and 40.9
tn corporate bonds
 Valuation of Preferred Stock
• Definition
• Perpetuity
• Seniority ( Bond>PS>CS)
• Voting right(CS)
• Callability
• Convertibility
• Convertible Bonds
 Distressed Bond/small cap Investing
• 1. Reward to risk ratio AAA rated bonds
• 2. Bond investors make money off business operation; stock speculators
make money off later buyer( seller)
• 3. BBB bonds----rating agency ： lack of features of AAA rated company
• Example: Second hand car sale
It’s the purchase price that matters
Money is made at buy ( for investors)
-Art of deduction/negativity –not only you search for what they have, you
also search for “what’s not there”
4. 60-40 approach portfolio basic framework ---defensive
 • DCF
• No Growth
Valuation of • Constant Growth
Common Stock • Variable Growth
 • Similar to preferred
stock

No Growth Model
 Technical MOAT+Du
Constant Growth in Dividends Analysis Pont

Monetary+Fiscal Growth
+systematic+Sec Catalyst
tor
1. The bigger the growth, the faster the stock price
moves
2. Why Warren Buffet not investing in growth
stocks?
3. VC approach
4. 4 Stages of growth stock speculation (even driven
investment strategy)
5. G –growth rate is one of the key factors investors
care most
Growth Stock AI stock in 2023 both China
and US equity market
Bottom Fishing-Value Investing-parabolic/Trend
Trading-Short Squeeze-Done