Applied Finance believes a focus on valuation, not “value” is critical to maintaining a sustainable and repeatable edge in creating long term alpha. We call this approach Valuation Driven, as valuation is the main emphasis that drives our stock selection process.
Today, most manager rely on distorted price multiples or faulty discounted cash flow (DCF) approaches that do not capture the true underline value a company. For multiple investing, which is based on distorted accounting numbers, price to some fundamental variable, investors miss on the four major tenants of capturing value: Investment Growth, Economic Profitability, Risk, and Competition. While DCF models appear to be more robust than multiples, they are highly inaccurate due to perpetuity assumptions and erroneous risk inputs.
By focusing on economics rather than accounting, Applied Finance can more accurately measure corporate performance leading to more effective valuation answers.
The key to our approach is avoiding many of the unrealistic assumptions inherent to most valuation models (such as terminal values), while mitigating the behavioral biases analysts suffer from (falling in love or hating companies) when generating qualitative model inputs. While other investment firms claim to be intrinsic value investors, they lack the objective rigor and insights obtained from our deep database of valuations.
A sophisticated approach to valuation must effectively link corporate performance and valuation. We achieve this through a Valuation Driven investment philosophy.