Last weekend, we held the second of two open Office Hour sessions regarding our recent Case Study series on IBM. For those who were unable to attend, we’re posting videos of the presentation here along with some light commentary.
Applying the Scientific Method to Investing
The scientific method is simple and powerful: Make a hypothesis, observe how well the hypothesis explains actual conditions, and revise your hypothesis when necessary. We can thank the scientific method for all the conveniences of modern life. Why not apply it to investing too?
Valuation Drivers
As we mentioned in our Fact-Based Valuation article, we focus our analysis in on the only four factors that can affect a company’s valuation: Revenue growth, profitability, investment level, and the effect of investments on medium-term cash flow growth. We split our analysis of theses drivers into two videos.
Revenues and Profits
We think the main reason that IBM’s stock has remained in a range for so long is the long decline of the company’s top-line. But focusing only on revenues distracts from some promising progress in the area of profitability.
Investment Level and Efficacy
IBM has been investing heavily to build its Strategic Imperatives business. We think that this investment level will come down a bit, but think that IBM’s Strategic Imperatives offerings are differentiated and should spur good growth of cash flows in the future.
Valuation Waterfall
All these drivers come together to generate an intrinsic value range for IBM, which we express in a “waterfall” diagram.
Perspectives on Portfolio Management
Before we talk about how we have incorporated a series of option investments in IBM into our stock portfolio, we talk about how we approach portfolio management in general. We have three simple rules to building a sensible portfolio.
Investing in IBM
Now that we have a sense of what IBM is worth and how to think about portfolios from a strategic level, let’s take a look at what tactics we have used to initiate and manage our position in IBM over the last few years.
Wrap-Up
Over the past few weeks, we have run through our thoughts about IBM’s valuation and detailed the way we have designed a long time-horizon position in IBM through the prudent use of options and purchases of the stock itself.
As our present option position matures, we will post articles explaining what steps we are taking to tailor our investment and the reasoning behind those steps.