• 057 01/16/2017
    I recently developed a quick template to look at potential commission structures for a business with customer concentration and large contracts. I thought a simple version of the Excel workbook would provide some decent Excel formula practice. 


    The idea was to create a structure where a salesperson would receive a tiered commission for each new customer gained. To provide the ability to evaluate different structures, the workbook attached applies the percentages shown to the dollar sums listed in "Tiers." For example, per the image below, the salesperson would earn 4% on the first $2M of revenue, 3% on the second $2M of revenue and 2% on the last $1M of revenue. In year two, for that same customer, the percentages would change to 3%, 2% and 1%, respectively. This same logic applies to the remaining years.

    For the calculation to work, the first year that the salesperson lands the customer needs to count as year 1, which is what the third schedule, titled "Count," calculates. Finally to arrive at "Commission" the worksheet uses the HLOOKUP function to pull the appropriate percentage from the figures under "Commission Structure."   

    Commission Structure

 



  • 056 12/02/2016
    Note: Excel file available for download at the bottom of this post. 

    The two most commonly used functions for scenario selection are =CHOOSE() and =OFFSET(). The =CHOOSE() function is the simpler of the two, and is sufficient for most simple scenario analysis. If, for example, you only intend to run three scenarios, then you may prefer =CHOOSE(). This function can cause frustration, however, if you are constantly adding or deleting the number of scenarios in your model. The reason is that it requires you link directly to the scenario. The image that follows demonstrates:




    For this reason, as the number of scenarios expands, or if you intend to add or delete scenarios regularly, =OFFSET() may be a more flexible alternative. With the added flexibility comes some additional complexity, but nothing that can't be learned in a few extra minutes. As you can see, the =OFFSET() function does not link directly to the scenario, but instead to a "reference cell" from which it counts to retrieve the correct scenario:




    From this "reference cell," which is indicated by a blue box in the image above, =OFFSET() can count both rows and columns, which provides even greater flexibility should you require it. In the example pictured, the formula is referencing the value 1 in cell C14 to count down one row from cell G15 (blue box) and retrieve the value 5%. 

    To select a value to the left or right of the reference cell, input a value for the column (this is the last variable in the formula). As an example, look to the image below. With the exception of the inputs listed in the column titled "Period 1," all of the other inputs have been deleted to demonstrate that the function is referencing the same cell across all periods (this will make more sense when you look at the file). 


    =OFFSET Microsoft Excel 


    CLICK THE LINK TO DOWNLOAD THE FILE: Choose_Offset.xlsx
 



  • 055 11/05/2016 Aswath Damodaran Interview
    I generally find it difficult to listen to long interviews and podcasts. One recent exception to this is an interview with Aswath Damodaran titled "Aswath Damodaran on the Art of Corporate Valuation" (click on the link for the interview). 

    I would highly recommend listening to the interview in its entirety, but if you struggle listening for extended periods of time, you can use the guide that follows to skip parts that may not be as interesting to you. If you are new to finance and valuation, tune in for the first 26 minutes before skipping around.

    00:03:40

    First thing investors have to be asking is whether or not they should be doing a valuation in the first place.

    Valuation requires two things: 
    1) A willingness to learn the basic tools. Many investors want to do valuation but the don't want to learn about accounting / present value / etc. 

    If you don't have time to learn, put your money in an index fund. Ninety percent of the world would be far better off.

    2) Doing it for the right reason. Most people do it for the wrong reason: they want to get rich.

    00:05:15

    How to approach accounting? "I would say keep it simple." "The problem is if you take an accounting course it's all about debit and credits, and getting you into the nitty gritty of the footnotes." 

    Explains a podcast he did where he explained how little of the 10-K is actually relevant to valuation. The problem is that accountants throw everything in. They cannot distinguish between what is significant and what isn't. "They're encapable of telling the difference between the stuff that matters and the stuff that does not because they are accountants. They are detail oriented."

    "Data is not information. We are mistaking the two." Typical 10-K is five times longer than it was 30 years ago. Argues for going back to 15 page 10-K. 

    Example of worthless section: Risk factors. All boilerplate text written by lawyers.

    00:07:05

    Do you know the difference between gross income, operating income and net income? If you don't you're in trouble.

    Wants to know that you can read a cash flow statement.

    00:07:40

    "I've described goodwill as the most destructive accounting item ever created in history."

    "Goodwill is the accountant admitting he screwed up."

    00:09:00 

    Valuation of Tesla.

    00:13:05

    Valuation of Amazon. "Amazon has been one of my pet obsessions for 20 years." 

    00:17:00

    Valuing a private company. "Knowing the price is a crutch." "Value should not be a function of knowing the price." "We use [price] when valuing public companies as a feedback loop to make sure we are not screwing up."

    "In a regular market you have hundreds and hundreds of people trying to assess the price." VC pricing, in contrast, can get out of control "because all you need is one crazy person to drive the pricing process out of control."

    Some comments on the reason VCs get sweeter deals than what is publicly disclosed. Options and protections that come with the investment.

    00:20:35

    Valuation of Uber. "They know how to grow ... but they have a business model that is indefensible. Entry is easy."

    00:22:33

    Valuing stocks in the market. Commentary on valuations creeping up over the last few years. If you look at any metric, P/E, P/BV all are at highs. "Investing is a relative game. If you are not going to invest in stocks, where are you going to invest instead." 

    "Stocks look expensive relative to their own history, but they don't look expensive relative to what my other options are."

    Valuation is not about any single metric. Commentary on flaws of this approach (using one metric to make a decision).

    00:28:10

    Commentary on how the amount of capital required to start a business has dropped considerably. Old economy businesses vs. new economy businesses. "It's a mixed blessing because you can grow really fast, but you can also shrink really fast."

    00:30:15

    Valuation techniques. Companies should be priced based on three things:

    1) Cash Flows
    2) Value of a Company's Growth - "Not growth per say, but how much it is costing them to get the growth." "55% of companies globally destroy value as they grow. ... It's one of the scariest statistics on growth."
    3) Risk

    00:33:00

    Valuation of Coca Cola.

    "The physical investments Coca Cola makes are completely useless in my determining what the value of Coca Cola is." 

    "If they can charge you a dollar for a can with water and crap and sugar and syrup thrown into it ... it costs them 3 cents to make. It's all about pricing power." That pricing power is not reflected in the value of their plants and equipment. It's the purest branding play you can make.

    00:33:54

    Valuation of Disney

    00:35:00

    "I describe myself as a Kim Kardashian of valuation."

    00:39:10

    Comments on being "transparently wrong" vs. "opaquely right." References to Philip Tetlock.

    00:42:25

    "The whole idea in investing is to separate the 5% of companies that are cheap that shouldn't be cheap from the 95% that are cheap for a reason."

    00:43:10

    The problems with "old-time" value investing strategy. "The fact that we keep going back to Warren Buffett as the name is more revealing than anything else. And even Warren hasn't been Warren for quite a while." Commentary on how Warren Buffett gets the best deals.

    00:48:10

    Investing has been focused on mean reversion. There has been a structural shift. Commentary on why 2008 was the wake up moment for Damodaran.

    00:51:20

    The investment world has become a flatter place. "In 1986 if you started out as an investor in New York you already had an advantage over an investor in Des Moines, Iowa." As the investing world has become a flatter place, the payoff for active investing has dropped.

    01:02:00

    How finance as an industry has evolved. As disciplines age, they narrow creating specialists. We have lost the generalist. 

    01:04:25 

    Investors that influence Damodaran. 

    01:06:40

    Favorite books:


    01:17:00

    Advice for students trying to get into finance.


 




 



Models are:
 
A) really boring
B) pretty sweet
C) super important
D) somewhat easy
E) kind of hard
F) fun
G) all of the above

 

 


*Answers a, b, c, d, e, f and g are all correct.