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  • Surviving the Bear Market: Margin of Safety

    In the previous whitepaper, we discussed calculating the intrinsic value of holdings, allowing investors to make better buy, hold, or sell decisions. However, the next step after finding the intrinsic value is determining the Margin of Safety of your holdings. Using the Margin of Safety, investors can buy a company at a market value much less than its intrinsic value, which can reduce risk and improve return simultaneously. Credit:Samco The concept of Margin of Safety was first introduced by the renowned value investor Benjamin Graham and his pupil Warren Buffet. It was soon popularized as investors find it effective as a cushion against errors in analyst judgment or calculation. As Warren Buffett says: “You don’t try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing.” The Margin of Safety is essentially a buffer zone for human error, bad luck, or unexpected events such as Covid-19. Take the McDonald’s store from our previous whitepaper, for example. We valued the store to be around $5.1 million, and the store will be sold at the end of year 5 for $1,000,000. If an investor buys the store at $4.5 million and all assumptions are accurate, they will get a 15% return after five years. The return is calculated by adding all the future cash flows that are discounted at the proper rate, subtracting the cost of the store, and divided by the cost of the store. However, the return may decrease if significant changes happen in the future that affect the store’s profitability or the neighborhood in which the store is located. For example, if people move out of the neighborhood around the store due to unexpected policy changes, and five new fast food restaurants with lower prices are built near the McDonald’s store, the assumption would completely change. As customers decrease, the store could shrink at -30% annually. The valuation of this store would change as well. Worst Case Scenario If the investors bought the store at $4.5 million, they would’ve experienced a 36% loss. However, suppose they use the Margin of Safety of 50% and buy the store for around $2.5 million through a bargain. In that case, the investor will still profit and make around a 14% return on investment even if the pessimistic scenario plays out. If everything is held steady and the optimistic scenario occurs, the investor will make a 106% return on the investment, almost ten times the return if they buy the store at $4.5 million. The Margin of Safety is often calculated by utilizing the market price as a point of comparison, and depending on risk preferences, it can vary among investors. In the previous example, the Margin of Safety is derived from the following equation A Margin of Safety of 50% can be considered to be very safe as it is very difficult for any high-quality business to lose more than 50% of its value. If a business is making $100 million each year, losing more than 50% of its value means that the business is only making $50 million or less each year throughout its lifetime. A 30% shrinkage in the previous example only led to a 44% decline in the store’s intrinsic value. Under this situation, the investor would still make money if they buy the store with a Margin of Safety. Therefore, it is very unlikely for a high quality business to lose half of its intrinsic value. Thus, risk-averse investors should always strive for a 50% margin of safety when analyzing new potential investments. Furthermore, once the stock reaches its deemed margin of safety investors should be cautious about the reasoning behind the drop. For example, many tech stocks have taken an unfair beating in the current market correction due to mass psychology. Investors are moving their positions from tech to other sectors like energy because everyone else is selling their positions in tech, scaring away more investors. Nevertheless, many of these tech stocks have not changed in any way fundamentally. This would be a special opportunity for intelligent investors who understand that the long-term demand in the tech market has not changed and the current short-term fluctuation is temporary. However, suppose the company’s price drop is driven by permanent, fundamental change such as emerging competitors, an adjustment in government regulations, or a complete change of management team. In that case, the short-term fluctuation would not be temporary. In conclusion, investors can be certain to achieve the Margin of Safety by buying businesses at a significant discount to their intrinsic value, and understanding the reasons behind the declines in a given stock price. In the next article, we will discuss the final task in surviving the bear market: strategizing with your financial advisors. By Siddharth Singhai, Yang Peng, Jake Glatz Disclaimer: Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. The views and strategies described may not be suitable for all investors. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

  • Surviving the Bear Market: Calculating the Intrinsic Value of Your Holdings

    In the previous article, we discussed the first task for investors to complete to survive under a bear market: identifying high-quality businesses in their portfolio. In this article, we will discuss task two, calculating the intrinsic value of businesses that can allow investors to make better buy and hold decisions. After identifying the high-quality businesses in their portfolio, investors should start determining the intrinsic value of the companies they own. Especially in the present day, with high inflation and sour markets, it is crucial to find a company’s intrinsic value. A company’s intrinsic value is key to surviving a bear market and making more intelligent buying, holding, or selling decisions. The intrinsic value of businesses is the present value of all expected future cash flows generated from business activities which are then discounted at an appropriate discount rate. The intrinsic value of a business differs from the market price because it is reached through objective calculations rather than the animal spirits of the markets on any given day. Credit: Market Business News Such a difference is shown in the graph above. As the graph shows, the stock market is efficient over the long run yet inefficient over the short run. The market value of a company can fluctuate significantly in any direction during the short run; however, the long-term movement will eventually reflect a business' intrinsic value. Company ABC, with an intrinsic value of $10 billion, can have a market cap of $16 billion when the market sentiment is optimistic and drop to $3 billion when it is pessimistic. However, this company will eventually arrive at its intrinsic value of $10 billion. There is one way that investors can go about calculating this value through qualitative and quantitative techniques. Qualitative as the name implies is everything outside of the numbers including the ethics and intangible characteristics of the business. While the quantitative side includes factors such as the numbers on the statement sheets and exact cash flows of the company. Take the company ABC, for example. ABC'S intrinsic value is derived from using a DCF model, which for inputs requires factors such as growth rate and projected cash flow. To find the values of these factors, a qualitative analysis must be deployed. Using qualitative analysis, investors are looking for factors such as competition, business demand, operating infrastructure, and other factors, which determine ABC’s growth and profits. Therefore, Investors have to take both quantitative and qualitative factors into account to calculate the intrinsic value of companies. Credit: Corporate Finance Institute Take a McDonald's store, for example. The qualitative and quantitative analysis must be used to value this McDonald's store. Qualitative Analysis: This McDonald's store has experienced an average of 500 customers daily, and the average profit from each order is around $5.5. Since the store opens daily, we can roughly estimate that it generates $1,000,000 in profits yearly. Furthermore, there are only two fast food restaurants within a five-mile radius of the store, and no new restaurants have opened up in the past year. The neighborhood where the store is located is expected to have a 5% population growth, and the store is looking to hike its price by 5% annually. Lastly, the owner is looking to close the store and sell its equipment and real estate at the end of year five, yielding a $1,000,000 income or the terminal cash flow. Therefore, we can assume that this store's terminal value will be $1,000,000, and its profit will grow by 10% over the next five years due to low competition, customer growth, and price increase. Credit: Google Quantitative Analysis: Investors can find the intrinsic value of the McDonald's store by using the above formula.The idea behind this formula is to discount all the future cash flows from this McDonald's using a rate that represents your opportunity cost. A typical discount or interest rate that investors can use is 10%, which is the long-term average return from investing in equities. Using this formula, investors can find the intrinsic value of the McDonald's store, given that the growth, which is 10%, remains steady for the next five years. Through valuation using conservative assumptions, investors can find that the McDonald’s store’s intrinsic value is around $5.1 million. Investors can use such methods to figure out the value of most equities. However, the key is buying the equity at much less than its intrinsic value, which will both reduce risk and improve return at once. In the following newsletter, we will discuss the importance of having margin of safety in your investments is key to surviving a bear market. By: Siddharth Singhai, Yang Peng, and Jake Glatz Disclaimer Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. The views and strategies described may not be suitable for all investors. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

  • Surviving The Bear Market

    All four major index funds have suffered significant losses since 2022. The Russell 2000 Index has dropped 33.2% from its all-time high, and the Dow Jones, which consisted of mainly blue-chip stocks, has decreased by nearly 20% from its all-time high. The stock market has officially turned bearish, which makes it critical for investors to manage their portfolio properly in order to survive the bear market. Therefore, it is important that investors can complete the following tasks Identify the high-quality businesses in their portfolio Determine the intrinsic value of their holdings Ensure they have sufficient margin of safety in their holdings Plan with their financial advisors Credit: Beaconsi.org In this article, we will discuss how investors can identify the high-quality businesses in their portfolio. Investors should start looking over each company in their portfolio and determine which companies are high quality and profitable. Now, many may wonder what defines a high-quality company. A high-quality company should exhibit the following characteristics: high returns on capital and modest leverage. Under the current environment, the FED is raising interest rates and the demand is receding. Low-quality businesses without attractive products or good business strategies will be likely to experience substantial loss as purchasing activities will likely decrease in the upcoming years. Low-quality companies usually have tremendous debt, lose money from its core business activities, and suffer from poor management. The return of capital of a company serves as a measure of the profitability and value-creating potential of companies relative to the amount of capital invested. For example, if you start a hot dog stand in Manhattan, and you earn $3 from each hot dog that you sell for $10, your profit margin will be 30%. Let’s say the initial investment is $10,000, and if you sell 10,000 hot dogs during the year, your return on capital will be 300%. Companies with high return on capital indicate a sustainable business model producing massive profits and that these companies have superior competitive positioning in their industry. Take Apple, for example. Apple’s return on capital is 54% in 2021, meaning that the company earns $1.54 for every dollar that it has put into the company. This is the end result of Apple being one of the most successful companies across the globe. Credit: Apple When it comes to debt and leverage, many investors may think debt will hurt a company more than it helps. Although the idea of which may not be one hundred percent correct, high leverage will magnify a company’s risk significantly if there is a downturn. Low-quality companies often do need to borrow a lot of money to support development and innovation; however, too much debt can greatly diminish a company's return on equity and profitability if there is a downturn. A great business doesn’t need leverage to earn a high return of capital. In times of economic crisis, businesses with lots of leverage and weak balance sheets are the first ones to go out of business. Vast majority of business failures or investment failures are a direct result of excessive leverage. Credit: Google Image During recessions, depending on leverage, the same hot dog stand can be in two different situations. Low Leverage: The business will continuously generate profits and survive when demand recess due to its high-profit margin. Will be just as profitable or more when demand comes back up again. High Leverage: The business’ capability to produce substantial profits will be severely limited as most of which are going into loan and interest payments. Unlikely to stay solvent during an economic crisis. Credit: Google Image Furthermore, temporary demand fluctuations do not affect long-term demand, which means companies with profitable products and modest leverage will continue to thrive in the long run. In the long run, high-quality businesses are like tennis balls; when they get hit by a crisis, they will always find a way to bounce back. Low-quality businesses, on the other hand, are like eggs. Whenever a crisis strikes them down to the ground, they crumble permanently. By identifying high-quality businesses, investors can be assured that their portfolio will be able to handle economic downturns with ease, and come out the other side stronger. In the next newsletter, we will discuss how investors can calculate intrinsic value and can make more educated selling and buying decisions. By: Siddharth Singhai and Yang Peng Disclaimer Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. The views and strategies described may not be suitable for all investors. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

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  • Home | Ironhold Capital

    A PREMIER GLOBAL INVESTMENT FIRM Ironhold Capital ​We employ a disciplined investment approach with the aim to deliver strong risk-adjust returns for our investors across market cycles. Get in Touch Contrarian Mindset We aim to identify and capitalize on low-risk- high reward asymmetric opportunities that arise due to temporary dislocations in the market, with the aim to compound our investors' wealth safely over time while leveraging tax efficiency. We seek to deploy capital in the highest quality businesses around the globe - Businesses that can earn an exceptionally high return on equity over long periods of time whilst using modest to no leverage, Businesses with a sustainable competitive advantage or wide moat. High Quality Assets Long Term Horizon We believe that markets in the short term swing between over-optimism and over-pessimism and that these fluctuations are random and are to be ignored. On the other hand, Markets, over the long term, are a weighing machine. The market value and fundamental value of businesses are the same. Diversifying market risk through global diversification in Global Equities to yield lower than average correlation to the U.S markets in addition, We apply a proprietary 4-Layer rigorous risk management process that prioritizes capital protection over everything else. 4 Layers of Risk Management Shareholder Friendly Management We believe in partnering with a high-quality, ethical management team that not only has a fantastic operational track record but has skin in the game and the right incentive scheme to ensure optimal alignment between the management and minority shareholders. MEDIA SECTION VIDEO CIO of Ironhold Capital Siddharth Singhai Discusses Value Investing on Benzinga WHITE PAPER Here Is Why You Shouldn't Sell In May and Go Away WHITE PAPER Don't Miss This Historic Opportunity in the Housing Sector FEATURED NEWS BLOOMBERG Unstoppable Dollar Risks Worsening $71 Billion Asia Stock Exodus July 17, 2022 BARRON'S Why Was the Stock Market Down Today? Dow Tumbles, JPMorgan Slides 14 July 2022 BENZINGA Stock Market Movers W/ Money Mitch 7 July 2022 THE NATIONAL Chipmakers’ profit warnings trigger recession worries on Wall Street 2 July 2022 See All News See All Research History of IronHold Capital The Ironhold Capital Partnership was originally formed in order to provide a true means of delivering exceptional risk adjusted returns for large institutional and select high-net worth investors. The Founders of Ironhold Capital set out to satisfy the global investment community's need for unique opportunities not already exhausted and covered by today's Wall Street analysts. Leveraging the unique experience of Ironhold Capital's Chief Investment Officer, Mr. Siddharth Singhai, Ironhold Capital delivers opportunities on a global scale in regions that are often poorly understood and widely overlooked by Wall Street counterparts. Utilizing the proprietary and confidential Global Deep Value (GDV) investment Strategy, the Ironhold Capital Investment Committee is able to seize the immense growth potential that exists in today's emerging markets while also harnessing the growth and stability of the United States as well. Furthermore, as an investment firm, Ironhold Capital strives for excellence by fostering a community which embraces rigorous research and analysis while also promoting an environment full of independent thinking, openness and inclusion. Our Leadership Paul Gray Chief Executive Officer Bio Siddharth Singhai Chief Investment Officer Bio Brokers & Custodian Tax & Accounting Admin Auditor Interactive Brokers LLC , Broker, New York, US ​ First Republic Bank , Custodian, New York, US ​ Kotak Bank , Custodian, Mumbai , India ​ Kotak Securities , Broker, Mumbai, India ​ A Private Organization for Affluent Investors The Iron100 is a private network of prominent high-net worth individuals who mutually collaborate with one another in order to expand business and investment acumen. Learn More CAREERS Ironhold and You Working at Ironhold means becoming part of a collaborative, results-oriented team. Learn More Sign Up for Our Newsletter First Name Last Name Email Code arrow&v Phone Accredited Investor Code arrow&v Phone Accredited Investor Submit

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