Weighing Machine, Opportunity Cost & MOS
Subject : Weighing Machine, Opportunity Cost & MOS
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Benjamin Graham — ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’
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A stock presents an opportunity by looking at its business fundamentals and performance.
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Literally :
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(A)
Opportunity Cost
= The Cost of Opportunity
= The Cost To Own a Dollar Worth of Opportunity
= The Ratio measured by Weighing Machine
= P ÷ Deserved Value
= P/E ÷ P/E (Deserved)
= P/E Weight Ratio
= 1 - MOS
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(I)
If P/E (Deserved) = G
Then
Opportunity Cost
= P/E ÷ P/E (Deserved)
= P/E ÷ G
= PEG Methodology
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(II)
If P/E (Deserved) = 1/Cost of Capital Ratio (Bruce Greenwald),
Then
Opportunity Cost
= P/E ÷ P/E (Deserved)
= P/E ÷ (1/Cost of Capital Ratio) Methodology
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(III)
If P/E (Deserved) = DCF
Then
Opportunity Cost
= P/E ÷ P/E (Deserved)
= P/E ÷ DCF
= PEDCF Methodology
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(IV)
If P/E (Deserved) = ROIC × Reinvested Ratio
Then
Opportunity Cost
= P/E ÷ P/E (Deserved)
= P/E ÷ (ROIC × Reinvested Ratio)
= P/E ÷ Reinvested_ROIC
= PEReinvested_ROIC Methodology
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(V)
If P/E (Deserved) = Intrinsic Value ÷ EPS
Then
Opportunity Cost
= P/E ÷ P/E (Deserved)
= P/E ÷ (Intrinsic Value ÷ EPS)
= P ÷ Intrinsic Value
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For instance :
P/E = 13, G = 16%
Then
Opportunity Cost
= The Cost To Own a Dollar Worth of Opportunity
= PEG Methodology
= 13÷16
= 0.8125
= $ 0.8125 Cost To Own a Dollar Worth of Opportunity
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SIDENOTES :
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Opportunity Cost is a useful tool.
Opportunity Cost formula used by superinvestor:
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Peter Lynch : PEG
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Warren Buffett, Charlie Munger, Li Lu, Joel Greenblatt : PEROIC
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Bruce Greenwald : PE(1/Cost of Capital)
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P/E is useless if valued alone.
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BUT The characteristic of P/E is metamorphosed when being fused with a Campanion Variable described by Professor Aswath Damodaran.
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You can’t equate a ferum to a steel (ferum + carbon); an oxygen to water (H2O).
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The Companion Variable of P/E are :
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Growth — PEG Model by Peter Lynch
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Growth + DY — PEGY Model by Peter Lynch
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ROIC — PEROIC Model by Warren Buffett, Charlie Munger, Li Lu, Joel Greenblatt
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(1/Cost of Capital) — EPV Model by Bruce Greenwald
DCF÷EPS — DCF Model
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Summary :
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Opportunity Cost
= P/E ÷ Companion Variable
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Opportunity Cost is an Opportunity Density Weighing Machine At The Time of Measurement, it spells The Cost Spent to Own A Dollar Worth of Opportunity.