Equity Investment

A stock is a

claim on a company’s future cash.

Or

A security that represents fractional ownership in a corporation.

Intrinsic value

= what that future cash is worth today.

We compute “today value” by

discounting future cash.

The discount rate rises with

rates and risk.

If Price < Intrinsic Value

→ Buy (Long).

If Price > Intrinsic Value

→ Avoid or Short (if you can borrow/hedge).

Intrinsic Value:

The “true” business value of a stock based on discounted future cash flows (not the current price).

NPV (Net Present Value):

Sum of discounted future cash flows.

Free Cash Flow (FCF):

Cash left after the company pays operating costs and invests in the business (CapEx). It’s the money that can go to debt paydown, buybacks, dividends, acquisitions, or growth.

Discount Rate (r):

The required return used to discount future cash flows back to today. Higher r → lower value today.

RFR (Risk-Free Rate):

Baseline return on “safe” government bonds (Treasuries).

ERP (Equity Risk Premium):

Extra return demanded for stocks over the risk-free rate.

When RFR↑ or ERP↑

→ Discount Rate↑ → Intrinsic Value↓.

Long:

you profit if price rises.

Short:

You profit if price falls (sell borrowed shares, buy back cheaper).

Gross exposure:

Long% + Short% (total activity).

Net exposure:

Long% − Short% (directional market bet).

Drawdown:

peak-to-trough decline. It measures the reduction in value from a historical peak to a subsequent low, indicating the extent of an investment's loss before it recovers.

Seminole’s “Great Company” Filter (Memorize)

They want companies that:

GROW

are NOT capital intensive

have a SUSTAINABLE franchise (defensible advantage) and generate strong cash flow.

Translation: future cash grows, margins hold, and you don’t need to burn piles of money to make money.

Income Statement (IS) — performance over a period

Performance over a period

Tells you: revenue → expenses → profit

• watch: revenue growth, operating margin, net income

Balance Sheet (BS)

Snapshot at a point in time

Tells you: what the company owns and owes

• Assets = Liabilities + Equity

• watch: debt levels, cash, equity strength/weakness

Cash Flow Statement (CF)

Reality check

Tells you: where cash came from and went

• operations, investing (CapEx), financing (debt, buybacks, dividends)

• watch: ability to generate cash through cycles

Connection:
Strong business = good IS + solid BS + real cash on CF.
Weak business = profits but no cash, or debt ballooning, or CapEx eating everything

Cumulative Performance Chart

“What happens if I invested $1 at the start?”

• steeper up = faster compounding

• big drops = risk

• smooth climb = strong risk-adjusted returns

Drawdown Chart

“How deep below the prior peak did we fall?”

• 0% = at a new high

• -20% = 20% below peak

• deeper/longer drawdowns = harder to recover (math + psychology)

Up-Market vs Down-Market

“How does the strategy behave when markets rise vs fall?”

• good hedge fund goal: protect more on the way down than it gives up on the way up

Net vs Gross Exposure

What risk posture are we running?”

• net high = bullish

• net low = cautious

• gross high = lots of positions / hedging activity

Equity investing

buying slices of businesses and trying to answer one question better than everyone else: Is this stock priced below what the business is truly worth?

Intrinsic value

NPV of future cash flows
the “true” value based on business cash generation, not the current market price.

Discount rate

risk-free rate + equity risk premium
the rate used to convert future dollars into today dollars (higher = harsher discounting).

Graphs + markets + macro

influence how prices move short-term, but value anchors long-term

Longs

concentrated, high-conviction, “cheap vs value,” strong cash flow businesses

Shorts:

smaller positions, more diversified, often hedges or “overvalued / deteriorating” companies

Gross exposure

(total longs + total shorts)

Net exposure

(longs − shorts)

100% long and 30% short

→ gross 130%, net 70% long

NPV + Discounting

Estimate:

• future cash flows

• how risky those cash flows are (discount rate)

you can estimate intrinsic value.

Discount rate foundation:

RFR + ERP

is the gravity in the room. Higher discount rate = lower present value.
And the Fed can move both (directly or indirectly).

Free Cash Flow (FCF):

cash a business generates that’s actually “free” to pay debt, buy back stock, pay dividends, reinvest, etc.

RFR (Risk-Free Rate):

baseline return you can get with minimal risk (Treasuries). T-bonds.

The starting point for discount rates
When it rises:

• bonds get more attractive

• stocks must offer higher returns

• valuations fall

Why it can mislead

• It’s macro-driven, not company-driven

• A great business can look “overvalued” when rates spike

• RFR moves faster than fundamentals

Trap:
Thinking “stocks are bad” when rates rise
Reality: the discounting environment changed

ERP (Equity Risk Premium):

Extra return demanded for equity risk above the RFR.

What it i

The extra return investors demand for owning stocks instead of risk-free bonds.

ERP = Expected Stock Return − RFR

What it represents
- Compensation for uncertainty, volatility, and pain.

ERP is fear + uncertainty + human psychology.

Why it matters

• Higher ERP = investors are scared

• Lower ERP = investors are confident (or complacent)

this directly increases the discount rate:

Why it can mislead

• It is not observable

• It’s inferred from markets

• It swings emotionally

Trap:
Assuming ERP is constant
Reality: ERP expands in crises and compresses in bubbles

Beta:

How sensitive a stock is to market moves (β > 1 moves more than market; β < 1 moves less).

P/E:

Price per share / Earnings per share.

“How much am I paying for current earnings?”

It’s the most famous ratio for a reason: it’s simple.

When it works

• Stable businesses

• Normal margins

• Low accounting distortions

• Mature industries

How it lies

• Earnings can be:

  • cyclical

  • temporarily inflated

  • temporarily depressed

• Doesn’t account for:

  • debt

  • capital intensity

  • reinvestment needs

Classic trap: Low P/E = cheap
Reality: low P/E can mean earnings are peaking

EPS:

Net income / shares outstanding.

EV (Enterprise Value):

Value of the whole firm’s operating business:

• Market cap + debt − cash (common simplified version)

EBITDA:

earnings before interest, taxes, depreciation, amortization (rough operating profitability proxy).

EV/EBITDA:

“how expensive is the whole business vs its operating earnings proxy?”

“How expensive is the entire business relative to operating profit?”

This adjusts for:

• debt

• capital structure differences

FCF yield:

FCF per share / price per share (or FCF / market cap). Think “cash return %.”

Dividend yield:

dividend per share / share price.

PEG:

P/E divided by growth rate (tries to normalize valuation by growth).

r = RFR + ERP

(You might later see

CAPM: r = RFR + β × ERP r = RFR + \beta \times ERP

r = RFR + β × ERP.

Since your DAL sheet shows beta, it’s on the radar.)

EPS =

Net Income​ / shares Outstanding

P/E =

Price ​/ EPS

EV =

Market Cap + Total Debt − Cash

FCF per share =

Net Profit + Depreciation − CapEx​ / SHARES

FCF Yield

= FCF / Market Cap (or) FCF per share​ / PRICE

Dividend Yield =

Dividend per share​ / Price

Gross exposure:

%Long + %Short

Net =

%Long − %Short

Money now beats money later because:

You can reinvest it

The future is uncertain

Investing is basically a war between:

• growth (future cash flows rising)

• risk (how uncertain those future cash flows are)

• price (what you pay today)

A stock is attractive when:

• Future cash flows look strong and

• The market is pricing it like they won’t be.

P/FCF — Price to Free Cash Flow

P/FCF = Price ​/ FCF per share

What it tries to say

“How much am I paying for real cash?”

This is a better flashlight than P/E.

When it works

• Cash-generative businesses

• Accounting-heavy industries

• Companies with heavy depreciation

How it lies

• FCF can be temporarily high if:

  • CapEx is deferred

  • working capital is released

• Short-term FCF spikes can be unsustainable

Trap:
Thinking high FCF = permanent
Reality: CapEx always comes back eventually