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Glad you are still sharp - yes typo. Apologies

I didn’t, but did anyone else realise that the name of ML’s yacht ”Bayesian” is named after Bayles’s Theorem that holds that, with the right understanding of probabilities, all outcomes are predictable. ( The Economist) . Freakish!

RIP ML and all the others. A terrible tragedy and very sad.

As someone who cruised the world oceans for 10 years in a much smaller sailing vessel, I can figure out how the yacht capsized but baffled how it could sink so quickly.

As for QCM and the conspiracy theorists, it is up to the accusers to prove something is amiss, not the other way round. Without proof or sound reasoning theory is but conjecture and, maybe, best ignored.

TT. Are you suggesting that estates should first pay tax on capital gains then pay IHT. Tax on a tax? Very difficult to calculate for many estates as many capital assets in estates result from purchases many years ago when there are no records.

The interim is paid before the full annual results are known so lower to cover the possibility of a lower than forecast profits in the annual results. This is how I have reasoned it, but could be wrong.

The govt. needs to make the UK an attractive place to invest, not force people to invest by having policies that make investing in the UK unattractive. What about start by scrapping stamp duty and revamping regulation to be more fit for purpose and business friendly.

It is not “free government money” - it is pension savers money before being grabbed by the government to splash on unproductive hand-outs.

And I think you’re are right. We used to set targets that had about 10% chance of being achieved - really stretch - and if achieved a reasonable bonus (about 20% of salary). Now soft targets are set which are almost certainly possible to achieve and bonuses are more than 2x salary. They are meaningless and the incentive to achieve something special is no longer there. The results speak for themselves.

Ahh, but Strictly, have you managed a 20%pa return Buffett/Munger gained over 50 years who looked out of the windscreen by looking out of the rear view mirror? I heard the same comment by Munger, and I think it was he who also said if you cannot figure out where the cash flows over the next 5 years are coming from, and be able to come to an informed view as to what the cash flows could be, you shouldn’t be investing.

But indeed there is no consensus on this - different strokes for different folks. Buffett/Munger give the most reasoned and logical explanation on how to be successful in investing in my view. I am a fan, and following their approach, I too have had great success - but not the 20%pa the Sage of Omaha achieved.

Good luck all with you investments whichever approach you use.

It’s raining so, as promised, my understanding of how to calculate bond prices for existing issues when interest rates change. The same concept can be used to price shares based on on future cash generation.

Assume you have a bond, duration 5yrs, coupon £10pa and maturity value £100. The coupon is the cash paid out each year.

What is its price? Now you don’t need to this for a new bond, as it will probably be issued at £ 100 to reflect a prevailing interest rate of 10%, but let’s do the calculation from the future cash flows to demonstrate the maths by discounting the future coupon and maturity value by the coupon rate (which becomes the discount rate).

You do this by dividing the coupons and maturity value by (1 + discount rate/100) which is in this example (1 + 10/100) which in turn equals 1.1 - once for the first year, twice for the second year and so on. Thus:

For year 1 divide £10 by 1.1 once to give £ 9.09

For year 2 divide £10 by 1.1 twice to give £8.26

For year 3 divide £10 by 1.1 thrice to give £ 7.51

For year 4 divide £10 by 1.1 four times give £ 6.83

For year 5 divide £10 by 1.1 five times to give £ 6.21

For year 5 also divide the maturity value of £100 by 1.1 five times to give £62.09

Add all these discounted values together you get £100 exactly - the calculated bond price from future cash flows. It is interesting to note that this price is made of several numbers, each of which is associated with a future cash flow. So the £7.51 discounted value is associated with the £10 coupon of year 3 - £7.51 compounding by multiplying by 1.1 three times is £ 10.

So to get the bond price if the prevailing interest rates rise to 15%, you discount the existing coupons and maturity value as above by 15%, giving a sequence of numbers of:£8.70;£7.56;£6.58;£5.72;£4.97;£49.72 which, if added together, gives the calculated reduced bond price of £83.24.

If the prevailing interest rate falls to 5%, the bond price would increase to £121.65.

The same basic concept is used to value shares by Buffett and most brokers . But there are difference in that you don’t actually have a duration or a defined figure for cash flows and a defined maturity value. You need to estimate these yourself to get an idea of what the SP should be. And a company has a book value now that must, too, be added.

All my understanding - DYOR.

Ok H007, i’ll post something on bond pricing when I figure out how to present it in the most understandable way.

The methodology is needed to answer the question. If a bond of maturity value z has a certain price when it’s coupon rate is x, what would it’s price be if the prevailing interest rates change to y? The price falls on rising interest rates, and rises on falling interest rates.

Then the methodology can be used for shares - as it is for most brokers and Buffett. See for instance the book “Warren Buffett and The Interpretation of Financial Statements" Buffett’s idea of an equity/bond is an analogy he uses to understand the merits of a potential investment.

Excellent and professional appraisal Tophat. I actually think the change to IFRS17 is right, but that is not a view shared by many it seems.

I like Buffett's view that you should follow the money which makes the concept of free cash (Buffett’s ‘owners funds”} in combination with the balance sheet so relevant to me.

I started to understand these matters better for software stocks when I better understood the concept of deferred revenue as a liability which can create a negative working capital and enhanced free cash. This is how I conceptualised the change to IFRS17, but I’m sure it is more complex than that.

Interesting comment regarding whether LGEN can offer an inflation corrected dividend rise. I don’t think it is the kind of business that can - unlike NG whose revenue is linked to inflation, or MSFT who van raise prices with inflation as uses of Office have no real alternative. So I think any calculations will have to be in money of the day, and inflation will have to be subtracted from those values to give a real return.

But, as LGEN seems to me to be a bond like proxy, I have been asking myself the different question based upon the reasoning used for bond evaluations. If the SP is the same as it is now (say 225p) in ten years and the annual dividend stays flat at 21.35p, which I take out, and I want a least 9.5% return per year on the future SP of 225p, what would be the maximum SP now be that would guarantee that return? To answer this requires a Discounted Cash Flow calculation as used for bond calculations. Then answer is, unsurprising perhaps, 225p.

But one can then play with the numbers. What if the dividend grows by 2% as now, or 5% as before and/or if the SP in ten years had grown over time rather than staying flat? Or if I am happy to get a lower, or want a higher yield, what SP would I be prepared to pay to get those returns.

Should anyone be interested I can show how these bond like calculations are done, and some of the answers posed - it is really not that difficult.

If anyone wants more background to the change to iFRS 17, the attached by LGEN is worth a peruse - and offer, perhaps, some assurance that not too much has changed regarding the fundamentals of the business.

https://group.legalandgeneral.com/media/xcwmd5d0/ifrs-17_final2.pdf

F55 Much of the fall in earnings is to do with the change in accounting standard to IFRS17 which does not allow all income to be recognised immediately on the income statement resulting in net earnings being recorded much lower. Nothing otherwise has materially changed.

I don’t know how you derive LGEN’s SP from the base rate, but, my view is that the best comparator for LGEN’s yield and hence SP, would be the “risk free” gilt yields - currently about 4% for 10yr gilts. LGEN’s dividend this year is 21.357 p, which, at a SP of 225p, is a yield of about 9.5%- a risk premium over gilts of about 5.5%.

So if gilt yields fall by 0.5% to 3.5%, and the same risk premium is 5.5%, a reasonable yield for LGEN would be 9%: giving a SP of 237p (21.257/0.09).

Personally, I think the 5.5% risk premium is too high for LGEN, and I would be comfortable with a risk premium for LGEN’s yield of about 3.5% above the 4% 10yr gilt yield. This would suggest a SP 285p (21.357/0.075). A 0.5% fall in the gilt yield with a 3.5% risk premium for LGEN would suggest a SP of 305p.

This is of course a simplistic way of viewing things, as there are other factors and benefits of equities over gilts, but, nevertheless I am more comfortable making elementary calculations than sucking numbers out of my thumb.

Zac0_4. They call themselves an insurance and asset management company, but, as insurance is only 26% of sales, I guess you are right. A bit of a financial conglomerate. To me it is difficult to predict just where the future growth in free cash is coming from, so I don’t try, and just hope they keep paying a decent divided as they have a long history of doing so. The gyrations of the SP do not concern me.

I usually only invest in companies in which I have some competence and understand.

LGEN is an exception, as my understanding of insurance businesses is limited, and, LGEN in particular, is complex because of its several business segments. But, exceptionally, I have held LGEN for many years as a cash-cow, using the dividends to invest in more growth orientated companies like REL and MSFT. To me boring is good for insurance companies, as I am unconvinced a rapid growth in such business is not all-together a good thing as Buffett explains in the attached article.

It is worth a peruse IMHO if you world like some appreciation of insurance businesses which have unique characteristics.

http://mastersinvest.com/newblog/2017/10/10/learning-about-insurance

Https://www.thetimes.com/magazines/the-sunday-times-magazine/article/flown-to-the-us-in-chains-now-mike-lynch-is-free-and-talking-nqlcv6mdv

Just to clarify. The dividends paid in the near to medium future will decrease per share held following the RI. This is because, although the total pot for the dividend distribution will increase slightly by CPIH, the shares in issue have increased by about 29%. It will take many years for the new money raised from the RI to generate sufficient income, if at all, to swell the amount of money earmarked for dividends. So even though those who took up the RI have more shares, the total dividend they get will be as before ,raised only by the CPIH.

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Buffett “price is what you pay, value is what you get”

Interestingly Buffett’s BH company does not pay a dividend, but rather seeks to increase the “intrinsic value “ of the company, arguing that a share certificate is just confirmation of co-ownership of a company. He defines “intrinsic value”, as the sum of the book ( or liquidation) value plus the discounted value of all assumed future free cash flows generated by the company. He argues the the SP should logically fall in line with that share of the intrinsic value when Mr Market behaves himself.

If you think about it , a bond is valued in a similar way as the present value - and related price - is the discounted value of the maturity value and all coupons - the discount rate being the prevailing market interest rates.