🎯 Goal: Combine valuation with scenarios, margin of safety, and measuring an investment's return.
A single valuation number isn't enough to decide. Investors build good – base – bad scenarios with probabilities → an expected value; and only buy when price is below value by a margin of safety. Performance is measured by MOIC (money returned ÷ money invested) and IRR (a time-aware rate of return). For startups, most fail, so a portfolio relies on a few "big wins" to cover many losses.
Let’s explore
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Don't trust one number: build good/base/bad scenarios with probabilities → an expected value.
🛡️
Only buy when price < value by a cushion (margin of safety) — protection if your estimate is off.
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Measure returns: MOIC = money returned ÷ money invested; IRR also counts time. 2x in 2 years ≠ 2x in 8 years.
Practice activity
🧮 Invest 100M, after 3 years receive 250M. What is the MOIC?
Worked example: MOIC = 250 ÷ 100 = 2.5x. But note: 2.5x in 3 years (IRR ~36%/yr) is far better than 2.5x in 10 years — time matters. For startups, since many go to zero, one "big win" of 10–20x must carry the whole portfolio.
Quick quiz
1. Before deciding to invest, you should build?
→ Good – base – bad scenarios + probabilities
2. Margin of safety means?
→ Buy when price is below value by a cushion
3. Invest 100M, receive 250M. MOIC?
→ 2.5x
4. Same MOIC of 2.5x — which is better?
→ After 3 years (higher IRR)
5. Why does a startup portfolio need a few "big wins"?
→ Most startups fail; a few big wins cover losses
🎯 Real-life mission
For an imaginary "investment" (e.g. opening a drinks stall by the school gate), write 3 scenarios: good, base, bad — with profit/loss for each. Then decide: would you do it, and why?