Value Investing 01 (May 08 - Dec 08)

[kennynah]

hi mw :

thanks...but this is too subjective a method for my comfort; too many variables and i dont presume to make the right assumptions...

what i fail to comprehend and disagree upon is the notion that intrinsic value is an estimate. why should a company's intrinsic value not be an exact figure? at least where tangible assets are concerned.

i will be delighted if you or anyone can enlighten me....with thanks.

[fclim]

what i fail to comprehend and disagree upon is the notion that intrinsic value is an estimate. why should a company's intrinsic value not be an exact figure? at least where tangible assets are concerned.

hi k,

lets chat, since market like a bit the quiet...

first of all, what do we mean by IV?
From Wikipedi http://en.wikipedia.org/wiki/Intrinsic_value_(finance):
... intrinsic value is therefore defined to be the present value of all expected future net cash flows to the company; it is calculated via discounted cash flow valuation...

Hypothesis:
1. Let's assume intrinsic value (IV) is an exact figure and see if we can be dis-proved.
2. If IV is an exact figure, that means we know the exact future net cash flow to the company.

Proofing steps:
3. In order to know the exact future net cash flow of a company, the company's revenue and expenses must be 100% predictable.
4. For revenue to be 100% predictable, the market demand must be 100% predictable, which is not true because market demands are always changing?
5. Furthermore, for expenses to be 100% predictable, the raw materials, land rental, labour, transportation costs must be 100% predictable. This again cannot be true, given the simple nature of the demand and supply market forces.

Conclusion:
Thus, since revenue and expenses CANNOT be 100% predictable, IV can never be 100% predictable.

How about tangible assets? Can it be 100% accurate? It depends on:
- if the asset has got an expiry date (e.g. food) or it the nature of the asset tend to be fast-depreciating (e.g. computer processor chip), the value reported would be the value that it is as at 2-3 months ago? Or even earlier, depending when the Financial Controller starts to collect figures?

Most importantly, does the asset got a realistic market value (e.g. its easy to put a value to gold, but not so easy if it is a customized machine / equipment).

So, yes assets can tangible, but it all boils down to who valuate them and whether it can fetch what the book-value says...

the above is purely from my thoughts (often messy thinking) and there is a very high chance that it is incorrect / inaccurate, please read with discern!!! sorry for the blah blah blah...

have fun,
fc

[helios]

how do analysts calculate their fair Values? using DCF? MOS? PE?

in this case, why do analysts need to give a range figures? 2SD?

[Cheng]

I like to look at increasing EPS>25%, ROE>20% and improving margins.

Balance sheet: little debts, able to expand the business using their earnings

Cashflow: using FCF try to predict future year's earnings and discount it back.

And then when you have your valuation, apply a margin of safety(MOS) on how sure you think your prediction will come true. If you are 80% sure, apply 20%MOS. How sure you are depends on a lot of factors, the economic situation that affects the company, market share, future costs increase/decrease, future expansion plans(feasible or not) etc. That is why valuation is a very delicate skill and MOS is very important. Everyone would come out with different valuations of a company.

One may be right or wrong, but we should always look for businesses with predictable earnings. The odds are definitely higher if you understand the company. Out of the 5, 1 will be your big winner, 1 will be your loser and 3 will be average.

I'm just wondering are there any value investors with like more than 10yrs of experience? From what I know, value investors seldom share their thoughts on valuation of companies, because all companies are valued differently. There are lots of fundamental factors to look at for the business to work. And people have different predictions and opinions too.

[Cheng]

:arrow: how do analysts calculate their fair Values? using DCF? MOS? PE?

in this case, why do analysts need to give a range figures? 2SD?

Here are some useful websites that I used to go to:

http://www.investopedia.com/university/dcf/

http://www.fool.com/investing/value/2005/05/11/digging-into-buffetts-numbers.aspx

PER valuation is highly inaccurate, that is why I dont use it. But overall PE values can help you tell the sentiments of the overall market.

Analyst gives a range of figures because they are not sure. No one can be 100% sure where the price of the company will go.

[chaibu]

hi mw :

thanks...but this is too subjective a method for my comfort; too many variables and i dont presume to make the right assumptions...

what i fail to comprehend and disagree upon is the notion that intrinsic value is an estimate. why should a company's intrinsic value not be an exact figure? at least where tangible assets are concerned.

i will be delighted if you or anyone can enlighten me....with thanks.

Hi K,

Generally in simple terms I would say FA consists of two components i.e. Quantitative Analysis and Qualitative Analysis.

Cashflow and Earnings being quantifiable they are considered Quantitative and probably the easier of the two. The hard nut is the Qualitative aspect which, depends on interpretation, tend to objectively look at the Business model and Management, both of which can encompass anything under the sun. Sort of.

Actually there is a 3rd component...Gasak gasak

[winston]

I think the gasak gasak part falls into the Qualitative part ...

[financecaptain]

what i fail to comprehend and disagree upon is the notion that intrinsic value is an estimate. why should a company's intrinsic value not be an exact figure? at least where tangible assets are concerned.

See if I can help.

In addition to future cash flows are at best estimates given that they are difficult to predict, one most understand that all same pieces of tangible asset have different intrinsic values depending on how they are managed as well as the capital structure on how they are financed etc..

If Intrinsic Value = PV of future cash flows = Summation (Future Cash Flows at time X/Discount Rate at time X) :- On the numerator, future net cash flows of different operators of an asset are different. On the denominator, some operators' cash flows are more likely than other (e.g., because they have stronger brand name) and hence the discount factor is lower as the risk is low.

For example, look at the semiconductor frabrication business. TSMC and Chartered builds the same facility all costing US$1 billion and assuming totally financed by equity. Given the former's ASP and GM is higher, the PV of the US$1 billion plant is definitely higher and hence higher valuation or intrinsic value. P/B will be higher.

Or say the same $1 that is being lent out by a finance company, Hong Leong and a bank, DBS. On the former, given that its deposit costs are higher, it charges therefore higher interest rate than DBS. On the latter given that its deposit costs are lower, it charges lower interst rates. As long as their net return on the S$1 is equal to the cost of capital required by each of their investors, their intrinsc value is par. Of course required equity return on Hong Leong is higher than that of DBS because of business risk. DBS is more stringent is terms of capiatl requirement etc.. The point is if any institution can generate return higher than their shareholders' required and at the desired risk, than they should be valued above par i.e., more than 1X book or tangible asset value. And less than 1X book of actual return is lower than required given the desired risk.

It gets more complicated when it goes to capital structure (MM model) etc...

The above are concepts on asset pricing. It is nice if everything can be predictd and spot on, however in the real world it is not. That makes investment fun and and the real test is your ability to pick undervalued assets...

[la papillion]

I think a lot had been discussed while I'm away

Let's try a different approach. Let's assume that intrinsic value is certain and exact and everyone that tried will calculate this value exactly. If that is true, then all who tried will look at the price of the company now and will bid up the price to the intrinsic value. But for everyone who buys the stock, there will be another who will sell it. But if the intrinsic value of a stock is exactly the same, no matter who calculated it, then why would someone sell the stock at prices below the intrinsic value? Or why would a buyer buy a stock a prices above the intrinsic value?

This, of course, assumes that investors are purely rational people, which is purely crap. This could mean that intrinsic value is not an exact value that can be calculated. In fact, it is a range of values whose magnitude depends on the various assumptions that is put into the model of valuation. It is not to 2 decimal places or 2 sig. figures, it's more likely to be +-20%. Why calculate it then? Well, in my views, we can back calculate the prices today to see what kind of assumptions are made, then go on to see if it is reasonable and justifiable.

[kennynah]

fclim/cheng/financecaptain/lapap/san/mw/winston/chaibu:

domo many arigatoes....i have been taught some important lessons here on Intrinsic Value in the ambit of FA... i wish all of you Huat Huat !!!

suffice this is beyond my ability to value properly any company; in fact, i even have a hard time valuing my 4 year notebook with a single core CPU....i guess....$20 maybe, but if tomorrow, i suddenly get named as a very successful trader who traded my successful positions on this notebook, maybe this asset becomes $20,000 ...so... all these subjectivity causes me headaches....hahahaha....

but again....thanks for all your effort for enlightening me...