Value Investing 01 (May 08 - Dec 08)

[iam802]

and in Virgin's case.. I see it as brand extension and hence it is 'diluted'.

Will Virgin Airlines be worth more than SIA? (seriously, I do not know the answer)

or a Virgin telo be worth more than competitors in the same industry? Didn't Virgin operate in Singapore before for some mobile space?

There is of course nothing wrong with what Richard Branson is doing.

But, I would avoid jumping in just because the 'brand' is slapped onto the goods or services.

[chaibu]

Wah, FC....you analogy between the course and bourse...boh beh chou

I remember reading WB sold tipping sheets at the racetrack as a boy. So WB and Munger has something in common. My guess is you also have something with both of them right?

[chaibu]

iam802....I think time will tell whether Virgin has lost its 'differentiation'

[kennynah]

Cheng :

welcome to Huatopedia, where everyday is a HUat HUat day !!!

your post..very long, a lot of effort and time to write it... appreciate your post. i have no extreme negative comments as i cannot yet convince myself that FA has no place in trading/investing.

...I am not here to debate the merits or demerits of value investing vis-a-vis other methods, but I think value investors should be accorded some respect for their belief system even though it may be flawed in certain ways.

MW : respect given... VA investors trade with their hard earned money...so, i doubt they don't believe in their system. yet, whether others give respect or not, how does this matter to the VA investor?

... this forum is "school-blind". ...

but it is NEVER Koyok-Selling Blind...so, newer members...pls dont try, we get a whiff of this in any form of disguise... well... just dont try ....

i'm not good with FA...which is the only reason for not employing this method full scale... not becos it is not a super method..i duno if it is, or isn't

duno, cant use it, waste time for me to speak too much of it...except, when i get some hardcore FAs who thiks the sun circle the earth...then, hahahaha...let go horse come across...

Eh.. I'm surprised at the reaction. maybe not tactful enuff. .

yes, it is as non-tactful, as i am saying you were insensitive with your choice of words... even though, my intent is up and up to help maintain a cordial forum here....and by the way, i have 1 more year experience than you...that's 16 years.

I think I've learnt more about value investing in the last few months than the whole of lasy year and since Sep 2006 when I "switched" to value investing. It encompasses a lot more than fundamental analysis, that's all I can say. It is a discipline, a mindset and a way of looking at things and it's not easy at all. Suffice to say that it is just the beginning of my value investing journey. The end will only come when they nail shut my coffin !

MW : i applaud your relentless effort to "master" this methodology... especially recognition that it is a discipline, a mindset, etc..... this applies to any skills acquisition... i agree with your mature view about non stop learning...

well said, grandrake... it is HA here man....
HA = Huatopedia Analysis... as long as you can make money, well... thats it!

FC : hahahaha....HA ...best answer....

iam802....I think time will tell whether Virgin has lost its 'differentiation'

chaibu : virgin will always have a premium value...

[blid2def]

chaibu : virgin will always have a premium value...

Next time, please put the main point at the very top of your message.

[kennynah]

as requested.... tot better i just rename the "title"..even better...hahaha...

[blid2def]

Wahlao... respect the OP lah!

[sidney]

I have a feel the longevity of Virgin relates to the founder only, this is just a feel only...

Discussion btw brand extension and brand dilution, could is be possible when too many conglomerates and M&A activites merge under Virgin, it may reach a point of reaching over its optimisation brand extension and hence became brand dilution instead.. But since brand is intangible, how to justify brand asset valuation? And what kind of yardstick?

On different school of tots...
Like religion, On different investing school of tots, i am very tolerant of diverse theories, personal experiences. Since everyone is right based on their experiences and beliefs, i can only adopt the methodology based on my personal accounts. I know nothing abt trend lines thus have no interest in TA. For FA, I am also skeptical of over simplisitic relative valuation models such as PE and EPS. Nor do i trust analyst bragging abt buy, hold, sell and their fantasy discounting rates used. I used to think investing is about common sense; but behavioral finance proved otherwise. One more thing... Do u believe everything on financial statements? GAAP is not a perfect financial reporting guideline.

Why not find a mutual point to merge all theories? Use PE, EPS to filter stock, use top-down approach to pinpoint. Use discounting rates to find intrinsic, then call your broker ask for his TA advice can i buy based on vol/5days MA/RSI. And after sometime when mother share still refuse to move, blame behaviour finance for making wrong decisions and its lousy branding. lol

[fclim]

Wah, FC....you analogy between the course and bourse...boh beh chou
I remember reading WB sold tipping sheets at the racetrack as a boy. So WB and Munger has something in common. My guess is you also have something with both of them right?

hi chaibu,

no horse run hor... i think banker almost sure win one lar... the odds is very much for them... and the odds very much against the gamblers... i think if ever turf club or singapore pool go public.... i would seriously consider to invest.... but then again, maybe not...

let me think.... thinking harder... bo leh... nothing in common leh...i wished i had just a little of their intelligence / judgement lor... but unfortunately dun have lar.... but will keep you posted if i get any enlightenment.... hahhaha....

oh ya, about the Virgin boss hor... i read a little abt him also... the guy "very super" one lar... cannot compare... most normal ppl difficult to follow his example... he's almost like.... those sports superstars, e.g. Michael Jordan, Tiger Woods.... in short he got USP = Unique Selling Personality... v v cool lar...

his business strategy? my opinion only hor... i think when he started, he acted like under dogs... for e.g. when the Virgin Blue airline still bery young that time, they took on the big BA in a law suit abt anti-competition (i think), then hor, its like the whole UK support him lor... coz the BA is painted as big bully while Virgin Blue machiam like super victim.... finally hor, the small guy won the lawsuit and he got the whole nation behind him lor...

also hor, i think he hates to wear suits... also he ever dress as females before for branding / campaigns... so i look up & down, left & right, I think bery few CEOs do this kind of things... unless CEO = chief entertainment officer! hahhaha

does he have a successor? i think difficult lar... which CEO wan to behave like him? hee can the brand continue to flourish after him? maybe if he can translate his USP into the organization culture... which i think he is always trying to do... but if he's gone and the org culture not in place, then how leh? I also dunno lar... i think it would be something that keeps him awake at night...

have fun,
fc

[la papillion]

I thought after playing with numbers for more than 9 months, I've got a little experience, however small, to talk about the perils of the calculation of intrinsic value. There are so many ways that we can evaluate the intrinsic value. In our need to place a certain number to our uncertain analysis, there could be a risk where the investor places too much confidence on what I call GIGO - Garbage In Garbage Out. However, armed with this magic number generated from fundamental data (that is, from the financial statements), the investor feels more confident than is justified and thus begins his (possible) sorrowful journey with the company.

I used to believe greatly on the certainty of the numbers, believing it will give me the ultimate decision to decide if a company's price is worthy of its value. It couldn't be further from the truth when the real test of investor - bear market - begins to maul down all the calculations made.

Here's an example of how an investor could 'justify' his purchase.

Company A had the following data:

http://1.bp.blogspot.com/_3qF-4FCPF1I/S ... _stats.gif


Impressive! Pretty good ROE of around 17.5% averaged over 4 years, high gross margins of around 24%, PATMI margins of 20% and had very low debts ratio of 20 to 30% compared to equity. Closing at $1.750 today, the investor almost jumps out of joy when he realised that the company also gave dividend, amounting to a dividend yield of 8.5% (inclusive of specials and based on FY07)!

Mr. Investor immediately logged in to his online brokerage account and started keying in his order when he suddenly remembered that as an investor, he ought to at least do out a DCF or other forms of valuation so that he can find out the price to value discrepancy. Didn't Benjamin Graham and Warrent Buffett keep harping about margin of safety? How could he, a practioner of safe and long term investing, forgot to do that? Tsk tsk.

So on he went, opening his excel and begin putting in the numbers. Since long term is 5 years to him, he started putting in the DCF with EPS for the next 5 years, projected at an EPS growth rate of 20% and discount rate of 4%. Mr.Investor used an EPS growth rate of 20% because from historical data, the PATMI per share is growing at a CAGR of 19.5% over 4 years, so it's reasonable to project this for another 5 years. 4% discount rate is because the long term SG treasury bonds is around 4%. Since Mr. Investor did not do out terminal value, which accounts for a huge bulk of the value, he thinks that it's very conservative already.

Here's what Mr.Investor did:

http://1.bp.blogspot.com/_3qF-4FCPF1I/S ... 10_5yr.gif


The current closing price is $1.75 but the intrinsic value is $1.25. Company A is actually overvalued! Mr.Investor tried checking the inputs for any mistakes but couldn't find any. As such, he reasoned that there is no reason why the earnings will stop after 5 years, so he could be too conservative. He decided to extend his timeframe to 10 years.

Here's what Mr. Investor did after extending to 10 years:

http://4.bp.blogspot.com/_3qF-4FCPF1I/S ... 10+yrs.gif


Now, the intrinsic value changes to $3.82. With current closing price of $1.75, that represents a margin of safety of 54.2%! Being a skeptic, Mr. Investor started thinking. If it is grossely undervalued, why is everyone not buying it? He started to feel insecure about his figures. Perhaps the EPS growth rate of 20% is too high. Over 10 years, it's highly unlikely that earnings will continue to grow at such a high rate, he reasoned. As such, he decides to do another valuation. This time, the EPS growth rate is changed to 10% (though the historical CAGR over 4 years is 19.5%) - conservative estimate!

Here goes:

http://4.bp.blogspot.com/_3qF-4FCPF1I/S ... 0yrs10.gif


Ahh..this sounds more reasonable, at $2.21. The current price gives a margin of safety of nearly 20%. For such a high quality company with low debts, strong margins and good yields, it's worth it! Besides, Mr. Investor already had 3 layers of safety margin:

a. The valuation assumes that the company folds over in 10 years. Since it is unlikely, the intrinsic value is supposedly higher than the calculated one. There is not perpetual or terminal value, which forms the bulk of the DCF value. As such, the value erred on the conservative side.

b. EPS growth rate of 10% is so much lower than historical growth rate of 19.5%. Conservative again.

c. Mr. Investor bought at a 20% discount to intrinsic value. As such, he had a 20% buffer against unforeseeable adverse circumstances.

Mr. Investor happily bought it, satisfied of having done a thorough analysis to Company A before buying. He can sleep soundly everyday knowing that he had done his valuation and bought with several layers of margin. So what's wrong with this?

With the right combination of earnings growth rate, discount rates and period of investment, DCF can make any purchase at any price justified, even with a margin of safety built into it.