Value Investing 01 (May 08 - Dec 08)

[winston]

Maybe we can look at how much one would pay for the entire business ...

1) Find out what is the Operating Profit ( ensure that they have consistent Operating Profits )
2) Divide that by an appropriate interest rate, say 4%
3) That would give you the Present Value of Future Operating Profits ( a Perpetuity ). This is how much the business is worth
4) Divide that by the number of shares
5) That would give you the "fair value" per share
6) Compare that Fair Value with the current share price, to have a feel of your Margin of Safety

Of course, one can put in various scenarios for the Operating Profit ie. Pessimistic, Realistic, Optimistic

And one can also discount things at various interest rates eg. 4%, 6%, 8% and 10%

[iam802]

Ok,.... this thread...should be voted 'Thread of the Week'.

Lots of gems here.

[la papillion]

We can complicate Winston's model by adding in a growth rate for operating profits, or adding in different discount rates for different periods of growth in accordance with the stage of the business growth, or add in dilution in shares due to warrants/new issues/employee stock options/scrips...then we'll end up with a mess of numbers that is called intrinsic value, haha

[kennynah]

you guys are really good...i mean the FA folks...and i am not being sarcastic...

with so much variables involved in valuing an entity, some actually can convince others this can be done accurately...

hats off !!!

[Cheng]

Kenny,

I'm looking forward to learn from the TA folks also. 收我为徒

[kennynah]

hi cheng,

you might wana have a look at the Ichimoku Thread.... where GR and 802 have shared this particular TA....rather interesting....

all the best !

[caseyc]

One interesting angle would be to compare what Winston has suggested (present value of perpetual earnings) with the NAV of the business. If the perpetual earnings is less than the NAV, it probably means that it's a lousy business, since u can get more money by just liquidating the company.

The theory is that a company with perpetual earnings significantly & consistently higher than the asset value will prb'ly have some moat. Without the moat, competitors will come in and erode the earnings, till the perpetual earnings is just the asset value + cost of capital.

We can complicate Winston's model by adding in a growth rate for operating profits, or adding in different discount rates for different periods of growth in accordance with the stage of the business growth, or add in dilution in shares due to warrants/new issues/employee stock options/scrips...then we'll end up with a mess of numbers that is called intrinsic value, haha

I agree, that will be really messy Adding more variables (with a signif degree of uncertainty) will likely distort the number even more. For the conservative investor, it may make more sense to assume 0 growth, as Winston has done.

[financecaptain]

You can have the best models in the world I guess because computing power is getting cheaper by the day. In any modeling you cannot escape carbage in and carbage out. Nothing substitutes a good understanding of the business or strong domain knowledge and knowing the people running the business. Warrant Buffet says he does not invest in businesses that he does not understand. Well he sure walked the walked and talked the talked... as evidenced during the internet boom time.

Warrant Buffet advises also to get involved in business that even a fool can run it because one day that will happen to any businesses. That is OK in the US because the US economy has both the depth and width but not the Asian or Singaopore economy.

I believe therefore to be a good investor, you have to read and network very widely. And put greater weightage on businesses that you trully understand and maybe have passion in. The last thing you want to do is to follow the herd. You have already done the first step already by participating in this investment blog and maybe others as collectively you have lots of news, opionions and fresh ideas. You need to accumulate experience and maybe make mistakes once a while (hopefully not all the time) to be a really good investor overtime.

This crisis has really created the opportunity to pick good long term stocks. You may regret it if you do not and glad that you did maybe 3-5 years from now. Warrant Buffet says that he does not like to keep cash ... it is like saving sex for old age. What are you waiting for ? The opportunity now presents itself. Good luck....

[helios]

Warrant Buffet advises also to get involved in business that even a fool can run it because one day that will happen to any businesses. That is OK in the US because the US economy has both the depth and width but not the Asian or Singaopore economy.

certainly agreed with this ...

also, maybe we can take a note on social corporate responsibility. in terms of the business founder, management or for the profiling of the business entity.

[la papillion]

Haha, finance captain had the same views as me GIGO - garbage in garbage out. With excel or a cheap financial calculator, it's really easy to feel comfortable and secure with the intrinsic value that one calculate.



Believe in PE ratio? STI is now at 9.10x PE. From TA point of view, this is the classic middle finger chart pattern. This pattern is neither bullish nor bearish...it's the funniest haha!