myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Showing posts with label absolute valuation. Show all posts

Monday, 28 October 2024

Valuation cheat sheet. What are some of your favourite metrics?

Valuation Cheat Sheet

What are some of your favourite metrics?

1. How to think about valuation

All intelligent investing is value investing: you try to buy stocks for less than what they're worth.

Here are some valuation ratios you can use:

P/E ratio: stock price / earnings per share

EY (Earnings yield): earnings per share / stock price

P/B ratio: stock price / book value

PEG ratio: P/E ratio / yearly EPS growth

FCF yield: free cash flow per share / stock price

2. Always buy stocks at a discount

When you go to the mall, you like to buy your favourite products on sale.

The same goes for stocks. You want to buy a stock at its cheapest possible price and valuation.

The beautiful thing about the stock market is that Mr. Market often acts as a Manic-Depressive. You can use this volatility to your advantage by buying when there's blood running through the streets.

3. Short term versus long term

Over a one-year period, most stock price fluctuations are driven by changes in valuation.

versus

In the long run, stock prices are driven by the evolution of the intrinsic value of a company.

This means that in the short term the valuation you pay for a company is very important while in the long term the rate at which a company can grow its earnings per share is the crucial factor.

Thursday, 5 March 2020

Absolute Valuation: Calculating the Intrinsic Value of a Business

Absolute Valuation (calculating Intrinsic Value)

In absolute valuation of a stock, the worth of a business is calculated. This is the Intrinsic Value.

The Intrinsic Value can be estimated from various ways, the two common ones are::

from the assets* the company owns, and the other,
from its expected future cash flows (also known as the discount cash flow analysis).

Relative Valuation

Some common market ratios for valuations of stock are PE, EV/EBIT, EV/EBITA, P/B and P/S. The problem is these are all based on price; comparing what an investor is paying for a stock to what he is paying for another stock.

Relative valuation does not tell you the Intrinsic Value (IV) of the stock. Without knowing the IV, at least an estimated one, the investors do not really know what price should be paid for it.

Absolute Valuation versus Relative Valuation

Comparing ratios across companies and across time can help us understand whether our valuation estimate is close to or far from the mark, but estimating the IV of a company gives us a better understanding of its value and hence the price we are willing to pay for it.

Having an estimated IV also helps us focus more on the value of the business, rather than the price of the stock which changes every minute on the screen.

It gives us a stronger basis for making investment decisions.

Discounted Cash Flow Analysis (DCFA)

Discounted Cash Flow Analysis (DCFA) is a method of valuing the intrinsic value of a company.

DCFA tries to work out the value today, based on projections of all the cash it could make available to investors in the future.

It is descried as "discounted" cash flow because of the principle of "time value of money" - that is, cash in the future is worth less than cash today.

DCFA starts with the premise that a stock's price should be equal to the sum of its current and future cash flows after taking the time value of money (discounted by an appropriate rate) into account. (John Burr Williams).

Stock Price IV
= Sum of the Present Value of All Future Free Cash Flow (FCF).

Advantages of DCFA

It produces the closest thing to an intrinsic value of a stock.
DCF method is forward looking and depends more on future expectations than historical results.
This method is based on FCF which is less subject to manipulation than some other figures and ratios calculated out of the financial statements.

Weakness of DCFA

It is a mechanical valuation tool and is subject to the principle of "garbage in, garbage out."
In particular, small changes of inputs in cash flows and discount rate can result in large changes n the value of a company.
Hence, IV obtained is never absolute and infallible, but rather an approximation.

Reference:

Page 256 to 265 The Complete VALUE INVESTING Guide That Works! by K C Chong

Also read:

* Warren Buffett Explains Why Book Value Is No Longer Relevant

http://myinvestingnotes.blogspot.com/2020/03/warren-buffett-explains-why-book-value.html

How to derive the intrinsic value of an asset?

https://myinvestingnotes.blogspot.com/2011/09/how-to-derive-intrinsic-value-of-asset.html

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My 18 points guide to Successfully compounding your money in Stocks

Be a good stock picker.
Think as a business owner.
Always look at value rather than the price. Do the homework.
Buy and hold is alright for selected stocks.
Compounding is your friend, get this to work its magic.
Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
Always buy a lot when the price is low.
Never buy when the stock is overpriced.
It is alright to buy when the selected stock is at a fair price.
Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.
Do not time the market for such or any stocks.
By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
The downside risk is protected through only buying when the price is low or fairly priced.
Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.
Sell urgently when the company business fundamental has deteriorated irreversibly.
You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.
In conclusion, a critical key to successful investing is in your stock picking ability.

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.
2. Never invest in any idea you can’t illustrate with a crayon.
3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
5. Time is on your side when you own shares of superior companies.
6. Owning stock is like having children. Don’t get involved with more than you can handle.
7. When the insiders are buying, it’s a good sign.
8. Unless you’re a short seller, it never pays to be pessimistic.
9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.
• A balance sheet with less debt than other companies in its particular industry.
• A P/E ratio no higher than average.
• A dividend yield that suits your particular needs.
• A below-average dividend pay-out ratio.
• A history of earnings and dividends not pockmarked by erratic ups and downs.
• Companies whose ROE is 15 or better.
• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Monday, 28 October 2024

Valuation cheat sheet. What are some of your favourite metrics?

Thursday, 5 March 2020

Absolute Valuation: Calculating the Intrinsic Value of a Business

* Warren Buffett Explains Why Book Value Is No Longer Relevant

How to derive the intrinsic value of an asset?

All equity security investments present a risk of loss of capital

The Ultimate Hold-versus-Sell Test

Some thoughts on Analysing Stocks (KISS)

Benjamin Graham

Sell the losers, let the winners run.

Investment Style

Warren Buffett

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