Be sceptical about expert advice

Experts will probably give you good advice, but do not overlook the possibility that they may be mistaken.

• For centuries, experts said that the world was flat, but Christopher Columbus proved them wrong.
• Experts (who were paid a lot of money) or some of them at least, failed to foresee and plan for the economic mess that has plaqued much of the world in 2008/2009.

You may not be a financial expert but you are probably an expert at your particular job.  If the advice feels wrong, perhaps it is wrong.

An important skill when reading articles in the press is to identify the difference between fact and opinion.

FINANCIAL NEWS
THIS WEEK
STOCKS SET TO SIZZLE
Joe's BBQs Ltd shares are set to soar after the recent Consumer group survey revealed that 95% of all Australian households are set to update their outdoor entertaining facilities this summer. 
A spokesperson for the Consumer Group survey stated "The survey results indicate a widespread consensus among Australians that it is time to update their BBQs."
Market analysts will be watching the share prices of outdoor furniture and accessory retailers with keen interest when the market opens this morning.


Test your knowledge.

1.  In the "Stocks set to sizzle" article is the comment about the future movements of Joe's BBQs shares:
-  Fact
-  Opinion.

Feedback:
Answer:  Opinion

While the information from the Consumer Group survey is fact, the comment about the future performance of Joe's BBQs Ltd shares is the opinion of the article's writer.  An important skill when reading articles in the press is to identify the difference between fact and opinion.  Before agreeing with a writer's opinion you may want to review the logic that they used to reach their conclusion.




WORLD NEWS
8.34am  Reserve Bank drops interest rates.
At the Reserve Bank's monthly meeting yesterday it decided to ease Monetary Policy and reduce interest rates by a quarter of one percent.  
The RBA quoted the reduced inflationary pressure in the economy and the falling levels of business investment as the key reasons behind the decision to lower interest rates.


Test your knowledge

2.  Does a drop in interest rates generally have a
-  Positive effect on the sharemarket
-  Negative effect on the sharemarket.

Feedback
Answer:  Positive effect on the sharemarket.

Interest Rates reflect the cost of borrowing.  The higher interest rates are, the more expensive it is to borrow money.  Higher interest rates also mean both individuals and companies have higher repayments on outstanding loans.

Test your knowledge

3.  Do these two articles alone contain enough information to base a decision to buy shares in Joe's BBQs Ltd?
-  Yes
-  No

Feedback
Answer:  No

While articles like these may provide the spark to motivate you to investigate, a crucial step before any share purchase is to review the company announcements released by your target company.  First you will need to get more information about Joe's BBQs Ltd from the ASX website.


http://www.asx.com.au/courses/shares/course_06/index.html?shares_course_06

Difference in Expert Opinion on Valuation of a closely held firm

Valuation of Closely Held Firm:  Difference in Expert Opinion


http://www.nafe.net/JFE/j02_1_03.pdf

The paper reviews four basic approaches to the valuation of the equity of a closely-helf firm:  net asset value, discounted cash flow, earnings multiples, and captialized earnings.  Financial and narrative information on an anonymous closely-held firm were evaluated by 18 valutaion experts.

Findings:

1.  All respondents reported valuation methods; 15 recommended values ranging from $6.0 million to $17.5 million. 

2.  The dispersion of values was not consistent with our expectation of convergence of value estimates.

3.  The professional training and background of the experts proved significant in the valuation methodology and estimate.  The 8 experts who are investors fvoured, by 7 to 1, a non-DCF approach, such as an earnings multiple or capitalized earnings.  The 10 consultants/appraisers expressed a slight preference, 6 to 4, for the DCF approach.

4.  The greatest disparity between investor experts and consultants was in the recommended value of the firm.  The average value recommende by the consultants was $14.7 million, almost 50 percent higher than the investors' average estimate of $9.87 million.


Conclusions:

Three implications of the study.

1.  The substantial variation in valuation opinions suggests that courts cannot expect convergence of expert valuation of a firm even from a large number of experts.

2.  The variation in opinion may be related to the professional training and background of the experts.  Consultants, those who are not investors or risk bearers, offered significantly higher valutaion opinions than investor experts. 

3.  The valuation expert who are interested in economically sound valuation opinons would be well-advised to use more than one valuation approach, if circumstances permit, cross verify valuation estimates.  The dispersion of values provided by the sample of experts suggests that the expert who can demonstrate the soundness of an opinion by the independent application of two or more methods is likely to have more credibility.