Calculating a Stock's Intrinsic Value (Actual Value)

You've found a great company, possibly the best investment opportunity in your lifetime...

Not only that, you understand the Basic Principle of Investor Return which says, "the price you pay determines your rate of return."

So all you have to do is take advantage of your expert knowledge and buy a great company at a great price.

Right?

Well, almost.

You've still got one problem left...

How do know a company's selling for a great price?

Easy...

You calculate its intrinsic value.

What's Intrinsic Value?

In his 1938 publication "The Theory of Investment Value," John Burr Williams first articulated the idea of calculating a stock's intrinsic value.

His idea essentially adds all of the expected future cash flows produced by a company and assigns them a present value. This present value represents the price you should pay.

So, in financial circles, "intrinsic value" is defined as the present value of all expected future net cash flows to the company.

Find that sentence a little hard to follow?

So do I.

That's why I prefer a definition that doesn't require a dictionary for interpretation.

Here it is...

Intrinsic value is the actual value of a company as opposed to its current market price.

That definition makes a lot more sense, doesn't it?

So why is intrinsic value important?

Because if you can calculate the actual value of a company, then...

You can compare it to the current market price.

If the current market price is higher, then you know the company is overvalued.

But if the current market price is lower, then you know the company is undervalued.

Knowing what's overvalued and what's undervalued is what separates successful stock market investors from the rest of the crowd.

Why?

Because if you know a company is undervalued, then...

You can buy low!

And buying low is the key to successful investing. Right?

Absolutely.

How Do You Calculate Intrinsic Value?

Sounds great, doesn't it?

But we still haven't tackled the problem...

How do you calculate a company's intrinsic value?

Well, first you need current information regarding your company's...

• Stock price
• Average return on equity
• Dividend payout ratio
• Equity per share (also known as book value per share)
• Earnings per share
• Average P/E ratio

Does all that information look intimidating?

Don't worry. We'll address how to easily find each piece of information soon. Fortunately, it's all on the Internet!

Once you have all this information at your fingertips, you can easily calculate your company's intrinsic value by estimating its earnings for the next ten years.

The following chart uses The Coca-Cola Company as an example to illustrate how easy this is...

We'll address how to use this chart in moment.

But first, let's get those figures...

How to Find the Numbers You Need

Before you can calculate a stock's intrinsic value, you need to know several pieces of information about the company and its stock.

Here's how to find each piece of information...

Current Stock Price - This one's easy. Just go to Yahoo! Finance or Google Finance or dozens of other places on the web where you can get real-time stock quotes. Plug in your company's stock ticker, and you've got it.

Average Return on Equity - While most online services like Yahoo! Finance provide a figure for return-on-equity, it most likely represents the current year only. To get a more accurate number for your intrinsic value calculation, go to Google Finance, type in your company's ticker symbol, and find the text link titled "More ratios from Thomson Reuters."

Follow that link, and you'll find a category titled "Management Effectiveness." Find the figure for "Return on Equity -5 yr. Avg."

It's best to use a company's five- or ten-year average return on equity as opposed to a single year when calculating intrinsic value.

Why?

Because a dramatically higher or lower one-year return on equity can throw off your entire calculation. So if you want the most accurate calculation possible, use a long-term average return on equity.

In my opinion, The Value Line Investment Survey offers the best return on equity figures. Visit your local library, and you can find a company's return on equity every year for the last ten years as well as Value Line's projections for the company's ROE over the next five years.

For best results, use Value Line figures for your intrinsic value calculations.

Current Dividend Payout Ratio - Again, go to Google Finance, type in your company's ticker symbol, and find the text link titled "More ratios from Thomson Reuters."

Follow that link, and you'll find a category titled "Dividends." Find the figure for "Payout Ratio (TTM)." That's the percentage of earnings your company pays out in dividends.

Current Equity Per Share - Go to Yahoo! Finance, type in your company's ticker symbol, and find the text link titled "Key Statistics." Find the category titled "Balance Sheet," and find the figure for "Book Value per Share." This is the current equity per share, also known as book value.

Current Earnings Per Share - Go to Yahoo! Finance, type in your company's ticker symbol, and find the figure for EPS. This is the earnings per share.

However, keep in mind that Yahoo! Finance and most online services report a company's last four quarterly earnings figures as the EPS, so this figure might be distorted by a one-time expense or charge-off due to otherwise favorable long-term investments by the company.

So make sure you perform due diligence when searching for an accurate earnings per share figure for your intrinsic value calculation. Again, The Value Line Investment Surveyprovides the most accurate figures.

Average P/E Ratio - This isn't a ratio I?ve run across on Yahoo! Finance or Google Finance, so I performed a Google search to find a good site. A site called ADVFN popped up. If you follow this link to their site, and scroll down to the category "Valuation Ratios," you'll find a figure titled "5-Y Average P/E Ratio." This is the company's five-year average P/E ratio.

But again, you can find a far more accurate ten-year P/E ratio by visiting your local library and consulting The Value Line Investment Survey. The figure they provide is the one I personally use.

Using Excel to Calculate Intrinsic Value

Once you've gathered all the necessary information, you can use Excel to calculate a stock's intrinsic value.

The previous image, using The Coca-Cola Company (KO), is a good example of this...

Do all those spreadsheet formulas and calculations look confusing?

Fortunately, I've already set them up for you!

All you have to do is plug in the customized numbers for your company...

And you can use the exact same Excel spreadsheet I use for calculating a company's intrinsic value.

Download Britt's Intrinsic Value Spreadsheet >>>

Just replace the numbers in the yellow-highlighted cells with your company's numbers, and the spreadsheet will calculate a value titled "Multiple" on line 29.

Line 29 is the calculation you're looking for.

If your great company has a number above 5.00, it's currently undervalued.

If it's below 5.00, then the stock is currently overvalued...

Why 5.00?

Because a multiple of 5.00 means you'll make a 5-fold return on your investment in the next ten years if you buy the company at its current price.

A 5-fold return in ten years is a 17.46% annual compounding rate of return.

Also, five is a nice round number, and I like nice round numbers.

No kidding...

Think that's a silly reason for picking 5.00?

It's really not.

Always keep in mind, calculating intrinsic value is an art, not an exact science.

The spreadsheet's calculations act as a guide, not a precise road map.

As Warren Buffett says...

"It's better to be approximately right than precisely wrong."

So a figure above 5.00 means you're approximately right.

But there's another reason you want a 5-fold investment return and not a 4-fold or a 6-fold return...

Remember, if achieved, a 5-fold return is a 17.46% annual compounding rate of return.

This beats the S&P 500's fifty year track record of 10.85% by more than six points.

Now, in order to make all your time and effort researching stocks a worthwhile endeavor, you need to beat the market by at least a couple of points per year.

Over time, those couple of points will add up to a lot.

And while achieving a 4-fold return over ten years (a 15% annual compounding rate of return) achieves your goal of beating the market by more than a few points...

You need to remember, calculating a stock's intrinsic value is an estimating tool. It's more art than exact science.

So as a precaution, give yourself a little room for error.

Force your potential investment to live up to a higher standard...

Tack an extra 25% onto that 4-fold return, and give yourself a new goal of a 5-fold return.

That way, if you fall short of your goal, you still have a good shot at beating the market averages.

Remember...

"It's better to be approximately right than precisely wrong."

So give yourself a little bit of leeway in case something goes wrong.

In investment circles, this idea is known as the margin of safety.

Providing a Margin of Safety

Benjamin Graham first put forth the idea of a margin of safety in his groundbreaking bookSecurity Analysis (1934), which he co-authored with colleague David Dodd.

According to Graham, margin of safety is the secret to a sound investment philosophy...

"Confronted with a like challenge to distill the secret of sound investment into three words, we venture the following motto, Margin of Safety."

So what's a margin of safety?

It's nothing more than giving yourself a little room for error.

Just ask yourself, "If things fail to go perfectly, will my investment still work out?"

If not, there's no margin of safety.

However, if your company's earnings fall well short of your projections and you can still achieve your desired investment returns...

Then, you have a margin of safety.

By purchasing only those stocks which offer a significant margin of safety, you limit your downside risk and significantly increase your odds of success.

Conclusion

Learn how to calculate a stock's intrinsic value. It's a skill that will prove invaluable over the course of your investing lifetime.

Use the spreadsheet located in the middle of this page. Look for companies with a multiple in excess of 5.00 at the current price.

However, remain mindful of other variables. Some companies look like they're dirt cheap, and they are. These companies will make you a fortune if you're prudent enough to buy them.

But other companies also look like they're dirt cheap, while in reality, they're grossly overvalued...

So how do you tell the difference?

By following all the rules previously outlined for finding a great company...

Also, I can't emphasize this enough - ask question after question about your company's future business prospects and apply your own common sense and good judgment. This will go a long way toward determining your investment success...

After all, if numbers told the entire story, no one would think about their investment decisions at all. We'd all just let computer programs "run the numbers" on our investments. Right?

http://www.your-roth-ira.com/calculating-a-stocks-intrinsic-value.html

Value investing – When to Sell or Hold?

A good discussion on when to sell in another blog.

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12:30 pm
April 10, 2012

matthew

Member
posts 13
9
Yes, I did this on Aeropostale. Approximately a 32% gain I got on that bad boy.
Reasons I sold, it had trouble getting past $21-$22, and then Barclay's raised there price target to $25 so more investors bought and price went up a bit. I took this chance and sold it, and it has now went back down after today -5%. Keep in mind that I sold it early basically because my intrinsic value was around $23 and I figured i'd rather sell now than risk more just for a small additional gain.

If I had not sold it then I would have been stopped out as during the price consilidation period I put in a stop loss @ $21
10:55 am
April 10, 2012

Jae Jun

Admin
posts 1408
8
do any of you sell after a big fast run up even though it is below intrinsic value?
6:29 am
April 1, 2012

nell

Member
posts 88
7
Some reasons to sell..


1. intrinsic value < price -> no margin of safety
2. business quality goes south, management issues etc.
3. better opportunity


One good reason to buy more is when market tanks but intrinsic value of your specific company keeps growing..

Best wishes,
Nell
10:58 am
March 31, 2012

BugMan

New Member
posts 2
6
I'm fairly new to this, and I, too, see selling as the hardest part.

One thing i've thought of that makes it easier is compare your current holdings to what else is out there. If are holding onto a good company, and you figure it has the potential to go up 12% per year, but you see other companies out there that have the potential to go up 25% per year, then sell your current stock and buy the other ones. It's not that the old company isn't good — it is — it's just that there are better deals out there.
8:03 am
February 27, 2012

gstyle

Member
posts 4
5
I am fairly new to value investing so I find it good to know other have had similar thoughts to my own!
2:17 am
February 25, 2012

Jae Jun

Admin
posts 1408
4
selling is defnitely harder than buying.
One of my weak points as well. If I had a partner, I'd find someone who was better at selling than buying. It would be a great combination.

But to sell, you would have to re value a company regularly.
If there isn't much upside to intrinsic value, then I'm willing to sell at 10% below intrinsic value rather than hanging on.
Companies like GRVY, I am happy to hold even if I'm up 100%.
8:17 pm
February 22, 2012

jalleninvest
Coronado, CA

Member
posts 22
3
Post edited 8:20 pm – February 22, 2012 by jalleninvest
G.raham came up with the 50% or two years towards the end of his life, in that interview that is bandied around the internet some. I am not at all sure that he practiced that in the Graham Newman closed end fund he ran. In one case, he did not, and that was GEICO which they bought half of in 1947 or 1948. They ended up having to distribute the shares to the shareholders of the fund, and it increased 54,000 per cent or something like that. Many became multimillionaires, quite a feat back then.
Walter Schloss, who died the past weekend at age 95, talked about selling. According to him that was the hardest part of this business, trying to figure out when to sell. He didn't like paying short term income tax rates and tried to hold stocks for a number of years. He commented ruefully several times about buying at $30, selling at $50 and watching the stock go to $200, etc. He recommended a new company to Graham that had wonderful prospects. Graham turned it down, saying it wasn't their kind of deal. It was Xerox, of course, but Schloss said Graham would have sold it at a double anyway and missed out on the big increase.

If it was easy, everybody would do it!
9:23 am
February 21, 2012

Graeme
Austin, Texas

Member
posts 162
2
Yeah, this is always a fun question.

For me what I do is I break up my holdings into different categories. For example, I have holdings that I bought at a good (not great) but good price, but they pay me dividends, and if they keep acting as they have for years, they should be increasing my dividends every year. I get a bit of return on the stock price increase, but a great return over many years with the dividends reinvesting. So my sell thesis on these guys is pretty firm: as in, I wont easily do it.

But then I have holdings that I would consider a deep value: selling at a deep discount to book value, or below NCAV or in a really beat up industry. These are the shares that I have a target price for: as in, I will sell when they hit that specific price. There is not a whole lot that would change my mind and make me hold on to it longer. And sometimes that target price is 50% above my purchase, 100% or even more.

So you need to judge for yourself whether the business you bought shares in is now fairly priced at it's 50% gain or if it still has room to go.
4:33 am
February 21, 2012

gstyle

Member
posts 4
1
Hi,

I was pondering the concepts of selling a value stock or holding it for longer. I understand that Ben Graham had a strict rule of selling after a 50% increase or after two years, whichever came first.

A stock brought at value brings the 50% gain, but if this stock is in a strong company with good prospects for the future, should it still be sold? At this point, do you make a decision to strictly adhere to Ben Grahams teachings or evolve to be more like Buffett in buying a good company at discount and holding it for a long time?

If the company in question was a 'cigar butt' then selling after its gain seems more obvious than for a value stock in a good company.

Thoughts / comments
No Tags
Page: 1

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http://www.oldschoolvalue.com/blog/forum/value-investing/value-investing-sell-or-hold/#p4033

To make sure every $1 investment will generate $2000 in just 30 years ...

Fundamental analysts can have good dreams because they usually sleep well. If you are one of them, you don’t have to be afraid of daily stock price fluctuations. Why care so much for $1 to $2 per day price movements and uncertainties when you can get $100,000 30 years later almost certainly and do nothing? The ‘do nothing’ is what makes you an investor. Don’t you think so? Once you bought the shares, you will only sell them if there are fundamental changes; such as change in management or business model. Otherwise, continue riding on their profits and keep on collecting dividends or bonus issues by ‘doing nothing’.

Doesn’t it sound so peaceful?

"To make sure every $1 investment will generate $2000 in just 30 years, make sure you buy the stock at the lowest price possible."

Tax Season – 11 Critical Deductions You Should Know

http://www.financetwitter.com/2012/04/tax-season-eleven-critical-deductions-you-should-know.html

7 Stock Investing Advices Warren Buffet Want You to Know

Good Stock Investing Advices

That All Beginners Need to Follow Religiously

Summarized Overview

In this article, you’ll find information on the stock investing ideas that Warren Buffet wants all stock investors to know, strategy he uses to maximise return, price of stocks that he willing to pay, key financial ratio that is so important to him, type of managers he loves, and kind of management he trusts.

7 Stock Investing Advices for Beginners

This stock market investing advice will help you on how to pick stocks Warren Buffet way.

Stock Investing Advices #1: Simple Business Model

It is not just about simplicity, but also something that you can understand. You must clearly define your circle of competence and stay where you are. It can be something that you learn while you are working or something that you spend time on to understand the business operation. To most, oil and gas business can be seen as so simple and yet very profitable, but to those who works in that industry will tell you, it is not as easy as what you think.  Do you know why this is so important?

When come to investing, predicting what will happen tomorrow is something that you can’t live without. Forecasting what the future will be is the only way you can estimate how much return you’ll be getting later on. So, if you really understand the business inside out, you can project how the company perform 30 years down the road; take into consideration the national economy, competition from others and change in customers’ lifestyle.

Stock Investing Advices #2: Wide Economic Moat

Simply said, the company should serve valuable niche market with price inelastic products or services. Warren Buffet himself avoids regulated industries, commodity businesses as well as capital intensive industries. 

He prefers stocks which can finance their capital from operating cash flow with less borrowing as well as has strong pricing power. Meaning, the company can price their products as much as they want. That is why, Warren Buffet love ‘franchise’, for example, Furniture Mart (the lowest cost in the industry), The Washington Post (market dominance and leader), Coke (strong brand name) and Candies (premium priced and high quality products that serve niche market).

Stock Investing Advices #3: Sustainable Growth

Serving the existing niche market is not enough. Instead, Warren Buffet wants the company to grow continuously and exponentially. Therefore, he looks for managements that have the ability to widen their economic moat consistently over the past years. Their businesses must be positioned where the demand able to grow continuously; Gillette is his best example. In the same time, always be ready for any possible trouble to the business, and most importantly back up your investment plan!

Stock Investing Advices #4: Excellent Capital Management

Every company that is listed in the stock market were entrusted to manage the business on behalf of their shareholders. Therefore, it is the managements’ duty to utilise the available resources for the highest possible return. To do this, they have to think and act like an owner and avoid the ‘institutional imperative’ style of management (think for themselves and don’t care what will happen 20 years down the road). When they don’t have the capability to create at least $1 value from $1 reinvestment, they should return the capital back to the shareholders by giving dividends or share buybacks.

Stock Investing Advices #5: Effective Management Team

Invest in company that have honest and capable managers. They should be so capable that Warren Buffet himself admires the way the managers do things. In Berkshire Hathaway Annual Meeting year 2000, he once said, “we want managers who tell the truth and tell themselves the truth, which is more important”. He loves cost conscious and frugal type of managers who are honest and integrity as well.

Stock Investing Advices #6: Superior ROE

Why ROE, and not the other financial ratios? Well, return on equity indicates how effective the management team convert the reinvested money into cash. The higher the return, the more profitably the company can reinvest its earnings. The faster the company able to turn the reinvested earnings into profits, the faster its value increases from one year to another. And mind you, it is a big challenge to the management to consistently create value for every penny they spend. To prove this, not many stocks that has 15 per cent ROE consistently for the past 20 or 30 years, worldwide.

Stock Investing Advices #7: Buy at Discount Price

Once the good stocks have been identified, now is the time to buy them. To make sure every $1 investment will generate $2000 in just 30 years, Warren Buffet have to make sure he buys the stock at the lowest price possible. In the same time, he has to be real that not to set very low price till he misses the golden opportunity. Thus, he keeps himself buying the stocks when the prices are offered at pre-determined margin of safety. The margin of safety can be as low as 80 per cent discount from the calculated intrinsic value. Even if the stocks are so profitable but the price is too high, he will just passes the opportunity to somebody else.  

If you want to be as successful as Warren Buffet in stock investing, study each point thoroughly. Ignoring either one advice is enough to make you broke in stock market; simply because, in stock investing, due diligence counts. Intentionally not following the advice proves that you are not ready for investing; perhaps you are just looking for fast cash.

http://www.stock-investment-made-easy.com/stock-investing-advices.html

Best Time to Start Saving and Investing

Now is as a good time as any. The earlier you start, the bigger the nest egg you’ll have on retirement. But as we know, it is difficult to start in our twenties, as at that age we save for a car and then a house. And soon after, there will be educational expenses for kids.

But you cannot afford to keep postponing your financial planning for retirement. In order to have sufficient income to cover all those non-working years, you cannot leave the plan to the very last moment. If you decide to retire at 55, you need a nest egg that can generate an income for another 25 to 35 years.

http://www.stock-investment-made-easy.com/retirement-planning.html

How to Pick Good Stock for Financial Freedom During Retirement

Pick Good Stock
And You'll Be as Successful as Warren Buffet


Investing in stock for retirement is not a new idea, but many are still sceptical of becoming rich from stock market income. If you are one of them, you might hear bad things about making money in stock market, bad enough that keeps you away from putting any money in any stock. Instead, you should learn how to invest in stock if you determine to become financially free.

The truth is, many succeed and why you can’t?

Once you’d master all the techniques, you are on your way to make fortune way beyond your wildering dreams. And these financial ratios are enough to get you started.

Minimum 15% Earnings per Share Growth Rate (EPSGR)

EPSGR is an incremental value of Earnings Per Share (EPS) annually. Stock with the highest EPSGR means it grows the fastest in that year than the rest. Consistently performing 15 per cent EPSGR is an indication of outperform, and 20 per cent EPSGR is superb. High EPSGR for the past five to ten years shows that the company has excellent products with great demand. Growing demand will eventually give the company some leverage opportunity through economies of scale.

You can ride on their very strong growth by owning these stocks.

Minimum 15% Return on Equity (ROE)

Return on Equity (ROE) is a comparison of the stock’s net profits to its shareholders’ equity.

ROE indicates how much you can gain if you had decided to invest in the stock at that period. Companies with 15 per cent ROE or better is able to utilise their shareholders’ money for maximum profits. On the other hand, ROE of less than 10 per cent is a sign of lack in management and business skills. In fact, you shouldn’t buy stocks that have ROE 5 per cent or less. Virtually, you can get the same return with zero risk with cash deposit.

After all, what’s the point of taking greater risk and yet get the same return?

Maximum 60% Debt to Equity Ratio (D/E)

D/E shows how much debt the company is taking to finance its business operation. You can calculate it by dividing the company’s total debt by the total number of available equity. You will know that the company is gearing too much if its D/E is greater than 1. This will give you an overview on how sensitive the stock is from the ever rising interest rates. Nevertheless, there are capital intensive industries which require huge financing sum from others due to their business nature.

Try to avoid these stocks to preserve your capital for the golden age.You must take into consideration these financial ratios in total to define how valuable your investment decision is. Picking one with dying business doesn’t make any sense to me, and the same should apply to you too! But don't forget to use some qualitative methods as well to pick good stock. After all, picking a good stock requires homework and effort. Trust me, it is well worth it.

http://www.stock-investment-made-easy.com/pick-good-stock.html

Warren Buffet The Greatest Stock Market Investor

Warren Buffet
The Most Successful Stock Investor

Warren Buffet is undoubtedly the champion of all stock market investors. He is also referred to as the Oracle of Omaha, the town in which he resides in Nebraska.

Buffet's own 38 per cent stake in Berkshire Hathaway gives him a net worth of more than $36 billion, making him the second wealthiestman in the world; after Microsoft Tycoon, Bill Gates.

Unlike Peter Lynch,Buffet choose to live and work in a quiet city, staying away from from the hustle and bustle of Wall Street. According to record, he still lives in the modest house he bought for $31,500 40 years ago. He deliberately did this to keep away from the market. He does his own research and spends a lot of time thinking about his investment, just like any other discipline investors do.

He is so success that if you had put $1000 into Berkshire Hathaway back in 1965, you would have $5 million by now. Getting a staggering return of 42.6 per cent per year is not an easy job you know! He have been rewarded for being patient and thinking for long term.

"Stocks are simple. All you have to do is buying shares in a great business for less than the business worth, with respect to its management of the highest integrity and ability. Then you own those shares forever".

With early influence from his father, who was a stock broker, the young Warren Buffet started investing at an early age of about 11. He learnt that patience was a basic ingredient of successful investing and is a lesson not to be missed. Persuaded by his father to further his studies in investment, he met and worked for his mentor; Benjamin Graham "The Father of Modern Investment". It was Graham who got Buffet started in investing in a great way.

Warren Buffet was more interested in the company's management as a major factor when deciding to invest as opposed to the usual financial figures and statements. He would find the 'hidden gem' amongst the hay and accumulated his wealth patiently, and finally acquired Berkshire Hathaway. He has not sold a single share of this company, believing that the best place to invest is often at home.

"We emphasise in finding businesses that are predictable in a general way as to where they'll be in 10 or 15, or even 20 years".

Buffet preferred to invest in a boring but predictable industries, and bought the shares in an unexciting companies such as insurance, textile, food and beverage, of which he knew about firsthand. He had difficulty understanding technology stocks and had stayed away from them. As a result, his long term holdings in such stocks (e.g. Coca Cola, Gillette and American Express) yielded very handsome returns.

Most importantly, he was spared by the dot-com meltdown in 2000. Buffet's ability to make decisions that are often opposite to the general market, is what makes him so special. His discipline and rational thinking are what separated him from other stock investors.

And these are certainly the qualities that all investors wish to have.

http://www.stock-investment-made-easy.com/warren-buffet.html

Unlimited Profits From Good Stock Pick. Be Choosy and Consistent in Your Stock Selelction Criteria

Having A Good Stock Pick
Is Your First Step to Make Money in Stock Market

Summarized Overview

In this article you will find information about how to select a good stock quantitatively, why the strategy is so important and the critical key financial ratio.

You will also find information on what is important in corporate annual reports.

Reasons to Have Good Stock Pick Strategy

Though there are thousands of stocks in stock market nowadays, not many of them are worth investing. In ever changing business environment, it is not easy for companies to remain profitable.

Worse, hardly any of them have shareholders' interest at heart. That is why, stocks represented by quality companies with effective management team is the key to get a higher investment return.

My Five Stock Screening Criteria

A good stock pick should've consider effective management as it is everything in sustainable stock investment. Thanks to financial ratios, picking good stock is just a simple math away.

Above average EPSGR and excellent ROE is my first stock screening criteria to filter rubbish stocks in the stock market. You can choose any figure which you feel comfortable. But, the figure 10 I chose is because:

• 10 per cent EPSGR shows that the company has reliable high demand products or services.
• 10 per cent ROE shows that the company are managing shareholders’ fund effectively.
• 10 consecutive years means the company able to survive the ups and down of the market, business cycles or the ever-increasing competition.

Past performance doesn't guarantee anything in the future for sure, but it is the best information for good stock pick. Should there be no changes in it's business foundation and it's management, profit will continue to be sustainable. For any circumstances, effective management will find ways to stay ahead of competition.

On top of that, i did consider:

• less than 0.6 debt to equity ratio (D/E) so that the company has manageable debt during economic crisis.
• high profit margin which shows the management really did a great job in reducing operating cost to maximise profits.

Be Consistent in Your Stock Selection Criteria

You have to be choosy and determined in selecting which stocks you'll be investing in.


If you love speculative stocks, this method is not for you. Rumors and hot tips are just not my taste.

But if you are serious ininvesting for long-term, or value investing as what Warren Buffet did, this good stock pick can easily get rid of junk and worthless stocks straight from the beginning.

Test yourself, and see the result!

http://www.stock-investment-made-easy.com/good-stock-pick.html

"Time in the Market" versus "Timing the Market"

Why Invest in Stock Market When There are Other Investment Options?

Advantages of Stock Market Investing

Why I Love Stock Investing So Much

Summarized Overview

In this article you will find information about reasons to why invest in stock market than other investment options, historical stock market performace from 1926 to 1999, short comparison to other investment vehicles, namely mutual funds, real estate and own a business.
Happy Investing!

Three Reasons Why I Invest in Stock Market

Advantages of Stock 1: Own Profitable Businesses

This is the major reason to why invest in stock market. Building own business might be your ambition, especially if you are an employee like me. But no matter how big or small the business you are going to build, it require A LOT of commitment, time and money.

With stock, owning a business is a lot easier, and cheaper too!. Just imagine, owning a business empire without ever showing up at work. You just have to sitback and relax, watch your company growing from time to time.

By the end of the year, you can collect checks from dividend issued. As your company grows, your stock valuation appreciates as well. You will be amazed on how much return you'll be getting by just holding them as long as possible. Does it sound too good to be true?

Advantages of Stock 2: Flexible Holding Position

You can buy more of the same stock if you find it profitable and undervalued. On the other hand, you can sell some or all of them if it is overvalued or the company losses money. Depend on your stock investing strategy, this flexibility can help you achieve your financial goal faster.

Unlike if you had your own business, even if it losses money, you have to stick with it and struggle to make it profitable to cover your ongoing overhead costs. Same goes to real-estate. If you made mistake since the first day you own the properties, you'll end up losing more and more money paying the mortgage with no rental income to cover.

Advantages of Stock 3: Can Do-It-Yourself

What is your primary investment options? Cash Deposits Stock Market Mutual Funds Own Business Real Estate Others

I can analyze stock profitability, track stock performance, call my broker for transaction and organize my stock investing strategies all by myself. I just have to catch up with few financial ratios either from analyst reports, business magazines, local newspapers or simply from myannual reports collection.

With good time management and focus on your research, all these processes are not require a lot of commitment, really. You don't have tenant to manage, supplier to deal with or customer to face in stock investment.

Unlike mutual funds, you have an absolute control over your investment decision. I can still have fun with my families and concentrate on my working career but make more and more money.

Historical Stock Market Performance

The average stock market is growing over time. Even excludingdividends paid, bonus issue or right issue, the stock market still able to grow 11 to 18 per cent per annum. Cool huh? Can you imagine if your stock has above average performace? Believe me, you can reach even 35 per cent return!

This is why invest in stock market is a very attractive options.

http://www.stock-investment-made-easy.com/why-invest-in-stock.html

If you are investing for long term, try to avoid cyclical stocks. But, it is ok to trade these stocks.

Acknowledge its Industry Nature

Companies have its own business cycle. This especially true to cyclical stocks. Businesses like housing properties, airlines or automobiles are more susceptible to the overall economy.

When the economy is riding the bull market, customers tend to spend more on luxuries thingy like cars, housing and holidays to overseas. But when economy experience slight downturn, people are more likely to avoid spending on the luxury things. 

Just imagine, when more employees been laid off and higher cost of living (as effect of inflationary pressures), buying new homes or brand new cars are most probably the last things in their mind. Struggling their lives through the turbulence time thought them how important cash saving is. If you are investing for long term, try to avoid this type of stock. But, it is ok to trade these stocks.

How to Calculate Intrinsic Value for Stock Investing

How to Calculate Intrinsic Value
Discounted Earnings, Instead of Just Cash Flow

Summarized Overview

You will find information about why you should calculate intrinsic value in stock market investing, and step by step guide on how to do it.

You will also find information about which key financial ratios to use and what you have to do after calculating intrinsic value.

Why You should Calculate Intrinsic Value

Simply because, you don't buy any stock at any price, do you? Do you know why? Because you want as much return as possible!

The price you are paying is the ultimate determinant for the rate of return that you'll be earning. The higher the price you pay for it, you'll be getting lower rate of return. This is why, you need to know how much a stock worth. Once you know its value, you can identify which stocks are traded at discounted price.

However, buying a stock simply because it is cheap is not the right approach either. This is another reason to calculate intrinsic value. To buy quality stocks at discounted price, value for money right?

How to Calculate Intrinsic Value

The way to go is, search for stocks whose prospects you believe in ( with good stock pick method ) and then use a valuation technique to ensure the purchase price is acceptable. Here, I use net present value (NPV) formula.

How to do it? Let say you are valuing stock ABC,

From 13 years historical data, you get the information as above. To proceed, you also need to firm up your expectation based on your risk profile. In this example:

• I set my investment horizon as long as ten years from 2007. So that in 2018 I can use the fund to finance my children's study
• I am confident stock ABC will continue growing 13 per cent per year for the next ten years (13 years records prove this stock able to grow 13 per cent EPS per year)
• I assume stock ABC will be having the same PER and dividend payout by end of 2017 (or early in 2018)

I am expecting 12 per cent return on investment (ROI) so that my initial investment able to cover my children's tuition costs in ten years time.

Let's start calculating intrinsic value of stock ABC.

Step One: Forecast Share Price

First of all, you need to forecast its share price ten years down the road. In this case, I project the price for the next ten years using 13 per cent per year growth.

Step Two: Forecast Total Future Value

Secondly, you need to calculate the total future value. This must include the potential dividend as well.

Look, some investors doesn't care much about dividend. To them, dividend is just too small to be considered. But as it has effect to the total future value, it should be taken into consideration.

By the end of the day, you can compare the stock's profitability to others; which may not pay any dividend at all.

Step Three: Calculate Intrinsic Value

After having all these data, then only you can calculate the intrinsic value for stock ABC.

Step Four: Compare with Current Stock Price

The intrinsic value above is because my goal is to get 12 per cent per annum from this stock. If so, current stock's price, which is $33.50, is acceptable indeed (stock price is below the intrinsic value).

How Do You Calculate Intrinsic Value? Discounted Cashflow Discounted Dividend Discounted Earnings Never Calculate What For?

But if your goal is about getting 25 per cent per annum return on investment, the intrinsic value will be $22. In this case, the current stock price will no longer acceptable for you.

For this same reason, you can say that current stock price is suit to those who are aiming for 15 per cent return per annum (in economics, this called as Internal Rate of Return or IRR)

What's Next?

As you can see, intrinsic value can be relatively different from one investor to another depending on the expected return. Expecting very high return will limit your investment options. On the other hand, having very low expected return may as well better keep the cash in fixed deposit.

As an investor, it is crucial to set a realistic target on the expected profits.

It is better if before you calculate intrinsic value of your selected stock, assess your own risk profile first. This will help you to determine your realistic preferred return based on your need, ability and investing habits.

Eager to buy stock? Hang on first! You need to have the fair value as another comparison. This is what mention by Warren Buffet's guru, the margin of safety 

http://www.stock-investment-made-easy.com/calculate-intrinsic-value.html

Related Reading

How to Value Stock - 3 Methods Warren Buffet Wants You to Learn
If you are looking for ways on how to value stock, click here. I'll share with you 3 stock valuation model most commonly used by stock analyst.

Additional Reading

How to Determine Margin of Safety in Stock Investing
Margin of safety is a way to preserve capital. Find out how to determine fair value for each stock effectively.

Guide in Analyzing Company for Stock Investing
Four guidelines in analyzing company that you are about to invest in. Find how companies difference to each other.

Fundamental Analysis: Definition and Basic Guide for Beginners
Fundamental analysis is a practice that attempt to determine stocks’ valuation. This technique is focusing on the underlying factors that affect the company’s actual business performance.

Unlimited Profits From Good Stock Pick
Discover my simple but profitable stock screening criteria. It is proven to be a good stock pick strategy for all stock investors.

Related Books

Security Analysis
Security Analysis is the bible of fundamental analysis. Originally published in 1934, the tome systematically lays bare the science of security analysis.

Value Investing: From Graham to Buffett and Beyond (Wiley Finance)
Discusses where to look for underpriced securities, how to determine the intrinsic value of a stock, and alternative methods for constructing a portfolio that control risk without restricting investment return.

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)
Among the library of investment books promising no-fail strategies for riches, Benjamin Graham's classic, The Intelligent Investor, offers no guarantees or gimmicks but overflows with the wisdom at the core of all good portfolio management.