Calculation of Intrinsic Value

I have created an excel sheet that could be usefull when calculating Intrinsic values of stocks.
All you have to do is open the excel sheet, and fill in the red numbers in the excel sheet, which you can find on the links next to each box.
Excel will then automatically calculate the intrinsic value of the stock you are analyzing.

If you want to change the ticker, open a hyperlink in a box next to a red number, and change the ticker in the web address.
For example, if you are looking at http://finance.yahoo.com/q/ks?s=PEP+Key+Statistics and you would like to see the data of Coca Cola co. instead of Pepsico, change the ticker from PEP (which is the ticker of Pepsico) to KO (which is the ticker of Coca Cola).
The link to visit then becomes: http://finance.yahoo.com/q/ks?s=KO+Key+Statistics for example.

Method number one is a very simplistic model, which calculates a price target for the next 5 years based on historical valuations, the last 4 quarters results and future growth.
Method number 2 is more advanced, and takes into account Free cash flow, net cash position and future growth.
This method discounts the future values at a discount rate of 9% per year, which is the return you can expect over the long run in the stock market (7% price appreciation per year + 2% dividend yield per year).

To open the excel sheet, please click here: Calculate_Intrinsic_Value

Please be aware that calculating an intrinsic value is not an exact science. It is based on subjective estimates.
The best thing you can do is to use methods used by the biggest value investors in the world, such as Warren buffet, Joel Greenblatt, Monish Pabrai and the likes…

http://profitimes.com/value-investing/calculation-of-intrinsic-value/

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

The Evolution of Warren Buffett as an Investor

The Evolution of Warren Buffett as an Investor
June 16th, 2011

Before Warren Buffett became Chairman and CEO of Berkshire Hathaway, he ran a successful investment partnership. But his style of investing was not always the same, it gradually evolved over time. His high school jobs consisted of varied ventures including selling golf balls and delivering papers. The money he saved from these jobs was invested in the stock market using different investment styles.

Perhaps trying to find the best style for himself, Buffett had read every book related to finance in the Omaha Public Library by the time he graduated college.

His investment style up to this point was wide ranging. He had studied many different techniques including odd-lot investing and technical analysis.

Buffett’s Investing Framework Takes Shape

In 1950 he came across a copy of The Intelligent Investor by Benjamin Graham, his future mentor at Columbia. This book had a dramatic effect on Buffett’s investment style.

Graham’s investment style could be seen on a deeper level in his other book, Security Analysis, which was co-authored by David Dodd.

Within Graham’s two books, an investing framework was outlined that would shape Buffett’s stock selection for the rest of his career.

Graham favored looking at a stock as a piece of a business. He viewed volatility more as an opportunity and less as a risk.

Working for Graham

While also a professor at Columbia, Graham ran the investment partnership Graham-Newman Corporation. Through his investment partnership he invested using the Net Current Asset Value formula to identify companies. Using this formula he was able to find companies selling for below an estimation of liquidation value.

In the early 1950s, Buffet was piggybacking off of Graham’s ideas with his own money.

Through his partnership, Graham would sometimes buy large stakes in companies to influence managements and join the board of directors. Some examples include investments in Northern Pipeline, Philadelphia and Reading Coal & Iron Company, and Marshall-Wells.

It was at the Marshall-Wells annual stockholder meeting that Buffett first met Walter Schloss, whom he would later be colleagues with. It wasn’t until 1954 that Buffet finally convinced Graham to hire him at Graham-Newman.

There, Buffet worked alongside Schloss in a spare room manually computing the liquidation value of companies. A signature trait of this investing was that little time was spent evaluating management. Buffet and Schloss merely filled out simple forms which would be used by Graham to make his investment decisions.

By ignoring the qualitative side, Graham’s method was largely quantitative.

The Early Partnership

After the Graham-Newman partnership was closed in 1956, Buffet formed his own investment partnership. He employed many of the same methods that he used while working for Graham.

Buffet followed in his mentor’s footsteps by buying companies selling below liquidation value and then proceeding to influence management. He did this with success at Sandborn Map, Dempster Mill Manufacturing, and Berkshire Hathaway.

The Birth of Berkshire Hathaway

Berkshire Hathaway did not start out as the conglomerate it is today, but as a textile mill selling below liquidation value. Buffett first began buying it in 1962 and by 1965 he had taken control of the company’s board and made himself Chairman.

During this time, Buffett’s investing style began to change again.

While he still favored buying companies that were selling below intrinsic value, how he came to a company‘s intrinsic value began to change.

While still managing his partnerships, Buffett was introduced to Charlie Munger. Munger felt better about buying a great business with high returns on capital than buying a struggling company selling below liquidation value.

Buffett’s Investing Style Today

Over time, Buffett and Munger both began to move further from the strict Graham approach and more towards buying great businesses. By placing a greater emphasis on the intrinsic value as determined by the operating company’s future cash flows (rather than the company’s assets) a company’s qualitative characteristics became more important.

Buffett views Phillip Fisher’s book Common Stocks and Uncommon Profits as the best guide to successful qualitative investing.

By 1970, Buffett’s partnerships had been wound down and Buffett concentrated his efforts on running Berkshire Hathaway.

Over the past 40 years Buffett has been able to combine the quantitative style of Graham with the qualitative style of Fisher, and in doing so has become arguably the greatest investor of all time.

About the Author: Daniel Rudewicz is a CFA charter holder and the managing member of the deep value investment company Furlong Financial, LLC. He will begin attending Georgetown Law in the evenings this fall. To contact him please send an email to dan@furlongfinancial.com .

http://www.oldschoolvalue.com/blog/featured/the-evolution-of-warren-buffett-as-an-investor/

Why your portfolio may not be as healthy as you think

Why your portfolio may not be as healthy as you think
Quarterly statements rarely tell the whole story
By Tom McFeat, CBC News Posted: Feb 27, 2012 5:36 AM ET

You can scan your quarterly statements for mention of your personal rate of return, but you may not find it. Many investment advisers and firms don't routinely provide it. (iStock)

You've just received the quarterly statement from your mutual fund company or financial adviser, and the results seem good. Your portfolio's worth has grown by five per cent from the last quarter and by 15 per cent over the past year —in fact, you see that your portfolio has doubled in the past five years.

Wow, you think, my financial adviser is a genius!

Not so fast.

Chances are that the figures you've been provided with show the overall value of your investment holdings. The catch is that most statements don't clearly show how that figure has been inflated by your regular contributions and perhaps by regular deposits of interest.

Warren MacKenzie, CEO of Toronto-based Weigh House Investor Services, says that when he worked at a big mutual fund company 20 years ago, he suggested they provide clients with calculations of their personal rate of return rather than the overall growth of their portfolio.In other words, that seemingly glowing return on your investments could be due in large part to the additional contributions you've made, not to growth of the investments themselves.

"'Great idea,'" they said. 'We'll get right on it.'"

Twenty years later, he's still waiting.

Common error

To figure out the real performance of your portfolio, you have to account for all those deposits (and any withdrawals). Failing to do that will leave you with a wildly inaccurate picture of how your investment portfolio has been doing.

It sounds simple, but it's surprising how often this factor is overlooked.

Back in the 1990s, a group of women investors from Beardstown, Ill., realized they'd made this mistake – but not before they'd written a best-selling book about how their small investors club had beaten the stock market and produced an annualized return of 23.4 per cent over 10 years. The book crowed about how their approach to investing delivered results that far surpassed what most professional money managers had been able to achieve.

The only trouble was, they had forgotten to account for those cash inflows into their club. The investment growth of their portfolio over those 10 years was actually just 9.1 per cent annually — six percentage points lower than what the broad market had returned.

Embarrassing doesn't begin to describe the fallout. Their well-meaning but hopelessly inaccurate bestseller — The Beardstown Ladies Common-Sense Investment Guide: How We Beat the Market and How You Can Too — was pulled from store shelves just as the lawsuits began to fly.

Rate of return

So, how do you avoid the Beardstown fiasco and figure out how you'rereally doing financially?

What you need to calculate is your own internal rate of return (IRR) — also known as the personal rate of return or the dollar-weighted rate of return.

What you need to calculate is your own internal rate of return (IRR) — also known as the personal rate of return or the dollar-weighted rate of return.

You can scan your quarterly statements for a mention of this figure, but you may not find it. Many advisers and firms don't routinely provide it.

Why not?

Well, that would make it easier to compare just how well your portfolio has done relative to an appropriate benchmark, such as the average return of the markets. Some advisers, it seems, don't want their clients to know the ugly truth that they aren't adding much, if any, value for the fees they charge.

MacKenzie has witnessed first-hand how reluctant some advisers are to reveal how well (or poorly) their clients are actually faring compared to the benchmark.

"One woman who came to see us said her adviser told her that [calculating her benchmark] couldn't be done because she had both stocks and bonds," he said.

The bottom line quickly became clearer, said MacKenzie, when his own calculations showed the adviser had badly underperformed the benchmark.

"I think he's afraid he'll lose the account if he comes clean," MacKenzie said.

Figuring it out

Figuring out one's personal rate of return in a portfolio is not the easiest calculation to perform, especially for the mathematically challenged. MacKenzie's firm has an online calculator that will do the figuring for you.

"It's the best one I've seen on the web that's free," says Justin Bender, a portfolio manager at PWL Capital, a fee-based investment management firm.

Bender cautions that large contributions made just before periods of relatively good or poor performance can skew the results. But for most investors, he says, the Weigh House calculator works well.

"A lot of advisers like to pretend that active management is paying off," says Bender.

The calculator can reveal the truth — that most advisers don't outperform benchmarks over the long term.

Besides its rate of return calculator, Weigh House also has calculators that can figure out if your portfolio's performance is falling short of the appropriate benchmark. One has users spell out their asset mix and compares that with appropriate benchmarks, so if their portfolio is 50 per cent equities and 50 per cent fixed income, they won't be comparing returns to an all-equity benchmark.

A third calculator tells you how much underperformance can cost you over time. Seeing how relatively small changes in the rate of return can have a huge impact on how much money you'll have in your golden years is sobering stuff, and it leads you to wonder why there isn't a requirement to routinely disclose this information.

Adviser fees don't always translate into profits

FAIR Canada — the Canadian Foundation for Advancement of Investor Rights — supports moves to have the industry provide better performance information to investors.

'Many investors find after 10 years that they're no further ahead than when they started.'— Ermanno Pascutto, Canadian Foundation for Advancement of Investor Rights

"Performance reporting has not been particularly uniform," says the group's executive director, Ermanno Pascutto, noting that sometimes such reporting is non-existent.

"Many investors find after 10 years that they're no further ahead than when they started, but the financial adviser has generated large fees."

That makes it even more critical, he says, that investors be given easy-to-understand information about how their portfolio has been doing so they can see whether their advisers have been earning those fees.

Still, some firms are coming through. BMO InvestorLine and RBC Direct Investing are two discount brokerage firms that routinely provide their do-it-yourself clients with personal rate of return calculations. Investment counsellors often do this for their high-net-worth clients. But many other firms that actively manage money don't routinely do this, nor do most financial planners.

What should you do if your adviser says he or she can't — or won't — provide this calculation for you?

"Find a new adviser," says MacKenzie. "In most cases, they won't volunteer it. But in most cases, if you ask, you can get it."

http://www.cbc.ca/news/business/taxseason/story/2012/02/21/f-rrsp-rate-of-return.html

Portfolio's Return Calculator

http://myinvestingnotes.blogspot.com/2012/04/portfolios-return-calculator.html

Portfolio Accounting

Portfolio Accounting

A basic understanding of 'portfolio accounting' is necessary when wanting to calculate returns. Portfolio accounting is also very important when it comes to dealing with derivatives. Most of what will follow in this subchapter looks trivial, but can give one or two headaches in practical applications.

'Portfolio accounting' is about recording, classifying, and summarizing financial events that affect an investment portfolio.

Portfolio Definition

Although it might sound trivial, the definition of individual 'portfolios' isn't always that straight-forward in practice.

We shall define a 'portfolio' as an abstract accounting entity including at least one security and one cash account. The term 'abstract' merely points to the fact that this definition does not necessarily correspond to 'real-world' accounting entities.

Basic Relationships

The relationships below are expressed on a "net" basis (net of transactions costs, fees & withholdings taxes).

Ending Market Value = Beginning Market Value
                                     + Net Contributions
                                     + Gains&Losses

Net Contributions = Contributions - Withdrawals

G&L = Income
           + Net Capital Gains&Losses

Net Capital Gains&Losses = Sales - Purchases
                                             + Ending Market Value Securities
                                             - Beginning Market Value Securities

Ending Cash Balance = Net Contributions + Income + Sales -Purchases

Note that for return calculation purposes, "gains and losses" are defined on a 'beginning-of-calculation-period market value basis', and not on a 'cost basis' as in an accounting context. The differences between the two concepts of "gains and losses" are...

• Valuation: Accounting G&L are calculated based on cost prices at the time each security was purchased. When calculating investment returns, all securities are considered at theirmarket prices.
• Time Period: In calculating accounting G&L, the holding period of securities are relevant (because different holdings periods are mixed, an inventory model such as LIFO has to be specified additionally. The calculation of investment returns refers to a specific calendar period (for example, "monthly")and stocks and flows during this period only are relevant.

The further decomposition of "net gains and losses" in "realized" and "realized" components is not of particular interest for return calculation purposes. The only thing to remeber is not to include 'realized gains & losses' as 'income' when calculating investment returns: As realized gains & losses are reinvested, this would result in double-counting and therefore distortion of investment returns.

Market values must be calculated including accruals.

The above portfolio accouting realtionships can be illustrated graphically...

Click here for a large version of the above chart.

Market Valuation

Portfolios are valued at market prices ('Mark-to-Market').

Accruals should be reflected in market prices whenever possible. Accrual accounting is a must for fixed-income securities, but typically rather unimportant in the context of dividends on equity. Dividends are not payable unless the stock was owned on the record date, so dividends are accrued as income on valuation dates  from the ex-dividend date up to the payable date trade.

Valuation issues are a very important, but often neglected issue in return calcuation and therefore in investment performance analysis: 'garbage in, garbage out'.

Mark-to-Market versus Mark-To-Model, Mark-to-Market versus OTC...

For illiquid instruments, there is no market price available and MTM can become a serious problem. The choice of valuation model is very often under the control of asset managers. They can therefore take advantage to manipulate the prices so as to smooth the portfolio returns. If this is the case, the auto-correlation coefficient of the portfolio return series will be significant. As a result, volatility of returns (=risk) will be underestimated as well as the correlation of the fund with peer products or the benchmark. The diversification benefits of the portfolio to the investor will therefore be overestimated.

Cash Flows

Income (dividends, coupons) is included in return calculations if income is re-invested. Income is an internal cash flow. Selling/buying securities also generates internal cash flows (transfer of value from securities to cash account or vice versa)

Contributions and withdrawals are external cash flows. For convenience reasons, we use the summary term 'net contributions', defined as contributions minus withdrawals.

Some authors use the term 'cash flow' instead of net contributions. This can easily lead to confusion when mixing up internal with external 'cash flows'. We strongly recommend avoiding the term 'cash flow' in the context of return calcuations and substitute it with the relevant conpcets directly (income, contributions etc.)

Besides actual client orders, there exist other external cash flows (especially withholding taxes, fees). When presenting net contributions, customer orders and other external cash flows should be reported as separate line items.

Taxes

Terminology: 'after-tax' and 'before-tax' returns.

Difficult to generalize since tax rates are customer specific.

In the context of a specific portfolio, returns are normally stated on a 'before-tax' basis, where values are not subject to any deductions in respect of tax (whether incurred or not). Any payments to the tax office out of the portfolio are then treated as a withdrawal of funds. When calculating returns after taxes, tax payments outside the portfolio have to considered as contributions.

Reclaimable (withholding) taxes versus non-reclaimable taxes: any reclaimable taxes payed have to be consdiered as withdrawals. Reclaimable taxes received are contributions.

Fees

Investment fee structures differ significantly across countries and products. In a universal bank setting, for example, investors might use one bank for all investment management services. Such full-service providing banks might work with cross-funded (subsidized) fees, partially bundled or summed up to an all-inclusive fee (also known as wrap account programs). In the case of a wrap account, 'net-of-fee performance' would mean a net-of-management-and-brokerage/custody-fee performance while in a difference setting, 'net-of-fee performance' is understood as net ofmanagement fees only.

Such differences complicate net-of-fee performance calculations considerably and also affect comparability of returns within a company (aggregating different types of clients and accounts to composites) and between different asset management firms.

Another issue in reporting net returns is that a presented net-return might not be achieved by all clients due to differences in characteristics (volume) or simply bargaining power.

Brokerage Commission Costs are usually added to the purchase cost and subtracted from sales proceeds for both gross- and net-of-fee return calculations

Custodial Fees are typically not deducted from either gross or net performance and are treated as a withdrawal. This is justified when the costs are beyond the control of the investment manager.

Management Fees and other charges for advisory services provided by the asset manager are usually charged to the portfolio. These charges are treated as withdrawals in the calculation of 'gross-of-fees returns' (=before deduction of fees charged).  The same withdrawals are excluded in the calculation of a net-of-fees return (=after the deduction of fees charged). Management fees can also be charged outside the portfolio. It is important to include fees charged are in the calculation of net- and gross-of-fees returns. When fees have been paid from outside the fund, they are excluded from calculations when a gross of fees return is required.  They are treated as a contribution to the portfolio when a net of fees return is required.

To avoid distortions and "jumps", fees payed out of the portfolio should be "accrued"  whenever possible.

If fees are calculated as a percentage of average capital invested, the calculation methodology for average captial invested should be specified as detailed as possible.

Transaction Costs

Transaction costs are usually deducted: securities at 'cost prices'.

Often neglected, source of return, quality indicator for operationally efficient investment management.

Exchange Rates

Portfolio base currency, security currency, currency overlays, currency fowards.

Consistency is oftenan issue: consistency not only within portfolio, but also when benchmarks and other entities the portfolio is compared with are involved.

Data source for exchange rates used should always be disclosed.

http://www.andreassteiner.net/performanceanalysis/?Return_Calculation:Portfolio_Accounting

Portfolio's Return Calculator

Use these calculators to work out your portfolio's returns.

Detailed version:   CALCULATE YOUR PORTFOLIO'S RETURN

Simplified version:  Portfolio Rate of Return – Calculator