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.
Wednesday 11 April 2012
Financial Planning Introduction
Review regularly.
Adjust financial goals.
Be prepared to act when situations change.
When is the best time to plant a tree? 20 years ago.
So, when is the 2nd best time to plant a tree? As soon as you can!
How should I choose a stock brokerage?
Rule - Know what you don't need
Full service brokers
Offer help and advice over the phone or in person
Charge higher fee per trade
Advice is, at best, an educated opinion.
Becomes an expensive luxury that reduce investment returns.
Discount online brokers
Self directed stock research services
Fast, easy trade executions
Convenient, cost-effective solution
Focus on low cost brokers with a clean, clear interface.
Full service brokers
Offer help and advice over the phone or in person
Charge higher fee per trade
Advice is, at best, an educated opinion.
Becomes an expensive luxury that reduce investment returns.
Discount online brokers
Self directed stock research services
Fast, easy trade executions
Convenient, cost-effective solution
Focus on low cost brokers with a clean, clear interface.
What's the difference between a great company and a great stock?
The price paid for a company is just as important as the quality of the company.
Rule of Thumb:
PE above 11: Market expects positive growth
PE at 11: Market expects zero growth
PE below 11: Market expects negative growth
Rule of Thumb:
PE above 11: Market expects positive growth
PE at 11: Market expects zero growth
PE below 11: Market expects negative growth
Small Business Valuation
Basic Truths about business valuations:
1. Purpose of business valuation is to determine a PRICE RANGE, not a specific number.
2. The earnings of your company should be the basis of the valuation. The buyer buys your company for one reason only, that is, for its earnings.
3. For small businesses, using the multiples of earnings is the common method of valuation.
The earning use in small business valuations is OWNER'S BENEFIT. It is suggested that past 3 years Owner's Benefit be used.
Owner's Benefit
= Annual Pretax Profit
+ Owner's salary + Owner's perks/benefits
+ interest + depreciation.
(Contrast with: EBITDA = Earnings before interest, taxes, depreciation and amortization)
When you are selling your small business, you can hope for a higher multiple of earnings when:
1. Your business is in a growing trend.
2. You are able to provide your own finance to the buyer to purchase your business.
A Buffett Disciple Shares His Secrets (Morningstar)
Low risk, high uncertainty situations.
Wall Street punishes uncertainties. The rewards can be very high for such low risk situations.
In a bull market, be prepared for the bear.
"It is not difficult to outperform the benchmark in a rising market. For the investor, it is more important to be with a portfolio that is defensive enough not to drop too much in a down market."
Value Investing - The Bottom Line
"You need to worry about where the company and the stock will be in three to five years. If you can buy something today with little chance of permanent impairment and a high likelihood that you'll double your money over the next five years, you should go ahead and do it."
- Seth Klarman
Start Early
- Seth Klarman
Start Early
Valuing a company using adjusted P/E
Average long-term P/E = 15
Company average long term P/E = 13 ( =$530m / $41m)
Market cap = $530 m
ttm Earnings = $41 m
$161 m in cash (no debt) or $4.75 per share
Cash-adjusted P/E is 9.[ = ($530m - $161m) / $41m]
Earnings yield ( 1/PE) of 11% is too cheap.
If company has a lot of debt, you wouldn't bother about the cash-adjusted P/E.
Company average long term P/E = 13 ( =$530m / $41m)
Market cap = $530 m
ttm Earnings = $41 m
$161 m in cash (no debt) or $4.75 per share
Cash-adjusted P/E is 9.[ = ($530m - $161m) / $41m]
Earnings yield ( 1/PE) of 11% is too cheap.
If company has a lot of debt, you wouldn't bother about the cash-adjusted P/E.
Simple DCF
Valuation
At the end of the day, every company is worth whatever the current value of all its future cash flows are discounted backward to today's terms.
It is a hint, not an answer. Based on a lot of assumptions, using conservative figures.
1st 10 years Cash flow. using OWNERS EARNINGS (FCF).
Cash flow beyond the 10th year (Terminal value): Assumes growth at 3% per year.
Add all the above discounted cashflows to get the present value..
Only the FCFs are hard data, all others are assumptions.
Time 14.13
http://www.youtube.com/watch?v=zA8udp8uRnw&feature=relmfu
At the end of the day, every company is worth whatever the current value of all its future cash flows are discounted backward to today's terms.
It is a hint, not an answer. Based on a lot of assumptions, using conservative figures.
1st 10 years Cash flow. using OWNERS EARNINGS (FCF).
Cash flow beyond the 10th year (Terminal value): Assumes growth at 3% per year.
Add all the above discounted cashflows to get the present value..
Only the FCFs are hard data, all others are assumptions.
Time 14.13
http://www.youtube.com/watch?v=zA8udp8uRnw&feature=relmfu
Key Points about Risks
Risk unequivocally exist in investing in any stock ...
... but important to distinguish between volatility in stock price and business risk ...
... and my point is that none are large or imminent enough to explain why shares are so cheap.
... but important to distinguish between volatility in stock price and business risk ...
... and my point is that none are large or imminent enough to explain why shares are so cheap.
Worthy of a look?
Not sexy, high growth or hot stock.
Warning: May not be in your "circle of competence."
Look at things that are temporary out of favour.
You wish to buy when the prices are falling or close to the bottom.
You should have a tough time trying to buy something that is NOT near its 52 weeks low.
Worthy of a look?
Moat?
Cheap?
Margin of safety?
Inside my circle!
Outcome:
No list
Watch list
Yes list
A large percentage of companies are too difficult to analyse, they are outside your circle of competence.
Concentrated Ideas
"Wide diversification is only required when investors do not understand what they are doing."
- Warren Buffett
Note: Focus concentration of about 10% in each stock. Anything stock that is less than 5% may not be worth your effort.
- Warren Buffett
Note: Focus concentration of about 10% in each stock. Anything stock that is less than 5% may not be worth your effort.
Margin of Safety
"Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY."
- Ben Graham
- Ben Graham
Mr. Market
Stock prices are quotes from an emotionally unstable business partner.
Use or ignore them as you see fit.
Use or ignore them as you see fit.
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