Previously I have been sharing some investment analysis on certain stock or sharing the experience of attending AGMs, but I realised I'd be either too lazy to write so much on the same stuff and sometimes cannot recall what I have observed during the AGMs. I always can't keep on updating the long stories that I was writting and thus I trully feel sorry to those who were following my blog.
I just started a new job in an investment bank recently, and the work load becomes quite heavy lately and always work long hours, so I can't concentrate on writting long story in the blog. In view of this, from now on, I'll only write something in short and spontaneous to what I can think of. And I would like to say thank you to those friends who would be keep visting my blog once a while in the future.
Monday, November 15, 2010
Saturday, November 6, 2010
How to evaluate a company's fair value? I'm puzzling.
Let me share some of my investment experience of analysing a company's fair value.
1st I'll check the company's management, if the quality of the management is good then I'll further check out their intrinsic value. If they are not integrity enough such as the "Berjaya" gang of companies are out of my radar screen.
2nd step is to evaluate a company's fair value. But what methods I should use? It depends on whether we are insider? Are we the substantial shareholder and be able to impose decision making onto the company's management and subsequently affect the distribution of the company cashflow?
1) If you are minority shareholders, maybe Discounted Dividend Model (DDM) is suitable.
2) If you are controlling shareholders, then Discounted Free Cashflow Model (DCF) could be a good tool.
However, these discounted models are too complicated because a lot of the people don't know how to use financial modeling to project future dividends/cashflows and subsequently to use the correct discount rate and constant growth rate to get the accurate PV. A small fault input or assumption could have lead to a disastrous outcome by using these models.
Then people would tend to make life easy by using P/E, P/B or P/S. But these relative valuations have their own weaknesses due to irregualr year of financial results and thus P/E, P/B or P/S could be invalid for certain years. In addition, certain ratios only applicable to certain sectors. For example P/B could be good for banking or property stocks because they rely on their asset to generate value, but it is not a good indicator for knowledge intensive sector such as IT companies since they make business base on human resource, not physical assets.
In order to justify the application of relative valuations, analyst would tend to get a normalised or average ratios for P/E, P/B or P/S by removing some of the outliers. Subsequently they further supplement these ratios by comparing with the Adjusted Net Asset (book value). IMHO, it's stupid to value a company base on NAV, because doing business is forward looking, so we should not evaluate a company based on its historical figures. If a company is making losses but sitting with huge base asset, what's the point we buy a company's at a discount to its NAV knowing a negative retain profit is gradually shrinking the company's NAV?
With all these absolute and relative valuation models, oh hell! they still cannot get us the exact valuation. So there are another value investing strategy comes to play that we should buy a company with a margin of safety to it's intrinsic value. At the end of the day, all we can see that we don't have some rocket science tools to get us the actual value but a vague range of valuation.
In order to understand a company's valuation, it all depends on how good is our business sense or instinct, how well we can understand the business model and how far we can look beyond the business prospect. It's not necessary to become well equipped in academic theory and historical numbers in order to be a good investor or else there would be a lot mathematicians, statisticians and historians become success in investment.
I like the quote from John Maynard Keynes as he had once said "It is better to be roughly right than precisely wrong”. The same quote does apply to value an investment because it's an art, not a science or mathematics.
1st I'll check the company's management, if the quality of the management is good then I'll further check out their intrinsic value. If they are not integrity enough such as the "Berjaya" gang of companies are out of my radar screen.
2nd step is to evaluate a company's fair value. But what methods I should use? It depends on whether we are insider? Are we the substantial shareholder and be able to impose decision making onto the company's management and subsequently affect the distribution of the company cashflow?
1) If you are minority shareholders, maybe Discounted Dividend Model (DDM) is suitable.
2) If you are controlling shareholders, then Discounted Free Cashflow Model (DCF) could be a good tool.
However, these discounted models are too complicated because a lot of the people don't know how to use financial modeling to project future dividends/cashflows and subsequently to use the correct discount rate and constant growth rate to get the accurate PV. A small fault input or assumption could have lead to a disastrous outcome by using these models.
Then people would tend to make life easy by using P/E, P/B or P/S. But these relative valuations have their own weaknesses due to irregualr year of financial results and thus P/E, P/B or P/S could be invalid for certain years. In addition, certain ratios only applicable to certain sectors. For example P/B could be good for banking or property stocks because they rely on their asset to generate value, but it is not a good indicator for knowledge intensive sector such as IT companies since they make business base on human resource, not physical assets.
In order to justify the application of relative valuations, analyst would tend to get a normalised or average ratios for P/E, P/B or P/S by removing some of the outliers. Subsequently they further supplement these ratios by comparing with the Adjusted Net Asset (book value). IMHO, it's stupid to value a company base on NAV, because doing business is forward looking, so we should not evaluate a company based on its historical figures. If a company is making losses but sitting with huge base asset, what's the point we buy a company's at a discount to its NAV knowing a negative retain profit is gradually shrinking the company's NAV?
With all these absolute and relative valuation models, oh hell! they still cannot get us the exact valuation. So there are another value investing strategy comes to play that we should buy a company with a margin of safety to it's intrinsic value. At the end of the day, all we can see that we don't have some rocket science tools to get us the actual value but a vague range of valuation.
In order to understand a company's valuation, it all depends on how good is our business sense or instinct, how well we can understand the business model and how far we can look beyond the business prospect. It's not necessary to become well equipped in academic theory and historical numbers in order to be a good investor or else there would be a lot mathematicians, statisticians and historians become success in investment.
I like the quote from John Maynard Keynes as he had once said "It is better to be roughly right than precisely wrong”. The same quote does apply to value an investment because it's an art, not a science or mathematics.
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