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Does anybody have any calulations on how to work out a stocks intrinsic value?
Thanks in advance : - )
Thanks in advance : - )
Does anybody have any calulations on how to work out a stocks intrinsic value?
Thanks in advance : - )
V= E x (8.5 + 2g)
Where E is simply current year's earning, g the expected growth rate per year over next 7 to 10 years.
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Above from Graham's Intelligent Investor where he said it's the approximate of all those crazy discounted cash flow voodoo (my word).
It works great, particularly because there's only two variables to look at.. and when you apply correctly it does wonders.
Just wondering...
g = decimal or percentage?
V = equity value or enterprise value?
Also noting that there's no risk free rate in this equation... well there is, but it's embedded and fixed into the 8.5 constant. So it might work well for much of the times, but may not work very well when the risk free rate goes extreme to one end of the spectrum or the other (like we do now)?
Does anybody have any calulations on how to work out a stocks intrinsic value?
Thanks in advance : - )
Does anybody have any calulations on how to work out a stocks intrinsic value?
Thanks in advance : - )
The Iron Law of Valuation is that every security is a claim on an expected stream of future cash flows, and given that expected stream of future cash flows, the current price of the security moves opposite to the expected future return on that security. Particularly at market peaks, investors seem to believe that regardless of the extent of the preceding advance, future returns remain entirely unaffected. The repeated eagerness of investors to extrapolate returns and ignore the Iron Law of Valuation has been the source of the deepest losses in history.
A corollary to the Iron Law of Valuation is that one can only reliably use a “price/X” multiple to value stocks if “X” is a sufficient statistic for the very long-term stream of cash flows that stocks are likely to deliver into the hands of investors for decades to come. Not just next year, not just 10 years from now, but as long as the security is likely to exist. Now, X doesn’t have to be equal to those long-term cash flows – only proportional to them over time (every constant-growth rate valuation model relies on that quality). If X is a sufficient statistic for the stream of future cash flows, then the price/X ratio becomes informative about future returns. A good way to test a valuation measure is to check whether variations in the price/X multiple are closely related to actual subsequent returns in the security over a horizon of 7-10 years.
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Put simply, every security is a claim on some future expected stream of cash flows. For any given set of expected future cash flows, a higher price implies a lower future investment return, and vice versa. Given the price, one can estimate the expected future return that is consistent with that price. Given an expected future return, one can calculate the price that is consistent with that return. A valuation "multiple" like Price/X can be used as a shorthand for more careful and tedious valuation work, but only if X is a sufficient statistic for the long-term stream of future cash flows.
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The question is whether P/E multiples, or the Shiller cyclically-adjusted P/E, or the forward operating P/E, or price/book value, or market capitalization/corporate earnings, or a host of other possibilities can be used as sufficient statistics for stock market valuation. The answer is no.
What we find is that both margins and multiples matter, and they matter with nearly the same regression coefficients – all of which imply that revenue is a better sufficient statistic of the long-term stream of future index-level cash flows than a host of widely-followed measures. Emphatically, one should not use unadjusted valuation multiples without examining the relationship between the underlying fundamental and revenues.
claim on an expected stream of future cash flows.
What we find is that both margins and multiples matter, and they matter with nearly the same regression coefficients – all of which imply that revenue is a better sufficient statistic of the long-term stream of future index-level cash flows than a host of widely-followed measures. Emphatically, one should not use unadjusted valuation multiples without examining the relationship between the underlying fundamental and revenues.
I have bolded a bit that I think is important. The aggregation makes price/sales useful for indexes that approximate the overall economy. Not so useful a measure for individual companies
Now I can see why one expert thinks a stock is a bargain and another thinks its expensive or fairly priced over the opinion of another.
I really keep coming back to the conclusion that in most cases profit is gleaned from "a rising tide floating all boats' rather than any analysis'---in particular to trading stock.
Analysis--any analysis T/A or F/A can sit and wait or be applied and re applied until the tide arrives.
Limiting losses until it rises and sitting long on the rise---equals profit.
Rising tides make T/A triggers frequent and reliable.
Rising tides bear out F/A valuations particularly those that rise toward a fairer valuation.
In BOTH cases falling or dodge tides make both forms of analysis look poor---even guess work.
Secondly, I think the main gist that you should account for margins as well as multiples in your choice of sufficient statistic still stands.
...Some points:
First, I don't necessarily disagree, price/sales is more useful for economic indices (country, sector, etc) than individual equity names. But I think this highlights the importance of understanding and finding a sufficient statistic (be it for investing in bonds, stocks, realestate, term deposits or anything else).
Yep agree, but there just isn't a universal sufficient statistic for individual companies - that's why no short cut formula adequately suffices for an individual analysis of the unique value drivers at a company level.
Secondly, I think the main gist that you should account for margins as well as multiples in your choice of sufficient statistic still stands. I would say profitability as well as multiples. Margin is just one aspect of profitability.
Thirdly, although there are some single year ratios which perform better than P/S (EV/EBIT comes to mind), P/S has still been demonstrated to be about as sufficient as, say P/E or P/B in the sense that the annual value decile outperforms the median decile and glamour decile in market wide portfolios for decades (although admittedly the performance of deciles is not perfectly systematic).
By market wide, I do really mean, take all of the stocks on the ASX or NYSE or whatever, apply a minimal liquidity filter and then sort the remaining universe by one ratio or another. So yes, you would be comparing the P/S of Woolworths with the P/S of Oceana Gold.
This does work, even if it is a little counterintuitive. Like I said, it's provably sufficient.
The bet is a little bit more crude than you're probably thinking when someone says "value premium", but essentially the value decile is often full of crap businesses, with outperformance driven by the fact that the businesses are often not as crap as the market price implies.
However, if market function is poor (think 1987 crash, flash crash, etc) then T/A strategies are much riskier and correctly implemented value strategies much less so.
Like to share some examples of this..?
It has been my experience that trading over a medium time frame using advanced T/A techniques and applied correctly is as safe as any strategy and further more will get you out of potential bad position much sooner then any F/A strategy once you are in a position IMHO...eg Forge group...WOW....
I am a bit confused about the point you are making, how are Forge or WOW relevant to a flash crash or GFC in your example?
Secondly I dont see a case for buying positions in either based on FA at the areas in time before they suffered significant drops in price.
My main point though is I do not think you can make a statement that one type of analysis is more riskier than another as it all depends an how each person is applying it.
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