Need help with Roger Montgomery's growth multiplier table

[viciam]

Hi all,

Thanks for clicking on my thread,

I was hoping that someone can help overcome a question that I have.

Please visit http://www.youtube.com/watch?v=Nc8rTFNqyww and forward to 4.30. In this video Roger Montgomery is explaining his intrinsic value calculations. The question that I have is to do with the table that you see at 4.30.

How does Roger make this table, I understand why he has 8%,9% and 10% at the top and also the percentages on the left hand side. But how has he filled the table with those other "multiplier numbers"?

In the Income table just before 4.30, I know he divides the return on equity by 8,9 and 10%, but I am not sure how he is getting the numbers that fill the Growth second table.

If anyone can help, it would be greatly appreciated.

Many thanks in advance

 

[viciam]

Re: Is anyone able to help? Re: Roger Montgomery growth multiplier table

For anyone who has read Rogers book, does he explain how he gets the multiplier numbers for the table I am talking about?

 

[Judd]

Re: Is anyone able to help? Re: Roger Montgomery growth multiplier table

For anyone who has read Rogers book, does he explain how he gets the multiplier numbers for the table I am talking about?

Suggest that you read the "Similar threads" just below and post there as well as possibly use this site's search function rather than starting a new thread on the same subject.

 

[viciam]

Re: Is anyone able to help? Re: Roger Montgomery growth multiplier table

Yeh I did, I read through the all the 801 replies but I can't find the answer

Somebody must know how to do this, please I will forever be in your debt if you can help me figure this out

 

[Sutekh]

Re: Is anyone able to help? Re: Roger Montgomery growth multiplier table

Yeh I did, I read through the all the 801 replies but I can't find the answer

Somebody must know how to do this, please I will forever be in your debt if you can help me figure this out

If I recall the values are equal to the Return on Equity (ROE), divided by the Investor's Required Rate of Return (RR) to the power of 1.8.

Growth Multiplier = (ROE / RR) ^ 1.8

In the second edition of the book, he modified some of the values in the 5%, 7.5% and 10% ROW rows to be lower (more conservative)

 

[viciam]

Re: Is anyone able to help? Re: Roger Montgomery growth multiplier table

If I recall the values are equal to the Return on Equity (ROE), divided by the Investor's Required Rate of Return (RR) to the power of 1.8.

Growth Multiplier = (ROE / RR) ^ 1.8

In the second edition of the book, he modified some of the values in the 5%, 7.5% and 10% ROW rows to be lower (more conservative)

Lower? how did he do that? by reducing ^1.8 to a lower power?

 

[Sutekh]

Re: Is anyone able to help? Re: Roger Montgomery growth multiplier table

Lower? how did he do that? by reducing ^1.8 to a lower power?

Actually, to a higher power of 2.2. It looks like he only applied the 2.2 power to cells in the table where the value of (ROE/RR) is less than 1.

For example (7.5/10)^2.2 = 0.531, or (10/14)^2.2 = 0.477

 

[craft]

Hi all,

Thanks for clicking on my thread,

I was hoping that someone can help overcome a question that I have.

Please visit http://www.youtube.com/watch?v=Nc8rTFNqyww and forward to 4.30. In this video Roger Montgomery is explaining his intrinsic value calculations. The question that I have is to do with the table that you see at 4.30.

How does Roger make this table, I understand why he has 8%,9% and 10% at the top and also the percentages on the left hand side. But how has he filled the table with those other "multiplier numbers"?

In the Income table just before 4.30, I know he divides the return on equity by 8,9 and 10%, but I am not sure how he is getting the numbers that fill the Growth second table.

If anyone can help, it would be greatly appreciated.

Many thanks in advance

The RM formula produces a ‘number’ not a true valuation (which incidentally is impossible to ascertain accurately for a business because the future is unknowable.)

There is to my knowledge no evidence of the return generated by betting against the market based on this ‘number’, however betting against the market opens you up to massive risk.

RM claims that he has statistical evidence but refuses to release it. RM’s historical public records are of underperformance.

With no evidence to support the usefulness of the number produced why would you want to know it, less still use it to risk your capital?

 

[Intrinsic Value]

The RM formula produces a ‘number’ not a true valuation (which incidentally is impossible to ascertain accurately for a business because the future is unknowable.)

There is to my knowledge no evidence of the return generated by betting against the market based on this ‘number’, however betting against the market opens you up to massive risk.

RM claims that he has statistical evidence but refuses to release it. RM’s historical public records are of underperformance.

With no evidence to support the usefulness of the number produced why would you want to know it, less still use it to risk your capital?

THe more you delve into the formula the more you will see that it is flawed.

Both his RR which is a figure he basically plucks out of the air and the overreliance on future forecasts make his formula very problematic. Add to that his quality rating A and B and C etc and you will have yourself in a world of pain if you try and follow his method.

Having said all of that I have found some good picks in stocks he has spruiked over the last couple of years but you need to do more study before you slavishly rush in on anything he recommends.

Caveat Emptor.

 

[viciam]

Thanks for the reply guys,

I kind of figured that the method he shows on youtube and in his book are far too simple for them to be realistically used in the real world. They may set a basic guide but that's all, they can't be used to base investment decisions on, or working out an estimate value be straight forward? or does it just seem straight forward because I might be smarter than most? or am I dumber than most for actually falling for RM's method and buying his book so he can make more money from the book sales? I don't know.

This is the stage I am at in my life at the moment, I've decided to commit and devote my self to investing until I die. I'm learning all the basics, reading all the tutorials, terminologies and ratios as quickly as I can, making my own records and descriptions of these ratios so I always have them on hand when I am reading through annual reports.

As for the intrinsic value, I've no idea where to begin and its getting me down.

 

[odds-on]

Thanks for the reply guys,

I kind of figured that the method he shows on youtube and in his book are far too simple for them to be realistically used in the real world. They may set a basic guide but that's all, they can't be used to base investment decisions on, or working out an estimate value be straight forward? or does it just seem straight forward because I might be smarter than most? or am I dumber than most for actually falling for RM's method and buying his book so he can make more money from the book sales? I don't know.

This is the stage I am at in my life at the moment, I've decided to commit and devote my self to investing until I die. I'm learning all the basics, reading all the tutorials, terminologies and ratios as quickly as I can, making my own records and descriptions of these ratios so I always have them on hand when I am reading through annual reports.

As for the intrinsic value, I've no idea where to begin and its getting me down.

Treat investing as a game and you will enjoy it. The games does need to be played professionally though!

Take a company. Read about it. Next draw an x y graph. The x axis is labelled 0 to 5 years. The y axis is labelled from 0 to 100%. Draw a line showing your confidence as a percentage in the companies ability to make profit in the next 5 years. Think about it. Then draw a line for a 5 year term deposit with your confidence as a percentage that you will earn interest and receive your money back. I find this a very interesting exercise before i even start to try and calculate the intrinsic value of a company.

Cheers

Oddson

 

[viciam]

Treat investing as a game and you will enjoy it. The games does need to be played professionally though!

Take a company. Read about it. Next draw an x y graph. The x axis is labelled 0 to 5 years. The y axis is labelled from 0 to 100%. Draw a line showing your confidence as a percentage in the companies ability to make profit in the next 5 years. Think about it. Then draw a line for a 5 year term deposit with your confidence as a percentage that you will earn interest and receive your money back. I find this a very interesting exercise before i even start to try and calculate the intrinsic value of a company.

Cheers

Oddson

Thanks for the tip Oddson, sounds interesting.

Talking about the calculations being simple, maybe they are? Watching Berkshire Hathways vice president, even he was insistent that its such a simple method to value a company

 

[McLovin]

Thanks for the tip Oddson, sounds interesting.

Talking about the calculations being simple, maybe they are? Watching Berkshire Hathways vice president, even he was insistent that its such a simple method to value a company

The calculation is the small final piece of the puzzle right at the end. Newbies spend an inordinate amount of time worrying about whether their valuation is correct down to the nearest cent and ignore far more important aspects to fundamental analysis. For a guy like Munger who is buying with a 20 or 30 year time frame, do you think he really cares if his estimate of IV is spot on? The whole point of the margin of safety is acceptance that your estimate will be wrong.

 

[odds-on]

Thanks for the tip Oddson, sounds interesting.

Talking about the calculations being simple, maybe they are? Watching Berkshire Hathways vice president, even he was insistent that its such a simple method to value a company

Here is a simple process that I use for calculating the value of a business:-

Firstly my main aim is to calculate my CONFIDENCE in future earnings. This is key. I do this by thinking of the following:-

1. SCALE. How large can a company grow within an industry? How large can the industry grow?
2. CHANGE. I always think back ten years to what has changed and what has not changed. Friends still live in the same house. Trains are still driven by train drivers. I still have to go to work. All work computers I have used in the last ten years use Microsoft. A bin man still collects the rubbish. Subway and Starbucks is everywhere I go these days. My mobile phone has a camera and MP3 player. You get the idea, what could change the business and industry?
3. FAILURE. Business failure will eventually happen. This needs to be assessed and taken into account.
4. HUMAN BEINGS. Do not underestimate the psychology of human beings and the effect this has on a company’s profits and the market’s sentiment of a company.

1. – 4. will alter CONFIDENCE. Repeat this many times until you are satisfied with the confidence – compare it to your confidence in the term deposit as it will make you think about the return you would like to receive.

Personally if I am confident (e.g 80% or more) then I stick a conservative multiple on the earnings (PE= 8.5 + 0.5*G, where G is growth) – I now have an IV. Some websites also have analyst forecasts – compare your IV to that, for well followed stocks do not be surprised if sits within the lower part of the analyst range. My personal view is that the market is broadly efficient therefore I do not use too much fundamental ratio analysis just revenue growth, return on equity or capital, dividend history and debt to equity. This is because I like to see economic tailwinds, profitability, real returns to shareholders and moderate leverage. Most of my time is spent thinking about 1. to 4. Evaluating management is something I have yet to really get my head round (hopefully I will do one day).

Try the following website for some simple calculators.

www.moneychimp.com

Cheers

Oddson.