Value Investing on the ASX

Discussion in 'Share Investing Strategies, Theories & Education' started by TPI, 14th Jun, 2007.

Join Australia's most dynamic and respected property investment community
  1. Takestock

    Takestock Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    173
    Location:
    Sydney
    Coopranos

    How do you determine a stock is worth having from fundamentals? What makes it attractive?

    Steve
     
  2. Takestock

    Takestock Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    173
    Location:
    Sydney
    You've covered some of the main methods of valuing businesses. A few are:

    1. Asset valuation method: What are the company's net assets (plant, equipment, inventory, goodwill etc) worth? Divide by number of shares and compare with current share price.

    2. Price to earnings ratio method: Look at the company's earnings and compare this with how the market values similar companies in relation to their earnings.

    3. Discounted cash flow method: Look at how much cash the company will generate each year and work out how much you would pay for that stream of income. That is, use some interest rate to determine what that stream of future cash is worth today.

    All valuation methods are obviously subject to many assumptions. However, if you have learnt the basics of reading and understanding an income statement (profit and loss), a balance sheet and a cash flow statement, it is possible to guesstimate a rough value for the business.

    I can understand that this involves a reasonable amount of work that some (if not most!) people may not wish to undertake. I would definitely recommend hiring your own team of analysts if this is the case. This could be a managed fund that invests in a value investing manner or subscribing to a newsletter that is also educational- The Intelligent Investor is an excellent read.

    If anyone wishes to increase their financial intelligence (ie knowing what all those numbers really mean), a book I can't recommend highly enough is "Financial Intelligence" by Karen Berman and Joe Knight. This book is very readable.

    If you really want to know how to value a company, read "The New Buffetology" by Mary Buffett

    Steve
     
  3. TPI

    TPI Well-Known Member

    Joined:
    3rd Feb, 2018
    Posts:
    227
    Location:
    Melbourne
    Yep, thanks Steve, will add them to the list.

    GSJ
     
  4. coopranos

    coopranos Well-Known Member

    Joined:
    3rd Jul, 2015
    Posts:
    468
    Location:
    Perth
    Not sure Steve, it doesnt make a whole lot of sense to me unfortunately, all I care about is the price the market puts on a stock. The fact is I could scream all day long about how the company whose shares I own is fundamentally sound, but if the market decides to dump the share price, being right doesnt mean heaps when they take my car away. There are teams people with far more resources and hundred million dollar trading accounts who already build their view of fundamentals into the price, the best I can hope to do is find their current flavour - stick around for any profit and run quick if they change their minds. I am as good as picking what will happen tomorrow as Jonothan Edwards is at talking to dead people.
     
  5. Tropo

    Tropo Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    2,303
    Location:
    NSW
    coopranos,

    You are on your way !!!:D
    Happy Trading !
    :cool:
     
  6. Takestock

    Takestock Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    173
    Location:
    Sydney
    Yes, but value investing is more than just buying shares in a company that is fundamentally sound, it is about buying them cheaply which gives you a margin of safety. Benjamin Graham said in his book, The Intelligent Investor, the margin of safety helps absorb ' the effect of miscalculations or worse than average luck'.

    If there was a major correction, I would feel much better knowing that I own shares in a company that has a low debt to equity ratio, high net asset backing, good cash flow, increasing net profits etc rather than a spec stock with no earnings bought because its chart showed that its three day moving average had moved above its 10 day moving average.

    In fact, if there was a major correction, I would purchase more of the same companies at the lower price (sale time!) :)


    He thinks he is very good at it - dead people tell him so all the time!;)
     
  7. coopranos

    coopranos Well-Known Member

    Joined:
    3rd Jul, 2015
    Posts:
    468
    Location:
    Perth
    A fair and intelligent comment, and the best argument for Fundamental analysis I know of. I still am not convinced about the idea of getting "value" on a share (on a business yes, but not a publicly traded share which is an imaginary investment operating on an emotional market driven by greed & fear). Also we both know that short term MA is nowhere near the total arsenal of technical analysis!
    Hopefully I have put forward some reasonable and understandable points of view to help the original poster in his search for share market investment - if only to get a point of view of some of the competition that exists in the market.
    Thanks to all for the discussion, I think it is valuable!
     
  8. Takestock

    Takestock Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    173
    Location:
    Sydney
    Now that's where reading a few of the value investing books would assist. It seems to me that you are looking at this through the glasses of a trader. Most true value investors are not looking at trying to get value on a share, but are in fact trying to get value on a business. They look at the shares as a part of the business that they intend to hold for the long term. Granted, this requires a slightly unusual mindset, however, you should approach it more like a business purchaser rather than a share purchaser. Once you've got a very good understanding of the business and its approximate worth, you then look at shares which are traded in the emotional market driven by greed and fear (as you said). If that irrational and emotional market offers you the shares (or part ownership of the business) at a reduced rate - take up the offer.

    That was a bit of tongue in cheek.;) In my previous trading days over the last twenty years, I had exposure (and utilised) many of them.

    In the end, everyone has to find an investment philosophy that suits their individual profile. I'm probably a bit slower than most - it took me almost twenty years to find mine. Now I find that I am very comfortable with my stock selections. I literally don't care if I don't check their current prices for weeks. I don't feel tied to the screen to watch every movement (although that could be exciting) and I'm happy to make reasonably substantial investments in a good company at the right price (which I didn't do when I was trading).

    To use that tired cliche: there are many ways to skin a cat.

    Good luck with your investing.

    Steve
     
  9. jscott

    jscott Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    123
    Location:
    Perth
    Hi Coopranos - this is the problem! You're confusing value with price. The market puts a price on a company at any one instant in time. In the long term price follows value, but in the short term, it can fluctuate randomly -ie the emotional market you're talking about.

    As Benjamin Graham put it - "In the short run the sharemarket is a voting machine... In the long run it is a weighing machine".

    I'm wondering why you think a publicly traded company is any different to an un-listed company in determing its value? (A listed company is actually much easier as the accounts are publicly available.)
    At what point does the value of a business start to go haywire - when it has one shareholder, 2 shareholder, 100 shareholder or a million shareholders.

    If the entire stockmarket drops 10% tomorrow that doesn't mean the intrinsic value of a business you invest in which has the same customers, the same revenues and provides the same cashflows to the owners as yesterday has lost 10% in value. :D


    Steve - you hit the nail on the head with your post at 7:18.

    Cheers,
    Jason.
     
  10. TPI

    TPI Well-Known Member

    Joined:
    3rd Feb, 2018
    Posts:
    227
    Location:
    Melbourne
    Yes, thanks for your posts coopranos, with an alternative view, that has stimulated some very interesting discussion.

    But value investors don't care about this emotionally driven market, they just use it to their advantage to buy good value shares at the right time...don't they?

    TA is trying to follow this very emotionally driven market, and somehow make money by operating on it...isn't it?

    That's what doesn't make sense to me.

    GSJ
     
  11. coopranos

    coopranos Well-Known Member

    Joined:
    3rd Jul, 2015
    Posts:
    468
    Location:
    Perth
    You perhaps feel I am confusing value with price, I think the concept of value is determined by price. You cannot have value without price. Without price, it is impossible to determine value (speaking in financial terms). Anything's financial "value" is only what someone is prepared to pay for it. The most reliable way to determine the value of anything is to see what price people are prepared to pay for it. Your property VALUEr doesnt say "look, the market is in a slump right now, it may be in the slump for the next 5 years, however I really feel the (financial) value of this property is a lot higher than what you could get for it on the open market. Therefore although you would only get $100k if you sold it, I will value the property at $300k". If he said that, he wouldnt be saying it for long!! You can have a nice solid house on a nice solid block returning a nice rental yield, in a nice growth area, but the valuer knows that the most reliable way to value something is recent sales.
    Therefore the most reliable way to determine the value of a share is recent sales. Fairly easy to determine on a publicly traded company.

    As already stated, the most reliable measure of value is recent sales - shares on a publicly traded company have more readily available sales information. Most unlisted companies go years without being sold, which is why if you get a business valued by 10 different people you will get 10 different answers (and they will all charge big bucks in the deal too!!) If a business could be perfectly valued from its financial statements, there would be no such thing as goodwill (which is only brought into the accounts on a sale).
    I agree with the idea that a business' financial statements could be used to determine future direction (historical performance being a reasonable way of determining future performance, and the market tends to react well to good performance), however direction is not value.

    I assume you mean "the same management" instead of the "same owners", if the sharemarket dropped by 10%, i dare say a lot of "business owners" would sell their shares quick as a flash!
    So if the sharemarket drops 10%, stays the same, or jumps 10% at what point is it considered "good value"? Is the stock better value if the market drops 10%? (I hope the answer is no and has a good explanation! If the answer is yes then there goes the theory of value having nothing to do with short term price, and all of a sudden price becomes the major determinant of value, if price is the major determinant of value then technical analysis on price just became a whole lot more attractive!)

    GSJ, I originally answered to hopefully give another view on the value of technical analysis, it wasnt my intention to hijack your thread with a debate, feel free to tell me to butt out of the thread! I do enjoy the discussion though, if all we get out of it is another way to explain and understand our own point of view then it is pretty valuable! The more we discuss alternate ideas, debate the shortfalls, etc the more we come to develop more confidence in our own ideas which is essential for the success of any strategy (in my opinion).
     
  12. coopranos

    coopranos Well-Known Member

    Joined:
    3rd Jul, 2015
    Posts:
    468
    Location:
    Perth
    Only my inexperienced understanding:
    A technical analyist belief is that the market is made up of emotional people, who tend as a crowd to act in a way that can be quite repetetive and may be predictable to some degree. The most accurate picture of what the crowd is doing is reflected in price action. By reacting to what the crowd is currently doing and has done in the past, it may be possible to have some idea of what the crowd will do in the future.
    The TA believes you are not so much buying part of a business, but that the share is a product in and of itself. Share prices increase because people will pay more for the share, and decrease because people will pay less. The amount people will pay may be based on a huge number of things, the performance of the underlying business, the income received from the shares, or any number of completely unquantifiable ideas and emotions which may have nothing at all to do with the underlying business (thus the underlying business is not the determinant of the purchase as it is with fundamental investors, the price that people are paying for the shares is the determinant of the purchase).
    Hope this makes sense, I am sure more experienced TAs could explain it much better!
     
  13. bundy1964

    bundy1964 Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    345
    Location:
    Adelaide, SA
    My take on value is what someone is prepared to buy it for today, you can guestimate what the price will be next year or in 10 years and you can get it badly wrong. FA imho gives you a stock that is likely to improve in the 2 main areas that are capital gain and dividends, part of that may be stable management and market perception. TA gives you an entry and if needed exit point, you could say looking back to go forward.

    I leave most FA to my margin lender and I don't like going below 60% LVR. TA I am a fan of for finding entry points, the market can be cruel and not follow the pattern for you. Some things you just can't predict so at times you have to have plan B up your sleeve.
     
  14. Tropo

    Tropo Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    2,303
    Location:
    NSW
    All that technical analysis really consists of, is the study of price and volume relationships to gain an insight into future trends.
    Basically TA is more an art than a science, and certainly is not a black magic as some may think.
    You can not consistently make money in the market by reading current fundamentals about company's in the newspaper and acting on that information because at the time you read about it, it's already too late
    All of the relevant information about a company's earnings, new products, management ect... that is currently known, is already build in the price of its stock.
    News that each player is looking for is a pending takeover offer. And it's not easy to find this info unless you are insider....But if you learn how to read chart properly - you'll be buying/selling with the insiders without even knowing it.
    The real market pro, the specialist on the trading floor of the exchange always based their decisions on market actions, not the news or fundamentals.

    bundy 1964
    "My take on value is what someone is prepared to buy it for today...."

    Precisely !!
    :cool:
     
  15. Takestock

    Takestock Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    173
    Location:
    Sydney
    I do.

    The value of a financial instrument is not determined by what someone acting on a whim may offer you at any particular moment. The value is what the business offers you in terms of income stream or net assets. This may seem slightly counterintuitive...let me try to explain.

    Imagine you own a company that has no debt and has net profit of $1M per year. Does that company have any value to you? I would think it does. Now imagine that you meet up with someone who offers you a price for the company of $1. Does that mean that the company now has a value of $1? No, of course not. Regardless of what he/she offers you, the company still has an income stream of $1M per year and therefore an intrinsic value.

    Obviously this is an extreme and ridiculous example, however, it helps to demonstrate my point. Now you could say that would never happen on the stock market where everyone thinks rationally and an efficient market would never allow such a scenario. Wrong...As has been stated many times during this thread, the market behaves irrationally and emotionally. Remember the 'market' is just people all trying to make a buck. And what happens when you have a large number of people looking at what everyone else is doing - MOB mentality (irrational behaviour). So back to what I was saying. Imagine the company listed on the stockmarket. It will continue to make $1M per year regardless of what anyone at any precise moment in time will offer for it. It has intrinsic value. As we all know, the share market price for the stock will go up and down depending on the often irrational and emotional decisions made by the enormous number of people trading the shares.

    I think old Warren B said it best; "Price is what you pay, Value is what you get."

    I don't understand the above comment. Goodwill is found on the balance sheet of companies that have acquired other companies. It's the difference between the price paid for the acquired company and the net assets the acquirer actually gets. In fact, the issue of good will is a perfect example of purchasing value. I quote from "Financial Intelligence": 'You are buying a going concern with a name, a customer list, talented and knowledgeable employees, and so on, and these so-called intangibles can in some cases be much more VALUEable (my emphasis) than the tangible assets'.


    Depends on the business. If the business was crappy and was making no profit, they just might sell in panic. If however it was a successful business that had increasing revenue, margins and net profit, I'd say they would go on a massive spending spree buying more of the shares; I would.

    Steve
     
  16. Nigel Ward

    Nigel Ward Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    989
    What about the "wisdom of crowds"? There's some research around that says that large groups of people have quite good predictive ability. I understand they've tested this, amongst other things by looking at who will win US elections...

    I'm still undecided about whether the market gets it wrong or whether it is always right...but just changes it's mind a lot? (The market must be female then hey? :D :p )

    I can't remember where I read it or heard it but the saying "the market can stay "wrong" longer than you can stay solvent" springs to mind...:rolleyes:

    Maybe the market just oscillates around true value...but it does move?

    Just some random ramblings...

    Cheers
    N.
     
  17. Simon Hampel

    Simon Hampel Founder Staff Member

    Joined:
    3rd Jun, 2015
    Posts:
    12,394
    Location:
    Sydney
    I think with any "democratic" system (whether it be elections or open market forces) ... I suspect it is not so much "prediction" as "fulfilment" that is being observed ... if enough people believe something to be true - it can be self-fulfilling (eg market negativity) ... until the something comes along to slap them out of it (eg a market scare leading to panic and overselling).
     
  18. Takestock

    Takestock Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    173
    Location:
    Sydney
    And look at who the wisdom of the crowd voted in...;)

    You said it, I didn't!:D

    It is important to remember that the 'oscillations' that a value investor is looking at can be quite lengthy periods of time. To catch the shorter oscillations, invest in the Navra Fund.

    Steve
     
  19. Tropo

    Tropo Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    2,303
    Location:
    NSW
    "I can't remember where I read it or heard it but the saying "the market can stay "wrong" longer than you can stay solvent" springs to mind...


    If I am not wrong, you may find this sentence somewhere on this forum :D
     
  20. TPI

    TPI Well-Known Member

    Joined:
    3rd Feb, 2018
    Posts:
    227
    Location:
    Melbourne
    Nope, no hijacking going on here at all, so there's definitely no need to butt out. It's very interesting to read opposing views and alternatives. Post and debate away!

    This group is pretty polite to each other at the moment, which is surprising, I would have guessed a value/FA vs TA debate could get very heated!

    A poster on Somersoft, who is a value investor, made the comment to me that 95% of TA is a complete waste of time :eek:! I tend to agree with him :D !

    eg. 'Candlesticks'?!

    GSJ