# Investing style is a religion



## Zaxon (20 June 2018)

I read an interesting thread in this forum about averaging down - buying more shares while the share price drops.  The exclusive conclusion was that it was a silly idea, and you're throwing good money after bad.  Cut your losses short.

But Buffett says it's one of his favourite things to do: buy quality companies when the share price drops.  Buy good companies at a bargain price.  (Not bad companies of course).

Both of those ideas can't be true, since they're the exact opposite.  SELL when the price drops and BUY when the price drops are contradictory.

It seems to me that investment styles: value, moment, growth etc, are really more of a "religion".  Religion is believing something you can't possibly know is fact. So value investors believe (but don't know) their set of principles.  Momentum investors believe (but don't know) their set of principles, etc.

It's curious to me that after a couple of centuries of investing, we still have to rely so much on belief rather than on hard, actual facts.


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## captain black (20 June 2018)

Zaxon said:


> It's curious to me that after a couple of centuries of investing, we still have to rely so much on belief rather than on hard, actual facts.




If you're using a technical approach to scaling in to a trade then it's easy enough to test the idea with software like Amibroker.


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## galumay (20 June 2018)

Interestingly both ideas you quote can be right. Averaging down works for long term value investors where they are ending up owning a bigger part of the business at a higher discount to value. For a trader who has no interest or understanding in value, and whose horizon is short term, selling out and not averaging down is the correct action.

Its these apparent inefficiences in the markets that create opportunity for both long term investors and short term traders to make money. 

In my view the important thing is understanding and articulating what your personal strategy is, and then making sure you conform with it. Its also finding a strategy that is aligned with your world view and personality.


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## Gringotts Bank (20 June 2018)

Only forward tests tell you if there's an edge.  Words like 'averaging down' mean NOTHING.  It can be highly profitable or it can be a losing strat.  Depends what, where, when you buy and how you sell.

To make your edge work, you have to have your mind right.  If you don't, you will start trading a strat at the wrong time, stop when it's ready to take off, add discretion to kill profits.  The mind is ALWAYS the dominant factor.  ALWAYS, no exception.  Even if your strat is automated.


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## luutzu (20 June 2018)

Zaxon said:


> I read an interesting thread in this forum about averaging down - buying more shares while the share price drops.  The exclusive conclusion was that it was a silly idea, and you're throwing good money after bad.  Cut your losses short.
> 
> But Buffett says it's one of his favourite things to do: buy quality companies when the share price drops.  Buy good companies at a bargain price.  (Not bad companies of course).
> 
> ...




If you have a firm estimate of what the value of a stock/asset is, it makes perfect sense to buy more of it as it gets cheaper.

If you don't care for owning the asset and benefit, or none, from its operations, profit etc.. If you aim to make your money from the buy/sell operations only... then it makes perfect sense to buy into an uptrend and get out when it's down - maybe jump back in as it starts to trend up again.

So the question comes down to whether or not you can "predict" or "value" your stocks.

I personally find it "easier" to value a business than to predict its price movement. 

With valuation, you can be somewhat wrong with your entry but since the time frame is flexible - i.e. you can wait until the market see it your way. It's harder to have to sell or buy until the price is right.


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## luutzu (20 June 2018)

Gringotts Bank said:


> Only backtests and forward tests tell you if there's an edge.  Words like 'averaging down' mean NOTHING.  It can be highly profitable or it can be a losing strat.  Depends what, where, when you buy and how you sell.
> 
> To make your edge work, you have to have your mind right.  If you don't, you will start trading a strat at the wrong time, stop when it's ready to take off, add discretion to kill profits.  The mind is ALWAYS the dominant factor.  ALWAYS, no exception.  Even if your strat is automated.




The Mind or the Wallet?


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## Gringotts Bank (20 June 2018)

luutzu said:


> The Mind or the Wallet?



what/?


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## Zaxon (20 June 2018)

captain black said:


> If you're using a technical approach to scaling in to a trade then it's easy enough to test the idea with software like Amibroker.




You'd have to decide on a timescale. Nobody would recommend buying downward trending stocks if you're only going to hold them for a week, for example. And you'd have to define what a "quality" company is.  There's lots of assumptions you'd have to set up first.


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## luutzu (20 June 2018)

Gringotts Bank said:


> what/?




Bad humour, never mind


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## captain black (20 June 2018)

Zaxon said:


> You'd have to decide on a timescale. Nobody would recommend buying downward trending stocks if you're only going to hold them for a week, for example. And you'd have to define what a "quality" company is.  There's lots of assumptions you'd have to set up first.




As I said, if you want to approach it from a technical or quantitative perspective then it's easy enough to test on any timeframe.


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## Zaxon (20 June 2018)

galumay said:


> Interestingly both ideas you quote can be right. Averaging down works for long term value investors where they are ending up owning a bigger part of the business at a higher discount to value. For a trader who has no interest or understanding in value, and whose horizon is short term, selling out and not averaging down is the correct action.




I think that's a good assessment.



galumay said:


> Its these apparent inefficiences in the markets that create opportunity for both long term investors and short term traders to make money.




So this speaks against the Efficient Market Hypothesis.  We all benefit from people doing the opposite thing from us to make money.



galumay said:


> In my view the important thing is understanding and articulating what your personal strategy is, and then making sure you conform with it. Its also finding a strategy that is aligned with your world view and personality.




I agree.  Which supports the statement that investing is a religion: based on your set of beliefs and your worldview at the time, and not so much on immutable truths.


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## cynic (20 June 2018)

Zaxon said:


> I read an interesting thread in this forum about averaging down - buying more shares while the share price drops.  The exclusive conclusion was that it was a silly idea, and you're throwing good money after bad.  Cut your losses short.
> 
> But Buffett says it's one of his favourite things to do: buy quality companies when the share price drops.  Buy good companies at a bargain price.  (Not bad companies of course).
> 
> ...



Every human, I have ever met, has expressed belief in many, many things, that they could not rightly, and truly, claim to know as "hard, actual facts". Belief in untrue, or uncertain, things, is not what defines religion.

It so happens that many traders do operate in strict accordance with tenets, pursuant to their chosen trading philosophy, thereby making it a religion.

Are the profits banked to such traders' accounts, more fiction than "hard, actual facts"?


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## Zaxon (20 June 2018)

luutzu said:


> So the question comes down to whether or not you can "predict" or "value" your stocks.
> 
> I personally find it "easier" to value a business than to predict its price movement.
> 
> With valuation, you can be somewhat wrong with your entry but since the time frame is flexible - i.e. you can wait until the market see it your way. It's harder to have to sell or buy until the price is right.




I think that's a good summary.  If you can select your own timescale, you increase your odds of winning.


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## Gringotts Bank (20 June 2018)

You discard belief as if it's a problem.  In medicine there's ample evidence that belief is stronger than almost all drugs, surgeries and other interventions.  So the idea that expectation determines reality is quite possible in trading also.  If that's how it works, then it's not like you find out what's true then believe it, but instead choose the belief you want, then apply belief to it (ie. there is no objective reality).


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## cynic (20 June 2018)

Zaxon said:


> So this speaks against the Efficient Market Hypothesis.  We all benefit from people doing the opposite thing from us to make money.



Not quite. The difference in time frame, creates some separation between longer and shorter term approaches to trading.


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## luutzu (20 June 2018)

Zaxon said:


> I think that's a good summary.  If you can select your own timescale, you increase your odds of winning.




I reckon so too.

With all the supercomputers shifting through all the massive amount of data; then there's the brainpower and wink wink nudge nudge going on in high finance, I think it's pretty hard for the average investor to compete in that game.

Better odds if we increase our timeframe... both in the time we're willing to wait for the investment to "work out" as well as in when we'd be interested in buying or selling.

Doesn't mean buy any company thinking that over time it'll grow. But that when a quality business sells for "cheap"... something's wrong with it. 

If something is wrong and that wrong won't kill it, it'll still take at least a couple of years to turn the ship around; or see the tide return.

On top of that, when the ship and tide have turned, it'll take another reporting season or two for the numbers to hit the books. 

I guess that's quite obvious. But having looked at a couple of companies... the market tend to be backward looking more than they are forward. 

Backward in that they look to the reported figurse and project them into the future in a straight line, it seem.


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## Gringotts Bank (20 June 2018)

The world's most "objective" and acclaimed scientists in the field I work in are extremely biased and blinded.  They are completely closed off to opposing views, even when those views have far more weight of evidence behind them.  No scientist wants to be wrong, especially if they've spent their whole career following a certain path and gaining a reputation and publication in prestigious journals.  The hard fact is, most people go from birth to death and change very little in terms of their perspective on anything.  We choose somethng (usually early on), decide "I'm a fundamentalist, technical analyst, right/left voter, cathlolic/muslim/navel gazer whatever" then remain that way until the last gasp.

Why the resistance to change?  Because the ego is built around identification and beliefs, so if we go changing things it creates enormous instability.  Most people don't tolerate that instability because what that leads to is "well... if I was lefty fundamentalist and now I'm right wing technician.... who am I really?".  And that's a question people will go to any length to avoid.  It's much safer to say "this is me" and never question anything.


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## galumay (20 June 2018)

Zaxon said:


> Which supports the statement that investing is a religion



I think religion is a poor choice of word, religion is specifically the belief in things for which there is no evidence at all. Faith means belief without evidence. Investment strategies at least have a basis in reality! Its more a reflection of the reality that there are few absolutes in life, and so there are multiple approaches that can have positive outcomes.



Zaxon said:


> So this speaks against the Efficient Market Hypothesis.




Again, its not an absolute, markets are partially efficient, part of the tme. But the 'hard' version of the EMH has been completely discredited these days.


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## Value Collector (20 June 2018)

Zaxon said:


> I read an interesting thread in this forum about averaging down - buying more shares while the share price drops.  The exclusive conclusion was that it was a silly idea, and you're throwing good money after bad.  Cut your losses short.
> 
> But Buffett says it's one of his favourite things to do: buy quality companies when the share price drops.  Buy good companies at a bargain price.  (Not bad companies of course).
> 
> ...




I think it comes down to your skills.

If you have the skill to identify a good business, and you see it dropping in value, then it makes good sense to buy more.

If you don't know what your doing, and you are buying into a terrible businesses that is over priced, you will not do well.


> It seems to me that investment styles: *value*, moment, *growth *etc, are really more of a "religion".




Value and growth are not actually separate things.



> we still have to rely so much on belief rather than on hard, actual facts




As investors we are making "estimates" and "assumptions" about the future, but these can be based on facts, but of course there things change and they probably can't be nailed down to hard facts.

I guess what is comes down to is strategy.

Value Investing is about making an estimate about the future output of something, and deciding if the current market price for that thing is justified by that out put.

So you would be using facts to come to that estimate, although it will always just be an estimate.

Momentum etc are different things, it can come down to time frames


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## Zaxon (20 June 2018)

cynic said:


> It so happens that many traders do operate in strict accordance with tenets, pursuant to their chosen trading philosophy, thereby making it a religion.
> 
> Are the profits banked to such traders' accounts, more fiction than "hard, actual facts"?




Someone's success story is an anecdote.  Whether if you tried to emulate their exact method you'd end up with the same success yourself, is hard to say. There's often a lot of luck and fortuitous timing involved.


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## Zaxon (20 June 2018)

Gringotts Bank said:


> In medicine there's ample evidence that belief is stronger than almost all drugs, surgeries and other interventions.  So the idea that expectation determines reality is quite possible in trading also.




So if I just believe hard enough, I can change the outcome of the market?  I look forward to this new power


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## Zaxon (20 June 2018)

Value Collector said:


> Value and growth are not actually separate things.




My understanding of the difference is that value investors insist on getting stocks cheap.  Growth investors insist on growing earnings, but are willing to buy in at a higher price a value investor wouldn't.


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## cynic (20 June 2018)

Zaxon said:


> Someone's success story is an anecdote.  Whether if you tried to emulate their exact method you'd end up with the same success yourself, is hard to say. There's often a lot of luck and fortuitous timing involved.



That is your religion, not mine!


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## Zaxon (20 June 2018)

Seeing it's my thread, let me ask you all a follow up question.  What do you think are the shared "truths" that are common to many different styles of investing?  Perhaps if we look for where the investing styles agree, we'll find ideas that are more likely to be based on facts.


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## Value Collector (20 June 2018)

Zaxon said:


> Someone's success story is an anecdote.  Whether if you tried to emulate their exact method you'd end up with the same success yourself, is hard to say. There's often a lot of luck and fortuitous timing involved.




Did you see the example of financing the wind farm I broke down for you in your thread about "debt".

what you have to remember is that where when we buy and sell shares from each other, we are trading that share holders equity, If the $60 Million of the wind farm funded by share holders was listed as 60 Million shares at $1 each, and everything went well, the holders would do well earning the 20% return.

But if every now and then markets fluctuated and people thought the wind farm wasn't going to deliver its expected 9.5% output and might, that share price might drop to $0.50.

If a value investor in confident in the long run performance of the wind farm, and has a time frame that is longer than the average punter, he can pickup $1 of equity in the wind farm earning 20%, for only 50 cents, so his return will be 40% over time, in that case it makes a lot of sense to increase his stake as the price falls.


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## cynic (20 June 2018)

Zaxon said:


> Seeing it's my thread, let me ask you all a follow up question.  What do you think are the shared "truths" that are common to many different styles of investing?  Perhaps if we look for where the investing styles agree, we'll find ideas that are more likely to be based on facts.



Or perhaps we will find popularised misconceptions.

Edit: In answer to your question: 
Aim to buy for less and sell for more!


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## Gringotts Bank (20 June 2018)

Zaxon said:


> So if I just believe hard enough, I can change the outcome of the market?  I look forward to this new power




There is emprical evidence to show there's a link between mood and discretionary trading performance.  So I think if trading is fun for you, that primes you by helping you access stored positive beliefs.  Then the odds are tipped greatly in your favour.  So yeh it is a kind of super power.


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## Value Collector (20 June 2018)

Zaxon said:


> My understanding of the difference is that value investors insist on getting stocks cheap.  Growth investors insist on growing earnings, but are willing to buy in at a higher price a value investor wouldn't.




A value investor will still buy growth businesses, they will just be trying to figure out how much a company would be worth 2 or 3 years from now after it grows, and figuring out how much is a fair price to pay today for that company.

Ideally, as a value investor, I want to by a growth company for a price that makes sense based on what the company looks like today, so all the future growth accrues to my benefit.

But I am also happy to pay for growth to if I am really confident about it, but yeah its all value investing, you are just putting a value on the growth potential.


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## Zaxon (20 June 2018)

Value Collector said:


> If a value investor in confident in the long run performance of the wind farm, and has a time frame that is longer than the average punter, he can pickup $1 of equity in the wind farm earning 20%, for only 50 cents, so his return will be 40% over time, in that case it makes a lot of sense to increase his stake as the price falls.




Holding and waiting out the lull can be a good strategy.  Hopefully you avoid the "value traps" which just sit there forever and never end up growing as you expect.


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## Zaxon (20 June 2018)

cynic said:


> Or perhaps we will find popularised misconceptions.




ha ha!  The areas we agree on could be a shared misconception.



cynic said:


> Aim to buy for less and sell for more!




Buy low sell high.  Very good!  I guess a value investor wants it really low, whereas other styles are prepared to pay a higher price for quality.  But that is the shared principle, I agree.


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## luutzu (20 June 2018)

Zaxon said:


> My understanding of the difference is that value investors insist on getting stocks cheap.  Growth investors insist on growing earnings, but are willing to buy in at a higher price a value investor wouldn't.




That's a misconception. Buffett, I think, said that growth is part of value. Graham is misunderstood to be all about "value"... ie. cheap stocks based on book values and hard assets etc. 

From my reading of Graham, while he's very conservative in his investment decision, he know and taught about growth stocks. Just that he prefer to buy stocks on something more immediate and patted down rather than a future possibility.

As to paying more for growth. Another to look at it is that... a higher priced stock might implied a "growth" stock but could just be an expensive one rather than a growing one. A cheap/value stock might suggest it is a dinosaur, but it doesn't mean can't grow... could just mean it selling for cheap.

So value is value... whether a higher priced be paid for "growth" or not depends on what's that expected rate of growth. Is that rate too optimistic or pessimistic... based on the company's historical performance, its assets, its products etc. 

For example... WOW or WES are established, they have a track record of performance. Aren't investing in anything that's game-changing... or maybe they are and it's going to blow up in their face... But if you study those established ones and see that its "growth" over the past decade had been about 2%p.a., for example... then you priced it on that basis. Doesn't make sense to priced them at, say 5% growth. 

If some upstart is rising fast in the world, its performance has been decent but as far as you can understand iti... the future looks very bright. Then you plug in a higher, but still modest, growth expectation. 

Graham said that in general any stocks selling above 22 [28?] times earnings is probably over priced. Its growth expectation are too high. That doesn't mean it wouldn't hit it, just it'd be quite a miracle if it were to. So probably best to stay away from it.

On the other hand, a business/stock can just not grow at all but could still be a good investment. As long as it manages to keep its earnings at the current level, won't deteriorate and the return to investor at their price is pretty decent.


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## Zaxon (20 June 2018)

luutzu said:


> That's a misconception. Buffett, I think, said that growth is part of value. Graham is misunderstood to be all about "value"... ie. cheap stocks based on book values and hard assets etc.




You've made good points.  I'm wondering if your view is a little more of a hybrid definition than most people use.



> Growth investing is a style of investment strategy focused on capital appreciation. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios.



https://en.wikipedia.org/wiki/Growth_investing



> Value investing is an investment paradigm which generally involves buying securities that appear underpriced by some form of fundamental analysis



https://en.wikipedia.org/wiki/Value_investing


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## Value Collector (20 June 2018)

luutzu said:


> That's a misconception. Buffett, I think, said that growth is part of value. Graham is misunderstood to be all about "value"... ie. cheap stocks based on book values and hard assets etc.
> 
> From my reading of Graham, while he's very conservative in his investment decision, he know and taught about growth stocks. Just that he prefer to buy stocks on something more immediate and patted down rather than a future possibility.




Yes, Buffett said "Growth and value are joined at the hip" 

it is a misconception to think 'Value investing" is only about investing in low book value stock and ignoring companies with growth potential.


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## Gringotts Bank (20 June 2018)

In terms of ASX systems, mean reversion buyers would be loading up today on oversold stock and exiting positions over the next 2-3 days.  These are good conditions for reversion.  fwiw.


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## Value Collector (21 June 2018)

Zaxon said:


> I guess a value investor wants it really low, whereas other styles are prepared to pay a higher price for quality.  But that is the shared principle, I agree.




Quality is part of value,

Value investing is about gauging the quality and quantity you are getting for your $1, and deciding whether it’s worth parting with the $1 to take the share based on the quality and quantity of the company that share represents.


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## Zaxon (21 June 2018)

Value Collector said:


> Yes, Buffett said "Growth and value are joined at the hip"
> 
> it is a misconception to think 'Value investing" is only about investing in low book value stock and ignoring companies with growth potential.




There's another way of looking at this:

There is a type of investing that's definitely value only.  Munger called it "cigar butt investing", where you're buying terrible companies because they're dirty cheap.  Buy them cheap, then sell them as soon as they've returned to value, because they're not going to fare well long term.  So that would be a good example of where value and growth aren't joined at the hip. 

Secondly, the ASX average P/E is about 16.  I would argue that if you're paying more than that (or perhaps anywhere even close to that), you're not a value investor.  You're a growth investor.

That isn't to say that a blend of value and growth investing isn't superior. It probably is.  But given that Wikipedia defines value and growth differently, you'd have to conclude that they can be practised, if you so chose, as two distinctly separate styles of investing.


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## Value Collector (21 June 2018)

Zaxon said:


> There's another way of looking at this:
> 
> There is a type of investing that's definitely value only.  Munger called it "cigar butt investing", where you're buying terrible companies because they're dirty cheap.  Buy them cheap, then sell them as soon as they've returned to value, because they're not going to fare well long term.  So that would be a good example of where value and growth aren't joined at the hip.




What you are talking about is just one subset of value investing.

As I said above Value investing is about judge both the "Quantity" and "Quality" of something, and then deciding what its true "Value" is.

Cigar Butt investing is like walking around trying to find cars selling for less than their value as scrap metal, that is just one way to make money valuing cars, and cigar butt investing is just one method of value investing.



> Secondly, the ASX average P/E is about 16.  I would argue that if you're paying more than that (or perhaps anywhere even close to that), you're not a value investor.  You're a growth investor.




I would say, how can you be a growth investor without being able to value the company to begin with and estimate what its value will be after its grown?

So yes, valuing businesses is still a key part of intelligent "growth" investing, Intact I would say they are one in the same.

If you aren't using a value approach when it comes to deciding on your growth shares you are speculating, not investing.



> That isn't to say that a blend of value and growth investing isn't superior. It probably is.  But given that Wikipedia defines value and growth differently, you'd have to conclude that they can be practised, if you so chose, as two distinctly separate styles of investing.




Wikipedia isn't the authority on the topic,

what you are saying is a popular misconception I know, it is popularly thought that Value investing is all about finding low PE stocks or High Book Value stocks etc, while that can be part of it, it is not the full story.

Charlie and Warren take a company's quality and growth prospects into consideration when valuing it, They don't just sit around looking for cigar butts.

Listen to their 4 filters, you will see he mentions price as number 4, So thats where the value comes into it, But it's price in relation to the quality of the 3 other filters, not simply price ignoring everything else, cigar butt investing is just 1 value strategy, its not the be all and end all.


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## Zaxon (21 June 2018)

Value Collector said:


> What you are talking about is just one subset of value investing.




Correct.  I chose that deliberately as something that couldn't be seen as both growth and value.



Value Collector said:


> Wikipedia isn't the authority on the topic




I would never presume to think I was better than Wikipedia 



Value Collector said:


> what you are saying is a popular misconception I know, it is popularly thought that Value investing is all about finding low PE stocks or High Book Value stocks etc, while that can be part of it, it is not the full story.




I'll give you an example where, in my mind, growth and value investing is distinct.

Imagine a company ABC that has great earnings growth.  You do your value calculation, and you decide it's worth $30.  Guess what!  It's trading exactly at exactly $30 today!

A *Growth Investor* would say, "Buy!".  He's paying a *fair price* for a good asset.  A *Value Investor* would say, "I demand a 30% discount below the $30 calculated fair value".  He wants a *discounted price*.


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## luutzu (21 June 2018)

Zaxon said:


> You've made good points.  I'm wondering if your view is a little more of a hybrid definition than most people use.
> 
> https://en.wikipedia.org/wiki/Growth_investing
> 
> https://en.wikipedia.org/wiki/Value_investing




I don't think it is a hybrid. Don't want to say it's what Graham and Buffett taught 'cause they might be offended by it... But I reckon I pick it up from them, Graham particularly.

The way I value a stock is making a few estimates under various scenarios. Depends on the company, I lean more towards its book value or its earnings/growth prospects.

I think Graham also discusses assets or earnings based pricing model somewhere. That often, when a company's sales growth and earnings are dismal, "Wall St" tend to put the stock in the bargains bin... ie. they see no value in the assets, real hard earned, on the book assets.


Zaxon said:


> Correct.  I chose that deliberately as something that couldn't be seen as both growth and value.
> 
> 
> 
> ...




The one demanding a discount on fair value is not a value investor, just an intelligent one 

Serious. A value investor working out that ABC is worth $30 and it's selling at $30... he'd buy it at $30 because that's a fair value. 

But you, or that value investor, have to had made the assumptions that ABC is worth/valued at, at least $30. i.e. under the worst case scenario it's $30 so it's fair enough. The margin of safety is already built into that $30 value estimate.


To want a discount on top... that's just bottom feeding. Something you'd want to do when you can't be asked to pay for fair price. 

Sometime it work out and you get to pick up a good, fair valued stock at an even better deal. Often you get to watch it sky rocket above what you could have gotten it for and scream dam it!


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## Zaxon (21 June 2018)

luutzu said:


> Serious. A value investor working out that ABC is worth $30 and it's selling at $30... he'd buy it at $30 because that's a fair value.
> 
> But you, or that value investor, have to had made the assumptions that ABC is worth/valued at, at least $30. i.e. under the worst case scenario it's $30 so it's fair enough. The margin of safety is already built into that $30 value estimate.




It seems you've interpreted "fair value" as already including a discount.



> But paying a high price for growth isn't always a great idea. If there is no margin of safety (in other words, a discount to the stock's fair value estimate) built in to the share price, everything has to go smoothly in the company’s growth path in order to justify the premium valuations. https://www.morningstar.com/articles/853989/10-growth-stocks-at-value-prices.html




Morningstar and I use "fair value" to mean what the company is worth.  You then take your discount after that - your margin of safety.


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## Value Collector (21 June 2018)

Zaxon said:


> Imagine a company ABC that has great earnings growth.  You do your value calculation, and you decide it's worth $30.  Guess what!  It's trading exactly at exactly $30 today!
> 
> A *Growth Investor* would say, "Buy!".  He's paying a *fair price* for a good asset.  A *Value Investor* would say, "I demand a 30% discount below the $30 calculated fair value".  He wants a *discounted price*.




You are assuming a value investor wouldn't be happy paying a fair price, I pay what I believe to be a fair price for company's all the time, But how can you know what the fair price is if you are not basing your opinion on value?

You are stuck in this thought that "Value investors" are only looking for companies with high book value or something.

That is flawed thinking, often we are just trying to work out what a rational price for a company is based on all the factors including growth prospects, So that we can find good investments and not over pay for them.

Do you honestly think all value investors are totally ignoring growth prospects?

what this video, Roger Montgomery is a value investor, and you will see with his formula he is calculating expected growth into his valuation.


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## luutzu (21 June 2018)

Zaxon said:


> It seems you've interpreted "fair value" as already including a discount.
> 
> 
> 
> Morningstar and I use "fair value" to mean what the company is worth.  You then take your discount after that - your margin of safety.




Yea I made that assumption for the example above. Nothing wrong with what you and morningStar is doing... just a matter of doing it before or after the calculation.


----------



## galumay (21 June 2018)

Yep, value and growth are definitely intertwined for me. I need to know the value of a business in order to decide whether the price has a sufficient margin of safety, but i would prefer to buy growth businesses where possible. 

I am looking for businesses that have a proven record of high returns on invested capital, some form of competitive advantage, (they usually go hand in hand), potential for sustainable growth in the foreseeable future, and that are trading at a price which represents a discount to value sufficient to provide that margin of safety.

I suspect that the OP may be using 'growth investor' in the sense of a trader, as in momentum, thats not what it means to me. A growth investor is someone who is looking for businesses where they are in the early stage of development and maybe cash flow negative, but the business analysis on a qualitative basis implies that there will be strong revenue growth and a move into a cash flow positive and profitable business in the future. 

I have a number of businesses in this category in my portfolios, my valuation is still important, but the analysis is a combination of value and extrapolation of growth.


----------



## luutzu (21 June 2018)

Value Collector said:


> You are assuming a value investor wouldn't be happy paying a fair price, I pay what I believe to be a fair price for company's all the time, But how can you know what the fair price is if you are not basing your opinion on value?
> 
> You are stuck in this thought that "Value investors" are only looking for companies with high book value or something.
> 
> ...





Monty is wrong about WOW being a quality business.

That's not just hindsight after his 2010 forecast there either.

His figures for equity is a bit off.

I have $7057.3M for 2009 equity. His was $6812.5M

Net profit was $1860 vs his $1835.7.

Not a biggie, but the trend from 2000, or in my case 2001... has been downwards to 2009. i.e. from 2002 to 2009, Net return on average equity was 33.67% then dropping down to 27.6% in 2009.

The DuPont ROE gives a higher figure, but still the trend is down. So by that ROE measure alone, WOW was definitely not doing as good as it used to.

That's not saying it's a bad business. But it's no WalMart.


----------



## Value Collector (21 June 2018)

luutzu said:


> Monty is wrong about WOW being a quality business.
> 
> That's not just hindsight after his 2010 forecast there either.
> 
> ...




WOW is a great business, just masters fiasco through off montys valuation, hence why you need a margin of safety, because you never know.


----------



## Value Collector (21 June 2018)

Zaxon said:


> It seems you've interpreted "fair value" as already including a discount.
> 
> 
> 
> Morningstar and I use "fair value" to mean what the company is worth.  You then take your discount after that - your margin of safety.




How exactly is the “growth investor” determining “fair value”, if he isn’t using some sort of “value investing” approach.


----------



## Zaxon (21 June 2018)

galumay said:


> I am looking for businesses that have a proven record of high returns on invested capital, some form of competitive advantage, (they usually go hand in hand), potential for sustainable growth in the foreseeable future, and that are trading at a price which represents a discount to value sufficient to provide that margin of safety.




Sounds like an excellent approach to me.



galumay said:


> I suspect that the OP may be using 'growth investor' in the sense of a trader, as in momentum, thats not what it means to me.




I try not to have a personal definition, since that's where everyone gets confused and "value investing" and "growth investing" then mean vastly different things to different people. And let the confusion begin.

So you go to the dictionary, or in this case, say Wikipedia.


----------



## galumay (21 June 2018)

Well probably not Wikiedia!

Does it really matter? People use all sorts of terms all the time with little understanding of what they really mean or how they should be used. The world is full of "value investors" who have no idea how to value a business, and "growth investors" who use that term because they are buying businesses whose price is "growing"!!

What matters is what someone is actually doing and why.


----------



## luutzu (21 June 2018)

Value Collector said:


> WOW is a great business, just masters fiasco through off montys valuation, hence why you need a margin of safety, because you never know.




It's slightly above average. Not a bad business. Just not a high quality one. There are other seriously awesome retailers I've seen, both aren't in Australia.

But WOW's performance and management is pretty good. Could have been better if it weren't due to Australia's small population, large distances... 

Monty's pricing was a couple bucks higher than a mechanical application of Graham's for an established business like WOW. But can't fault the guy for Masters though. 

I'm not quite sure why he'd need to value dividend and retained earnings or such separately. But yea.


----------



## Zaxon (22 June 2018)

This thread asked, "*Are the different styles of investing really more like a religion than a science?*"  I use religion in this context to mean a fervently held set of beliefs and practices without objective scientific evidence to support them".

Secretly, I was hoping for people to share studies which show, over a long period, Value Investing, Momentum Investing, or Trading, etc has proven to give the highest rate of return over a wide cross section of market conditions, and here's the data to support that.

What I got, overwhelmingly, was comments like, "Everyone else's understanding of <insert investment style here> is wrong!  I know the only true way of how this works.  My guru <insert name here> says <x> therefore you're all wrong."  Obviously, I'm exaggerating a bit for effect here, but these responses seem very "religious" to me.

Now I'm not "having a go" at any individual.  That's not my purpose here.  My conclusion, based on the tiny sample size of this thread, is that yes, people invest more like they're following a "religion", rather than following a set of methods objectively proven to give you the greatest rate of return.  Perhaps because the science of investing is still largely unknown.  And perhaps because human nature just works that way.


----------



## galumay (22 June 2018)

Zaxon said:


> "*Are the different styles of investing really more like a religion than a science?*"




No, because as a few of us have tried to explain, the different styles of investing are based on quite different elements of the market. Different styles will work better in different parts of a market cycle, but also markets are dynamic and complex, nothing is ever exactly the same as it was in the past and new things that have never happened before happen for the first time.

If you look you will find studies to support just about any investing strategy - and others to disprove them! The systems are simply too dynamic and complex to draw ridiculously simple conclusions. 

Your obsessing about categorising investing as religion or science is silly IMO, its neither and no one is claiming its one or the other. 

If there were one investing style that was objectively proven to give you the greatest rate of return it would be being practised by everyone. (and the conundrum is that it would then probably stop working!)

There is no science of investing, just like there is no religion of investing.


----------



## luutzu (22 June 2018)

Zaxon said:


> This thread asked, "*Are the different styles of investing really more like a religion than a science?*"  I use religion in this context to mean a fervently held set of beliefs and practices without objective scientific evidence to support them".
> 
> Secretly, I was hoping for people to share studies which show, over a long period, Value Investing, Momentum Investing, or Trading, etc has proven to give the highest rate of return over a wide cross section of market conditions, and here's the data to support that.
> 
> ...




You read Buffett's "Superinvestors of Graham and Doddsville"?

It's not about guru or secret formula or some unique art. Investing is a science, just its subjects are never constant so the scientist investor have to adapt his knowledge to the investment opportunity.

Say value investing state that you should only buy a stock valued at $1 for $1.

If a $1 stock is offered at $1 or less, then obviously they're going to do well.

But how can anyone be certain that a $1 stock is actually worth $1?

It might appear to be $1 now, but a few years down the track unexpected things happen. Might work out really well, might work out badly. So in hindsight, what appear $1 would have actually been $0.50 that turned out, through luck and new business venture, to be $2. etc. etc.

That's not saying a business can't be valued. It can't be valued precisely. Just an approximate.

But there are investors and university professors teaching perfectly smart people how to precisely predict the future of a business, down to the decimal places.


----------



## Zaxon (22 June 2018)

luutzu said:


> Investing is a science, just its subjects are never constant so the scientist investor have to adapt his knowledge to the investment opportunity.




Buffett has said that the same investment principles he used 50 years ago are exactly the same that are right for today.  What is that you think we need to constantly adapt to?  Market cycles?



luutzu said:


> But how can anyone be certain that a $1 stock is actually worth $1?
> 
> That's not saying a business can't be valued. It can't be valued precisely. Just an approximate.




For sure.  Which reminds me of the "I don't need to know a woman's exact weight to know she's overweight" comment that Buffett and Graham have used.

Value investing I think has a high chance of being an outperforming investment style.  And Buffett has demonstrated exactly that.  But "cut your losses short and let your profits run", so more of a momentum style, also could have an outperforming edge.


----------



## galumay (22 June 2018)

Zaxon said:


> Buffett has said that the same investment principles he used 50 years ago are exactly the same that are right for today.



...for him.



Zaxon said:


> Value investing I think has a high chance of being an outperforming investment style.




Maybe, but most so called value investors have a high chance of underperforming based on past performance. There isnt a holy grail of investment style, otherwise everyone would be doing it. What works for you may not work for me, you have to match investment style with psychology, personality and conviction.

Someone whose personality is suited to short term market action, who sees shares as a commodity in themselves, who believes TA is an indicator of future price action, is going to make a hopeless long term value investor!



Zaxon said:


> "cut your losses short and let your profits run"




How do you decide when thats the correct action? I made huge amounts of money averaging down into a business I had a very high conviction about, my biggest wins have come from averaging down. I have sold out of businesses that were solid gains for me, but something changed with the business that made me sell the winner - and they went into a slow, long price decline.

In other cases my decision to hold onto winners has cost me nearly all the invested capital - SGH being the prime example.


----------



## Value Collector (22 June 2018)

luutzu said:


> I'm not quite sure why he'd need to value dividend and retained earnings or such separately. But yea.




Because a company that earns 25% return of equity, and retains 100% of earnings and deploys them into further investments that also earn 25% is worth more than a company that pays out all its dividends.

eg.

If company A - has $1 of equity, and it earns 25% return on that equity, and pays the whole $0.25 earning as a dividend, it will probably never grow, So if I want a 10% return I can only pay $2.50 for the company, because my 10%pa earnings have to come from dividend alone.

However,

If Company B - also has $1 of equity, and also earns 25% return on that equity, but it retains 100% of its earnings and deploys it into investments also earning 25% return, it will grow earnings over time as its equity base expands via retained earnings, So I can pay up to $5.20 for it and still get my 10% return I want.


------------

Which would you be willing to pay more for,

1, A bank account with $100 in it, paying 25% interest that pays out the interest every year in cash to you. (that you have to bank into you normal account at 2%)

or

2, A bank account with $100 in it, paying 25% interest that it retains and compounds at 25%



*This is the type of thing value investors take into consideration, hence why I say growth is part of being a value investor, we are constantly weighing up companies growth potential and factoring it into the price I am willing to pay, and my prediction of what companies will be worth. *


----------



## luutzu (22 June 2018)

Zaxon said:


> Buffett has said that the same investment principles he used 50 years ago are exactly the same that are right for today.  What is that you think we need to constantly adapt to?  Market cycles?
> 
> For sure.  Which reminds me of the "I don't need to know a woman's exact weight to know she's overweight" comment that Buffett and Graham have used.
> 
> Value investing I think has a high chance of being an outperforming investment style.  And Buffett has demonstrated exactly that.  But "cut your losses short and let your profits run", so more of a momentum style, also could have an outperforming edge.




The principles don't change. You don't adapt the method and principles. 
But you ought to adapt to the opportunity you see.

That is, the method in itself allow for that adaption in the calculus. You know, Art of War stuff. 

Alright, that still sounds like those DCF nonsense. Let's illustrate....

Say you generally do not buy stocks above 20 times earnings because that implied an expected annual growth of 5.75%. A figure that's not impossible, but somewhat rare. 

But then you figured the business have a pretty good chance of matching or exceeding that implied growth rate. Quite confident about it. 

in such situation, you're not adapting your principles and methods. You simply adapt to the opportunity. 

That's why Graham bought GEICO. I mean, from my reading of Munger and Buffett they reckon Graham was abandoning his value method, going for the growth stocks and so win big. I'm sure they know better just I reckon Graham know GEICO very, very well... I think his purchase also mean he has some influence on the board... So you adapt. 

The more confident you are about the future prospect of a business, the higher the price you're willing to offer... and that higher price would still be "value". 


Cut your losses and let the profit run... yea... if you could be sure the current loss is a loss and profit is an actual profit. 

Sometime the market just doesn't know what it's doing and your loss is just an opportunity to buy. Sometimes it's an actual loss and sticking around is not advisable. 

Sometime, like APA, haha... you hit a series of lucks and reckon the profit is from a wonderful business.


----------



## luutzu (22 June 2018)

Value Collector said:


> Because a company that earns 25% return of equity, and retains 100% of earnings and deploys them into further investments that also earn 25% is worth more than a company that pays out all its dividends.
> 
> eg.
> 
> ...




That doesn't make much sense. 

I mean, technically, mathematically it does. Just that if you see the ownership of a business as owning the entire business and you're its one and only shareholder... it doesn't really matter whether the company pays out dividends or keep all its earnings.

The company earns x so its value is y. It splitting of that earnings out as dividend etc. shouldn't affect the value of the company. 

I mean it certainly affect the individual holder depends on their tax position. So I see where he's coming from.


----------



## Value Collector (22 June 2018)

luutzu said:


> Just that if you see the ownership of a business as owning the entire business and you're its one and only shareholder... it doesn't really matter whether the company pays out dividends or keep all its earnings.
> 
> .




Of course it matters, I think you are missing the entire point.

The Point is, a company that retains earnings and deploys them into new assets earning a high rate of return of say 25%, is worth more than a company that pays them out as a dividend.

In rogers example of woolies, woolies had a return on equity of 26%.

If woolies pays out 70% of its earnings and invests the other 30% in opening new supermarkets and bottle shops earning 26%, then we have to factor the growth into our valuation.

When Roger was breaking it up between retained earnings and dividends, he was simply making an allowance that the retained portion was going to add to equity and grow earnings at a good rate.


-------------------------

if you want a 10% return

$1 of equity earning earning 25% is worth $2.50 to you ( if all earnings get paid out)

but,

$1 of equity earning earning 25% is worth $5.20 to you (if all earnings are retained compounding at 25%)

but,

Companies like woolies that pay out only 70% while retaining 30%, you need to break up the valuation a bit to account for the pay out ratio.

so you take

$0.70 of equity x  2.5 = $1.75 (this portion of equity has earning paid out)
$0.30 of equity x  5.2 = $1.56 (this portion of equity has earning retained)

Total - $3.31 Fair value of $1 of equity compounding at 25%, paying out 70% of earnings.

So you wouldn't want to pay more than that for the $1 of equity unless you had good reason to think ROE will rise higher than 25%, and you would probably want a margin of safety because sometimes Masters situations happen.


----------



## gaius (22 June 2018)

Zaxon said:


> ...
> It's curious to me that after a couple of centuries of investing, we still have to rely so much on belief rather than on hard, actual facts.




I don't believe in neither value/momentum religion. Those are for fundamental/technical academia to complicate things and make themselves look smarter. The market always goes up, it is dead simple, anyone could make money. That is why both value and momentum religion believers believe their strategy works.


----------



## luutzu (22 June 2018)

Value Collector said:


> Of course it matters, I think you are missing the entire point.
> 
> The Point is, a company that retains earnings and deploys them into new assets earning a high rate of return of say 25%, is worth more than a company that pays them out as a dividend.
> 
> ...




Just rewatched the video above...

I'm a bit slow here, but what!? 

Say WOW earns $X. According to Monty....

If WOW pays all of that earning out in dividends, it is worth less [~$16].

But if it were to keep all that earnings, it's worth more [~$36?]

It's the same company, earning the same amount in both scenario. So how is it valued less in an objective sense? 

Say I own WOW all by myself. And the board decided to hand over the year's profit. All 100% of it. Or hand over 50%... either way, WOW still earn the same amount, so its value is the same as a business. True?

The only difference would be my tax position, and possibly what I decide to do with the cash. So if I put all the dividends on a night out at Star Casinos, that dividend is soon worth zero. If I put it in a savings account, close to zero... but it does not affect WOW's earnings, and hence value, as a business.


Put it another way. Say WOW pay each of us the same dividend. I know a good accountant and having made losses over the years (not biographical ), I pay zero tax on that divvy. You on the other hand pays a few cents in taxes on the divvy. 

That shouldn't mean that WOW's dividend is any different when it pays to you and to me. It's the same amount, just worth differently on that individual, after tax basis. But that basis shouldn't influence an objective assessment of what WOW is worth.

Don'tknow... I find it to be a strange way to value a business. Like I said, I do get that for each shareholder the value of dividends and such will be different. But that doesn't have anything to do with the business' own value. 


btw, how did he/yuo come up with that 10% required return mean $1 is worth $2.50 etc.?


----------



## Zaxon (22 June 2018)

galumay said:


> There isnt a holy grail of investment style, otherwise everyone would be doing it. What works for you may not work for me, you have to match investment style with psychology, personality and conviction.




There's two ways of looking at that.  I think, experimentally, you could determine which specific investment methods have a higher probability of winning overall, and which statistically underperform.  I don't think it would be a broad as "Value Investing" or "Growth Investing", but if you define a method precisely enough that you could enter it into, say Amibroker, you could find an outperforming method.  Not a holy grail, but something with a edge.

But, as you say, even if we knew precisely what that winning method was, it would be totally unsuitable for a whole lot of people, because their psychology wouldn't be matched to that method.

But I don't think we should be afraid of researching into what styles out/under perform objectively, just because there are certain people who wouldn't be able to make use of the answer.



galumay said:


> How do you decide when thats the correct action? I made huge amounts of money averaging down...
> In other cases my decision to hold onto winners has cost me nearly all the invested capital - SGH being the prime example.




The same exact method is definitely going to give you winners and losers.  You just hope the wins are bigger in the end.


----------



## Zaxon (22 June 2018)

luutzu said:


> The principles don't change. You don't adapt the method and principles.
> But you ought to adapt to the opportunity you see.




Yup.  That all makes sense.



luutzu said:


> Cut your losses and let the profit run... yea... if you could be sure the current loss is a loss and profit is an actual profit.
> 
> Sometime the market just doesn't know what it's doing and your loss is just an opportunity to buy. Sometimes it's an actual loss and sticking around is not advisable.




Very true.  Hold on or buy more when the market goes down, because you know your evaluation of this company will ultimately prove right.  Until it doesn't, and your left in a value trap.  Or sell out early to protect your capital, only to find that the market suddenly shot up the minute you sold it all.   Such fun!


----------



## Zaxon (22 June 2018)

gaius said:


> I don't believe in neither value/momentum religion. Those are for fundamental/technical academia to complicate things and make themselves look smarter. The market always goes up, it is dead simple, anyone could make money. That is why both value and momentum religion believers believe their strategy works.




You're my favourite person right now, because I think this is the great "truth".  Markets, over time, will always go up, and that's the only thing you need to know.  And I think your comment is the takeaway conclusion from this whole thread.

Which speaks to using cheap, passive, index funds.


----------



## gaius (22 June 2018)

luutzu said:


> Say I own WOW all by myself. And the board decided to hand over the year's profit. All 100% of it. Or hand over 50%... either way, WOW still earn the same amount, so its value is the same as a business. True?




No, not true. I'm pretty sure your WOW business would operate differently with your company cash reduced, and pretty sure that that would have some negative impact on your future earnings, and pretty sure that that would affect the value of the business.



luutzu said:


> That shouldn't mean that WOW's dividend is any different when it pays to you and to me. It's the same amount, just worth differently on that individual, after tax basis. But that basis shouldn't influence an objective assessment of what WOW is worth.




Nope, how much WOW worth is how much investors are willing to pay for, hence influenced by investors' tax.


----------



## galumay (22 June 2018)

gaius said:


> Nope, how much WOW worth is how much investors are willing to pay for,




Nope, thats the price. The value can be very different to the price.


----------



## galumay (22 June 2018)

Zaxon said:


> Which speaks to using cheap, passive, index funds.




That will work to give you returns of slightly less than the market net of fees. While the US market has always made gains after inflation for any period of longer than 20 years holding, thats not true of some other markets, (notably Japan.)

How many investors can hold in the big drawdowns though? Twenty years plus for a potentially small return with big drawdowns in the middle is something very few investors can tolerate.

Most people want to get rich fairly fast, I reckon that has more to do with investment failure than any other factor.


----------



## Zaxon (22 June 2018)

galumay said:


> thats not true of some other markets, (notably Japan.)
> Twenty years plus for a potentially small return with big drawdowns in the middle is something very few investors can tolerate.




And that's a very real concern. Including with Australia, where we still haven't surpassed our previous peak.  We've just been slowly recovering from March 2009.  In a market like Japan, I'm not sure if any investment style would actually get anywhere.  Possibly a trader could take advantage of the short term rises.



galumay said:


> Most people want to get rich fairly fast, I reckon that has more to do with investment failure than any other factor.




Very true.


----------



## luutzu (22 June 2018)

gaius said:


> No, not true. I'm pretty sure your WOW business would operate differently with your company cash reduced, and pretty sure that that would have some negative impact on your future earnings, and pretty sure that that would affect the value of the business.




It would operate differently, but then its value need to be reappraised. To do what Monty is doing would be double counting.

Say WOW's equity is $100. It earn $20. 

From that $20 it pays out 50% dividend, kept 50%.

The moment Monty appraise it, he must appraise it at the $100 Equity. i.e. equity that produces the $20 profit.

To appraise it post the dividend payout... i.e. appraise it as though its equity become $100+$10 retained. That's for the next year. Or the assessment after the point of purchase.







gaius said:


> Nope, how much WOW worth is how much investors are willing to pay for, hence influenced by investors' tax.




I didn't deny that investor's individual perspective doesn't affect the "worth" of a company to them. Was saying that their individual circumstances doesn't objectively make the company more or less valuable. 

Sure, if enough investor are in the same boat and so they appraised it based on their tax impact etc., the market price will reflect it. But that's market price, not value.


----------



## Value Collector (22 June 2018)

luutzu said:


> I'm a bit slow here,




I am starting to think so because you are just not getting the point. 





> If WOW pays all of that earning out in dividends, it is worth less [~$16].
> 
> But if it were to keep all that earnings, it's worth more [~$36?]
> 
> It's the same company, earning the same amount in both scenario. So how is it valued less in an objective sense?




Because in one case it is paying out all earnings, and won't grow.

While in the second case it is retaining earnings and putting those retained $$$ to work earning 25% return.







> Say I own WOW all by myself. And the board decided to hand over the year's profit. All 100% of it. Or hand over 50%... either way, WOW still earn the same amount, so its value is the same as a business. True?




Say you own all of WOW, and they have $100 of equity earning 25%, and at the end of *every* year they hand over the $25 to you, the most you can pay is $250 if you want a 10% return, because that $25 dividend will probably never grow, so that income stream is only worth $250 if you want to earn 10%PA

However

If they retain the $25, the *equity* *and earnings, *compound so they will have

$125 Equity and $31.25 earnings in year 2
$156 Equity and $39.00 earnings in year 3
$195 Equity and $48.00 earnings in year 4
$243 Equity and $60.00 earnings in year 5


So after 5 years of retaining and reinvesting earnings, equity and earnings have more than doubled at the company that retained earnings,

So a company you believe genuinely has the ability to retain and compound earnings at high rates is worth more to you than one that earns at the same rate but has no ability to retain and deploy earnings at high rates.




> Don'tknow... I find it to be a strange way to value a business




I am pretty shocked you don't understand this stuff already, 



> btw, how did he/yuo come up with that 10% required return mean $1 is worth $2.50 etc.




Simple, If you need to earn 10% to meet your investing objectives, and you find a business $100 of equity inside earning $25, you can afford to pay $250 for that equity and you will still get your 10% return.

eg $25 of earning is 10% return on your $250 investment. This is why most shares trade at "market prices" above their equity value.


----------



## Value Collector (22 June 2018)

Zaxon said:


> And that's a very real concern. Including with Australia, where we still haven't surpassed our previous peak.




The market has actually well and truly surpassed the peak when you factor in reinvested dividends.

People that say we still haven't recovered are just neglecting to account for dividends.


----------



## luutzu (22 June 2018)

Value Collector said:


> I am starting to think so because you are just not getting the point.




Dude, that's a bit unnecessary. 



Value Collector said:


> Because in one case it is paying out all earnings, and won't grow.
> 
> While in the second case it is retaining earnings and putting those retained $$$ to work earning 25% return.




Yea, I get that if earnings is retained the company would be more valuable. 

But why should I pay for it? Isn't it my owning that I decided to retained in the company?

Let say I'm trying to sell you WOW, all of it. And I tell you...

VC... brother... this WOW is worth $110. 

You say... no, I worked it out and it's worth only $100. 

I use the same calculator, work out that it's $100 too. But my reasoning to you is...

Yea, but if you keep the earning it's going to earn next year, keep it back in the company, it's going to be worth more. Wouldn't it?

Yea it will. But why should you pay for that earning that you kept back?

Right?

Who's the slow one now? Ey? 



Value Collector said:


> Say you own all of WOW, and they have $100 of equity earning 25%, and at the end of *every* year they hand over the $25 to you, the most you can pay is $250 if you want a 10% return, because that $25 dividend will probably never grow, so that income stream is only worth $250 if you want to earn 10%PA
> 
> However
> 
> ...




Again, yes I agree it will be worth more in that future. But I as a new owner is being asked to pay for that future today. 

So if those earnings being retained.. i.e. my earning being retained and reinvested... Those are mine. Why should I now revalue and pay extra now for that future my money made possible?

Doesn't make sense.



Value Collector said:


> I am pretty shocked you don't understand this stuff already,
> 
> Simple, If you need to earn 10% to meet your investing objectives, and you find a business $100 of equity inside earning $25, you can afford to pay $250 for that equity and you will still get your 10% return.
> 
> eg $25 of earning is 10% return on your $250 investment. This is why most shares trade at "market prices" above their equity value.




Yea alright, that part makes sense. Calculator didn't have e nough coffee


----------



## gaius (22 June 2018)

luutzu said:


> ... That's for the next year. Or the assessment after the point of purchase.




So your valuation ignores all future years? or contains an unknown not known until next year??




luutzu said:


> ... But that's market price, not value.




So the true valuation should be off by the tax effect amount on the day the market price fully reflect the true valuation?


----------



## Value Collector (22 June 2018)

luutzu said:


> Again, yes I agree it will be worth more in that future. But I as a new owner is being asked to pay for that future today.
> 
> So if those earnings being retained.. i.e. my earning being retained and reinvested... Those are mine. Why should I now revalue and pay extra now for that future my money made possible?




It's worth more today, because it has some sort of system or advantage that is allowing it earn high rates of return, and if you aren't actively looking for those sorts of businesses you are missing out.

Let me try and explain it to you one last time, and if you still think I am wrong before you respond read through it again, because I can assure you I am right.


Lets say there are two Bank accounts for sale.

Bank account A - has $100 deposited in it and it will pay out 25% Interest ($25) for life, you can never add extra money into the account, it just sits there and pays you $25 once a year.

Bank account B - Has $100 deposited in it and it will also earn 25% Interest, however it will retain 50% of its earnings in the account earning 25%, and pay out the other 50% to you once per year.

The fact that Bank account B is able to retain earnings and reinvest them at above market rates gives it a huge advantage over Bank account A. 

So if the two accounts were selling at the following prices which account would be the best investment?

Bank account A - $250

Bank account B - $285 

If all else was equal, which would you buy?

I will give you a hint, Bank account B has to sell at over $385 before it makes sense to choose Bank account A at $250.

This is what roger's calculation was trying to work out, eg how much was WOW worth when it was retaining earnings and reinvesting them back into its businesses. 

Of course you are going to try and buy investments as cheap as you can, thinking about things like this is how the value investing approach includes growth, and to try and decide whether future growth has been priced in, or is it still good value when the future growth is factored in.


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## luutzu (22 June 2018)

gaius said:


> So your valuation ignores all future years? or contains an unknown not known until next year??
> 
> So the true valuation should be off by the tax effect amount on the day the market price fully reflect the true valuation?




It doesn't double count to my disadvantage.

Say I reckon WOW's earning power is $10 from now into eternity. And based on that estimate I figured it's worth $100.

The fact that it kept back 30%, pays out 70% of that $10 earning shouldn't make it more or less valuable. I mean, it still earn $10. 

To say that if it kept back more then it's worth more... that's mathematically true. But that's assuming I haven't already paid for and own it; that it wasn't my earning that's being kept back and being compounded.

It also assume that the dividend paid out is paid to someone else and not to me. Which doesn't make sense because it's paid to me as I own the thing. 

Say I have $100M in my bank account. I call up Monty and offered it to him for $150M. 
Why would he buy $100M in cash for $150M in cash? 

Using his logic I tell him that if he kept all the earning and compound the $100M earning for next 5 or 10 years, it'll surely be worth $150M, at least.

That's not going to work on him, or will it?


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## gaius (22 June 2018)

luutzu said:


> .. But why should you pay for that earning that you kept back?




That's investment. I pay money for a return because the company would put the money into better use.


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## luutzu (22 June 2018)

Value Collector said:


> It's worth more today, because it has some sort of system or advantage that is allowing it earn high rates of return, and if you aren't actively looking for those sorts of businesses you are missing out.
> 
> Let me try and explain it to you one last time, and if you still think I am wrong before you respond read through it again, because I can assure you I am right.
> 
> ...




I'm not disputing the fact that if equity are retained and reinvested into the company, it will be worth more. But that more is in the future, a future where I already own it. So I can sell it for more in that future, but I wouldn't pay more for that future today.

Timing.

OK. Say a bank account has $100M in it today. It earn 5% p.a. 

If you were to buy it today, are you going to pay $100M, or are you going to pay $100+5% interest on it today?

We know it's going to be worth $105M next year... just why should you value it at that future price today when you're paying for it?


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## luutzu (22 June 2018)

gaius said:


> That's investment. I pay money for a return because the company would put the money into better use.




Put it another way...

Say you're selling me a brand new car. Brand spanking new.

I tell you that it's not new at all. It's used.

Dude, you just bought it and it show 0Kms on it.

Then I said, mate... after a year of me driving it, it ain't going to be 0Km. 

You're not going to sell me yuor new car at a used price now will you?


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## gaius (22 June 2018)

luutzu said:


> Put it another way...
> 
> Say you're selling me a brand new car. Brand spanking new.
> 
> ...




I wouldn't buy a car if it can't drive. Remaining at 0km after a year doesn't help its value.
On the other hand, the car worth more if it can run more kms over its remaining life.


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## gaius (22 June 2018)

luutzu said:


> We know it's going to be worth $105M next year... just why should you value it at that future price today when you're paying for it?




Of course, I won't be paying 105 for 105. I would pay, say 102, earning about 2.9%. If you happy to sell it at 100, I could earn 5%, thank you very much.


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## luutzu (22 June 2018)

gaius said:


> Of course, I won't be paying 105 for 105. I would pay, say 102, earning about 2.9%. If you happy to sell it at 100, I could earn 5%, thank you very much.




Come on, admit it, you know I'm right. 

btw, here's an almost accidental discovery of mine using Buffett and Graham's approach [or rather, my understanding of it]...

Sigma at 72c a share:




See that 7.47% pa return there? Higher than the market's implied expectation of 2.45%. 
So when the market price expects 2.45% but based on historical earnings it's at least 7.47%, you're ahead if you buy. 

Then if the future is brighter, that's just extra cream with cherries on top.

Sigma is currently at 80c or so... so far, seem to be somewhat alright.


Here's the same for the WashingPost when Buffett bought it.





Buffett weren't kidding when he said he expects to earn 15% on the first day he buy anything.

Well, that's according to his biographer.

Of course that's just mechanical algo. But pretty damn good I reckon.



As for Monty's formula... he overpaid by about 10%. Which as we've been discussing, kinda make sense doesn't it.


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## gaius (22 June 2018)

luutzu said:


> Come on, admit it, you know I'm right.
> 
> btw, here's an almost accidental discovery of mine using Buffett and Graham's approach [or rather, my understanding of it]...
> 
> ...




It is unclear to me if your example actually help prove you right or wrong.

If you say Monty's formula overpaid by about 10%, I could also say the seller wouldn't sell it too cheap if he uses Monty's formula.


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## luutzu (22 June 2018)

gaius said:


> It is unclear to me if your example actually help prove you right or wrong.
> 
> If you say Monty's formula overpaid by about 10%, I could also say the seller wouldn't sell it too cheap if he uses Monty's formula.




People do what makes sense to them. 

It just doesn't make sense that a buyer have to pay more because the investment will, in the future, be worth more from having his dividend withheld from him.


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## gaius (22 June 2018)

luutzu said:


> It just doesn't make sense that a buyer have to pay more because the investment will, in the future, be worth more from having his dividend withheld from him.




This is typical for growth stock. Any growing company should be able to put their money to work to earn a higher return than returning the cash to shareholders. That's the whole point of the market to drive better resource allocation for the economy.

This is text book theory anyhow, but with QE flooded the world with cheap funding, even the crappiest project is still profitable, the value of retaining cash for growth is becoming less obvious (or even becoming doubtful). Yet, the result is the same - high valuation.


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## galumay (22 June 2018)

I think we are bashing our heads against a brick wall here, VC. I am done.


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## luutzu (22 June 2018)

gaius said:


> This is typical for growth stock. Any growing company should be able to put their money to work to earn a higher return than returning the cash to shareholders. That's the whole point of the market to drive better resource allocation for the economy.
> 
> This is text book theory anyhow, but with QE flooded the world with cheap funding, even the crappiest project is still profitable, the value of retaining cash for growth is becoming less obvious (or even becoming doubtful). Yet, the result is the same - high valuation.




I think that's the problem with adjusting a project's/investment required rate of return based on prevailing cost of capital/interests. 

Gov't own infrastructure project might be the exception... where if the return is far away and below the cost, it's still acceptable as it benefit the community, create jobs, reduce the cost of doing business etc., which in turn return the cash back to the state coffer. 

But yea, projects or investment made based on what interest the bank charges... while it make sense in the short term when rates are low and fixed, won't do well if interest were to rise but the return cannot be raise.


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## luutzu (22 June 2018)

galumay said:


> I think we are bashing our heads against a brick wall here, VC. I am done.




Dude, Monty's approach mixes price with value.

More specifically, mixes today's price with tomorrow's value.

He's the buyer but his calculation is that of a seller. 

Not sure how else to put it... so let's repeat with different emphasis.

Monty is buying WOW today, with his own cash which he will transfer over to the seller.

But for some reason, Monty figured that the *price* of WOW today is what it will be worth today _plus_ the retained earnings it will earn in the future. 

Yes, WOW will be worth that higher value in that future. But that future belong to him because he already paid for it today. So it's a value that is his, he should be the one selling it at that future price, not paying for it right now.

I mean, Monty would be paying for today's value, plus the value _his _WOW will further gain in the future. 

On top of that, he's taking on the risk that Masters and other ventures didn't work out. 

But alright, just put it in that I'm clueless bin.


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## gaius (22 June 2018)

luutzu said:


> He's the buyer but his calculation is that of a seller.




What buyer/seller calculation?? It is supposed to be the fair value! The 'objective' mid point estimate. Buyer would of course bid for lower, seller would of course ask for higher.


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## Value Collector (22 June 2018)

luutzu said:


> It doesn't double count to my disadvantage.
> 
> Say I reckon WOW's earning power is $10 from now into eternity. And based on that estimate I figured it's worth $100.
> 
> ...




Dude, you haven’t been paying attention at all have you?

So you understand what “return on equity” is? Do you understand why “return on equity” is important?


If you had an account with $100 million in it and it was earning 25% interest, you can bet it’s worth a lot more than $100 million in today’s market, where people are buying bonds at 2% interest.

If you had a $100 US treasury bond with a 25% interest rate, you can bet it’s going to sell for more than $100.

And a bond that earned 25%, and allowed all the earnings to be reinvested back at 25% would be selling for more than the bond that didn’t allow reinvestment.

You didn’t answer my question about which bank account you would buy?

But let me ask the similar question using bonds as an example.

Which is the best value investment.

1, $100 perpetual bond @ 2% interest - selling at $100

2, $100 perpetual bond @ 25% interest - selling at $250

3, $100 perpetual bond @ 25% interest with 50% of earnings reinvested into the bond - selling at $285

Please actually answer this question.


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## luutzu (22 June 2018)

gaius said:


> What buyer/seller calculation?? It is supposed to be the fair value! The 'objective' mid point estimate. Buyer would of course bid for lower, seller would of course ask for higher.




Monty is about to buy, say, a $100M bank account today. For simplicity, just say that there's $100M in cash in it right now so its price is $100M. 

But in valuing that $100M ordinary, typical, no special mate's rate account at its current price of $100M.... he get creative.

He figured that if the interests (dividend) were kept back and compound... in the future that $100M will be worth, say, $150M. 

Then he goes ahead and "value" that account at $150M. 

I'm exxagerating the figures and it does sound silly when you put it that way. But that's essentially what he's doing when he said... 

paraphrasing:   If the company pays out its earnings in full, it will be worth $x. If it retain all of its earnings it will be worth $2X. 

I'm saying there's no difference in *price*  no matter the payout ratio. That yes, if more cash are kept back and wisely invested to achieve the historical ROE, it will be worth more. But that new value generated were generated from what will be my saved earnings. So why should I pay the seller for that extra value now?


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## luutzu (22 June 2018)

Value Collector said:


> Dude, you haven’t been paying attention at all have you?
> 
> So you understand what “return on equity” is? Do you understand why “return on equity” is important?
> 
> ...





You are missing the point.

I as buyer had come to the conclusion that WOW, at ROE of 28% etc. etc. is worth $100M, say.

That is, the reason I'm paying $100M for WOW is because of its awesomeness. 

What Monty's approach is saying is that, IF the earnings from WOW were retained, it will be worth more. If that same earning were paid out completely in dividend, it will be worth less. 

What I am saying is that the price should be the same $100M regardless of what I decide to do with that eventual earning once I had bought and paid for WOW.

So if I decide to retain all the earnings next year, year after that etc. Yes it will be worth more... But that new value is from my savings and investing the earnings my company earned.


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## Value Collector (22 June 2018)

luutzu said:


> You are missing the point.
> 
> I as buyer had come to the conclusion that WOW, at ROE of 28% etc. etc. is worth $100M, say.
> 
> ...




Please you are really missing a key point here, 

Go back to my last post, look at the 3 bond examples I gave, 

Take a moment to think about it, don’t rush, 

And please tell me, which of the three bonds represents the best value.


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## gaius (23 June 2018)

luutzu said:


> Monty is about to buy, say, a $100M bank account today. For simplicity, just say that there's $100M in cash in it right now so its price is $100M.
> 
> But in valuing that $100M ordinary, typical, no special mate's rate account at its current price of $100M.... he get creative.
> 
> ...




Ok, let's use your example.

You value your special $100M bank account at $100M.
Monty sees your special $100M bank account worth $150M, offers you $130M for your $100M bank account.

Say $30M 'immediate profit' is a good enough for you, so deal.

So, you get $130M from Monty, and think Monty is crazy.
Monty paid you $130M, uses your special $100M bank account to get $150M, so net gain of $20M.

Notice that you could have got $150M but only pocketed $130M in the end. Monty would have got nothing without the deal but now received $20M.

Also note that your $130M could not have earn enough interest to reach $150M, because it is assumed the company (your special bank account) would invest wisely at a higher earning rate.


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## luutzu (23 June 2018)

Value Collector said:


> Please you are really missing a key point here,
> 
> Go back to my last post, look at the 3 bond examples I gave,
> 
> ...




How about you work it out for me?

My understanding of perpetuity can't plug the figures you gave to split out an answer.

But regardless, the point I'm making is that... Yes, if earnings are retained and reinvested, and further being reinvested at a higher rate. Then of course the bond/company will be more valuable in the future. 

Just that, again, that future had already been bought and paid for by the buyer... so why is it priced today at that future value?

My brother have a habit of drawing things out. I find it annoying most of the time... maybe I should draw it out


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## luutzu (23 June 2018)

gaius said:


> Ok, let's use your example.
> 
> You value your special $100M bank account at $100M.
> Monty sees your special $100M bank account worth $150M, offers you $130M for your $100M bank account.
> ...




Pretty sure I said ordinary account, nothing special about it.

You're mixing a bank account example with an ongoing business there.


If we stick to a bank account example it's this:   
--------- There's $100M in cash, in the bank right now. It is worth $100M in cash because there's $100m in cash in it haha

Now, offer me $130M for it please. 

You can "earn" that extra $20M all you like. All I know is that my pallett of $100M in cash just got offered $130M. So you/Monty, is taking your future earnings of $30M from on that $100M deposit and pay it to me.

True or not?

---------------
A $100M business value example....

A $100M business doesn't mean it has $100M. Not in this example. 

I worked out that given its future income streams from now until eternity, discounted that back to today at my required rate... it is worth $100M. 

Now, why in the world would I now, after working out that it will be worth $100M because of its probably, very likely, income streams... Why in the world will I now pay extra for it because it will reinvest those earnings back on itself? 

Want to see how Buffett value the Washington Post vs how Monty values WOW?


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## gaius (23 June 2018)

luutzu said:


> You can "earn" that extra $20M all you like. All I know is that my pallett of $100M in cash just got offered $130M. So you/Monty, is taking your future earnings of $30M from on that $100M deposit and pay it to me.
> 
> True or not?




True, of course, didn't you notice that I used your $30M to pay you???

A $100M bank account worth more than $100M might sound silly, but in current low rate environment, if you have a $100M bank account that gives $150M in a year, it surely worth more than $100M.


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## gaius (23 June 2018)

luutzu said:


> You're mixing a bank account example with an ongoing business there.
> 
> ...
> 
> ...




That bank account example was your example, but okay the same applies to your $100M business example.

You have a $100M business. The business earns some future income streams from now until eternity and you figured that with your required discount rate it worth $100M.

I see your $100M business could have earn $50M more over the next 3 years, if the business kept back some of its dividend to expand its business this year.

Since you don't believe changes in dividend payout ratio now would affect the value of the business because you believe that the dividend is yours already, you maintained your valuation of the business at $100M.

I, on the other hand, being the crazy and double counting my numbers, figured that the worth of the business should be $150M because it will worth $50M more in 3 years time. So, by mixing today's $100M and future $50M (also double counting what would have been already mine if I bought the business), I offer you $130M for the business.

Say, $30M 'immediate profit' is good enough for you, so deal.

Now, you got $130M from me, and think that I am crazy for double counting what is already mine.

I paid you $130M, uses your business to generate that additional $50M. In other words, I used your business's $50M earning to pay you $30M for your business and pocketed the remaining $20M.

Now, what price would you accept to sell your business? Is $130M good enough for you?


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## Value Collector (23 June 2018)

luutzu said:


> How about you work it out for me?




Ok, Well as investors it our job to put money to work where it will earn a satisfactory rate, and if we can maybe even an excellent rate, while also protecting ourselves from loss.

Now I gave you the following choices, and and I said our target rate was 10% return or better.



> 1, $100 perpetual bond @ 2% interest - selling at $100




This Bond is the worst investment, even though we can buy it at its face value, its not going to deliver us our 10% required return, this option would have to be selling at $20, before it would deliver us our 10%, So it is very under priced....... it expensive



> 2, $100 perpetual bond @ 25% interest - selling at $250




This bond is Ok, it's selling for $250 but will deliver $25 interest, so it meets our 10% required return, But if we pay over $250 for it, it won't



> 3, $100 perpetual bond @ 25% interest with 50% of earnings reinvested into the bond - selling at $285




This bond is the star of the group, At $285 it will deliver you a return of well over 10%, it would have to be trading at $385 before it was considered equal with bond 2. So the fact you can buy it for only $285 makes it a huge Bargain opportunity.

 its ability to retain earnings and deploy them at 25%, mean that even though it's selling for $35 more than bond 2, it's returns will be significantly better, if we buy it for $285 it will have a return of well over 10%, in just 5 years the equity in the bond would have doubled and it would be earning twice the interest of bond 2.




> Just that, again, that future had already been bought and paid for by the buyer... so why is it priced today at that future value?




The future value is not priced in, The full value of bond 3 is $385, but its selling today for $285 thats a big discount to its fair value, But if you are only looking skin deep and ignore its ability to retain earnings at a high return on equity, you will miss it.

Roger Wasn't saying "work out what it will be worth in the future and pay that price today", He was saying "work out what it will be worth in the future to see whether todays price represents good value and a margin of safety"



> But regardless, the point I'm making is that... Yes, if earnings are retained and reinvested, and further being reinvested at a higher rate. Then of course the bond/company will be more valuable in the future.




So wouldn't you be stupid to buy an inferior bond/share just because its a looks a little cheaper based on P/E ratio or dividend today? I think so.

No, one is saying go and pay for all the future growth today, I am just saying Rogers method is one tool to help estimate future growth potential, So you can compare what the company might be worth in the future compared to todays share price, its then up to you to decide what you are willing to pay today.


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## Value Collector (23 June 2018)

Just so people understand how the Bond example relates to shares, Shares can be considered as "Perpetual Equity Bonds"

Where the "Equity per share" is like a bonds "Face Value", 

The "Return on equity" is like a bonds "Interest rate coupon"

And just like Bonds, shares will trade in the market at market prices that may be higher or lower than the face value of the equity you are buying.

It's up to you to decide what the fair value for that "Share / equity bond" is based on its likely return on equity going forward, and what it will do with earnings, eg does it pay them out, does it retain them and invest them at a low rate or high rate, will it burn them in a bad investment etc etc.


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## luutzu (23 June 2018)

gaius said:


> That bank account example was your example, but okay the same applies to your $100M business example.
> 
> You have a $100M business. The business earns some future income streams from now until eternity and you figured that with your required discount rate it worth $100M.
> 
> ...




Where do I sign? 


Put another way....

Monty goes to the car dealership. He like this Mustang that's selling for $100K. 

So he try to figure out what a $100K car is worth after he bought it. 

He said... it's $100K now, but wait til I reskin it with fibreglass; then gold plate that fibre. Change the rim, put in a double turbo. Some extra dark tint. 

Oh boy, it's going to be worth at least $150K, easy.

Then he goes ahead and pay $130K for it after a tough negotiation. 


That would be pretty silly of Monty right?


It's the same in his valuation. 

So he figured that WOW earns $X. From that earning stream, it should be worth $10X, for example. 

But then he figured that if he, as its new owner, were to keep back future earning streams (from himself), it is worth a lot more. 

Of course it'll be worth a lot more, but that's the worth/value he own... not the owned by the current owner that's selling it to him.


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## Value Collector (23 June 2018)

luutzu said:


> That would be pretty silly of Monty right?




You are building a straw man.

Roger Wasn't saying "work out what it will be worth in the future and pay that price today", He was saying "work out what it will be worth in the future to see whether todays price represents good value and a margin of safety"


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## luutzu (23 June 2018)

Value Collector said:


> You are building a straw man.
> 
> Roger Wasn't saying "work out what it will be worth in the future and pay that price today", He was saying "work out what it will be worth in the future to see whether todays price represents good value and a margin of safety"




So if I can prove that I didn't made it up, Monty is wrong?


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## Value Collector (23 June 2018)

luutzu said:


> So if I can prove that I didn't made it up, Monty is wrong?



Make what up? The story about Roger buying car?

All I am trying to show you is that bond 3  in my example is worth a lot more than bond 2, and it’s worth today, no one is saying pay the full future value today, you are just making that up.

Rogers calculation is just showing that you could pay up to $385 for bond 3 and it would still deliver you a 10% return, so paying $285 wouldn’t be over paying, it would be securing a good deal, that will deliver a lot more than 10% return.


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## luutzu (23 June 2018)

Value Collector said:


> Make what up? The story about Roger buying car?




If I can prove to you that his valuation method is what I said it is: that he count his earnings in the business as though it's not his earnings, hence the value of the business is worth more so he'd have to pay more.

So yea, like my car example.


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## Value Collector (23 June 2018)

luutzu said:


> If I can prove to you that his valuation method is what I said it is: that he count his earnings in the business as though it's not his earnings, hence the value of the business is worth more so he'd have to pay more.
> 
> So yea, like my car example.




I honestly don’t think you are understanding it.

Can you see in my simple example that bond 3 is worth more today than bond 2?


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## luutzu (23 June 2018)

Holy cow, I was wrong.

It's worst than I thought. Monty didn't use earnings, he uses Equity. So the more equity that's kept back, the more valuable the business is. Dudeeee.... that ain't right.

I mean, it's right that if I put more equity back its equity will be more. But why am I paying for it twice?


*Monty says...*

Woolworths is what "an extraordinary business looks like".
- Its NPAT was $295.5 in 2000, grew to $1835.7 in 2009.
- "BUT", he say, forget about that growth. It's not important.

Wait, say what? Why?

- There's something else that grew as well.

What is it Roger?

Equity.

Like QANTAS, Woolies owners have put in a heck of a lot more equity into the business over the past 10 years.

And that is good, how, Roger.

Because WOW had managed to improve its return rate on that equity. So that's good.

Fair enough. That's true if it is in fact true that ROE had improved and not decrease like that idiot Luu is saying [see chart below].

Roger: So in 2000, its ROE was 18.1% vs 26.9%. Phenomenal.

Luu: But dude, equity was $1627.6 then some $5Billion more equity was added. Sooo... but alright, higher is better than lower. Go on. Just mate, those $5B better not be mainly from new equity raised from me. 'cause that would be a different story altogether. But go on... Why is WOW a quality business.




*Roger: *Well, shareholders have also put in a lot more new equity from share issues. But... OK, its debt in 2000 was $432M and a decade later it's over $3 Billion. That's a big increase (shiet, I should really rehearse this video and picked another company. Wonder if I can dub over and retitled it as a so-so operation ).

But don't worry about it. There's plenty of cashflow, it's generating crazy amount of return on equity. So let's move on. It's a quality business, alright!

*Luu: *Alright Roger, alright mate. What's a billion or three between lenders and borrowers anyway. What does Munger knows when he and Buffett says "little or no debt". Go on.... It's an "extraordinary business" you were saying.

*Roger: *Now that you take my word for it. You're wondering "how do I, roger, decide when a stock is cheap."

*Luu: "cheap". * You're saying you're going to show us when, at what price, you're going to pay for it. Right?

*Roger:* Right. Stop interrupting Lutz. It's going to get a bit complicated here. There's some maths involved so pay attention.

*Luu: *Woo... It's not imaginary numbers level of math is it? 

*Roger:* Mate, if you focus, by the time I'm done explaining it. It's going to be very easy.

Ready?

We're going to value its EQUITY.

Equity?

Yea, EQUITY.

Get Woolies Equity divided by its shares outstanding... Just simple fraction. You still with me?





So Equity is $5.98 per share.

Payout Ratio is 70cps.

ROE is NPAT/E = 27.5%.

Your required rate of return is 10%.

Now. Here's the tricky part, it's going to blow your mind my friend.





*Luu: *What's step 1 and what's the higher $36.94 there?

*Roger: *Step 1 is the value of WOW if all dividends are paid out to you, its owner.
Step 2 is the value if all the dividend is kept back.

*Luu: *So why the $20 difference there Roger?

*Roger: *Obvious isn't it. Too bloody obvious.

Think about it.

IF WOW hand you over its earnings, you're going to either blow it at the casino or take the kids to Disneyland.

*Luu:* Or I could invest it.

*Roger:* No, you're going to either waste it or put it in a low interest bearing account. A waste! You'll waste it!

*Luu: *Yea, you're right. What was I thinking. Go on.... Why is WOW worth $36.94 if earnings that belong to me are kept back inside Woolies for the management to play with. Why.

*Roger: Obvious*. For one, the more equity that's kept back the higher the equity will be. Then two, the magical effect of compounding... If more of your equity that's kept back are compounded, there will be more of it, so it's worth more.

*Luu:* Bloody genius. So that mean that if I save my earnings, put it back into the business it will grow the business. Then when I come to sell it later down the track it'll be worth more. Why can't I see that.

*Roger:* You're not  me that's why. Takes brain power my friend.

*Luu:* So Monty. What price do I pay for WOW now?

*Roger:* Huh? You pay $36.94 for it. That's the value of WOW if all your woolies earnings are kept back.

*Luu: *Wait. You're telling me that if I buy woolies, decides to take all its annual earnings out as dividend and enjoy life. I get to pay

*Roger: *That's what it looks like doesn't it. But... but Woolies doesn't pay out all its earnings, only 70% so you'll....

*Luu:* Say no more my friend, say no more.

Btw, I have a $100M account. What say you take it off me for $130M even?


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## Value Collector (23 June 2018)

luutzu said:


> Holy cow, I was wrong.
> 
> It's worst than I thought. Monty didn't use earnings, he uses Equity. So the more equity that's kept back, the more valuable the business is. Dudeeee.... that ain't right.
> 
> ...



I can’t believe how bad you are misreading the situation, maybe on purpose I don’t know.

Dude, when you buy a share what are you buying?

You are buying the equity of a business, another name for shares is literally “equities”.

Do you understand the whole concept of return on equity?

I am not sure why you aren’t understanding that a company that can generate high returns on equity is worth more than one that earns low returns on equity.

And I don’t understand why you can’t see that a company that has the ability to retain earnings at high rates of return is worth more than one that can’t.

You aren’t paying for equity twice, I have no idea why you are saying that,

You are valuing the company at a higher value because it has the ability to retain earnings and deploy them at 25%.


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## So_Cynical (23 June 2018)

Buy whats cheap and sell it for more than you paid for it - call it whatever you want.

Simples.


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## luutzu (23 June 2018)

Value Collector said:


> I can’t believe how bad you are misreading the situation, maybe on purpose I don’t know.
> 
> Dude, when you buy a share what are you buying?
> 
> ...




When you buy a company, you also buy its debt, liabilities as well as its equities.

Unless, of course, your deal is that the offer price excludes the debt and obligations. But that condition is not possible when you're buying shares or stocks or a fraction of the business.

that is, when you make a stock purchase you're buying a fraction of the entire enterprise.


Dude, like I said before, I understand that a business with higher ROE is worth more. If it retain its earnings and reinvested it, it will be worth more [all else being equal].

But unless those retained and reinvested earnings are already made [past tense there]... then I should not be paying for those future value and benefits my retained earning made possible. Because those future I've bought and paid for.


Another example...

Say I bought an ATM. It dispenses $1000 a day, everyday.

Why is the ATM worth any more or less to me as its new owner if I were to spend that $1000 daily earning or put it back into the ATM?

I mean, I know the ATM will have more money [worth more] if I put back the $1000. And that's the way it should be. But that $1000 retain is not the previous owner's cash to give. I mean, the only reason there's more cash in that ATM for me now is because I saved up, make sacrifices by putting the cash back into it.

So yes, if I were to later resell it, it will be worth more. But that's for me to gain from, not for me to pay for now.

i.e the reason I buy and paid the price I paid for that ATM is because it gives me $1000 a day. [similar to high ROE, low debt, quality business etc.]. 

That I've done the maths, kick the tyres and are confident that the ATM will dispense $1000 a day... hence I wrote the cheque etc. etc. 

to then say that... Luu, if you were to not spend that daily cash but instead reinvested it, then you of course need to pay a higher for it now because it'll be worth more. 

come on man, that's pretty straight forward and I went back over Monty's video I'm pretty definite I understand what he's saying.


Anyway, his analysis is wrong and his valuation of WOW isn't "cheap" either.


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## luutzu (23 June 2018)

Here's why WOW is not "a great business".

It's so-so. Have its moment. Not losing money. 

But not WOW, incredible.






Compare that to WalMart




Earnings paid out as dividend and also retained. 

Some equity raising but that pale in comparison to the growth in profit, operating cash. Just look at the amount of dividend in 2014 vs the total equity owners contributed. 

Not saying you can find a WalMart quality operation everyday. Or if you find it you can get it for a reasonable price.

Just saying that WOW is so-so. Not one you'd want to pick as exmplary of awesomeness.


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## cynic (23 June 2018)

I suspect that there has been some mathematical sleight of hand in the assessment of the bonds from the 3 bond hypothetical.

If one were to buy bond 2, in multiples of 8, then half the 25% return (i.e. $100) could be reinvested in that same bond specification, thereby rendering it the higher perfoming of the 3 investment choices!!!


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## gaius (23 June 2018)

luutzu said:


> Where do I sign?
> 
> 
> Put another way....
> ...




Of course you could argue that Monty is silly for offering $130K instead of $100K, but without the $150K calculation of including future value, Monty wouldn't know of such opportunity at all.

You could keep hitting on 'why not offer $100K', but that doesn't prove the logic behind the $150K valuation methodology is wrong.


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## gaius (24 June 2018)

luutzu said:


> But unless those retained and reinvested earnings are already made [past tense there]... then I should not be paying for those future value and benefits my retained earning made possible. Because those future I've bought and paid for.




Let me get this straight. Are you suggesting that you want to buy shares from yourself?? and wondering why you should pay more for your own shares because you have already bought and paid for your shares??

Well, I rest my case. Yes, it doesn't make sense. Although the value of your shares increased, you don't have to pay more for your own shares.


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## Value Hunter (24 June 2018)

Luutzu the concept of a valuation changing based on the dividend payout ratio is very simple. How many investors can compound their capital at 20% plus per annum? The answer is not many.

Therefore if you are an investor who is able to generate for example 15% per annum compound returns (sill a pretty good investor) over the long term and you invest in a company that is able to generate a 23% return on incremental equity (i.e on retained earnings). If you can only generate 15% return by investing the dividends the company pays you, whereas by keeping the money the company can generate a 23% return, isn't the company more valuable to you if it retains all of its earnings?

To put it into example if company A generates a 23% return and reinvests all of its earnings. Let's assume you buy the company at book value. Your return will be 23% per annum compounded. Now lets assume company B also earns a 23% return and you pay the same price of book value for company. If company B pays 100% of its earnings to you as a dividend and then you go and invest the dividends somewhere else and get 15% per annum, your compounded return is no longer 23% per annum. Your compounded annual return is now somewhere in between the two figures of 15% and 23%. Therefore in this scenario company A is worth more to you than company B and thus deserves a higher valuation.


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## cynic (24 June 2018)

Value Hunter said:


> Luutzu the concept of a valuation changing based on the dividend payout ratio is very simple. How many investors can compound their capital at 20% plus per annum? The answer is not many.
> 
> Therefore if you are an investor who is able to generate for example 15% per annum compound returns (sill a pretty good investor) over the long term and you invest in a company that is able to generate a 23% return on incremental equity (i.e on retained earnings). If you can only generate 15% return by investing the dividends the company pays you, whereas by keeping the money the company can generate a 23% return, isn't the company more valuable to you if it retains all of its earnings?
> 
> To put it into example if company A generates a 23% return and reinvests all of its earnings. Let's assume you buy the company at book value. Your return will be 23% per annum compounded. Now lets assume company B also earns a 23% return and you pay the same price of book value for company. If company B pays 100% of its earnings to you as a dividend and then you go and invest the dividends somewhere else and get 15% per annum, your compounded return is no longer 23% per annum. Your compounded annual return is now somewhere in between the two figures of 15% and 23%. Therefore in this scenario company A is worth more to you than company B and thus deserves a higher valuation.



Momentarily setting aside the subjectivity of tax considerations, why not just purchase company B and then use the issued dividends to purchase more of company B?


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## Value Hunter (24 June 2018)

Cynic in the real world share prices do not stay the same. So by the time you get paid your dividend the share price may have gone up (lets say it got re-rated) and you may for example be 2 times book value instead of the original 1 times book value so you are no longer getting the same return by buying at the higher price.


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## cynic (24 June 2018)

Value Hunter said:


> Cynic in the real world share prices do not stay the same. So by the time you get paid your dividend the share price may have gone up (lets say it got re-rated) and you may for example be 2 times book value instead of the original 1 times book value so you are no longer getting the same return by buying at the higher price.



Share prices do typically fluctuate in _both_ directions in the real world!

So it now seems that the justification for higher valuation, is premised upon a presumption that these 23% yields , at the same, or lesser, book value, have little likelihood of future availability!

This would seem to suggest that present pricing has somehow become a fortuitous, never to be repeated anomaly!


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## Value Hunter (24 June 2018)

I'm just telling you how it works in the real world. Few stocks stay substantially undervalued for an extended period (typically oscillating between undervaluation and overvaluation). To assume that an attractive price to buy more shares will fortuitously be available every single time you are paid a dividend over a period of many years is quite a stretch. Sure at certain times the price will be attractive but its not going to happen consistently.

There is a reason why companies that have a high return on equity coupled with being able to reinvest a decent portion of their earnings have been the stocks with the highest total returns. Aside from the occasional speccy junior mining or biotech stock the real big long term winners have been your companies like CSl, Cochlear, Seek, Resmed, Flight Centre, Credit Corp, McMillan Shakespeare, etc. Notice how none of these companies have even close to a 100% payout ratio. Can you name a concrete example of anybody in actual practice buying a Telstra type of pure income (bond like) stock and getting rich from reinvesting the dividends into more shares of the same company? Its just not the way the real world works.

I don't even know why there is a discussion around a concept so basic.


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## luutzu (24 June 2018)

gaius said:


> Let me get this straight. Are you suggesting that you want to buy shares from yourself?? and wondering why you should pay more for your own shares because you have already bought and paid for your shares??
> 
> Well, I rest my case. Yes, it doesn't make sense. Although the value of your shares increased, you don't have to pay more for your own shares.




The way Monty is valuing WOW, yes, he is essentially buying it from himself today when he have yet to own it.


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## cynic (24 June 2018)

Value Hunter said:


> I'm just telling you how it works in the real world. Few stocks stay substantially undervalued for an extended period (typically oscillating between undervaluation and overvaluation). To assume that an attractive price to buy more shares will fortuitously be available every single time you are paid a dividend over a period of many years is quite a stretch. Sure at certain times the price will be attractive but its not going to happen consistently.
> ....



That assumption is no more unreasonable than the presumption that the healthy yields, currently available, wiĺl subsequently become unavailable.







> I don't even know why there is a discussion around a concept so basic.



Because, consequent to unspecified presumptions, it is being misunderstood, at a very basic level!


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## Value Hunter (24 June 2018)

generally speaking a quality "growth" stock (e.g. Blackmores, CSl, etc) will typically trade on a much higher price to earnings ratio then a quality "income" stock. There is a reason for this and I am not sure why some people here struggle to grasp it.

Most share market investors in the long-term will be lucky to even get a low double digit (net) return from the sharemarket. Therefore for the vast majority of investors a company that can reinvest a portion of its earnings at high returns (e.g. returns north of 20%) will (generally speaking) be worth more (and will thus be typically valued using a higher price to earnings ratio) than a comparable company that pays out most of its profits as dividend. If A2 milk or Blackmores suddenly decided to stop growing and pay out 100% of their earnings as a dividend their share prices (and price to earnings ratios) would rightly plummet.


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## galumay (24 June 2018)

Value Hunter said:


> generally speaking a quality "growth" stock (e.g. Blackmores, CSl, etc) will typically trade on a much higher price to earnings ratio then a quality "income" stock.




Until they dont, and then the rerating is often savage. 



Value Hunter said:


> There is a reason for this and I am not sure why some people here struggle to grasp it.




One of the reasons is that P/E is not a accurate or meaningful measure of value. There is a reason for this and I am not sure why some people here struggle to grasp it. (Hint - "P")


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## Value Hunter (24 June 2018)

Galumay let us get to the point of the discussion. If you own shares in Seek or Credit Corp or Cochlear, etc would you rather management keep retaining a portion of the earnings or would you rather they pay 100% out as a dividend? Would you ascribe them the same intrinsic valuation if they switched to a 100% dividend payout ratio?


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## Value Hunter (24 June 2018)

I will give one more simplified hypothetical example to cement the point. Lets say company A shares always trade on a p.e. ratio of 15 and the return on equity is always 20% (including on reinvested earnings) and the dividend payout ratio is 0%. I am also leaving out tax to simplify the example.

So in year 1 the earnings per share is $1 and the share price is $15. After 10 years of reinvesting earnings, earnings per share are now just over $6.19 and the share price is $92.87. So you turned $15 into $92.87 after 10 years.

The alternative for investment is company B. Shares always trade at 15 times earnings and return on equity is always 20%. The dividend payout ratio is however 100% instead of 0%. So the earnings growth is zero and the dividend yield is 6.6666%. Every year you use the dividends to buy more shares. So after 10 years the share price would still be $15 but for every share you originally owned you now own approximately 1.9 shares. So you turned $15 into $28.65.

I think it should be clear to everybody why dividend payout ratios affect company valuation. Galumay, Cynic are you actually both trying to make the absurd argument that a company's dividend payout ratio does not affect its intrinsic valuation?


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## luutzu (24 June 2018)

Value Hunter said:


> generally speaking a quality "growth" stock (e.g. Blackmores, CSl, etc) will typically trade on a much higher price to earnings ratio then a quality "income" stock. There is a reason for this and I am not sure why some people here struggle to grasp it.
> 
> Most share market investors in the long-term will be lucky to even get a low double digit (net) return from the sharemarket. Therefore for the vast majority of investors a company that can reinvest a portion of its earnings at high returns (e.g. returns north of 20%) will (generally speaking) be worth more (and will thus be typically valued using a higher price to earnings ratio) than a comparable company that pays out most of its profits as dividend. If A2 milk or Blackmores suddenly decided to stop growing and pay out 100% of their earnings as a dividend their share prices (and price to earnings ratios) would rightly plummet.




You're assuming that a business can only grow from its owner's equity. 

While most business might very well "grow" if it keep back its earnings, and/or raise new equity to make investment to grow. That capital from equity is not the only option.

A business can perfectly grow through liabilities/debt. 

In fact, the mark of a quality business is one that rarely need to retain its earnings or raise new equity to grow. 

It can "owe" its suppliers money in paying it later than the supply being turned to cash once received. It can, say, delay paying its employees or enslave them. Can also grow by borrowing at mates' rates. etc. etc.


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## cynic (24 June 2018)

Value Hunter said:


> I will give one more simplified hypothetical example to cement the point. Lets say company A shares always trade on a p.e. ratio of 15 and the return on equity is always 20% (including on reinvested earnings) and the dividend payout ratio is 0%. I am also leaving out tax to simplify the example.
> 
> So in year 1 the earnings per share is $1 and the share price is $15. After 10 years of reinvesting earnings, earnings per share are now just over $6.19 and the share price is $92.87. So you turned $15 into $92.87 after 10 years.
> 
> ...



No!
I am merely pointing out that either undisclosed presumptions exist, or the reasoning offered in support of the evaluation is seriously amiss.

Now, do I need to point out the various logical and mathematical errors you have presented here to "cement" your point"?

Or would you prefer to first spend some time revisiting the logic and mathematical calculations, before I attempt to explain why what you have posted here is seriously amiss?


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## galumay (24 June 2018)

Ditto.


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## luutzu (24 June 2018)

Value Hunter said:


> I will give one more simplified hypothetical example to cement the point. Lets say company A shares always trade on a p.e. ratio of 15 and the return on equity is always 20% (including on reinvested earnings) and the dividend payout ratio is 0%. I am also leaving out tax to simplify the example.
> 
> So in year 1 the earnings per share is $1 and the share price is $15. After 10 years of reinvesting earnings, earnings per share are now just over $6.19 and the share price is $92.87. So you turned $15 into $92.87 after 10 years.
> 
> ...




You're not taking in the perspective of the investor as the buyer today vs the investor who had bought then became the new owner and eventual seller.

To rephrase what Monty and your example above, Monty is saying this:

If you buy a company that earns money, take all that earning out, spend it however you like, you will pay less for it.

If you buy the same company with the same earning, but instead of taking that earning out to enjoy, you put it back to reinvest, you will have to pay more for it (because it will become more valuable, with your retained earnings saved and compounded).

You don't need any maths to work out why that line of reasoning is just wrong.

I mean, buy for cheap and getting to enjoy the cash each year? 

Buy for more because you defer enjoying the cash today?


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## Value Hunter (24 June 2018)

My main point was that a company's dividend payout ratio does affect its valuation. Cynic its good to see that we agree that the dividend payout ratio does affect a company's intrinsic valuation. I think given we agree on this main point we can end this rather pointless discussion rather then get bogged down quibbling on the details.


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## Value Collector (25 June 2018)

luutzu said:


> Dude, like I said before, I understand that a business with higher ROE is worth more. If it retain its earnings and reinvested it, it will be worth more [all else being equal].
> 
> But unless those retained and reinvested earnings are already made [past tense there]... then I should not be paying for those future value and benefits my retained earning made possible. Because those future I've bought and paid for.
> 
> ...




Mate you are simply not getting it, and your examples you are using demonstrate you don't get.



> Another example...
> 
> Say I bought an ATM. It dispenses $1000 a day, everyday.
> 
> Why is the ATM worth any more or less to me as its new owner if I were to spend that $1000 daily earning or put it back into the ATM?




Against my better judgement, let me attempt one last time to explain the concept to you that you are missing, and what you aren't understanding about how ROE matters when we are dealing with retained earnings.

Lets say me and you both have some lazy money to invest, and we are looking to get into the pizza industry, we find 2 pizza shops, management is in place and ownership is completely passive.

*Shop 1*, Has $300,000 of equity (Pizza ovens, fridges, counters, signage etc etc) and Net profit after tax of $75,000 of after tax profit, thats a 25% return on equity. The business isn't really suited to expand, so management will pay $75,000 dividend each year.

It's on the market for $750,000 which would give the future owner a 10% earnings yield.


*Shop 2*, Has $300,000 of equity (Pizza ovens, fridges, counters, signage etc etc) and Net profit after tax of $75,000 of after tax profit, thats a 25% return on equity, this businesses is well suited to expand, and management, have a credible plan to open identical pizza shops all over Australia each new store will take $300,000 of equity to open, and deliver the same 25% return on that equity.
Management will retain all earnings so will not pay a dividend (for 10 years), but will use the retained earnings to expand store numbers.

Its on the market for $850,000 which would give the owner a 8.8% earnings yield.

--------

Now you seem to be saying that shop 2 is not worth anymore than shop 1, because they both have $75,000 of earnings each year, so if you paid $850,000 for shop2, you are getting a worse deal than shop 1.

What Roger and I would say is that the fact that Shop 2 has a credible way to retain earnings and put them to work at 25%, makes it more attractive to us today, So we would do a calculation as he described to work out what its future vale is going to grow to, and then decide whether todays price represents good value or not.

--------------

Shop 1, pays out all earnings as dividends and won't grow, so it is never going to be worth more than $750,000 if you need a 10% return.

however,

Shop 2, retains earnings and reinvests them at 25%, so its earnings are going to grow rapidly, So todays price of $850,000 is very cheap when we require a 10% return, because given its likely growth rate, we could actually pay $1,500,000 for it and still get a 10% return if its growth plans go well.

after 10 years,

Shop 1, still only has 1 stores and still only earns $75,000

however

shop 2, now has 6 stores and earns $450,000 per year. (and thats without using debt), at a 10% earnings yield shop 2 is now worth $4,500,000.

Rogers valuation would have said you could have paid up to $1,500,000 for shop 2 and still got the same 10% earnings rate as shop 1, So his calculation would have helped us see that shop2 at $850,000 market price was the better investment, even though you would have missed it, as you think shop 1 and shop 2 are equal.



> I mean, buy for cheap and getting to enjoy the cash each year?




You should be able to see how that attitude would lead you to miss huge investment gain if it makes you avoid companies that can retain earnings at high ROE.


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## luutzu (25 June 2018)

Value Collector said:


> Mate you are simply not getting it, and your examples you are using demonstrate you don't get.
> 
> 
> 
> ...




Timing, ownership deed... those are important dude.

When someone else make the savings and investment in their business, it is their business. They use their own savings, put it into their own shop, it grew in value. So it is more valuable to them. True?

So why is Monty, and yourself, asking that owner to pay more for a business that became more valuable only later, after all his own sacrifices. And why would you and Monty do it if you're that future owner.

You're bidding against yourself.


Again, a business that have high ROE, good margin, outstanding this and all that... generates $x earning power.

Those are the qualities and attributes that make it worth, say $10X.

Monty is saying... but since that company is going to reinvest all that $x, or some of it... it's going to be more valuable. So instead of $10x, he's going to now pay $10x + value from retained earnings he will make, call it $10x + y.

Yea, when he come to sell it later, after he bought and made the investment, it will, hopefully, be worth $10x+y. That's LATER. Sold to someone else.


I mean, when Monty first jumped into ownership of that business, the business retain earnings they should have handed over to him, but kept back into the business. Yes, the business becomes more valuable. BUT, but Monty had become the owner and had put aside his earnings [from that business] to grow it further.

So why is the Monty that's on the platform wanting to pay the future Monty more cash to jump in at time-zero.

--------------

Dude, you and Monty can't just assume that the $75K in dividend that's paid out will be wasted. It's real cash, paid out and can be use or invested as I want.

Sure that mean the Pizza shop will have to carry on with its own steam. It will most likely not expand and take over the world.

But the owner, with that additional $75K dividend they're free to allocate it however... might very well invest it a BerkshireHathaway etc. etc.

Or they can waste it... either way, it does not affect the value of the business that generate the same income at Time-Zero.


You have got to freeze the business the moment you value it.

Like that new car example.

A buyer can't tell the dealer that a new car is old and used because in the future he's going to use it.

Likewise, a buyer will not pay a higher price than the asking price simply because he will do it up and treat it well after he bought it.


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## Value Collector (25 June 2018)

> Sure that mean the Pizza shop will have to carry on with its own steam. It will most likely not expand and take over the world.
> 
> But the owner, with that additional $75K dividend they're free to allocate it however... might very well invest it a BerkshireHathaway etc. etc.




Berkshire is a perfect example of my point, retained earnings deployed at high rate.

Pizza shop 2 will grow at the same rate as Berkshire Hathaway did, because it is deploying its retained earnings at the same rate Berkshire did.

what you are saying is that it is stupid to pay a little extra to invest in a company like Berkshire that can deploy retained earnings at high rates.






luutzu said:


> When someone else make the savings and investment in their business, it is their business. They use their own savings, put it into their own shop, it grew in value. So it is more valuable to them. True?
> 
> So why is Monty, and yourself, asking that owner to pay more for a business that became more valuable only later, after all his own sacrifices. And why would you and Monty do it if you're that future owner.




Because not all businesses can retain and earnings and invest them at 25%, so it makes total business sense to pay a little extra for a business that is going to grow your retained earnings at 25% for you, rather than one that can't do that.
You're bidding against yourself.




> Monty is saying... but since that company is going to reinvest all that $x, or some of it... it's going to be more valuable. So instead of $10x, he's going to now pay $10x + value from retained earnings he will make, call it $10x + y.




No, he is saying he is willing to pay a higher multiple for the existing equity in the business, because the business he is buying has the ability to deploy earnings at high rates of return.



> Yea, when he come to sell it later, after he bought and made the investment, it will, hopefully, be worth $10x+y. That's LATER. Sold to someone else.




Can you not see in my pizza shop example that it would be well worth paying an extra $100 for the company thats going to grow to be worth $4.5 Million?

and can you not see that even if you did pay $1.5 Million for it you are not paying for "all" future growth.



> I mean, when Monty first jumped into ownership of that business, the business retain earnings they should have handed over to him, but kept back into the business. Yes, the business becomes more valuable. BUT, but Monty had become the owner and had put aside his earnings [from that business] to grow it further.




So do you not see the difference between a company that can retain earnings and deploy them at 25% vs one that can't?

Do you think a company retaining earnings and deploying them at 10% is equal to a company deploying them at 25%?






> Dude, you and Monty can't just assume that the $75K in dividend that's paid out will be wasted. It's real cash, paid out and can be use or invested as I want.




No one is saying it's wasted, thats your straw man you are building.


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## Value Collector (25 June 2018)

Listen to this from the 2 minute mark, buffett explains the concept I have been trying to explain (at the 3.15 mark he specifically talks about preferring companies to retain earnings)



at the 4.40 mark of this second video he explains the concept of thinking of stocks as equity bonds.



Rogers method is simply used to estimate the future growth rate of a company, and then discount that back to what your required return is to figure out if the current market price is good value when you apply your margin of safety etc.

applying rogers method to pizza shop 2, shows us that even though on face value it looks more expensive than shop1 one, its actually a solid bargain


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## luutzu (25 June 2018)

Value Collector said:


> ....
> 
> what you are saying is that it is stupid to pay a little extra to invest in a company like Berkshire that can deploy retained earnings at high rates.




No I didn't.

I'm saying that the price I'm willing to pay for Berkshire already take into account all that is good and valuable. I've already gone infinity, came back with a value for Berkshire.

What Monty is doing is to go there, came back, then go again to come back with a new value if he were to reinvest his own cash [from its earnings].


From Monty's video:
Price to pay if all earnings paid out: ~$16 per share.

Price to pay if all earnings retained: ~$36 per share.

Soo.... again, if single owner were to tell the current WOW vendor that he intends to take all the future dividends out of the business, he will only need to pay $16

If he intend to sacrifice and reinvest, he'll pay $36 to the guy. Right now.

Doesn't make sense.


I do know that yes, if dividends are reinvested, WOW will be "worth" $36 [let say] in the future. But that's the additional value the new owners made after his purchase, plus all the reinvestments.

So if we follow Monty's formula, we ought to buy WOW at $16. Not at $36.

The $36 is, if everything goes well with the retained earning being invested... will be worth $36 later.




Value Collector said:


> Can you not see in my pizza shop example that it would be well worth paying an extra $100 for the company thats going to grow to be worth $4.5 Million?
> 
> and can you not see that even if you did pay $1.5 Million for it you are not paying for "all" future growth.
> 
> ...




If someone else were to own the pizza place, use joint's earnings to reinvest, raise their own additional equity to expand etc. Then yes, I'd pay more for it.

But if I were to buy it today, then it's my cash that's going to go back into the business. It'll be more valuable but those value were from my savings etc. etc. Why should I have to pay that future value now, to someone else, for the privilege of me growing the business after I bought it?




Value Collector said:


> No one is saying it's wasted, thats your straw man you are building.




No I didn't. 

Monty said that $1 earnings that's paid out is not the same $1 earning that's kept back.

Why not?

Because if it's kept back it'll grow and expand the business.

Of course it will. Heck, it better grow because I could find better use for it at the pub otherwise.


i.e. if the business grew with somebody else's money, then sure it's fair that you and Monty pay for that extra value.

But if it were to grow with your and Monty's earnings being retained. You and Monty shouldn't have to pay for that "growth". You can enjoy the fruit later, for sure. But not pay someone else who already cashed out, then your cash  reinvested made possible.

If if you and Monty wanted to, I still have that $100M bank account you were welcome to pay $130M for it today.


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## Value Collector (25 June 2018)

luutzu said:


> Soo.... again, if single owner were to tell the current WOW vendor that he intends to take all the future dividends out of the business, he will only need to pay $16




You just don't get it, that sentence proves it, so I will leave you to your ignorance now, I have heard its bliss.


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## luutzu (25 June 2018)

Value Collector said:


> Listen to this from the 2 minute mark, buffett explains the concept I have been trying to explain (at the 3.15 mark he specifically talks about preferring companies to retain earnings)
> 
> 
> 
> ...






Of course you'll want a high ROE business to retain the earning and compound the heck out of it. 

Save you from tax, and save you the trouble of having to find another company to compound that earning.

So by all mean, keep the capital if management can do it well. 


That does not, in no way, detract from the fact that if the earning is paid out in dividend its enterprise price today is any more or less. It's the same business. 

So if it were to retain and compound well.... that's tomorrow's business, tomorrow's value. 

--------------

Yes, I understand perpetuity. I actually agree with it. 

So, where in Monty's valuation formula did he apply that earning/coupon?

He literally only value equity in the business. 

That's all fine and fair if it's other people's equity he's valuing when he works out how much to buy it for.

It's ridiculous to price it at *both* before and after he bought the business. Then go about paying for both the past and the future equity he himself already paid for.

-----------------------

*Perpetual Annuity:*

Present Value = Earning / r

Where r is the owner's required rate of return.
So if the company can keep compounding the E at my required r, then keep my E and do your work.

If the company cannot meet that r requirement, pay it out and I'll try to find some place.

But at the time of purchase, a company is not supposed to cost more or less simply because I, as its new owner, decide what and where to put what will be my earning.

Further, in that formula, where does it says the present value depends on how the Earning is split?
Remember that Earnings mean the company's NPAT.

If anything, if you want to split the earning so that you can buy it for cheap... which was that Monty said was his aim... you'd want to define "Earning" as only the dividend that's paid out to you the new owner, see what those are worth because it's dividends paid out that goes into your pocket.


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## luutzu (25 June 2018)

Value Collector said:


> You just don't get it, that sentence proves it, so I will leave you to your ignorance now, I have heard its bliss.




Not ignorance dude. Stupidity. No need to be polite 

Ignorance is if I never heard of the subject. To have heard and debate it mean I am norance of it , just too thick to understand it.


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## Value Collector (25 June 2018)

luutzu said:


> Of course you'll want a high ROE business to retain the earning and compound the heck out of it.
> 
> Save you from tax, and save you the trouble of having to find another company to compound that earning.
> 
> ...




I get it, you don't think a business that can retain earnings and invest them at 25% is worth more today than a company that doesn't have that ability and can only deploy retained earnings at 10%.

All I can say is that you are wrong, companies that have the ability to deploy earnings generating 25%+ on an ongoing basis are rare, and are worth more than their face value of equity, and worth more than stranded earnings multiples, if you can't see that, then thats your loss.

All rogers calculation is about is estimating how much that future growth might be, and working out a rational price to pay for that today. the reason he split the valuation between paid out and retained, is because its only the retained earnings that will stick out and compound, so he applies a smaller multiple to the part of the equity that pays out its earnings, and a higher multiple to the part of the equity that retains and compounds its earnings.



> So, where in Monty's valuation formula did he apply that earning/coupon?
> 
> He literally only value equity in the business.




the coupon is the ROE.

As I tried to explain earlier.

The equity is like the face value of the bond, eg a company with $5 of equity per share is like a bond with a face value of $5, if that company has a ROE of 25%, each share is basically a $5 bond paying a 25% interest rate coupon,

So that $5 equity bond earning 25% is worth more than one only earning 5%,

and a $5 Equity bond earning 25% ROE that allows you to reinvest the earnings back at 25%, is worth more than one that doesn't.


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## luutzu (25 June 2018)

Value Collector said:


> I get it, you don't think a business that can retain earnings and invest them at 25% is worth more today than a company that doesn't have that ability and can only deploy retained earnings at 10%.
> 
> All I can say is that you are wrong, companies that have the ability to deploy earnings generating 25%+ on an ongoing basis are rare, and are worth more than their face value of equity, and worth more than stranded earnings multiples, if you can't see that, then thats your loss.
> 
> ...




Of course it's going to worth more.

Any idiot would know that.

Question is, whose equity is it that made it worth more.

If it's the previous owner's equity... well that had already been paid for.

if it's the new owner's equity.... why should he pay more for what is already his?


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## luutzu (25 June 2018)

Value Collector said:


> .....
> 
> All rogers calculation is about is estimating how much that future growth might be, and working out a rational price to pay for that today. the reason he split the valuation between paid out and retained, is because its only the retained earnings that will stick out and compound, so he applies a smaller multiple to the part of the equity that pays out its earnings, and a higher multiple to the part of the equity that retains and compounds its earnings.




That's the problem with Monty's approach there.

He mixes the future worth/value his reinvestment will be worth later. Mix that with the price that's being asked of him today, before those reinvestment are made and compound.

i.e. he's bidding against his future self. 

Clear as mud McFly?


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## Value Collector (25 June 2018)

luutzu said:


> Of course it's going to worth more.
> 
> Any idiot would know that.




Well its been a hell of a long road to get you to admit that, Rogers calculation is used to estimate that future growth rate, and provide you with a maximum price you could pay to make she you aren't over paying for the growth and putting your required return at risk.



> Question is, whose equity is it that made it worth more.




It is the underlying economics of the business that make it worth more.

What makes it worth more today, is that this particular company has something about it that makes it possible for the company to be able to continue retaining earnings and deploying them at high rates eg 25%+





> If it's the previous owner's equity... well that had already been paid for.
> 
> if it's the new owner's equity.... why should he pay more for what is already his?




Again, this comment makes me think you still are not really understanding the process of valuation.

When valuing a company, we are looking at the existing equity in the company, and trying and figure out how much that equity is worth to us.

Knowing that there is $5 of equity per share doesn't tell you anything by itself, you have to look at other factors, 

If that $5 of equity is only producing a 5% return the share is worth much less than $5 to me its worth $2.5 at best, even less if they are retaining the earnings and deploying it at 5% 

if the $5 of equity is earning a 25% return, the share is worth much more than $5 to me, at least $12.50, and more if they are deploying earnings at 25%

If the company is mature, and can't deploy fresh capital at 25% ROE, and instead is just paying out large dividends and buying back shares, I can't pay more than 2.5 times the $5 of equity ($12.50), other wise I won't get my 10% return.

However, if the company is one of those rare companies, that can continually retain earnings and deploy them at 25%, the compounded equity growth happening inside the company will make earnings grow at a high rate, So it is worth buying even if you have to pay more for it today.

The premium you may pay today is being paid because you are recognising the companies solid economics.


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## Value Collector (25 June 2018)

luutzu said:


> He mixes the future worth/value his reinvestment will be worth later. Mix that with the price that's being asked of him today, before those reinvestment are made and compound.




He is estimating its future worth to decide what a rational price is to pay for it today, its not much different from using a discounted future cashflow model.

If you aren't estimating what it will be worth in the future, what do you base your fair value on?


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## Value Collector (25 June 2018)

I will ask you this question and please answer me,

If you want to earn a minimum of 10% return, what price can you pay for the following 2 shares to earn your 10% return?

1, XYZ company with $1 of equity per share @ 5% ROE, that pays out all earnings as a dividend.

2, ABC company with $1 of equity per share @ 5% ROE, that retains earnings and deploys them at 5%

--------------------
you should be able to see that you can't pay the full face value of equity for either company, because their ROE of 5% is lower than your required return of 10%

But, because XYZ company is paying out all earnings, you can still get your 10% if you only pay $0.50 cents for each dollar of equity.

But, ABC is destroying value every time it retains earnings and deploys it into investments generating only 5% ROE, so you can't pay $0.50 for it even though it has the same ROE as XYZ.

in the same way that ABC's low ROE makes it worth less than XYZ just because they decide to retain earnings, a high ROE company can be worth more if they are able to retain earnings and deploy them at high rates, because they are generating excess value, with every retained $1 they will generate more than a dollar, and the discounted future cashflow model means its worth more today.


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## luutzu (25 June 2018)

Value Collector said:


> I will ask you this question and please answer me,
> 
> If you want to earn a minimum of 10% return, what price can you pay for the following 2 shares to earn your 10% return?
> 
> ...





I don't value a business based on those factors, so I wouldn't have a clue how to compute it.

How about we meet half way and let say you're wrong?


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## Value Hunter (25 June 2018)

Value Collector I am not sure how you have the patience to argue with Luutzu. Its honestly a lost cause.


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## luutzu (25 June 2018)

Value Hunter said:


> Value Collector I am not sure how you have the patience to argue with Luutzu. Its honestly a lost cause.




Aside from being a nice guy, he know deep down I'm right just he couldn't figure it out yet.


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## gaius (29 June 2018)

luutzu said:


> Aside from being a nice guy, he know deep down I'm right just he couldn't figure it out yet.




Of course you are right. Of course buyers want to buy at the lowest possible price. Even if a stock should be worth 100 times its current market price, I still buy at its current market price, not 100 times its current market price.


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## luutzu (29 June 2018)

gaius said:


> Of course you are right. Of course buyers want to buy at the lowest possible price. Even if a stock should be worth 100 times its current market price, I still buy at its current market price, not 100 times its current market price.




I'm in the middle of replying to VC to tell him how wrong he is 

Seriously though, that's not how an investor ought to value a business if he want to buy it today.

It might be somewhat acceptable if the investor use it to guess at what his investment will be worth in the distant future [assuming he's buying the whole lot]... but it's not how we're to value a business on the day of purchase.

If you put yourself inside the business you'll see what I mean.

I guess a perfect proof of what I'm saying is the current share price of Woolies vs when Monty valued it some ten years ago.

I guess shareholders get to collect the dividends; They also get to chipped in more additional equity [about $1B something from memory].

But if they were to sell it in its high $40s they might have done alright? But then Monty want to believe he'd hold it for a decade so yah...


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## gaius (29 June 2018)

luutzu said:


> I'm in the middle of replying to VC to tell him how wrong he is
> 
> Seriously though, that's not how an investor ought to value a business if he want to buy it today.
> 
> ...




Personally, I won't waste my time valuating what a business should worth. The market always goes up. Active fund management is long dead.


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## luutzu (29 June 2018)

gaius said:


> Personally, I won't waste my time valuating what a business should worth. The market always goes up. Active fund management is long dead.




Serious?

Have you just read "A Random Walk Down Wall St" or what?

Not trying to be smart, well, kinda... but I thought the same too when I first read that book and no other investing book beside uni textbooks.

Unless an investor have no interest and has lots of cash they don't know what to do with, then they would do alright to just put it into an index and buy everything in the market.

In that case, and in that rare situation where they do not need the money... or their capital base is so large that any rate of dividend can pay their bills... yes, just put the cash away and over the long term, the market would do very well. 

For most average people though, I reckon they better know what they're doing. And just to be sure that they're not kidding themselves, they better follow Graham's and all engineers advise to over protect their self confidence that they know what they're doing. And that's mostly advise to myself


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## Value Collector (1 July 2018)

luutzu said:


> I guess a perfect proof of what I'm saying is the current share price of Woolies vs when Monty valued it some ten years ago.
> 
> I guess shareholders get to collect the dividends; They also get to chipped in more additional equity [about $1B something from memory].
> 
> But if they were to sell it in its high $40s they might have done alright? But then Monty want to believe he'd hold it for a decade so yah...




Had it not been for the few Billion of capital destroyed buy the masters fiasco, Rogers valuation would have been spot on, but that’s what the margin of safety is for.


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## Skate (2 July 2018)

luutzu said:


> Aside from being a nice guy, he know deep down I'm right just he couldn't figure it out yet.




luutzu if you want to stop this argument with Value Collector you need to agree with him - the only downside - *you'll both be wrong.*

Skate


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## Value Collector (2 July 2018)

luutzu said:


> I guess a perfect proof of what I'm saying is the current share price of Woolies vs when Monty valued it some ten years ago.




I just went over the numbers in the video again, and Roger Valued Woolies at the start of 2010 @ $22.59.

If you had purchased it at $22.59 and held it till today, you would have $8.00 of capital gain and $9.76 dividends.

Thats a 7.51% compounded return, and thats without including any compounded returns the dividends would have generated.

So he was pretty spot on when his required return he was shooting for was 10%, If it wasn't for Masters losing billions I have no doubt it would have got the 10% return.

Also, if you had purchased with a Margin of safety of say 15% and included earned interest on the dividends over the 8 years, you would have been able to offset the masters losses, and got your 10% return.


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## Value Collector (2 July 2018)

Skate said:


> luutzu if you want to stop this argument
> 
> Skate




The argument is over, the facts speak for themselves.


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## luutzu (2 July 2018)

Value Collector said:


> I just went over the numbers in the video again, and Roger Valued Woolies at the start of 2010 @ $22.59.
> 
> If you had purchased it at $22.59 and held it till today, you would have $8.00 of capital gain and $9.76 dividends.
> 
> ...




Did you subtract or otherwise include the impact of a few extra billions additional equity raising over that decade?

And wasn't it $18 or $20s just last year? So maybe average the share price over past year to even out an average holder's return?


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## Value Collector (2 July 2018)

luutzu said:


> Did you subtract or otherwise include the impact of a few extra billions additional equity raising over that decade?
> 
> And wasn't it $18 or $20s just last year? So maybe average the share price over past year to even out an average holder's return?




All my numbers are per share, not sure what you are carrying on about?

But anyway I am out of this conversation, I just wanted to point out that if you bought based on rogers estimate of intrinsic value, you would have done ok, everything else you mention is just noise.


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## luutzu (2 July 2018)

Value Collector said:


> All my numbers are per share, not sure what you are carrying on about?
> 
> But anyway I am out of this conversation, I just wanted to point out that if you bought based on rogers estimate of intrinsic value, you would have done ok, everything else you mention is just noise.




Here dude...

They would have done slightly better than putting their cash at the bank and go to sleep.




Note the number of shares outstanding are approximates. Rounding errors as I automate it instead of entering the actual figures.
-----------------

Closer look....




So if we follow Monty's approach and buy at $26.45 back in 2010, we'd be paying about $32.87B for all of WOW.

Over that period, we would have recieved $10.07B in dividends.

BUT we would also have contributed some $1.76B in additional cash.

Making it simple, ignore, or assume that dividends paid and cash contributed earn zero interest elsewhere. Ignore time/term too.

So dividends received would actually be $8.31B.

That's a 25% yield over 8 years. Or 3% a year dividend (less if you use compound instead of simple interest]

Now if we sold it last FY at average market price of $24.50 ps, we'd make a capital loss of $173M.

If we sold it this year at its higher price of $30.... a capital gain of $7.19B.

Total gain on that $32.87B investment in WOW would be: $8.31 + $7.19B... or $15.5/$32.87 = 47% return over 8 years.... that's 5%pa compounded.




Monty was looking for 10% rate of annual return right?

He also wasn't looking to add another $1.76B either. Well... maybe he likes to as it'd mean his initial investment is now worth more 

So WOW failed him big time.

---------------------

The only way an investor in WOW could make profit beyond what is estimated above there is they'd trade in and out. Getting their timing more right than not.

Doing that mean they let other shareholders bear the additional equity raised; suffer the capital loss etc.

But if an investor could do that, there are other more votatile stocks they can play and gain a whole lot more than from WOW.


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## luutzu (2 July 2018)

Skate said:


> luutzu if you want to stop this argument with Value Collector you need to agree with him - the only downside - *you'll both be wrong.*
> 
> Skate




Just to be sure, you were referring to me giving in right?


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## Skate (2 July 2018)

Yes..
Someone will have to give in - it dosn't mean Value Collector is right if you give in - it means the revolving door will stop turning.

Your conversation with Value Collector is like watching Tennis - you hit the ball to him (your point of view) & Value Collector hits the ball staight back to you (with his point of view) & the game as I see it has no end in sight because - *both of you steadfastly hold your own position.*

luutzu I could be mistaken but the position you hold is the consensus of most. (IMHO)

*NOW:* If you agree with Value Collector it will stop the argument..

*I'M JUST SAYING:* If you agree with Value Collector it will mean both of you will be wrong..

*Another way of looking at this:* If Value Collector agrees with you then both of you will be right. (IMHO)

*IMPORTANT:* Value Collector will not agree with you and he will hold his position till his last breath (thats why I'm suggesting you agree with him - I know agreeing with him will make you both wrong but its the price you may have to pay)

*FROM EXPERIENCE: *Agreeing with the other breaks a stalemate *- but -* I always conclude my arument with:

_"you know by me agreeing with you will make us both wrong but its a price I willing to accept to move on" 
_
luutzu - I was trying to help you move on - thats all !

*ANOTHER IMPORTANT POINT:* I read enough of your post luutzu to realise you don't need any help from me.

*AS WELL AS: *Value Collector always reinforces his point of view with conviction - so I don't see an end - UNLESS - you both agree to disagree.

*JUST SAYING:* There would be no trading or traders if we all held the same opinion.

Skate


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## luutzu (2 July 2018)

Skate said:


> Yes..
> Someone will have to give in - it dosn't mean Value Collector is right if you give in - it means the revolving door will stop turning.
> 
> Your conversation with Value Collector is like watching Tennis - you hit the ball to him (your point of view) & Value Collector hits the ball staight back to you (with his point of view) & the game as I see it has no end in sight because - *both of you steadfastly hold your own position.*
> ...




Now that's wisdom. Serious, wow.


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## Value Collector (2 July 2018)

Skate said:


> Yes..
> Someone will have to give in - it dosn't mean Value Collector is right if you give in - it means the revolving door will stop turning.




Dude, I ended this debate on the 25th of June, I only wrote what I wrote today to show the actual fact of 1 single point to clear it up for the readers at home, I have given up trying yo convince luutts.

He seems to look at everything backwards, and misses key points, so I have no more time for it, I am working on frying a bigger fish at the moment.


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## luutzu (2 July 2018)

Value Collector said:


> Dude, I ended this debate on the 25th of June, I only wrote what I wrote today to show the actual fact of 1 single point to clear it up for the readers at home, I have given up trying yo convince luutts.
> 
> He seems to look at everything backwards, and misses key points, so I have no more time for it, I am working on frying a bigger fish at the moment.




I know you're upset when you start calling me funny names 

No. The way Monty value it is a bit like playing a ponzi scheme. That is, he doesn't see new equity, or retain earnings, as his. He sees them as someone else's problem.

So when new equity is raised, he doesn't see it as his own cash being put into the business. When earnings are retained, he see it as some one else's profit that's being kept back.

If we follow that approach, we're essentially getting into a business and let other shareholders reinvest their earnings, let other shareholders take up those "rights" issues and additional capital investment.

Not saying that that's a bad idea. Just that.. well, one, that's not exactly holding onto a business as though it's yours alone. Two, you're hoping that if others are adding in the cash, the share price will just rise over time because their new cash pick up the losses and over compensate them to such an extend that if you're in early enough, you will always make money.

Problem with that is, as with all ponzi, the music will eventually stop if the business is bad enough.

I'm not saying WOW is a Ponzi and such. Saying that the way Monty value it... it would only be correct if the investor just happen to be smart or lucky enough to jump in early and enjoy the ride over a decade or two. i.e. be on top of the pyramid.

-----------

Again, if an ATM dispenses $1000 a day. We're buying it because of that ability to dispense $1000 a day.

Say we pay $10,000 for that ATM and can pick it up today.

If after we paid, receive and take it home with us...

Why would that ATM be *priced *higher than $10,000 that we've paid for simply because we decide to retained, say $500 from that $1000 daily payment?

For sure it will now be "worth" more from that retained earning; but that new worth is from our savings from what ought to have been paid out to us.


But yea, I don't know man. I don't understand the other way of valuing stuff so will just stick to what I think I know.

But seriously, appreciate the patient and debate. I somewhat like you


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## galumay (2 July 2018)

Skate said:


> luutzu I could be mistaken but the position you hold is the consensus of most.




Concensus of 1 methinks.

Gawd, they're everywhere, there goes another on ignore!


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## luutzu (2 July 2018)

galumay said:


> Concensus of 1 methinks.
> 
> Gawd, they're everywhere, there goes another on ignore!




It's a wonder you learn anything dude. Ignoring people with different perspective, listening only to those that can finish your sentence.

Yea yea, I know I'm on your ignore list long ago.


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## Value Collector (23 July 2018)

Zaxon said:


> My understanding of the difference is that value investors insist on getting stocks cheap.  Growth investors insist on growing earnings, but are willing to buy in at a higher price a value investor wouldn't.




I came across this video today, it shows what I was trying to explain a while back that value and growth are not different things, rather value is an integral part of all intelligent investing.


----------

