# Students of Roger Montgomery's (Buffett's) intrinsic valuation method



## ubtheboss

Roger Montgomery's new book expounds and expands Warren Buffet's methods of calculating/ forecasting a share price based on the intrinsic value of a company.

Roger has a blog but not an efficient forum where students can help each other. If you are a student of Montgomery/ Buffet and want to share or ask questions about your calculations/ methods post your thoughts here.

All for one and one for all!


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## So_Cynical

ubtheboss said:


> Roger Montgomery's new book expounds and expands Warren Buffet's methods of calculating/ forecasting a share price based on the intrinsic value of a company.
> 
> Roger has a blog but not an efficient forum where students can help each other. If you are a student of Montgomery/ Buffet and want to share or ask questions about your calculations/ methods post your thoughts here.
> 
> All for one and one for all!




Using the search function on this forum, i searched for the word "Roger" and found this thread where all Roger Montgomery related posting should probably occur. 

https://www.aussiestockforums.com/forums/showthread.php?t=20217


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## ubtheboss

So_Cynical said:


> Using the search function on this forum, i searched for the word "Roger" and found this thread where all Roger Montgomery related posting should probably occur.
> 
> https://www.aussiestockforums.com/forums/showthread.php?t=20217




Thanks for that SC.  I've made 'specific topic' posts in that forum but it is really more for general comments on Roger's book.  

In this thread I'm encouraging people who are students of his method to post if they are looking for help or able to help one another.  Being the 'long term investment strategy' section of ASF it seems appropriate.

To start things off....


Has anyone done an IV calculation for Forge (FGE)?

Roger I think has a 2011 forecast around $4.80ish

Another IV advocate on YMYC said he thought it was worth at least double it’s current price (he said that when it was about $3.70ish) but of course he doesn’t use exactly the same method.

I can’t find DPS and EPS forecasts so I’ve merely done a EOFY 2010 calculation based on the annual report figures. 

EOY equity- 93.38
# of shares on issue- 78.76
DPS- 0.07
EPS- 0.38
NPAT- 29.45
BOY equity- 48.78
ROavgE- 41.43

Using a RR of 12% I got an IV of….. $10.23

Anyone else?


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## robusta

ubtheboss said:


> Thanks for that SC.  I've made 'specific topic' posts in that forum but it is really more for general comments on Roger's book.
> 
> In this thread I'm encouraging people who are students of his method to post if they are looking for help or able to help one another.  Being the 'long term investment strategy' section of ASF it seems appropriate.
> 
> To start things off....
> 
> 
> Has anyone done an IV calculation for Forge (FGE)?
> 
> Roger I think has a 2011 forecast around $4.80ish
> 
> Another IV advocate on YMYC said he thought it was worth at least double it’s current price (he said that when it was about $3.70ish) but of course he doesn’t use exactly the same method.
> 
> I can’t find DPS and EPS forecasts so I’ve merely done a EOFY 2010 calculation based on the annual report figures.
> 
> EOY equity- 93.38
> # of shares on issue- 78.76
> DPS- 0.07
> EPS- 0.38
> NPAT- 29.45
> BOY equity- 48.78
> ROavgE- 41.43
> 
> Using a RR of 12% I got an IV of….. $10.23
> 
> Anyone else?




Look like the numbers we are using are fairly different I get.
EOY equity 1.10
DPS           0.15
EPS           0.375
Payout Ratio 40%
Average ROE 30%

using a RR of 10%  i get a IV of $5.89

I have been more conservative than you with the ROE and payout ratio as I think FGE will have difficulty maintaining such a high ROE through organic growth only. Will be watching any aquisitions to see that they are positive for the ROE and not just "earnings accreditive".


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## ubtheboss

robusta said:


> Look like the numbers we are using are fairly different I get.
> EOY equity 1.10
> DPS           0.15
> EPS           0.375
> Payout Ratio 40%
> Average ROE 30%
> 
> using a RR of 10%  i get a IV of $5.89
> 
> I have been more conservative than you with the ROE and payout ratio as I think FGE will have difficulty maintaining such a high ROE through organic growth only. Will be watching any aquisitions to see that they are positive for the ROE and not just "earnings accreditive".




Hi robusta,

Thanks for posting!  Excellent way to start.  

As Roger has pointed out on his blog- with forecasting, different people will get different numbers depending on their inputs.  

However, what has me bamboozled is how am I getting such a high valuation when I'm using black and white numbers from an annual report, NOT forecast numbers from some broker?!  When you're going off an annual report- and assuming the same RR- you should end up with the same IV.  If not, the only logical answer is that I am NOT using the same RR as someone else.

I thought a RR/ margin of safety of 12% was enough for a solid company like Forge but if my 2010 IV is $10.23 and Roger's 2011 is $4.80ish then he must be using a more conservative RR yeah?

Anyway, Robusta looking at your numbers and looking at the annual report my first question is- is your $5.89 IV for 2010?

Here is why I ask:

- you quote an EOY equity figure of 1.1 and I'm not sure why.  Page 25 of the annual report states it as 93.375

- you quote the DPS as 0.15 and I'm not sure why.  Page 46 states the div paid was $3,418,891 and the # of shares on issue at EOY were 78,759,014.  Divide the former by the latter and you get a DPS of 0.043 (which is actually less than my DPS which was 0.07 based on Commsec)

- you have an ROE of 30%.  I tried to figure out where you got that from an could only come close if I divided the reported NPAT of 29.45 by the EOY equity.  According to Roger we should use BOY equity or an average of the BOY and EOY equity in calculating ROE.  If you use EOY then you are including the NPAT figure in the denominator by default which skews the result.... does that make sense?

I just tried using my 2010 figures but with a margin of safety of 14% instead and I got an IV of $7.83.  Much closer to the IV suggested by the guy on Your Money Your Call a couple of weeks ago.  Hmmmm....


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## Keegan88

Hello all,

Since you are all working out the intrinsic value of stocks, and coming up with different values, either through different methods or different inputs, I have been trying to put together an excel spreadsheet that will do this all for me rather than doing it by hand. The problem is I am not 100% sure that it is correct. I just changed the ROE so it was calculated from the average of the BOY Equity and the EOY Equity so thanks for that point ubtheboss. 

If any one is interest by all means take a look, run your numbers though to see what you get, any suggestions will also be appreciated.


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## ubtheboss

Keegan88 said:


> Hello all,
> 
> Since you are all working out the intrinsic value of stocks, and coming up with different values, either through different methods or different inputs, I have been trying to put together an excel spreadsheet that will do this all for me rather than doing it by hand. The problem is I am not 100% sure that it is correct. I just changed the ROE so it was calculated from the average of the BOY Equity and the EOY Equity so thanks for that point ubtheboss.
> 
> If any one is interest by all means take a look, run your numbers though to see what you get, any suggestions will also be appreciated.




Hi Keegan,

Sharing your spreadsheet is very much in the right spirit of this thread.  Well done mate.  Thanks for your willingness to share.

To test your spreadsheet I ran numbers from Telstra's 2009 annual report (random, I know).  With a RR of 10%: on paper I got $3.97 and with your spreadsheet I got $3.77.  That's pretty close.  The difference could be in rounding numbers.  Not sure...

I don't know anything about Excel and spreadsheets but I have a couple of notes on your inputs:

- in cell #8 you have 'starting EqPS' and then in cell #14 you have 'calculated forecast EqPS'.  Why do you have two EqPS numbers in the 2010 column?

- same question for 'forecast earnings per share'...?

Cheers!


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## Keegan88

ubtheboss said:


> Hi Keegan,
> 
> Sharing your spreadsheet is very much in the right spirit of this thread.  Well done mate.  Thanks for your willingness to share.
> 
> To test your spreadsheet I ran numbers from Telstra's 2009 annual report (random, I know).  With a RR of 10%: on paper I got $3.97 and with your spreadsheet I got $3.77.  That's pretty close.  The difference could be in rounding numbers.  Not sure...
> 
> I don't know anything about Excel and spreadsheets but I have a couple of notes on your inputs:
> 
> - in cell #8 you have 'starting EqPS' and then in cell #14 you have 'calculated forecast EqPS'.  Why do you have two EqPS numbers in the 2010 column?
> 
> - same question for 'forecast earnings per share'...?
> 
> Cheers!




Ubtheboss,

It is good to see that there is a bit of accuracy in it. 

The starting  EqPS is the equity value at the present time. Now since I am using the forecast EPS and DPS to value the company if it achieves these estimates, I need to calculate what the equity will be in the future, (what I refer to as Forecast EqPS) in order to more accurately determine the ROE in the future. EqPS(Forecast)=EqPS(starting)+EPS-DPS. 

You previously noted to use the average of the BOY Equity (what I call current Equity) and EOY Equity (what I call forecast Equity). 

The two values of forecast EPS is one is to calculate the pay out ratio, while the other I use to calculate the forecast NPAT, NPAT=EPS(forcast)x#Shares. Both these values are the same though. 

Hope that explains it. 

Keegan


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## awg

Hi,

Just got a free invite to a seminar he is holding, will be attending

Is he associated with Clime Capital and Stockval in any way?


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## ubtheboss

Keegan88 said:


> Ubtheboss,
> 
> It is good to see that there is a bit of accuracy in it.
> 
> The starting  EqPS is the equity value at the present time. Now since I am using the forecast EPS and DPS to value the company if it achieves these estimates, I need to calculate what the equity will be in the future, (what I refer to as Forecast EqPS) in order to more accurately determine the ROE in the future. EqPS(Forecast)=EqPS(starting)+EPS-DPS.
> 
> You previously noted to use the average of the BOY Equity (what I call current Equity) and EOY Equity (what I call forecast Equity).
> 
> The two values of forecast EPS is one is to calculate the pay out ratio, while the other I use to calculate the forecast NPAT, NPAT=EPS(forcast)x#Shares. Both these values are the same though.
> 
> Hope that explains it.
> 
> Keegan




Ok I see where you are going.  

What throws me looking at your spreadsheet is that you have the first column labelled as 2010 but you're calculating a 'forecast EqPS' number.  

You don't need to 'forecast' EqPS for EOFY 2010- you get that from the annual report numbers (EqPS = EOY Equity/ # of shares).  Your method does apply for the next column (2011) of course.  

In calculating 'forecast EqPS' don't forget to have an input variable for 'new capital raised' and 'buy backs' as per the equation:

EqPS(Forecast)= EqPS(starting) + EPS - DPS + NC - BB


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## ubtheboss

awg said:


> Hi,
> 
> Just got a free invite to a seminar he is holding, will be attending
> 
> Is he associated with Clime Capital and Stockval in any way?




I did a google to see if I could find out.  He was once the chairman of Clime Capital.  I think he sold the company though.  They never refer to RM on Sky Business as being still associated with CC.  Just my guess.


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## ubtheboss

How do you calculate IV when the pay out ratios is '0'?

Roger answered someone on his blog this way...

When the payout ratio is zero the first component is zero and since the process adds the two components together, the remaining value will be equal to the value of the only the second component.

But I don't understand that.... POR = DPS/EPS not DPS+EPS.

What is Roger talking about?


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## MrBoJangles

Hi all,
Here is something for you Roger fans to play with.

http://tdserver2.com/cgi-bin/start.cgi/apps/bourse/login1.htm

You can login for a play with:
LoginName: demo and Password: demo

Inspired by Roger, I have only changed one thing, and that is the A1-C5 rating business, and simplified it to just a 0-5 rating system. I could be convinced to go the A1-C5, but not sure it's really a plus.

There will be a web site up shortly re this web application, and your comments on the app re amendments, improvements will be very welcome(or send me a Private Message).
Private subscriptions will be available for the app - maybe just asking for a donation or something..

Regards,

Mr Bo


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## gt88

ubtheboss said:


> How do you calculate IV when the pay out ratios is '0'?
> 
> Roger answered someone on his blog this way...
> 
> When the payout ratio is zero the first component is zero and since the process adds the two components together, the remaining value will be equal to the value of the only the second component.
> 
> But I don't understand that.... POR = DPS/EPS not DPS+EPS.
> 
> What is Roger talking about?




What I think he is saying is that given table 11.1 gives you the multipler when a company pays out 100% of its earnings, steps 1, 3 and 4 which make refenece to table 11.1 are ignored, thus the 'first component is zero'. The 'first component' is the figure that results from table 11.1 calculatons and the second component is the figure that results from table 11.2 calculations.


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## Keegan88

MrBoJangles said:


> Hi all,
> Here is something for you Roger fans to play with.
> 
> http://tdserver2.com/cgi-bin/start.cgi/apps/bourse/login1.htm
> 
> You can login for a play with:
> LoginName: demo and Password: demo
> 
> Inspired by Roger, I have only changed one thing, and that is the A1-C5 rating business, and simplified it to just a 0-5 rating system. I could be convinced to go the A1-C5, but not sure it's really a plus.
> 
> There will be a web site up shortly re this web application, and your comments on the app re amendments, improvements will be very welcome(or send me a Private Message).
> Private subscriptions will be available for the app - maybe just asking for a donation or something..
> 
> Regards,
> 
> Mr Bo




Bo,

I like what you have started to put together. I have done something very similar in excel for the stocks that I hold and those that are recommended from a newsletter I subscribe to. 

I see that you have the intrinsic value but what require return is this calculated from? I think that multiple columns are required for the IV for say 8%, 9%, 10% etc. required return.  Then this can be used to determine whether of not the stock is over valued depending on the type of company that you are considering investing in.  

Secondly, I also consider the following year's IV. If the current year's IV is more than the share price, it suggest that the company is undervalued and is worth buying. However if the IV decreases in the following year this would suggest that the share price may no longer represents good value. Therefore to include the following years IV would also be very handy.

Finally, how do your quality ratings work? 

Keegan


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## MrBoJangles

Hi Keegan,
thanks for your comments.
'Required Return' is one of the fields that you enter your choice % into, and the IV is then calculated, taking this into account.
The results for Intrinsic Value will be as for Roger's tables - but more accurate because for those of you that have used Roger's tables, it is somewhat difficult for % values that fall in between what are on the table axes.

Hope that helps,

Mr Bo


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## ubtheboss

gt88 said:


> What I think he is saying is that given table 11.1 gives you the multipler when a company pays out 100% of its earnings, steps 1, 3 and 4 which make refenece to table 11.1 are ignored, thus the 'first component is zero'. The 'first component' is the figure that results from table 11.1 calculatons and the second component is the figure that results from table 11.2 calculations.




I see.  So the multiplier you get in Step 1 is '0' and you end up just using the second multplier in the subsequent equations.  Cool.  Thanks so much gt88!!


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## ubtheboss

I was just crunching some IV numbers on Matrix (MCE).  Has anyone else had a go at that?

It's a quite a challenge since it is such a new company.

In figuring out forecasts for EOY equity and NPAT we need to make a judgement call on (amongst other things) what 'new share capital' in $$ terms might be and how many new shares might be issued.  Tough with a new company.

I started with an IV for 2010 based on the annual report.

EOY equity- 59.893
DPS- 0.04
EPS- 0.294
# shares on issue- 69.964

With my RR of 12% I got an IV of.... $10.14

It's currently at $4.70!  Hmmmm....no wonder it has gone up 400% since its IPO.

Since NPAT= EPS x SHARES ON ISSUE

based on the annual reports numbers

NPAT= 0.294 x 69.964= $20.57 mill BUT the annual report's NPAT number is $18.15 mill.

Can anyone school me on why there is a diff?

Cheers


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## gdbaker

MrBoJangles said:


> Hi Keegan,
> thanks for your comments.
> 'Required Return' is one of the fields that you enter your choice % into, and the IV is then calculated, taking this into account.
> The results for Intrinsic Value will be as for Roger's tables - but more accurate because for those of you that have used Roger's tables, it is somewhat difficult for % values that fall in between what are on the table axes.
> 
> Hope that helps,
> 
> Mr Bo





Mr Bo,

Love the demo site so far. Looking nice and easy. Takes away some of the mess that spreadsheets seem to create.

I would be willing to join when up and running.
I notice you have said your intrinsic values are more accurate than using rogers tables. Ive been trying to figure out the formula for table 11.2, 11.1 is quite straight forward, but trying to figure out 11.2 has got me stumped. I was trying to use the formula and set up a spreadsheet, pretty much like your website.

Would be appreciative of any help into the formula if you can spare it.
Thanks
gdbaker


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## Keegan88

ubtheboss said:


> I was just crunching some IV numbers on Matrix (MCE).  Has anyone else had a go at that?
> 
> It's a quite a challenge since it is such a new company.
> 
> In figuring out forecasts for EOY equity and NPAT we need to make a judgement call on (amongst other things) what 'new share capital' in $$ terms might be and how many new shares might be issued.  Tough with a new company.
> 
> I started with an IV for 2010 based on the annual report.
> 
> EOY equity- 59.893
> DPS- 0.04
> EPS- 0.294
> # shares on issue- 69.964
> 
> With my RR of 12% I got an IV of.... $10.14
> 
> It's currently at $4.70!  Hmmmm....no wonder it has gone up 400% since its IPO.
> 
> Since NPAT= EPS x SHARES ON ISSUE
> 
> based on the annual reports numbers
> 
> NPAT= 0.294 x 69.964= $20.57 mill BUT the annual report's NPAT number is $18.15 mill.
> 
> Can anyone school me on why there is a diff?
> 
> Cheers




Mate looks like you have found a good one, I have also done the calculations on this, for 2011 IV=$7.90 and 2012 IV=$10.72 at RR=12%. My calculations were done from comsec though.  

The question is do we buy or not??

Their Debt/Equity ratio is not bad either at 13.5%.  

According to comsec's glossary Earnings per Share (EPS) is the "Earnings attributable to each common share, adjusted for capital reconstructions (such as stock splits) and dividends. Measured by net income after preference dividend, divided by the weighted number of ordinary shares outstanding during the year. The earnings exclude non-recurring items such as abnormals and extraordinary items." 

So as you can see there are a few extra things include in the EPS formula. I'm just not sure what they mean. 

Hope that helps


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## moreld

ubtheboss said:


> NPAT= 0.294 x 69.964= $20.57 mill BUT the annual report's NPAT number is $18.15 mill.
> 
> Can anyone school me on why there is a diff?




The difference in this case is weighted average shares vs current shares at 2010 FYE (financial year end). The 0.294 is the diluted eps. That is calculated using a weighted average of shares over the financial period (year). 

If you look at the annual report  and the basic and diluted eps numbers they have a note number next to them. In this case number 29. Go to note 29 (pg68) and it shows the weighted shares 58.580M.

As to whether it is good value. No single number or calculated IV can tell you that. If investing was that easy then we'd all be rich...no wait we wouldn't cos everything would be priced correctly and there would be no bargains.

Is this a cyclical industry? How likely are they to hit earnings forecast? What are the growth drivers ... and so on.

Good luck, from my two minute look it appears worth investigating further.

PS Can anyone point me to Roger's formula or type it out, I thought I saw it on his blog, but can't find it now.


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## MrBoJangles

Hi gdbaker, and thank you,
Re the formula for Table 11.2, I can assure you that it sure ain't simple - it is *very* complex, and as I'd like to further develop the web app etc. I would prefer not share it for the present. 

Kind regards,
Mr Bo



gdbaker said:


> Mr Bo,
> 
> Love the demo site so far. Looking nice and easy. Takes away some of the mess that spreadsheets seem to create.
> 
> I would be willing to join when up and running.
> I notice you have said your intrinsic values are more accurate than using rogers tables. Ive been trying to figure out the formula for table 11.2, 11.1 is quite straight forward, but trying to figure out 11.2 has got me stumped. I was trying to use the formula and set up a spreadsheet, pretty much like your website.
> 
> Would be appreciative of any help into the formula if you can spare it.
> Thanks
> gdbaker


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## ubtheboss

moreld said:


> The difference in this case is weighted average shares vs current shares at 2010 FYE (financial year end). The 0.294 is the diluted eps. That is calculated using a weighted average of shares over the financial period (year).
> 
> If you look at the annual report  and the basic and diluted eps numbers they have a note number next to them. In this case number 29. Go to note 29 (pg68) and it shows the weighted shares 58.580M.
> 
> As to whether it is good value. No single number or calculated IV can tell you that. If investing was that easy then we'd all be rich...no wait we wouldn't cos everything would be priced correctly and there would be no bargains.
> 
> Is this a cyclical industry? How likely are they to hit earnings forecast? What are the growth drivers ... and so on.
> 
> Good luck, from my two minute look it appears worth investigating further.
> 
> PS Can anyone point me to Roger's formula or type it out, I thought I saw it on his blog, but can't find it now.




Thanks moreld!

I had a sneaking suspicion it had to do with the # of shares because so many were issued during the year.

Thanks also for your list of 'other things to consider'.  I'm trying to make a check list of those sorts of things to go along with my IV calculations.  There's a definite learning curve.  

In terms of checking out a company's competition to judge whether it has a competitive advantage- can you suggest a good source of information/ website?  I can always try googling that sort of thing but the trick is streamlining your process in doing these company evaluations or you can spend limitless hours on each one


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## hrundi999

Hi All



  I notice that some people have been asking for the formula for table 11.2. This bugged me also, but I think I've worked it out. I believe it's: 



        MULTIPLIER = (ROE / RR) power(1.8)



For instance if we require a RR of 10 and the companies ROE is 30:

  ROE / RR = 30 / 10 = 3

Now calculate 3 to the power of 1.8 and we get 7.225, just as in table 11.2.

  Regards.


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## gt88

hrundi999 said:


> Hi All
> 
> 
> 
> I notice that some people have been asking for the formula for table 11.2. This bugged me also, but I think I've worked it out. I believe it's:
> 
> 
> 
> MULTIPLIER = (ROE / RR) power(1.8)
> 
> 
> 
> For instance if we require a RR of 10 and the companies ROE is 30:
> 
> ROE / RR = 30 / 10 = 3
> 
> Now calculate 3 to the power of 1.8 and we get 7.225, just as in table 11.2.
> 
> Regards.




Good work mate.  I was also trying to figure this out of curiosity but after an hour gave up.  

Now it begs the question. Why would Roger choose 1.8? Has anyone read Richard Simmons book? Maybe it has something to do with the valuation method put forward in that book.


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## MrBoJangles

Hi, 
Have you tested your formula for the full range of the x & y axis?

Regards,
Mr Bo



> I notice that some people have been asking for the formula for table 11.2. This bugged me also, but I think I've worked it out. I believe it's:
> 
> MULTIPLIER = (ROE / RR) power(1.8)
> 
> For instance if we require a RR of 10 and the companies ROE is 30:
> 
> ROE / RR = 30 / 10 = 3
> 
> Now calculate 3 to the power of 1.8 and we get 7.225, just as in table 11.2.
> 
> Regards.


----------



## moreld

ubtheboss said:


> In terms of checking out a company's competition to judge whether it has a competitive advantage- can you suggest a good source of information/ website?  I can always try googling that sort of thing but the trick is streamlining your process in doing these company evaluations or you can spend limitless hours on each one




You're welcome ubtheboss. 
Formulas/metrics are a good way of filtering for stocks to investigate further, but then it is time to get down and dirty.

A few thoughts: 
Stick to your knitting/wheelhouse/what you know. That way you use your expertise in what ever area. If you're an engineer then MCE would be a good company for you to check in and you'd competitors. If you're in IT, then concentrate on tech companies and so on. 

If you find a good cheap company, then there may be other ones in that industry, so start looking at their competitors. Build up a picture of the industry and competitors.

Over the years you'll get to know / be vaguely familiar with a lot of companies and will develop a checklist for different industries. 

Yes this does take a lot of time, which is probably why technical analysis is so popular!

Sorry I can't point you to an easy solution.


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## hrundi999

Hi 

  gt88: As you know, at the bottom of table 11.2 Roger states that the numbers he uses is based on Simmon's formula. I bought a cheap copy from Amazon.com. Using Simmon's book is how I worked out what I think Roger is doing. Simmons expresses it differently but the multiplier he would use is: 
  (ROE/RR) power 2 
I presume that to make it more conservative Roger uses 'power of 1.8' instead of 'power of 2'.

  Mr Bo: I have tested it against many ranges of x and y axis. It all looked good. I also created a spread sheet simmilar to the format of table 11.2 with the formula. It looks good. Corrections are welcomed of course.

  Regards.


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## MrBoJangles

That sounds logical. Roger did say he had 'detuned' it a bit for safety.

Regards,
Mr Bo




hrundi999 said:


> Hi
> 
> gt88: As you know, at the bottom of table 11.2 Roger states that the numbers he uses is based on Simmon's formula. I bought a cheap copy from Amazon.com. Using Simmon's book is how I worked out what I think Roger is doing. Simmons expresses it differently but the multiplier he would use is:
> (ROE/RR) power 2
> I presume that to make it more conservative Roger uses 'power of 1.8' instead of 'power of 2'.
> 
> Mr Bo: I have tested it against many ranges of x and y axis. It all looked good. I also created a spread sheet simmilar to the format of table 11.2 with the formula. It looks good. Corrections are welcomed of course.
> 
> Regards.


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## ubtheboss

moreld said:


> PS Can anyone point me to Roger's formula or type it out, I thought I saw it on his blog, but can't find it now.




Thanks again moreld!

Which of Roger's forumla are you after?  The whole IV method is a multi-step process.


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## ubtheboss

Keegan88 said:


> Mate looks like you have found a good one, I have also done the calculations on this, for 2011 IV=$7.90 and 2012 IV=$10.72 at RR=12%. My calculations were done from comsec though.




Hey 88,

Like others I'm trying to create a spreadsheet to run these numbers.  In calculating ROE I was using BOY equity instead of an avg of EOY and BOY.  When I fixed that it brought my 2010 IV down to $6.79 which seems much more reasonable 

Having said that, I noticed in Roger's Valueline portfolio (that he includes with each article in the Eureka Report) that his 2011 IV as of Aug. 31st this year is $6.02.  A more conservative forecast.

I still like the company. 

Having said THAT, I'm not in it.  I decided to take up the MACA IPO instead.

Plus I'm in Forge (FGE) already.  Can't go overweight in mining services.


----------



## Gixxer

ubtheboss said:


> Thanks for that SC.  I've made 'specific topic' posts in that forum but it is really more for general comments on Roger's book.
> 
> In this thread I'm encouraging people who are students of his method to post if they are looking for help or able to help one another.  Being the 'long term investment strategy' section of ASF it seems appropriate.
> 
> To start things off....
> 
> 
> Has anyone done an IV calculation for Forge (FGE)?
> 
> Roger I think has a 2011 forecast around $4.80ish
> 
> Another IV advocate on YMYC said he thought it was worth at least double it’s current price (he said that when it was about $3.70ish) but of course he doesn’t use exactly the same method.
> 
> I can’t find DPS and EPS forecasts so I’ve merely done a EOFY 2010 calculation based on the annual report figures.
> 
> EOY equity- 93.38
> # of shares on issue- 78.76
> DPS- 0.07
> EPS- 0.38
> NPAT- 29.45
> BOY equity- 48.78
> ROavgE- 41.43
> 
> Using a RR of 12% I got an IV of….. $10.23
> 
> Anyone else?




Hello everyone. I'm new to the forum and am pleased to have found it. Great idea and way to exchange information so thanks for setting it up and for the opportunity to contribute/participate.

I think Roger has an IV around $6.40 for FGE and some reservations regarding the sustainability of their current ROE.

Utilising an RR of 14% and an ROE of 41%, I have a 2010 IV of $7.33 for FGE. 

Looking ahead, I've got a 2011 IV of $7.27 based on a 25% YoY increase in NPAT, an ROE of 35% and an RR of 14%.

Hope this info is of some assistance.


----------



## ubtheboss

Gixxer said:


> Hello everyone. I'm new to the forum and am pleased to have found it. Great idea and way to exchange information so thanks for setting it up and for the opportunity to contribute/participate.
> 
> I think Roger has an IV around $6.40 for FGE and some reservations regarding the sustainability of their current ROE.
> 
> Utilising an RR of 14% and an ROE of 41%, I have a 2010 IV of $7.33 for FGE.
> 
> Looking ahead, I've got a 2011 IV of $7.27 based on a 25% YoY increase in NPAT, an ROE of 35% and an RR of 14%.
> 
> Hope this info is of some assistance.




Hey Gixxer and welcome!

I found on Roger's blog a copy of an article he did for Money magazine in which he gives an IV for FGE and two others.

http://blog.rogermontgomery.com/wp-...e.able-Stocks-Money-Magazine-October-2010.pdf

His IV for FGE is $4.45 as of Oct.  He really is doing some calculations above and beyond what he gives us in his book in order to get that kind of number.  It bugs me a bit.

Adjusting the original figures I listed in my first post on FGE:

for a 2010 IV

changing RR to 14%
changing EPS to 0.417 (basic)
changing # of shares to 70.699 (weighted average)

I still get an IV of $8.78

Mark Moreland (...from Team Invest?) values it somewhere in the mid to upper $7 range.

Gixxer- would you like to share the variables you inputed into the IV formula to get your value in order to compare and contrast for everyone?

Seems if you put 6 people in a room you will still get 6 different valuations but it's worth comparing notes.  Getting an IV is just a starting point anyway.

Cheers!


----------



## Gixxer

ubtheboss said:


> Hey Gixxer and welcome!
> 
> I found on Roger's blog a copy of an article he did for Money magazine in which he gives an IV for FGE and two others.
> 
> http://blog.rogermontgomery.com/wp-...e.able-Stocks-Money-Magazine-October-2010.pdf
> 
> His IV for FGE is $4.45 as of Oct.  He really is doing some calculations above and beyond what he gives us in his book in order to get that kind of number.  It bugs me a bit.
> 
> Adjusting the original figures I listed in my first post on FGE:
> 
> for a 2010 IV
> 
> changing RR to 14%
> changing EPS to 0.417 (basic)
> changing # of shares to 70.699 (weighted average)
> 
> I still get an IV of $8.78
> 
> Mark Moreland (...from Team Invest?) values it somewhere in the mid to upper $7 range.
> 
> Gixxer- would you like to share the variables you inputed into the IV formula to get your value in order to compare and contrast for everyone?
> 
> Seems if you put 6 people in a room you will still get 6 different valuations but it's worth comparing notes.  Getting an IV is just a starting point anyway.
> 
> Cheers!



Sure. Here are the variables I've used to calculate the 2010 IV.

Ending Equity = $93.376m
No of Shares = 78.759m
Equity per Share = $1.19
NPAT = $29.450m
Beginining Equity = $71.079m (used average 2009/10 total equity due to substantial increase in 2010 total equity)
ROE = 41.43%
Dividend = $3.419m
POR = 11.61%
RR = 14%
IV = $7.33

Cheers


----------



## ubtheboss

moreld said:


> The difference in this case is weighted average shares vs current shares at 2010 FYE (financial year end). The 0.294 is the diluted eps. That is calculated using a weighted average of shares over the financial period (year).
> 
> If you look at the annual report  and the basic and diluted eps numbers they have a note number next to them. In this case number 29. Go to note 29 (pg68) and it shows the weighted shares 58.580M.




I'm wondering about this while looking at the 2010 annual report:

NPAT = basic EPS x weighted avg. # shares

EqPS = end equity / # of shares on issue

Should the # of shares in the EqPS calculation also be the weighted avg or should it be the total number of shares on issue at the end of the year?


----------



## kermit345

Hey guys,

I haven't checked these forums recently but was lucky enough to notice the personal message from ubtheboss to come check out this thread. Very interesting stuff you guys are looking at. While I haven't read Roger's book nor have I 'adopted' his methodology of valuation, the 'idea' of value investing intrigues me and I think it has great merit.

As I mentioned within a thread I created some time ago, i've over time developed my own screening method, and valuation technique for stock valuation. Unfortunately in recent times i've been extremely busy with other commitments and haven't been able to put as much time into my valuation technique as i'd like.

I've been developing a website that will contain information in relation to value investing, and my goal is to eventually offer some form of a cheap subscription service that will cover value investing (With some stock tips and a value portfolio much like Roger's for people to follow).

Anyway enough about that. I'm at work at the moment so can't actually divulge much detail as all my spreadsheets etc are at home. What I can do is give some form of a background to my process.

Firstly I use a simple screen to identify 'potential' value investments, using ROE and D/E to identify these potential stocks (A good example is I run the screen every sunday, this way as any annual reports/guidance is updated weekly my screen picks up all new opportunities on a weekly basis, hopefully to get in before the trend kicks in - as mentioned, a good example of this is my screen picking up ACR after its maiden profit annual report on 24 Aug, as I was busy still developing website, could have bought in at approx $2.00, stock price is now approx $3.00)

Secondly, I run the stocks my screen picks up in greater detail through a spreadsheet i've developed which provide an intrinsic value and 12 month valuation based on my inputs. Its taken me quite a while to refine and develop these calculations but I think i've got it pretty close to where I want it now. I also apply percentage variations to the intrinsic values based on my perceptions of industry trends/cycles and management competency (I guess this adds some bias to the intrinsic value - but its my view).

Lastly I've put together a scoring system which compares all stocks i've valued so far and attributes points depending on a number of inputs (i.e. ROE, D/E, Buffer to IV and a couple of others). This just serves as an added guide and simply adds a point system valuation and comparison tool to other stocks i've identified.

Thats about all I can think of from the top of my head at the moment, look forward to everyones comments and will definately be checking back to see how everyone is doing with their techniques.

Food for thought, some of the stocks my screen has initially picked up as value investments (and are pretty typical value investments in the market as well) - PTM, ACR, WTF, NVT, CRZ.

There's some to start off with .


----------



## Cakeman

Keegan88 said:


> Hello all,
> 
> Since you are all working out the intrinsic value of stocks, and coming up with different values, either through different methods or different inputs, I have been trying to put together an excel spreadsheet that will do this all for me rather than doing it by hand. The problem is I am not 100% sure that it is correct. I just changed the ROE so it was calculated from the average of the BOY Equity and the EOY Equity so thanks for that point ubtheboss.
> 
> If any one is interest by all means take a look, run your numbers though to see what you get, any suggestions will also be appreciated.




Thanks a lot for this Keegan, just a quick question... i have run the numbers through your spreadsheet for the example UBTHEBOSS has used for MCE. With those input numbers and those from commsec the EOY equity im getting from your file is 76.86 however he use 59.893 and on Commsec is is 59...

I really like the spreadsheet and am wondering have i made a mistake somewhere aling the line or is it Cell Error?

Cheers

Andrew


----------



## awg

Hi,

I did attend a free talk with Rog as the guest by RBS Morgans, as it was 5 minutes from my place.

He is a student of Graham and Buffet, nearly all the over 200 attendees were 65+ ( he made cracks about investing in retirement and funeral homes)

ROE and low Debt were his themes, as well as purchasing at a discount to Intrinsic value.

I asked a question how he felt about coys with high ROE but debt and high ROI

He replied he avoids, as their profitability can be battered in volatile times

I was in a bit of a rush to go elswhere so I didnt line up for the last of the  signed hard copy of his book, but I probably will order the 2nd edition, maybe in softcover it will be cheaper and therefore represent better intinsic value:

I did have a quick flick thru it on the way in, and It seemed good, have read something previously by McNiven ( I think) which is called StockVal

Montgomerys methods seem similar, but perhaps more accesible to the layman


----------



## hrundi999

ubtheboss said:


> I'm wondering about this while looking at the 2010 annual report:
> 
> NPAT = basic EPS x weighted avg. # shares
> 
> EqPS = end equity / # of shares on issue
> 
> Should the # of shares in the EqPS calculation also be the weighted avg or should it be the total number of shares on issue at the end of the year?




Hi Ubtheboss

  When calculating the EqPS, use the total number of shares on issue at the end of the year. Also, going by Roger's examples, EqPS uses either the beginning equity or the average of beginning equity and end equity. In your example above you had 'end equity' in your EqPS equation.

  Regards.


----------



## ubtheboss

hrundi999 said:


> Hi Ubtheboss
> 
> When calculating the EqPS, use the total number of shares on issue at the end of the year. Also, going by Roger's examples, EqPS uses either the beginning equity or the average of beginning equity and end equity. In your example above you had 'end equity' in your EqPS equation.
> 
> Regards.




Thanks for that 999.

I posted the same question on Roger's blog and he answered that it didn't matter if you used the EOFY # of shares or the weighted avg # of shares as long as you were consistant with which one you used.

This is a more conservative approach but this is what I am doing now to calculate 'equity per share' (EqPS):

for my base year 2010 (i.e. the FY I have actual numbers for)-

EqPS = average of BOFY and EOFY equity / weighted average # of shares

then going forward my 'forecast EqPS' calculation is-

2011 EqPS= 2010 EqPS + 2011 EPS (f)- 2011 DPS (f) + 2011 new share capital (per share)* - 2011 buy backs (per share)*

* new share capital and buy backs are fairly uncommon for a rock steady company but directors do exercise options so I keep a variable input in my spreadsheet for these and update it as App 3Bs are announced.  If the company has a track record of option exercising you can always estimate that going forward and put it in your equation from the start.

Thoughts on that anyone?


----------



## ubtheboss

Cakeman said:


> Thanks a lot for this Keegan, just a quick question... i have run the numbers through your spreadsheet for the example UBTHEBOSS has used for MCE. With those input numbers and those from commsec the EOY equity im getting from your file is 76.86 however he use 59.893 and on Commsec is is 59...
> 
> I really like the spreadsheet and am wondering have i made a mistake somewhere aling the line or is it Cell Error?
> 
> Cheers
> 
> Andrew




Hi Andrew,

It sounds like the EOY equity number you are getting from that spreadsheet is the 'forecast' number for 2011.  If you look at the EqPS equation I just posted, do that for 2011 and then multply that by the current # of shares that will give you a forecast for EOFY 2011 equity.  My forecast so far is 76.871 (options were exercised recently) but it's a running total as more oppies could be exercised in the future (or capital raised but that's unlikely).

Hope that helps.


----------



## GaryS

Hi Guys

I purchased Roger's book a couple of months back. I wish I had read his book years ago, would not have wasted money on some  ***** companies.


I have a spreadsheet that I made up myself, that I use with the view of trying to estimate the future IV of companies using broker reports etc.

Most companies that I have worked out future IV for roughly align with what others state on Roger's blog or better still are close to Roger's

I have two companies that I get embarrassingly high future IV. Could a couple of you guys see what you come up with for AGO (Atlas Iron) and AUT (Aurora Oil and Gas)

I used the research reports found on each companies website.

By the way I remember when Roger first disclosed that he had purschased shares in MCE. I mistakely watched the run up so stayed out. Roger has just posted on his blog that MCE still has a margin of safety of 46.3%

I personally like JBH and will jump in if the SP drops towards $17


----------



## ubtheboss

GaryS said:


> Most companies that I have worked out future IV for roughly align with what others state on Roger's blog or better still are close to Roger's
> 
> I have two companies that I get embarrassingly high future IV. Could a couple of you guys see what you come up with for AGO (Atlas Iron) and AUT (Aurora Oil and Gas)
> 
> I used the research reports found on each companies website.
> 
> By the way I remember when Roger first disclosed that he had purschased shares in MCE. I mistakely watched the run up so stayed out. Roger has just posted on his blog that MCE still has a margin of safety of 46.3%
> 
> I personally like JBH and will jump in if the SP drops towards $17




Hi GaryS,

I had a quick look at the Atlas 2010 annual report and it's past numbers on Commsec.  Based on what I see:

- Roger would say it is worth $0.  It has never made any money.  The net equity it does have is from issuing more shares not from making a profit.  This puts it in the speculative arena rather than the 'investing' arena and thus a true intrinsic valuation is impossible.
- having said that, the negatives are getting less negative.  I don't know anything about the company but it's revenue is growing and it's losses are shrinking.  The Commsec EPS forecasts have it growing by 100% by 2013 so they must be headed in the right direction.

GaryS, if you are getting most of your valuations roughly close to Roger's than you are doing well.  He hasn't revealed his entire method for valuing to us which is why just using his calculations from his book will not get you the same IVs that he gets.  Did you modify or add anything to what Roger gave us in his book to get your IVs?  

Speaking of modifying, since I posted my last IV of MCE I have changed the way I calculate EqPS (see my post a couple of posts back).  Based on this, my current 2011 forecast is now at $8.89 (with 14% RR).

As you mentioned Roger has posted on his blog that he considers MCE about 46% undervalued.  Considering the EPS forecasts are for a near 50% increase in profit I'm not surprised.  With a current price of $5.00 a 46% increase gets you a 2011 IV forecast of $7.32.

That puts my valuation about 20% off of his.  Not sure why but there are many variables so who knows.  For any Roger student interested here are the current numbers I am using for 2011:

BOYE: 59.893 m
EOYE: 76.871 m
# of shares: 72.964 m
DPS (f): 0.114 c
EPS (f): 0.486 c
RR: 14%
NPAT: 34.15 m
EqPS: $1.066
POR: 24.36%
ROE: 49.62%
RR: 14%
Step 1: 3.570
Step 2: 9.888

2011 IV = $8.896

My EPS/ DPS forecast numbers are from Comsec.

If anyone got closer to Roger's IV it would be great if you could compare and contrast your variables and methods to help others... and me


----------



## Julia

GaryS said:


> I have two companies that I get embarrassingly high future IV. Could a couple of you guys see what you come up with for AGO (Atlas Iron) and AUT (Aurora Oil and Gas)



I know nothing about either of these, but AUT is in a healthy uptrend.  Looks good, as long as the fundamentals support the rise in the SP.  Has it already run too hard?   
What is the medium term fundamental outlook for this?


----------



## ParleVouFrancois

RE: Julia, long term AUT seems to be ticking all the boxes to be a compounding machine. All AUT does is drill oil/condensate wells in the Eagle Ford Shale, the acres they have are incredibly profitable, with complete paybacks on each well varying from 12 to 24 months. This is an annual return of say 50% (on the 24 months figure), all the capital is being recycled into the business to drill more productive wells, etc etc.

AUT hasn't shown any income on their quarterly as of yet because the initial costs of their wells were carried by Hilcorp, who get their payback before AUT gets any revenue (payback should be finishing soon, the revenue and consistent cashflows will be hitting AUT's bottom line).

That all being said, imo about 50 to 70% of the upside has been priced into the share, so any bad news could cause an overly large tumble in share price (would be a sign to top up again). However the one of the big reasons I'm a fan of AUT is the capital raising of 70 million dollars, this money is going to be earning a very large return if deployed even half as good as the predictions state. 

With rising/high oil prices and improving fraccing techniques, all the stars are aligning for AUT to be a long term winner.


----------



## stumacd

Hi,

I have a value stock screener that calculates the IV (for RR 10-16) and allows you to filter by the 3 critical factors (ROE, Safety Margin, LT Debt) allowing you to weed out unwanted stocks.(eg. where debt/equity > 20%)

asxvaluescreener.heroku.com/records (paste it in your browser)

I get two standout performers, but I'm not sure if they make any sense.

REF - gets a massive safety margin even using a RR of 16 - but something doesn't seem quite right but I can't figure it out.
RHG - in a similar position but without the amazing ROE. 

They both get 5/5 long term from buysellsignals, but it seems a little bit too good to be true, and we all know how the saying goes.

Let me know if there's anything I can add to the screener and I'll do what I can.

Cheers,
Stu


----------



## Julia

ParleVouFrancois said:


> RE: Julia, long term AUT seems to be ticking all the boxes to be a compounding machine..........



Thank you, PVF.  I appreciate your trouble.


----------



## ParleVouFrancois

The Intelligent Investor did a write up many years ago when RAMS home loans was taken over by Westpac, the remaining loan book spun off heaps of cashflow for the shell company which was only holding that asset. NTA was calculated as something on the order of $1.20 - $1.70 per share, so it seems obvious that the best step is to return money to long-suffering shareholders but I doubt that is what will happen.

Management signed a non-compete with Westpac which I think expires sometime early next year. I think management will restart the home loans business, under a different name (Westpac bought the distribution system and company name). 

The uncertainty over the companies direction (previously management indicated that all the money would be returned to shareholders, but this is yet to happen), is probably the primary reason for the discount being applied by the market on RHG.

PVF.


----------



## stumacd

That sounds logical, thanks for the insight ParleVouFrancois


----------



## ubtheboss

regarding the IV for MCE...

One of the hardest things to get your hands on (as a non-professional) when doing IV calculations is raw data, i.e. forecasts for things like DPS, EPS, etc.

Through a friend of a friend I did mange to get my hands on a broker's report for MCE.  It was revealing.

While Commsec (my original source) had these figures:

DPS (f): 0.114 c
EPS (f): 0.486 c

The broker's report had these:

DPS (f): 0.148 c
EPS (f): 0.434 c

I shouldn't be surprised.  If I remember correctly Commsec's numbers are an average of several that they collect.  On their 'forecasts' page they even give you the high and low estimates from the brokers they asked.

For some reason seeing another source outside of Commsec really underlined the fact that different brokers/ people (most brokers are people) will have different opinions on the same subject.

Using these new numbers for the DPS and EPS forecasts in my IV calculations my intrinsic value changed:

Previously it was high $8 low $9.  Now it becomes:

14% RR- $7.08 FOR 2011 FY which is closer to Roger's $7.31


Now that I have my head around this a little better I can look closely at the company and see if it ticks the other boxes of a 'good investment' before I plunge in.

This stuff is probably obvious to a lot of people with more experience but maybe my thinking out loud will help other new students of IV investing.


----------



## stumacd

I think it's still the best information out there.

Perhaps using the previous years payout ratio and growth would give a more concrete number, but it doesn't take into account any factors that the analysts factor in, so taking the mean of all their guesses might be best. If you're worried about overvaluing a stock just take the minimum estimates.

If you wanted to get serious about it, you could look at how far off previous estimates have been and adjust for that.

We have to remember that Roger has given us an easy equation, he undoubtedly adds in a few more factors that he's found useful.


----------



## ubtheboss

stumacd said:


> We have to remember that Roger has given us an easy equation, he undoubtedly adds in a few more factors that he's found useful.




True stu.  I might have the same EPS and DPS numbers as Roger and still get a diff IV.  He does have a couple of other factors in his calculations.  One look at a screenshot of his Stockval system (his former company) and you get an idea.

He's got some cheek in showing us 'his way' and then saying 'that's not necessarily the way I do it.'  Still, it's a 'leg up'... as he says.


----------



## stumacd

I've seen that stockval screenshot, but I'm not sure many of the numbers mean anything significant. I mean the graphs don't really tell you all that much (just how the earnings are distributed, if I remember correctly.)

I only real value of any meaning to us on that page is the IV (and the cash flow too), which might be a few percent different from ours using the basic formula.

I tried to make some more useful graphs for each stock:

http://asxvaluescreener.heroku.com/records?search=LYL
and click on the link in the Record column.

At the moment it's a bar graph, but I'll make it a line ASAP. It tries to give a better IV between the two estimated IVs.

I don't know what Roger's evaluation is for LYL, but I'll use my data.
(RR =10)
Cur Price = 4.24
2010 IV = 7.27
2011 IV = 7.89
Today's Date: 2010-11-08
Day's after 2010 Fin Year: 131
Today's better IV 7.49

It might be a little simple, but I feel that this way I can adjust the IVs the further we progress towards 2011 without having to work out how far away I am from either of the estimates.


----------



## ubtheboss

Has anyone looked at SWL- Seymour Whyte Ltd?

Just saw it mentioned on YMYC last night.  Looking at past ARs now. Pretty impressive numbers so far. I wonder who their main competitors would be?


----------



## awg

Hi again,

following my attendance at Rogers talk

He strongly favored ORL  ( Oroton)

This company has consistently ranked very highly in every fundamental scan I have done. 

I regret not owning it, but it wasnt a coy within my area of understanding or really fit my portfolio.

However, I believe I may have found the correct share to pique my wifes interest in the share market ( she has shares, but i bought them all, she couldnt care less, but is starting to think about retirement now)

Would anyone care to run an Intrinsic Value calc over ORL?

A further question for those who have read his material..

How does he treat stocks with -EPS  ( such as many small cap resources/explorers)?

I presume he excludes them from consideration

I will be obtaining his book


----------



## robusta

ubtheboss said:


> Has anyone looked at SWL- Seymour Whyte Ltd?
> 
> Just saw it mentioned on YMYC last night.  Looking at past ARs now. Pretty impressive numbers so far. I wonder who their main competitors would be?




Interesting company, definately one to add to my watch list. Just did a quick back of the envelope valuation and I get about $2.23 value should rise quickly if they can maintain 40% + ROE and 50% payout ratio. Like you I now want to know about major competitors and do SWL have any competitive advantages. Also want to look at cash flow, slightly less this year but CFO points to project timing as the reason. Good find ubtheboss


----------



## ubtheboss

robusta said:


> Interesting company, definately one to add to my watch list. Just did a quick back of the envelope valuation and I get about $2.23 value should rise quickly if they can maintain 40% + ROE and 50% payout ratio. Like you I now want to know about major competitors and do SWL have any competitive advantages. Also want to look at cash flow, slightly less this year but CFO points to project timing as the reason. Good find ubtheboss




Thanks robusta! 

With a D/E ration of only 4.6% I used  a margin of safety of 12% and got an IV of $2.57.  A little bit more but I agree we need to know more about who else is out there.  I found this link which may or may not uncover some info:

http://www.infrastructureaustralia.gov.au/project_pipeline/index.aspx

You know in Google Finance how it gives you a list of companies that are related to the one you in your portfolio?  That would be GREAT... if only the list they give you were Oz companies and not US ones.  Ah, oh well...


----------



## stumacd

awg: 
http://asxvaluescreener.heroku.com/records?search=ORL click on the stock code for some graphs.

Also Roger's got a Youtube video of him talking with the CEO of Oriton:
http://www.youtube.com/watch?v=eWLMRmVAgpw

ubtheboss & robusta:
Nice find - looks good. The 2010 report seems quite appealing. AGM in 2 weeks might give a little more insight. 

Looks like RHG is finished - their business model has been scraped from the GFC and subsequent legislation. A nice last hurrah payout though, +37% today.


----------



## nator

Can someone explain to me what Margin of Safety is and how it is calculated? As I see some big margin of safeties posted here.

I thought initially that the RR already incorporates safety issues, where smaller/volatile companies should be assigned a higher RR.


----------



## MrBoJangles

Nator, 
I think RR's Margin of Safety is simply a % expression of IV to Current Price and is:
(IV-Current Price)/IV * 100

By the way, I have made available for anyone (for free) to set up their own private area to make use of my web app based on RR's system:

tdserver2.com/cgi-bin/start.cgi/apps/bourse/login1.htm

initial Login is 'demo' 
Password is 'demo'

There is a Menu button to take you to the area to request a private folder.

Let me know of any enhancements you would all like and we might be able to incorporate.


----------



## robusta

nator said:


> Can someone explain to me what Margin of Safety is and how it is calculated? As I see some big margin of safeties posted here.
> 
> I thought initially that the RR already incorporates safety issues, where smaller/volatile companies should be assigned a higher RR.




Margin of safety is basically any discount to intrinsic value. It is a case of more is better.
You should use a higher RR for smaller/volatile companies but still should demand a large margin of safety. (20% +)
The bottom line is any valuation tecnique is not perfect. IMO opinion Roger's is one of the best.
The margin of safety serves two purposes.
1) If you miscalculate the intrinsic value you have a margin to make sure you don't overpay.
2) It can supercharge your returns. If you are buying a business that is rising in value at a discount to intrinsic value eventually the share price should rise to the value of the business.


----------



## ubtheboss

nator said:


> Can someone explain to me what Margin of Safety is and how it is calculated? As I see some big margin of safeties posted here.
> 
> I thought initially that the RR already incorporates safety issues, where smaller/volatile companies should be assigned a higher RR.




I may be wrong but I've always assumed that 'required return' (RR) is just another term for 'margin of safety'.  With that in mind I second what robusta said previously.


----------



## ubtheboss

'discount rate' is another term that is interchangeable with 'required return' yeah?

Also I think a 20% RR or margin of safety is way too high (sorry Robusta).  If you're a student of RM and use his tables then 9-14% (higher RR for higher risk) is fine in my opinion.  You could argue some specs need an even higher RR but then IV calculations are not applicable to companies that don't have positive NPAT  really.  There is a way to value resource companies based on resource estimates and shares outsanding etc but I don't know what it is.

Got my eyes on MCE this morning.  News keeps getting better and better with this one.

MLD is retracing a bit as I thought it might but it is still undervalued (despite any issue over future contract renewals- which are not in doubt, they are just a factor of doing business).


----------



## pedalofogus

Hi guys,

This is my first time posting on this particular thread, and that is mainly due to the fact that I only read Value-able a few weeks ago.

Re the discussion about RR and Margin of Safety.  My interpretation of Roger's comments in the book and on his blog is that Required Rate of Return is the 'base level' of ROE that you would accept (ie, return you could receive elsewhere).  His use of Margin of Safety appears to solely relate to the % difference between the current Market Value (Share Price) and the Intrinsic Value.  Therefore, if a company has an IV of $1 per share, and the current SP is 80cents, then you have a margin of safety of 20cents (or 25%).  However, if the SP was $1.30, then you have a margin of safety of negative 30cents (or -23%).

Based on that, i agree with ubtheboss that a RR of 20% is too high (i think Roger's range of 8 to 14% provides coverage for most companies).  However, i disagree with ubtheboss on a Margin of Safety of 20% being too high.  I personally wouldn't buy anything that is less than 20% undervalued.



Now a question for the readers of this thread.  Do you think there is a minimum company size that Roger's methods can be applied to?  I have a company that I have been watching that only has a $9m market cap, but i feel it ticks all of Roger's boxes (such as:- no debt, unique service, high ROE, etc).  I have run a IV calc on it, and the valuation came in at about 3 times the current SP.  But i am just not sure if it is too small for the IV calc to be able to work on it?


Any comments appreciated.
Cheers
Pedalofogus


----------



## ubtheboss

pedalofogus said:


> Hi guys,
> 
> This is my first time posting on this particular thread, and that is mainly due to the fact that I only read Value-able a few weeks ago.
> 
> Re the discussion about RR and Margin of Safety.  My interpretation of Roger's comments in the book and on his blog is that Required Rate of Return is the 'base level' of ROE that you would accept (ie, return you could receive elsewhere).  His use of Margin of Safety appears to solely relate to the % difference between the current Market Value (Share Price) and the Intrinsic Value.  Therefore, if a company has an IV of $1 per share, and the current SP is 80cents, then you have a margin of safety of 20cents (or 25%).  However, if the SP was $1.30, then you have a margin of safety of negative 30cents (or -23%).
> 
> Based on that, i agree with ubtheboss that a RR of 20% is too high (i think Roger's range of 8 to 14% provides coverage for most companies).  However, i disagree with ubtheboss on a Margin of Safety of 20% being too high.  I personally wouldn't buy anything that is less than 20% undervalued.
> 
> 
> 
> Now a question for the readers of this thread.  Do you think there is a minimum company size that Roger's methods can be applied to?  I have a company that I have been watching that only has a $9m market cap, but i feel it ticks all of Roger's boxes (such as:- no debt, unique service, high ROE, etc).  I have run a IV calc on it, and the valuation came in at about 3 times the current SP.  But i am just not sure if it is too small for the IV calc to be able to work on it?
> 
> 
> Any comments appreciated.
> Cheers
> Pedalofogus




Hi Fogus,

I think you're right- I confused RR with margin of safety.  RR would be the per annum return you would hope to get (i.e. the increase in the share price) like the interest rate you might get on a savings account.  Does that sound right?

As per your question on company size- if it has positive NPAT, ROE, DPS and EPS figures I don't see why you couldn't do a Roger-Dodger on it yeah?  The smaller it is though the harder it will be to find forecast figures for things like DPS, EPS to plug into your IV calculations.


----------



## drlog

You should also make sure it has positive cash flow and has a competitive advantage?

Often you find things that tick most of the boxes but not all of them - small market cap shouldnt really be a problem though.

On another note - any ideas as to what is happening with MCE? The announcement today looks good but the share price has fallen? It's probably just Mr Market doing his thing but does anyone else have an idea?

Cheers


----------



## kermit345

From my studies (university) and working in the finance industry:

RR = Required Rate of Return and is in relation to a per annum basis. So say the ASX has averaged 10.50% returns in the past 25 years, your Required Rate of Return might be 12% as you expect to do better than the market with your research and selections.

Margin of Safety (What i like to call 'Buffer') = As people have stated, the percentage difference between your intrinsic value calculation and the current share price.

I've expect an RR of between 10-12% is fair enough (i'm sure people would be reasonably happy making 10-12% on their funds per annum) and that the Buffer is more stock relative rather then providing a basis figure such as 20%. This can prove to be a good guideline, but I think some companies command and deserve a premium, so in some circumstances you might be willing to accept a 5-10% buffer as it may not be very often that the company trades under its IV anyway (i.e. a timely opportunity).

I'm continuing to put more and more companies through my value rating and evaluation spreadsheet. I've put approx 20 companies through at the moment, and the more I put through, the greater precision my rating system exhibits. The two companies that have stood out so far on my ratings system are ACR and NCK. I also did a valuation of Forge, can't remember the exact figures for my IV as i'm at work, but I know it was a reasonable way above the current SP.

PM me if you want to discuss my spreadsheet or thoughts further. Always looking for others input/ideas to help refine my own strategy and bounce ideas.


----------



## ubtheboss

drlog said:


> You should also make sure it has positive cash flow and has a competitive advantage?
> 
> Often you find things that tick most of the boxes but not all of them - small market cap shouldnt really be a problem though.
> 
> On another note - any ideas as to what is happening with MCE? The announcement today looks good but the share price has fallen? It's probably just Mr Market doing his thing but does anyone else have an idea?
> 
> Cheers




I agree drlog- positive cash flow and competitive advantage essential for long term success.

Been re-reading sections of Roger's book on cash flow.  He mentions a good quick way most investors use to look at cash flow (for others that are interested):

Balance sheet cash flow= change in cash - change in borrowings - change in share capital + div paid

('change' is the difference between one year and the next)

He mentions it is important to do this kind of calculation because even though an annual report might show a profit that could just be tricky-dicky accounting.  You want a business where cash flow is greater than profit.  

Anyway, on the subject of MCE drlog- I was scratchin my head today too.  That was a great shareholder update but the 'heard' was headed for the gate.  Just Mr Market in my opinion.  I bought more at 5.25


----------



## ubtheboss

kermit345 said:


> From my studies (university) and working in the finance industry:
> 
> RR = Required Rate of Return and is in relation to a per annum basis. So say the ASX has averaged 10.50% returns in the past 25 years, your Required Rate of Return might be 12% as you expect to do better than the market with your research and selections.
> 
> Margin of Safety (What i like to call 'Buffer') = As people have stated, the percentage difference between your intrinsic value calculation and the current share price.
> 
> I've expect an RR of between 10-12% is fair enough (i'm sure people would be reasonably happy making 10-12% on their funds per annum) and that the Buffer is more stock relative rather then providing a basis figure such as 20%. This can prove to be a good guideline, but I think some companies command and deserve a premium, so in some circumstances you might be willing to accept a 5-10% buffer as it may not be very often that the company trades under its IV anyway (i.e. a timely opportunity).
> 
> I'm continuing to put more and more companies through my value rating and evaluation spreadsheet. I've put approx 20 companies through at the moment, and the more I put through, the greater precision my rating system exhibits. The two companies that have stood out so far on my ratings system are ACR and NCK. I also did a valuation of Forge, can't remember the exact figures for my IV as i'm at work, but I know it was a reasonable way above the current SP.
> 
> PM me if you want to discuss my spreadsheet or thoughts further. Always looking for others input/ideas to help refine my own strategy and bounce ideas.




That's about what I though kermit.  Thanks for the double check.

So if you're looking at a stock trading at $1 and it's IV is $1.20 then you have a 20% margin of safety.  If the return you are looking to get on your money each year is say 12% then- if the company looks good from all the other angles- you would hope it reaches $1.12 in a 12 month period.  Since the IV is $1.20 you could feel reasonably safe that your 12% gain is achievable if all goes well.  They say that IV and share price will eventually converge so your gain could be higher.  There are no guarantees though.

As you suggest kermit you can/ should adjust your RR and margin of safety according to the size and stability of the company.

kermit- if you want to compare IVs feel free to post your inputs and I'll run the numbers to see what my spreadsheet spits out.  Same goes for anyone.

Cheers


----------



## pedalofogus

Thanks for the thoughts guys.

You are right ubtheboss, the forecast figures are hard to get hold of, and really all you have to go on is rough figures thrown into agm speeches by directors.

I have also been playing around with TWD this week.I have been coming up with IV's of approx 1.70, which is a fair bit lower than SP of 2.40. But it has been hard to come up with solid figure due to special dividends and demerger of AIR. Would be interested to hear if anyone else has looked into it, because I think it has the possibility to be a special business


----------



## pedalofogus

pedalofogus said:


> Hi guys,
> 
> This is my first time posting on this particular thread, and that is mainly due to the fact that I only read Value-able a few weeks ago.
> 
> Re the discussion about RR and Margin of Safety.  My interpretation of Roger's comments in the book and on his blog is that Required Rate of Return is the 'base level' of ROE that you would accept (ie, return you could receive elsewhere).  His use of Margin of Safety appears to solely relate to the % difference between the current Market Value (Share Price) and the Intrinsic Value.  Therefore, if a company has an IV of $1 per share, and the current SP is 80cents, then you have a margin of safety of 20cents (or 25%).  However, if the SP was $1.30, then you have a margin of safety of negative 30cents (or -23%).
> 
> Based on that, i agree with ubtheboss that a RR of 20% is too high (i think Roger's range of 8 to 14% provides coverage for most companies).  However, i disagree with ubtheboss on a Margin of Safety of 20% being too high.  I personally wouldn't buy anything that is less than 20% undervalued.
> 
> 
> 
> Now a question for the readers of this thread.  Do you think there is a minimum company size that Roger's methods can be applied to?  I have a company that I have been watching that only has a $9m market cap, but i feel it ticks all of Roger's boxes (such as:- no debt, unique service, high ROE, etc).  I have run a IV calc on it, and the valuation came in at about 3 times the current SP.  But i am just not sure if it is too small for the IV calc to be able to work on it?
> 
> 
> Any comments appreciated.
> Cheers
> Pedalofogus




By the way, stock I was referring to in previous post was RZR. Feel free to publicly pick it to pieces, as I would be interested to hear others' thoughts


----------



## ubtheboss

Two of the stocks Roger likes that I've mentioned here - MLD and MCE- are both doing well.

 FGE is having a pullback after good earnings upgrade. Looking to buy more at 4.44 or thereabouts.

Another that I asked Roger about and that he likes and rates an A1 or A2- SWL - is also doing quietly well. Thinly traded but gosh it's good.


----------



## ScottyfromAussie

has anyone fixed their RR's?

I fixed mine at 10%, then I just go for a 25%-15% margin of safety


----------



## tinhat

I recently bought Roger's book. I've done IV calculations for all stocks in my portfolio plus those on my watch list.

One company in my portfolio which has a calculated IV I found interesting is RIO. I've used forecast figures for Dec 2010 for eps and dividend and a required ROR of 12% and come to an IV of $450

With BHP, using forecast Jun 2011 results I get an IV of about $100.

Well I sure am looking forward to seeing my money quadruple over the next year or so!


----------



## robusta

A lot of post's on this thread seem to be focused on the valuation technique and forget about the rest of the book that should be factored into the valuation technique.

With very few exceptions high ROE does not last. Other businesses see the massive profits been made and open up in competition often reducing the returns from both businesses.

We need to look for businesses with competitive advantages, price makers not price takers.

We also need to be more conservative with our Intrinsic Values. I hold FGE and MCE, now I believe the value is rising in the next couple of years but some of the IV calculations are ridiculous. These companies can not continue to grow at the rate they have in the recent past, ROE will have to decline and/or the payout ratio will have to increase.


----------



## DeCal

What is the rationale for ROE/RR ^ 1.8 to calculate the book value multiple for eternally reinvested equity? What is the rationale for Simmon's ^2? 

No one should except the output until they fully understand the process.

There seems to be logical flaws in the formula so if anyone has the argument for it, that would make for solid discussion.

-Decal


----------



## magicmoment

tinhat said:


> I recently bought Roger's book. I've done IV calculations for all stocks in my portfolio plus those on my watch list.
> 
> One company in my portfolio which has a calculated IV I found interesting is RIO. I've used forecast figures for Dec 2010 for eps and dividend and a required ROR of 12% and come to an IV of $450
> 
> With BHP, using forecast Jun 2011 results I get an IV of about $100.
> 
> Well I sure am looking forward to seeing my money quadruple over the next year or so!




Hi Tinhat, i think your figures are wrong for BHP and RIO as you ignore the London shares which makes up the other half for BHP and Rio. 

Cheers


----------



## ubtheboss

Have any Roger Dodgers been following Acrux (ACR)?  Roger had this an A1 on his rating scale but I'm not sure of an IV for ACR.  Has anyone crunched the numbers?  Has anyone investigated what they do and who their competition is?  Vector Vest I noticed has it as a 'buy' with a value somewhere above $5.20.  Hmmm....


----------



## pedalofogus

I haven't been watching Acrux, but it is one of the companies on my list of stocks that I intend to perform analysis and IV calculations on over the Xmas break.

I will report back with my thoughts on Acrux (once i have put together some thoughts) haha


----------



## Intrinsic Value

pedalofogus said:


> I haven't been watching Acrux, but it is one of the companies on my list of stocks that I intend to perform analysis and IV calculations on over the Xmas break.
> 
> I will report back with my thoughts on Acrux (once i have put together some thoughts) haha




There is guy who posted on Rogers blog about this stock as one of his picks for the next year. He didn't post the IV figure but he did have some other encouraging figures. The below figures taken from the blog.

Postive cashflow of $145m,
- Positive company cashflow
- Very high ROE (83%)
- No debt.
- A strong relationship with Eli Lilly who will be marketing the products in the states

I think i remember Roger talking about this one with some reservations i.e. if someone else comes up with a better product in the interim where would you then stand with this company? 

It is however a big potential growth area but no without risks of a better product emerging and seriously damaging the brand.


----------



## DeCal

My 3 questions:

1) Can one use Commsec or other sites to filter price information, I.e. "companies with ROE >30%"

2) Does anyone know what goes into determining if a business is A1 or A2 etc?

3) What is the logic behind ROE/RR ^ 1.8 for Roger's formula.


If anyone can answer any of these questions, it'd be greatly appreciated.

DeCal


----------



## Intrinsic Value

DeCal said:


> My 3 questions:
> 
> 1) Can one use Commsec or other sites to filter price information, I.e. "companies with ROE >30%"
> 
> 2) Does anyone know what goes into determining if a business is A1 or A2 etc?
> 
> 3) What is the logic behind ROE/RR ^ 1.8 for Roger's formula.
> 
> 
> If anyone can answer any of these questions, it'd be greatly appreciated.
> 
> DeCal




I suggest you look at Rogers blog and/or buy his book. All the information you need is there.


----------



## hrundi999

DeCal said:


> My 3 questions:
> 
> 1) Can one use Commsec or other sites to filter price information, I.e. "companies with ROE >30%"
> 
> 2) Does anyone know what goes into determining if a business is A1 or A2 etc?
> 
> 3) What is the logic behind ROE/RR ^ 1.8 for Roger's formula.
> 
> 
> If anyone can answer any of these questions, it'd be greatly appreciated.
> 
> DeCal




Hi DeCal

  To answer your first question, go to Commsec -> "News & Research" -> "Company Research" -> "Advanced Search Tool". Once there you have a *very basic* filtering tool. In the first list box select "Performance Measures", second list box "Return on Equity", third "Greater than", fourth type in '.3' (ie 30% in decimal). Then hit the 'add query' button and  then the 'run query'. A list of companies with greater that 30% is displayed.

  Regards.


----------



## DeCal

H999 much appreciated mate! Thanks for the time taken to write that.

Intrinsic Value - I own his book, I've devoured his blog. Firstly he has never told anyone the formula ^1.8, it was figured out in this very thread. It is important that the logic (math) to come up with the method is understood before it is used, hence my question. Roger unfortunately thinks it's not necessary to discuss - which is just him trying to keep him formula propreitary which is understandable, but annyoying in a "reveal all" book.

Secondly, I cannot find anywhere discussing what goes into how he "grades" companies (I.e. A1 A2...), it'd be great to know how he grades them.

-DeCal


----------



## pedalofogus

DeCal said:


> My 3 questions:
> 
> 1) Can one use Commsec or other sites to filter price information, I.e. "companies with ROE >30%"
> 
> 2) Does anyone know what goes into determining if a business is A1 or A2 etc?
> 
> 3) What is the logic behind ROE/RR ^ 1.8 for Roger's formula.
> 
> 
> If anyone can answer any of these questions, it'd be greatly appreciated.
> 
> DeCal




Hi DeCal,

Although I can't 'exactly' answer the last 2 questions that you have asked, I can say that in relation to the A1 and A2 ratings, I heard Roger on one of those TV programs one night (Switzer i think it was) and he was talking about his criteria for A1 and A2 companies.  The factors he considers are Management, Competitive Advantage, Earnings Growth History, Number of Competitors, Future Validity of the Industry, etc.  But the way he was talking it was giving me the impression that it is very much a subjective classification, and it is really just his way of determining the businesses that are worth watching, and that he considers to be 'Extra-Ordinary Businesses'.

Although I think his method for calculating IV seems very good, and his factors that he discusses in his book for an 'Extra-Ordinary Business' make a lot of sense, i don't use his Montgomery Quality Ratings (or whatever they are called) as a guide to my investments at all.  In fact, when i dissected his list of A1's and A2's, i feel there were a lot of companies in there that were definitely not 'Extra-Ordinary Businesses'.

In relation to the use of the '^1.8' in his formula, I am not entirely sure of the validity of this.  As mentioned in this thread earlier, he has stolen that from a previous author and just adjusted it to his individual needs.  I have spent a bit of time trying to prove/disprove the effectiveness of it in giving a value for companies that retain all profits, but as yet i have been unable to do either.


----------



## DeCal

pedalofogus said:


> Hi DeCal,
> 
> Although I can't 'exactly' answer the last 2 questions that you have asked, I can say that in relation to the A1 and A2 ratings, I heard Roger on one of those TV programs one night (Switzer i think it was) and he was talking about his criteria for A1 and A2 companies.  The factors he considers are Management, Competitive Advantage, Earnings Growth History, Number of Competitors, Future Validity of the Industry, etc.  But the way he was talking it was giving me the impression that it is very much a subjective classification, and it is really just his way of determining the businesses that are worth watching, and that he considers to be 'Extra-Ordinary Businesses'.
> 
> Although I think his method for calculating IV seems very good, and his factors that he discusses in his book for an 'Extra-Ordinary Business' make a lot of sense, i don't use his Montgomery Quality Ratings (or whatever they are called) as a guide to my investments at all.  In fact, when i dissected his list of A1's and A2's, i feel there were a lot of companies in there that were definitely not 'Extra-Ordinary Businesses'.
> 
> In relation to the use of the '^1.8' in his formula, I am not entirely sure of the validity of this.  As mentioned in this thread earlier, he has stolen that from a previous author and just adjusted it to his individual needs.  I have spent a bit of time trying to prove/disprove the effectiveness of it in giving a value for companies that retain all profits, but as yet i have been unable to do either.





Cheers buddy, appreciate it.

I've found the math behind ROE/RR ^ 2

It appears that Rogers 1.8 is purely nothing more then a subjective drop, probably to make the formula "his own". There is no mathematical justification for the decline.

Cheers
DeCal


----------



## pedalofogus

DeCal said:


> Cheers buddy, appreciate it.
> 
> I've found the math behind ROE/RR ^ 2
> 
> It appears that Rogers 1.8 is purely nothing more then a subjective drop, probably to make the formula "his own". There is no mathematical justification for the decline.
> 
> Cheers
> DeCal




Yeah, aparently he just bumped it down to 1.8 to be a bit more conservative.

If you don't mind me asking, what is the 'math' behind using the ^2 (or ^1.8 in Roger's case).  It is obviously an allowance for the additional capital being employed due to lack of dividend payment, but I'm not sure why ^2 is the figure that was decided on.


----------



## rx2

pedalofogus said:


> Yeah, aparently he just bumped it down to 1.8 to be a bit more conservative.
> 
> If you don't mind me asking, what is the 'math' behind using the ^2 (or ^1.8 in Roger's case).  It is obviously an allowance for the additional capital being employed due to lack of dividend payment, but I'm not sure why ^2 is the figure that was decided on.




I don't believe the formula (ROE/RR)^1.8  is 100% correct. While the values it produces correlates with a majority of Roger's Table 11.2, it does not correlate 100%. For example the first two rows (5% ROE and 7.5% ROE) in Roger's Table do not correlate with the output of the formula i.e. 5%/8%^1.8 = 0.429 whereas Roger's Table is 0.356.

Rogers exact formula still remains a mystery. I was personally interested in the formula for two-reasons a) Save time typing the table into excel b) Understand the mechanics and reasoning behind the numbers. 

For now - I will use Roger's magic table and look forward to when the exact formula and reasoning is revealed.

Cheers

Rob


----------



## DeCal

I will give you the credit of assuming you could figure this one out, I'll start you off...

ROE/RR ^ 2 ...

If MV/BV = ROE/RR ^ 2

therefore
= ROE/RR * ROE/RR

Try to simplify the problem perhaps - then logically thing why you might times the multiple again by ROE/RR.

DeCal


----------



## hrundi999

rx2 said:


> I don't believe the formula (ROE/RR)^1.8  is 100% correct. While the values it produces correlates with a majority of Roger's Table 11.2, it does not correlate 100%. For example the first two rows (5% ROE and 7.5% ROE) in Roger's Table do not correlate with the output of the formula i.e. 5%/8%^1.8 = 0.429 whereas Roger's Table is 0.356.
> 
> Rogers exact formula still remains a mystery. I was personally interested in the formula for two-reasons a) Save time typing the table into excel b) Understand the mechanics and reasoning behind the numbers.
> 
> For now - I will use Roger's magic table and look forward to when the exact formula and reasoning is revealed.
> 
> Cheers
> 
> Rob




Hi Rob

  I just checked Table 11.2 in my copy of Value.able. In the book I see:
     RR 8%, ROE 5%, Table 0.429
     RR 8%, ROE 7.5%, Table 0.890
  Does your book have different values to the above? I calculated a few entries for ROE 5% and 7.5%. The values in the table agreed with the  (ROE/RR)^1.8 formula.

  Regards.


----------



## rx2

hrundi999 said:


> Hi Rob
> 
> I just checked Table 11.2 in my copy of Value.able. In the book I see:
> RR 8%, ROE 5%, Table 0.429
> RR 8%, ROE 7.5%, Table 0.890
> Does your book have different values to the above? I calculated a few entries for ROE 5% and 7.5%. The values in the table agreed with the  (ROE/RR)^1.8 formula.
> 
> Regards.




Hi,

Just checked Table 11.2 in my book and I have different values. In my book I see:
RR 8% ROE 5%, Table 0.356
RR 8% ROE 7.5%, Table 0.868

When I ran the ^1.8 formula it appears the first two rows in my book are completely different to what the formula produces, and there are some variations in other places too.

I have the 2nd edition of the book. What edition do you have? I am wondering if Roger updated the tables between editions, and if so, why?

Cheers

Rob


----------



## hrundi999

rx2 said:


> Hi,
> 
> Just checked Table 11.2 in my book and I have different values. In my book I see:
> RR 8% ROE 5%, Table 0.356
> RR 8% ROE 7.5%, Table 0.868
> 
> When I ran the ^1.8 formula it appears the first two rows in my book are completely different to what the formula produces, and there are some variations in other places too.
> 
> I have the 2nd edition of the book. What edition do you have? I am wondering if Roger updated the tables between editions, and if so, why?
> 
> Cheers
> 
> Rob




Hi Rob

  That's very interesting. I have the very first edition. I'm also wondering why the table was updated.

  Regards.


----------



## rx2

ubtheboss said:


> Hi GaryS,
> 
> Speaking of modifying, since I posted my last IV of MCE I have changed the way I calculate EqPS (see my post a couple of posts back).  Based on this, my current 2011 forecast is now at $8.89 (with 14% RR).
> 
> As you mentioned Roger has posted on his blog that he considers MCE about 46% undervalued.  Considering the EPS forecasts are for a near 50% increase in profit I'm not surprised.  With a current price of $5.00 a 46% increase gets you a 2011 IV forecast of $7.32.
> 
> That puts my valuation about 20% off of his.  Not sure why but there are many variables so who knows.  For any Roger student interested here are the current numbers I am using for 2011:
> 
> BOYE: 59.893 m
> EOYE: 76.871 m
> # of shares: 72.964 m
> DPS (f): 0.114 c
> EPS (f): 0.486 c
> RR: 14%
> NPAT: 34.15 m
> EqPS: $1.066
> POR: 24.36%
> ROE: 49.62%
> RR: 14%
> Step 1: 3.570
> Step 2: 9.888
> 
> 2011 IV = $8.896
> 
> My EPS/ DPS forecast numbers are from Comsec.
> 
> If anyone got closer to Roger's IV it would be great if you could compare and contrast your variables and methods to help others... and me




I am just curious how you managed to come up with a forcasted EOYE of 76.871 m?

The figure I come up with is 85.77m based on no additional capital raised for the forecast -

(Current EQPS .82 +
Forecast EPS 0.4686 -
Forecast DPS 0.114) *
Shares Issues 72.964 = $85.77

Regards


----------



## rogerd

rx2 said:


> Hi,
> 
> Just checked Table 11.2 in my book and I have different values. In my book I see:
> RR 8% ROE 5%, Table 0.356
> RR 8% ROE 7.5%, Table 0.868
> 
> When I ran the ^1.8 formula it appears the first two rows in my book are completely different to what the formula produces, and there are some variations in other places too.
> 
> I have the 2nd edition of the book. What edition do you have? I am wondering if Roger updated the tables between editions, and if so, why?
> 
> Cheers
> 
> Rob




Looks like RM changed the factor to 2.2 for the first two rows of those tables. My guess is it artificially boosts the safety margin needed to acquire these type of stocks with very low ROEs by reducing their IV, as they have slow IV growth (maybe even less than term deposit rate) thus a larger purchase discount is probably required to partially offset this risk, in case your estimates are off.

5%/8%^2.2 = 0.356

From experience the formula works alright for companies with moderately high ROEs of around 20-25% (Generally can get very close numbers to RM under this condition).

But tends to substantially overestimate companies with large ROEs (eg 35%+) with low payout ratios. I think mathematically it tends to slightly overestimate the power of compounding (retained profits). If we can somehow factor in logistic growth (s-curve) instead, it would be a little more consistent. RM mentions that due to our small economy, even the best businesses with strong competitive advantages will eventually see returns diminish.

The formula I think is very useful as a screener but nothing much more in my opinion. Its easy to calculate but definitely flawed in a lot of areas, but I think will be sufficient when incorporated with a margin of safety to avoid a lot of dud stocks/companies.

Cheers
-R


----------



## rogerd

DeCal said:


> H999 much appreciated mate! Thanks for the time taken to write that.
> 
> Intrinsic Value - I own his book, I've devoured his blog. Firstly he has never told anyone the formula ^1.8, it was figured out in this very thread. It is important that the logic (math) to come up with the method is understood before it is used, hence my question. Roger unfortunately thinks it's not necessary to discuss - which is just him trying to keep him formula propreitary which is understandable, but annyoying in a "reveal all" book.
> 
> Secondly, I cannot find anywhere discussing what goes into how he "grades" companies (I.e. A1 A2...), it'd be great to know how he grades them.
> 
> -DeCal




The way he grades his companies is a big mystery.
He has stated however that his grades are based solely on their risk of a 'liquidity event' such as a need to raise capital, liquidate, raise debt, inability to pay off interest. But I personally think he is hiding a 'lot' more. 

I remember that he also mentioned that the digits 1-5 are based on discount to IV on a video on the sky business channel about a year ago (cant find it anymore unfortunately) where 1 represents the largest discounts to IV and an A symbolises little to no risk of a liquidity event (which can of course change IV), thus an A1 stock is worth the most consideration. But that is definitely contradictory, following his blog you will notice a lot of A1 companies are not trading at large discounts to IV, some might even be at a premium. So I dont really know what to believe anymore. 

A1-A2 stocks dont always have the lowest RRs either and its quite hard to find a lot of common ground. I do know that A1-A2 MQR companies usually have shown consistently high financial performance (ROEs of 25% or more), have very little debt or very strong cashflow and have generally sound competitive advantages (not all, for example NCK I dont see a strong competitive advantage). Which quite matches the risk of liquidity event that he mentions. I think its a combination of the above.
Hope that helps.


----------



## rogerd

Forgot to also mention that morningstar is a nice place to filter companies:
http://www.morningstar.com.au/
Just scroll to the bottom of the page.


----------



## Intrinsic Value

If you don't want to go thru all the hooplah of trying to work out the formulas and trying to assess all the unknowns then i think if you pay attention to Rogers blog and his tv appearances you will get his top tips anyway.

The best three of the year in my opinion and he hinted very strongly at these stocks at the time were MCE Matrix, sitting at 6.90 today and he strongly recommended them at three dollars something , FGE Forge he strongly recommended at around 2.50 and they are 4.90 roughly today and the recent float of  MLD Maca. I got in on the first two but didn't have any spare cash left for the Maca float which floated at a dollar and is now 1.70 odd.

As he himself has stated there might be only a few opportunities a year to crop up but when they do you need to take these opportunities.


----------



## Trog Dog

rogerd said:


> Looks like RM changed the factor to 2.2 for the first two rows of those tables. My guess is it artificially boosts the safety margin needed to acquire these type of stocks with very low ROEs by reducing their IV, as they have slow IV growth (maybe even less than term deposit rate) thus a larger purchase discount is probably required to partially offset this risk, in case your estimates are off.
> 
> 5%/8%^2.2 = 0.356
> 
> From experience the formula works alright for companies with moderately high ROEs of around 20-25% (Generally can get very close numbers to RM under this condition).
> 
> But tends to substantially overestimate companies with large ROEs (eg 35%+) with low payout ratios. I think mathematically it tends to slightly overestimate the power of compounding (retained profits). If we can somehow factor in logistic growth (s-curve) instead, it would be a little more consistent. RM mentions that due to our small economy, even the best businesses with strong competitive advantages will eventually see returns diminish.
> 
> The formula I think is very useful as a screener but nothing much more in my opinion. Its easy to calculate but definitely flawed in a lot of areas, but I think will be sufficient when incorporated with a margin of safety to avoid a lot of dud stocks/companies.
> 
> Cheers
> -R




Ok now it makes sense - when ROE<RR the formula is (ROE/RR)^2.2 and when ROE>=RR the formula is (ROE/RR)^1.8 - given the original Simmons formula was (ROE/RR)^2 these modifications fit with RM adjusting it to be more conservative - the ^2.2 produces a lower multiplier. The ^1.8 actually produces a higher multiplier for those businesses with a higher ROE - which RM says you should pay more for when they retain all their earnings.


----------



## resourceboom

I think it is unrealstic to have a single formulae that can accurately provide an IV for many different companies. However as Roger says this is a great starting point and requires all the other aspects of the company to be looked at, and in my opinion the most important thing to determine is how sustainable is the ROE expected for this company, and determining the expected long term dividend payout as the 2 parts of the formulae are so different.

Regarding the capital re-invested portion of the equation, I believe this is the loosest part of the formulae, as it is very hard to be accurate, over the longer term.

I think an example may help show how compounding can make such a difference over time if it can be sustained.

eg 30% ROE for a company that doesn't pay out any dividends, vs one that pays out all:
Equity1	Equity2	Ratio	Year
100M	100M	1:1	0
130M	130M	1:1	1
169M	160M	1.06:1	2
219M	190M	1.15:1	3
284M	210M	1.35:1	4
369M	240M	1.54:1	5
480M	270M	1.77:1	6
624M	300M	2.08:1	7
811M	330M	2.46:1	8
1054M	360M	2.92:1	9
1370M	390M	3.51:1	10

Ratio Times Book Value formulae suggests you should pay for 30% ROE at 10% RR:
7.225	3	2.4:1

Just some things to think about in my opinion.
Apologies in advance if some of my math or logic is wrong


----------



## sultanmudo

kermit345 said:


> From my studies (university) and working in the finance industry:
> 
> RR = Required Rate of Return and is in relation to a per annum basis. So say the ASX has averaged 10.50% returns in the past 25 years, your Required Rate of Return might be 12% as you expect to do better than the market with your research and selections.
> 
> Margin of Safety (What i like to call 'Buffer') = As people have stated, the percentage difference between your intrinsic value calculation and the current share price.
> 
> I've expect an RR of between 10-12% is fair enough (i'm sure people would be reasonably happy making 10-12% on their funds per annum) and that the Buffer is more stock relative rather then providing a basis figure such as 20%. This can prove to be a good guideline, but I think some companies command and deserve a premium, so in some circumstances you might be willing to accept a 5-10% buffer as it may not be very often that the company trades under its IV anyway (i.e. a timely opportunity).
> 
> I'm continuing to put more and more companies through my value rating and evaluation spreadsheet. I've put approx 20 companies through at the moment, and the more I put through, the greater precision my rating system exhibits. The two companies that have stood out so far on my ratings system are ACR and NCK. I also did a valuation of Forge, can't remember the exact figures for my IV as i'm at work, but I know it was a reasonable way above the current SP.
> 
> PM me if you want to discuss my spreadsheet or thoughts further. Always looking for others input/ideas to help refine my own strategy and bounce ideas.




Would you please send me a copy of your value rating and evaluation spreadsheet. I have not yet rec'd my copy of the book. Please forward as an attachment to gdpeters@aapt.net.au


----------



## kermit345

Sorry sultan but not really looking at sharing my spreadsheet and hard work with someone who has just joined with 1 post. I'm more then happy to discuss my methodology or valuation techniques and equations. But not going to just hand out my spreadsheet.


----------



## Tysonboss1

sultanmudo said:


> Would you please send me a copy of your value rating and evaluation spreadsheet. I have not yet rec'd my copy of the book. Please forward as an attachment to gdpeters@aapt.net.au




no spread sheet can ever match years of experiance,

Value investing is not just about crunching numbers ( though the numbers are very important). you have to have a good understanding of alot of factors that can never be explained to you in any thread, post or book.


----------



## ubtheboss

Tysonboss1 said:


> no spread sheet can ever match years of experiance,
> 
> Value investing is not just about crunching numbers ( though the numbers are very important). you have to have a good understanding of alot of factors that can never be explained to you in any thread, post or book.




I agree.  It's a combination of those things and more.  Using Roger's book, the lessons he teaches AND the formula he gives (which I have put in my own spreadsheet) has allowed me to make a 23% gain in 3 months on a handful of 'value' stocks.


----------



## kermit345

Tysonboss1 said:


> no spread sheet can ever match years of experiance,
> 
> Value investing is not just about crunching numbers ( though the numbers are very important). you have to have a good understanding of alot of factors that can never be explained to you in any thread, post or book.




If anyone thinks there is a magic answer, spreadsheet, trading plan or strategy they are kidding themselves. If there were such a thing a) that person would keep it to themselves or b) if they didn't, everyone would have it so there would be no losers.

My spreadsheet is simply to identify value stocks that I should look into in more depth first. Not all of them will be good investments, nor will all of them currently be at a good entry price. As you say Tyson, there are a number of factors at play which there is no program or spreadsheet that can cover them all.


----------



## rogerd

Definitely agree with the above comments. Dont expect to outperform the market with a simple plug it in and thats it, because you'll end up disappointed. Theres a lot of judgement involved which takes a lot of work/time to learn and understand.


----------



## DeCal

For those of you interested in finding out the *full formula behind Montgomery's Valuable and Richard Simmon's explained* and fully detailed, see the link in my signature of this post.

Quite interesting explanation that goes on to take the formula apart and explain the logic behind it.

You can then see the pro's and con's to that specific formula as a method of filtering.

DeCal


----------



## robusta

Personally I am not really interested in the nitty gritty of the formula. IMO it is close enough. Concentrate instead on finding exceptional businesses and buy them when they are at compelling value.


----------



## DeCal

If you were to use ANY formula for any purpose, no matter how small, it must be understood.

Other then that I understand your point that a formula is no where near as important as researching companies with proper characteristics.


----------



## Intrinsic Value

DeCal said:


> If you were to use ANY formula for any purpose, no matter how small, it must be understood.
> 
> Other then that I understand your point that a formula is no where near as important as researching companies with proper characteristics.




The formula is a good starting point to filter out the companies you don't want.

Then when you find companies that appear to have a good discount to intrinsic value you need to do more research yourself.

The formula is what it is and it gives a guesstimate of the intrinsic value of a company at a particular time. There are of course always a lot of unknowns and no formula is perfect or even close to perfect. But if it enables you do consistently outperform the general market return then you should be happy. 

The whole idea of the Buffet/Montgomery approach is to lessen the risks and increase the returns.
i.e. take as little as risk as possible and try to get a good return.


----------



## sultanmudo

kermit345 said:


> Sorry sultan but not really looking at sharing my spreadsheet and hard work with someone who has just joined with 1 post. I'm more then happy to discuss my methodology or valuation techniques and equations. But not going to just hand out my spreadsheet.




Kermit, I don't blame you. Your comment re someone who has just joined with 1 post amused me. FYI, I have developed my own S/S over thirty years. I misinterpreted your post and I wrongly assumed you needed a critique of your spreadsheet. My humble apologies for trying to help. I trust you are doing better than 40% on your portfolio. Good fortune.


----------



## kermit345

sultanmudo said:


> Kermit, I don't blame you. Your comment re someone who has just joined with 1 post amused me. FYI, I have developed my own S/S over thirty years. I misinterpreted your post and I wrongly assumed you needed a critique of your spreadsheet. My humble apologies for trying to help. I trust you are doing better than 40% on your portfolio. Good fortune.




haha i sense your sarcasm sultan. I'm more than happy to discuss my method/spreadsheet via PM and bounce some ideas/thoughts but not really looking to have my spreadsheet 'critiqued' per se. Anyway, if you'd like to discuss via PM I would be more than happy to talk about ideas, my screen, strategy, stocks or valuation etc etc.

Cheers (I didn't mean to come off as an ass, just not that keen on releasing my spreadsheet into the wild without having some communication with the person first)


----------



## kermit345

ok everyone, have a bit of a question/task for those who are interested to see what they think.

I've been looking at ACR for quite some time now and as the special dividend payment draws closer, i'm thinking of taking an entry.

I've ran some numbers and although the current SP is $3.45 I was thinking that you could buy in now and get the 60c dividend, the SP may drop by 60c however based on my calculations the future intrinsic value POST the 60c dividend is still $3.90 to $4.10.

So either way, if the SP drops I still think it will return to the mid/high 3's, or if it hardly reduces post special dividend, you've still made a return on the dividend with still some upside.

Thoughts? anyone else looked at the company/financials and have an approx IV?


----------



## ubtheboss

Kermit I have been tempted by ACR also but have held off because I thought it was close to full value.  Margin of safety is not large enough for me to jump in now.

I'm looking at CCP.  It has had quite a run and I'm wondering if anyone has an IV.  I haven't crunched the numbers yet but plan to.

The market in general- ASX/ DOW- seems due for a pullback don't you reckon?  BRW published an issue recently and they expect a 10-15% pullback soon.  Worryingly they also expect commodity prices to tank (a sentiment I have heard on on Sky Biz also).

Thoughts anyone? (besides the obvious- a pullback in a value company is a chance to buy more at a better price)


----------



## RandR

ubtheboss said:


> I'm looking at CCP.  It has had quite a run and I'm wondering if anyone has an IV.  I haven't crunched the numbers yet but plan to.
> 
> )




Despite not knowing much in general about CCP itself or its practices...

just crunched some quick numbers on CCP and have come to an IV of 3.71. However this is on a ROE from the previous 2 years. where as previously you can see from 10 yr data they have achieved much larger levels of ROE.  Which would result in a significantly higher IV.

Another unrelated to IV calc ive done has given me the figure to investigate/monitor the company below 4.66 Which is obviously above where there trading at now.

I think i need to do some reading on this company to provide any further information. But it appears they fell off the face of a cliff during the GFC (sp went from 12 to 0.40 !)


----------



## RandR

kermit345 said:


> ok everyone, have a bit of a question/task for those who are interested to see what they think.
> 
> I've been looking at ACR for quite some time now and as the special dividend payment draws closer, i'm thinking of taking an entry.
> 
> I've ran some numbers and although the current SP is $3.45 I was thinking that you could buy in now and get the 60c dividend, the SP may drop by 60c however based on my calculations the future intrinsic value POST the 60c dividend is still $3.90 to $4.10.
> 
> So either way, if the SP drops I still think it will return to the mid/high 3's, or if it hardly reduces post special dividend, you've still made a return on the dividend with still some upside.
> 
> Thoughts? anyone else looked at the company/financials and have an approx IV?





Once again, ACR is a company i havnt been familiar with, a quick look at the financials makes me think this is still very much a speculative stock and not something i'd be comfortable putting money in ... However, future results could be promising indeed, ACR statements say a lot of the value in the company moving forward will be generated by royalties from Axiron, talk of royalties potentially up to 1 billion over the period to 2026. So looking at income somewhere between 50 - 100 million per year generated from royalties if the product is a commercial success.... not bad. Also say they are eligible for milestone payments up to around 200million

But of course the product has not actually yet been launched. But is set to be early 2011 in the States. One for me to watch I think.

Acrux expects the royalties to provide a substantial part of the total value of
Axiron. - http://imagesignal.comsec.com.au/asxdata/20101209/pdf/01130988.pdf

If the product is a success, and royalties/milestone payments are achieved, you'd expect there current earnings to double from there current point. But you'd really want them to be able to develop further streams of revenue from there.

For Myself i'd probably wait to see how successful there product is commercially and if they can cross the line from being an "R&D" company to a consistent profit making company before looking at investing.


----------



## drlog

Hi all,

I am currently working on some software to calculate IV over time and compare it to the market price. I have included a plot for ORL - take it with a grain of salt since it the program is still in development. It gives you an idea of what I am trying to do. Also, I think the 2011 IV is highly inflated because commsec thinks the payout ratio will decrease for ORL.

Which brings me to this question: How do you calculate the payout ratio? Now, when ROE is very high, the payout ratio affects the IV a lot!

So I am looking at JBH at the moment.

For 2010 we have DPS = 66c and total shares of 108m = $71.28m of dividends paid. BUT, in the statements of cash flows, the dividends paid = $67.083m.

This means a payout ratio of 66 / 108.4 = 60.8% or a payout ratio of 67.083m / 108m = 56.5%?

For 2009 we have DPS = 44c and total shares of 108m = $47.52m of dividends paid. BUT, in the statements of cash flows, the dividends paid = $33.217m.

This means a payout ratio of 44 / 87.6 = 50.2% or a payout ratio of 33.217m / 94.4m = 35.2%? Clearly, that bigger difference in payout ratio has a massive effect on the IV!


Roger says to use the "Dividends paid" value but my question is: why the discrepancy? And why does that discrepancy change from year to year?


----------



## stumacd

I think both ACR and CCP are worthy of further investigation. 

Has anyone looked into the SFH? big ROE, little debt. Apart from the general retail slow down, is this good value investment material?


----------



## RandR

drlog said:


> Roger says to use the "Dividends paid" value but my question is: why the discrepancy? And why does that discrepancy change from year to year?




Has the number of total shares fluctuated over the course of the year ? Could that possibility contribute to any discrepancy ?


----------



## skc

RandR said:


> Has the number of total shares fluctuated over the course of the year ? Could that possibility contribute to any discrepancy ?




With JBH dividends for the prior financial year are paid in Sept the following financial year. Cashflow statements reflects the dividend paid date so you will find that the total dividend paid out in cash terms for FY10 was (29c + 33c) x 108m shares = ~$67m.

For valuation purpose however the payout ratio is (33c + 33c) x 108m shares / earnings.


----------



## VSntchr

just wondering why we should use the calendar years dividends (I know comsec does it this way), when we are basing the valuation on the financial year?

I try and use the dividends paid in each financial year, which is annoying when using commsec data...although once im ready to extend into an indepth analysis of a chosen company...I will forecast my own dividends rather than use commsec data.


----------



## drlog

skc said:


> With JBH dividends for the prior financial year are paid in Sept the following financial year. Cashflow statements reflects the dividend paid date so you will find that the total dividend paid out in cash terms for FY10 was (29c + 33c) x 108m shares = ~$67m.
> 
> For valuation purpose however the payout ratio is (33c + 33c) x 108m shares / earnings.




Thanks for the insight. Now here is another question: Why not use DPS / EPS? It is easy to show that it is mathematically equivalent to (DPS) x shares / NPAT by dividing by shares.


----------



## skc

drlog said:


> Thanks for the insight. Now here is another question: Why not use DPS / EPS? It is easy to show that it is mathematically equivalent to (DPS) x shares / NPAT by dividing by shares.




You've said it. It's the same.


----------



## Billyb

DeCal said:


> For those of you interested in finding out the *full formula behind Montgomery's Valuable and Richard Simmon's explained* and fully detailed, see the link in my signature of this post.
> 
> Quite interesting explanation that goes on to take the formula apart and explain the logic behind it.
> 
> You can then see the pro's and con's to that specific formula as a method of filtering.
> 
> DeCal




Thank you for that post DeCal. Like you, I think it's important to understand the formula if we are going to use it to do our research, otherwise we might as well let our brokers choose all our stocks.

There's a few insights I've learned. By thinking of this a little bit differently, I now understand it better for myself. I thought I'd post my thought process, all this is my personal opinion of course, and may be wrong, so feel free to correct me. ALso, I've ordered value.able but yet to read it.

IMO, Roger's formula is nothing more than a prediction of where the share price will go. How can it be a true valuation of a company? The value of anything is how much you have to pay for it if you wanted it now or at a certain point in time, i.e the price that someone in the market will sell it to you for. It depends on a lot of factors -supply and demand, mood, business performance etc. But ultimately, it is determined by what people are willing to buy the thing for. The value of ORL is exactly the price it is right now, not Roger's intrinsic value calculation now or for 2 years time away, since these are not values, they are predictions of value. However, his prediction is based on the premise and assumption that the market will be [/reasonable and predictable/] and will eventually pay a price for ORL that is in proportion to it's business performance, particular equity factors, in the long term. I haven't been doing shares for long, but my understanding is that usually, this is what will happen, which is why Roger is usually right.

Roger talks a lot about all the other factors besides ROE and earnings that are important in a successful company, but none of these factors are in his formula, because it's impossible to quantify everything. Hence I think it is easy to miss the rest of his message, the 'wood for the trees', which is that other factors (management, debt, competitive advantage, cashflow etc) are as important or more important than the calculation itself.

The other thing is that Roger's experience allows him to to perform these calculations in a more accurate way than most. He know what RR is most suitable, he knows how to read a business better than most, he has access to paid forecasts and raw data from various brokers, and possibly the most important thing he has is time. So his calculations are less likely to be misinterpreted by himself, and he is more likely to come up with better predictions that the average folk. We have seen how his formula can come up with some very variable figures, just ye changing the numbers slightly. Experience is the key to knowing what numbers to use.

My 2 cents.


----------



## Intrinsic Value

Billyb said:


> Thank you for that post DeCal. Like you, I think it's important to understand the formula if we are going to use it to do our research, otherwise we might as well let our brokers choose all our stocks.
> 
> There's a few insights I've learned. By thinking of this a little bit differently, I now understand it better for myself. I thought I'd post my thought process, all this is my personal opinion of course, and may be wrong, so feel free to correct me. ALso, I've ordered value.able but yet to read it.
> 
> IMO, Roger's formula is nothing more than a prediction of where the share price will go. How can it be a true valuation of a company? The value of anything is how much you have to pay for it if you wanted it now or at a certain point in time, i.e the price that someone in the market will sell it to you for. It depends on a lot of factors -supply and demand, mood, business performance etc. But ultimately, it is determined by what people are willing to buy the thing for. The value of ORL is exactly the price it is right now, not Roger's intrinsic value calculation now or for 2 years time away, since these are not values, they are predictions of value. However, his prediction is based on the premise and assumption that the market will be [/reasonable and predictable/] and will eventually pay a price for ORL that is in proportion to it's business performance, particular equity factors, in the long term. I haven't been doing shares for long, but my understanding is that usually, this is what will happen, which is why Roger is usually right.
> 
> Roger talks a lot about all the other factors besides ROE and earnings that are important in a successful company, but none of these factors are in his formula, because it's impossible to quantify everything. Hence I think it is easy to miss the rest of his message, the 'wood for the trees', which is that other factors (management, debt, competitive advantage, cashflow etc) are as important or more important than the calculation itself.
> 
> The other thing is that Roger's experience allows him to to perform these calculations in a more accurate way than most. He know what RR is most suitable, he knows how to read a business better than most, he has access to paid forecasts and raw data from various brokers, and possibly the most important thing he has is time. So his calculations are less likely to be misinterpreted by himself, and he is more likely to come up with better predictions that the average folk. We have seen how his formula can come up with some very variable figures, just ye changing the numbers slightly. Experience is the key to knowing what numbers to use.
> 
> My 2 cents.




You are right in a lot of what you say.

The RR is the big wildcard.

Depending on what RR you use the IV varies significantly.

And of course a lot of the formula is based on forecasts.

But even having said all of that RMs track record is a lot better than most pundits and if you look at a share game that was done over 6 months he thrashed the other experts.


----------



## ubtheboss

Billyb-

Once you have actually read RM's book you might understand his methodology better.  He postulates (correctly imo) that 'price' is what people are willing to pay which is different to what something is actually worth.  Using his formula you can get a rough idea as to what a company is worth on a per share basis.  Few people will get the same valuation because the inputs can vary but his track record speaks for itself (as noted by IV above).  I would argue that my track record since using his methods and doing my own research on things like management and competitive advantage also speaks volumes.

I could go on and on but better for you to read the book first and then come back for more discussion.  

One last point- he certainly does not think of the market as reasonable or predictable in the short term.  He just thinks price will chase value in the long term.

Cheers


----------



## Intrinsic Value

ubtheboss said:


> Billyb-
> 
> Once you have actually read RM's book you might understand his methodology better.  He postulates (correctly imo) that 'price' is what people are willing to pay which is different to what something is actually worth.  Using his formula you can get a rough idea as to what a company is worth on a per share basis.  Few people will get the same valuation because the inputs can vary but his track record speaks for itself (as noted by IV above).  I would argue that my track record since using his methods and doing my own research on things like management and competitive advantage also speaks volumes.
> 
> I could go on and on but better for you to read the book first and then come back for more discussion.
> 
> One last point- he certainly does not think of the market as reasonable or predictable in the short term.  He just thinks price will chase value in the long term.
> 
> Cheers




I am a convert to RM.

Results are what counts and since I started using the IV method outlined in his book I am tracking up over 70 percent for the current year.

I don't expect that I will be able to maintain those sort of returns (hoping) but I feel much more confident that at least now I have some idea about investing and some control over my financial destiny.

As will all valuation techniques IVs will vary but at least you will be on the right track to identifying good businesses and filtering out all the rubbish.


----------



## Billyb

ubtheboss said:


> Billyb-
> 
> Once you have actually read RM's book you might understand his methodology better.  He postulates (correctly imo) that 'price' is what people are willing to pay which is different to what something is actually worth.  Using his formula you can get a rough idea as to what a company is worth on a per share basis.  Few people will get the same valuation because the inputs can vary but his track record speaks for itself (as noted by IV above).  I would argue that my track record since using his methods and doing my own research on things like management and competitive advantage also speaks volumes.
> 
> I could go on and on but better for you to read the book first and then come back for more discussion.
> 
> One last point- he certainly does not think of the market as reasonable or predictable in the short term.  He just thinks price will chase value in the long term.
> 
> Cheers




Yes I will read the book and look forward to more discussion. However, I reckon I understand what RM's talking about and I also understand how/why the formula works. 

I like RM, but I am not buying the book to learn about the formula because I don't believe in it for myself (unless the book changes my mind, which I doubt). I don't have the knowledge/ability/time/skill to find good reliable analyst forecasts that I'm confident in. I would argue that most of the margin in safety is actually in the _growth_ of IV rather than the current IV itself, if you have calculated a growing IV >10%/annum then you have a good margin of safety - however the problem with this is that it relies on analysts, and I don't trust analysts too much...they have been proven wrong many times, just look at ABS as well as various other examples. No, the reason I'm buying his book is to learn about the other aspects of what to look for in a business.

IVs are useless unless you understand how to read the business. For example, you can get a high IV, but if you didn't notice the dodgy accounting that is giving you the high IV in the first place, then I don't think there's much point. These are the areas I'm more interested in developing my 'investment eye' for.

Lastly, I feel he may be a self fulfilling prophecy, looking at MCE/FGE; and remember; RM himself says his valuation only finds undervalue on a handful of stocks each year.  This leaves a lot of potential misses.

I am still learning so my viewpoint could change, but this is what I think at the moment


----------



## prawn_86

Ok i am only just starting out reunning some numbers based on the earlier spreadsheet in this thread.

Would someone else also be so kind as to check MAQ? I am currently getting IV of $15.64 in 2010 and $17.62 for 2011 with ROE of 24% but i think i am out somewhere.

Help appreciated


----------



## titus

drlog said:


> Roger says to use the "Dividends paid" value but my question is: why the discrepancy? And why does that discrepancy change from year to year?




I've just finished Value.able and have been scouring Roger's blog pages.  There is one poster who gets his raw information from the Annual Reports rather than analysts figures from Commsec, etrade etc.  In particular, the dividend figure is variable and you need to make sure you have the correct figure for valuation purposes.  Perhaps this is where your discrepancy stems from.

The link is: http://blog.rogermontgomery.com/how-do-your-value-able-valuations-compare/#comment-6865

Cheers


----------



## Bunter221

prawn_86 said:


> Ok i am only just starting out reunning some numbers based on the earlier spreadsheet in this thread.
> 
> Would someone else also be so kind as to check MAQ? I am currently getting IV of $15.64 in 2010 and $17.62 for 2011 with ROE of 24% but i think i am out somewhere.
> 
> Help appreciated




I have just received the book and look at Suncorp's Value Model as I can't do RM analysis just yet - they show it at $34.36, I appreciate they are using a different group of numbers but a similar principle is applied, ie show perceived value.

Showing a number like you have identified may well be correct but hopefully an expert in the process will come on and explain.

The main issue I noted was the number of shares on issue 20m - not sure if it will be hard to get in and out.


----------



## kermit345

prawn_86 said:


> Ok i am only just starting out reunning some numbers based on the earlier spreadsheet in this thread.
> 
> Would someone else also be so kind as to check MAQ? I am currently getting IV of $15.64 in 2010 and $17.62 for 2011 with ROE of 24% but i think i am out somewhere.
> 
> Help appreciated




I've created a spreadsheet, which I have access to at home (but i'm at work at the moment). So i've quickly grabbed some figures from Etrade and have the following current IV's based on slightly different return requirements:

10.5% Required Return - $14.69 Current IV
11.0% Required Return - $13.22 Current IV

So you can see required returns has a reasonable effect on the basic version of my valuation technique. MAQ has been a company i've only just recently started looking at as it popped up in my initial screen.


----------



## prawn_86

Bunter221 said:


> The main issue I noted was the number of shares on issue 20m - not sure if it will be hard to get in and out.




Yes it is a very illiquid share as the Tudehopes (founders) own 60%, plus the other top 20 holders, hence why it has seen such a sustained uptrend.



kermit345 said:


> I've created a spreadsheet, which I have access to at home (but i'm at work at the moment). So i've quickly grabbed some figures from Etrade and have the following current IV's based on slightly different return requirements:
> 
> 10.5% Required Return - $14.69 Current IV
> 11.0% Required Return - $13.22 Current IV
> 
> So you can see required returns has a reasonable effect on the basic version of my valuation technique. MAQ has been a company i've only just recently started looking at as it popped up in my initial screen.




Interesting to see it only popping up in your scan now. If your willing to share i would live to see your spreadsheet when you get home


----------



## kermit345

prawn_86 said:


> Yes it is a very illiquid share as the Tudehopes (founders) own 60%, plus the other top 20 holders, hence why it has seen such a sustained uptrend.
> 
> 
> 
> Interesting to see it only popping up in your scan now. If your willing to share i would live to see your spreadsheet when you get home




I should clarify what I meant by popping up in my scan now. Its been coming up in my scan for quite sometime however its only recently that I incorporated the financials into my spreadsheet. My spreadsheet assigns ratings to companies based on how certain elements (ROE, D/E, buffer to IV etc) compare to each other on the ones that have passed through my screen.

I recently added the financials for MAQ and it compares favourably to the other 50 stocks i've included within my spreadsheet.

Don't have any plans to pass on my spreadsheet as its taken a lot of work on my part to get it where it is and don't want to give it away. However I can tell you to help me initially find value investments I conduct the following screen:

ROE > 15%
D/E < 30%
Market Cap > 100,000,000

Spits out about 70 or so companies, from there i rank them and then add their financial etc.


----------



## Bunter221

drlog said:


> Thanks for the insight. Now here is another question: Why not use DPS / EPS? It is easy to show that it is mathematically equivalent to (DPS) x shares / NPAT by dividing by shares.




Some companies aren't paying a dividend, so as a process in the book using your suggestion may not always work. Thats probably why!


----------



## drlog

Bunter221 said:


> Some companies aren't paying a dividend, so as a process in the book using your suggestion may not always work. Thats probably why!




I'm confused. If they aren't paying dividends then that is the easiest case to deal with because the payout ratio is zero no matter which way you look at it.


----------



## Bunter221

drlog said:


> I'm confused. If they aren't paying dividends then that is the easiest case to deal with because the payout ratio is zero no matter which way you look at it.




I don't know how RM deals with this - he believes that the company re-investing the dividend is best for an investor as you get the ROE on your money rather than putting it in a bank account getting very low interest rates.
In my preliminary fiddle with the concept I have used a fictious number.  Of course your choice will skew the results.
Does anyone have ideas?


----------



## drlog

Bunter221 said:


> I don't know how RM deals with this - he believes that the company re-investing the dividend is best for an investor as you get the ROE on your money rather than putting it in a bank account getting very low interest rates.
> In my preliminary fiddle with the concept I have used a fictious number.  Of course your choice will skew the results.
> Does anyone have ideas?




That's right - if the payout ratio is zero, then table 11.2 is used. I dont think you really need a fictitious number for this case. Under the assumption that the payout ratio is zero and the company can keep the ROE the same with increased equity, value goes up a lot if ROE is high.

However, a very high ROE is generally not sustainable and therefore the company will start to pay dividends (payout ratio goes from zero to something above zero).


----------



## Bunter221

drlog said:


> That's right - if the payout ratio is zero, then table 11.2 is used. I dont think you really need a fictitious number for this case. Under the assumption that the payout ratio is zero and the company can keep the ROE the same with increased equity, value goes up a lot if ROE is high.
> 
> However, a very high ROE is generally not sustainable and therefore the company will start to pay dividends (payout ratio goes from zero to something above zero).




Love the site and the support thanks - I have the book will try to get through it today or so then I will understand fully what is required. Then create a spreadsheet to easily enter company details to generate IV.


----------



## robredo

stumacd said:


> I think both ACR and CCP are worthy of further investigation.
> 
> Has anyone looked into the SFH? big ROE, little debt. Apart from the general retail slow down, is this good value investment material?




I'm looking purely at the financials for SFH on Comsec now, and i can see that the profits for this business in 2010 are the same as they were in 2003. The ROE seems high because the total equity of the company is lower than it was back in 2003 due to a big loss in 2005 and a smaller loss in 2006.


----------



## Bunter221

I note that RM hasn't been a fan of IPL but with low debt 12% ROE and Suncorp Value Model at $5.85 and the need for fertilizer increasing as farmers replant all over Australia, maybe its not that bad.


----------



## Noddy

Bunter221 said:


> I note that RM hasn't been a fan of IPL but with low debt 12% ROE and Suncorp Value Model at $5.85 and the need for fertilizer increasing as farmers replant all over Australia, maybe its not that bad.




Hello Bunter

I'm interested in finding out what the Suncorp Valuation Model is.
Can you supply any info on it ?
Thanks.


----------



## Bunter221

Noddy said:


> Hello Bunter
> 
> I'm interested in finding out what the Suncorp Valuation Model is.
> Can you supply any info on it ?
> Thanks.




As I'm just up to Part 2 of RM's book and don't want to jump ahead - I log onto Suncorp Share Trade and its a facilty offered there called Value Model - not available for every single stock but all majors and many minors.

Of course you don't see the maths behind it but it doesnt use price and takes into account the following: Book V/S $2.22, Discount Rate 11.36%, Div Payout Ratio 43%, 1st year forecast EPS $0.30, 2nd year forecast EPS $0.327, Long Term EPS growth rate 23.7%, Long Term industry average return on Equity 18.5% calculates to $5.85.

Need someone to reverse engineer it!  
e=sthere


----------



## Bunter221

stumacd said:


> I think both ACR and CCP are worthy of further investigation.
> 
> Has anyone looked into the SFH? big ROE, little debt. Apart from the general retail slow down, is this good value investment material?




ACR on Suncorp Value Model was $1.33 and CCP was not available - that's the limitations I guess when you can't put any company into the evaluating system.


----------



## Noddy

Bunter221 said:


> As I'm just up to Part 2 of RM's book and don't want to jump ahead - I log onto Suncorp Share Trade and its a facilty offered there called Value Model - not available for every single stock but all majors and many minors.
> 
> Of course you don't see the maths behind it but it doesnt use price and takes into account the following: Book V/S $2.22, Discount Rate 11.36%, Div Payout Ratio 43%, 1st year forecast EPS $0.30, 2nd year forecast EPS $0.327, Long Term EPS growth rate 23.7%, Long Term industry average return on Equity 18.5% calculates to $5.85.
> 
> Need someone to reverse engineer it!
> e=sthere




Had a look at the Suncorp website, and they appear to be using data from Aspect Huntly (same as commsec), but with a price (valuation) target that commsec doesn't offer. If interested, you can recieve free use for 1 month of the Aspect Huntly website operating under the name of Morningstar. They even send you a weekly bulletin mailed to your home for the month's trial all at no cost.

Suncorp's trading offer is $2 per buy or sell dearer than commsec. Thought commsec's deal at $19.95 a time was dear enough, but all the other banks appear to be even more expensive. Much cheaper to trade in shares in the U.S.


----------



## titus

Hi all

This thread is great and I thank you for all the help.  I need some guidance as to which NPAT figure you use in your IV calcs.  Do you use NPAT before abnormals or NPAT after abnormals?  In most of the cases they are the same but for some companies I've come across they differ (which as we know, can significantly change the IV result).

Can anyone help?  Appreciate if you can.

Titus.


----------



## Noddy

titus said:


> Hi all
> 
> This thread is great and I thank you for all the help.  I need some guidance as to which NPAT figure you use in your IV calcs.  Do you use NPAT before abnormals or NPAT after abnormals?  In most of the cases they are the same but for some companies I've come across they differ (which as we know, can significantly change the IV result).
> 
> Can anyone help?  Appreciate if you can.
> 
> Titus.




I always use NPAT before abnormals. I assume most people use that as it gives a clearer picture of the company's trading. Abnormals should only happen once, or they are not abnormal.


----------



## Noddy

Readers of this thread may be interested in a website -
www.moneychimp.com
It gives a number of ways to value shares, including a calculation for Buffet's "secret formula" and lots of other interesting information on valuations etc.


----------



## McCoy Pauley

Looks like Roger has decided to get off the couch and start up a new funds management.  He's opened a new funds management caper with a minimum investment level of $1 million.  Presumably he'll use the same techniques as he's evangelised about in his book.


----------



## titus

Noddy said:


> I always use NPAT before abnormals. I assume most people use that as it gives a clearer picture of the company's trading. Abnormals should only happen once, or they are not abnormal.




Cheers Noddy, that's what I thought.  It's good to have that reassurance.


----------



## MrBoJangles

Personally, I love RM's whole philosophy and blog site and book, BUT I'm not exactly a fan of the MQRs - A1 to C5 is too broad a range IMO to be really useful - and I think you need something a bit more coarse.
On my web-based Roger's Tool site (Intrinsic Value), 
tdserver2.com/cgi-bin/start.cgi/apps/bourse/login1.htm
Login: demo   P/W: demo
I have devised a simpler MQR variant which results in a MQR equivalent 0-5

The inputs for this Quality Rating are:
____________________________________________
Quality of the Company Management: 
poor    0    1    2    3    4    5   excelent   

Amount of Debt: 
poor    0    1    2    3    4    5   excelent   

Future Prospects: 
poor    0    1    2    3    4    5   excelent   

Consistent Good Growth: 
poor    0    1    2    3    4    5   excelent   

Immunity from Competition: 
poor    0    1    2    3    4    5   excelent   
___________________________________________

Regards,
Mr Bo



rogerd said:


> The way he grades his companies is a big mystery.
> He has stated however that his grades are based solely on their risk of a 'liquidity event' such as a need to raise capital, liquidate, raise debt, inability to pay off interest. But I personally think he is hiding a 'lot' more.
> 
> I remember that he also mentioned that the digits 1-5 are based on discount to IV on a video on the sky business channel about a year ago (cant find it anymore unfortunately) where 1 represents the largest discounts to IV and an A symbolises little to no risk of a liquidity event (which can of course change IV), thus an A1 stock is worth the most consideration. But that is definitely contradictory, following his blog you will notice a lot of A1 companies are not trading at large discounts to IV, some might even be at a premium. So I dont really know what to believe anymore.
> 
> A1-A2 stocks dont always have the lowest RRs either and its quite hard to find a lot of common ground. I do know that A1-A2 MQR companies usually have shown consistently high financial performance (ROEs of 25% or more), have very little debt or very strong cashflow and have generally sound competitive advantages (not all, for example NCK I dont see a strong competitive advantage). Which quite matches the risk of liquidity event that he mentions. I think its a combination of the above.
> Hope that helps.


----------



## So_Cynical

I think there is some scope for someone to build a site offering punters the ability to simply type in a ticker code and select a valuation model from like a drop down or something and bingo...maybe even have user defined inputs from several menus so punters could create custom valuations.


----------



## MrBoJangles

So_Cynical said:


> I think there is some scope for someone to build a site offering punters the ability to simply type in a ticker code and select a valuation model from like a drop down or something and bingo...maybe even have user defined inputs from several menus so punters could create custom valuations.




Agreed.


----------



## Bunter221

MrBoJangles said:


> Personally, I love RM's whole philosophy and blog site and book, BUT I'm not exactly a fan of the MQRs - A1 to C5 is too broad a range IMO to be really useful - and I think you need something a bit more coarse.
> On my web-based Roger's Tool site (Intrinsic Value),
> tdserver2.com/cgi-bin/start.cgi/apps/bourse/login1.htm
> Login: demo   P/W: demo
> I have devised a simpler MQR variant which results in a MQR equivalent 0-5
> 
> The inputs for this Quality Rating are:
> ____________________________________________
> Quality of the Company Management:
> poor    0    1    2    3    4    5   excelent
> 
> Amount of Debt:
> poor    0    1    2    3    4    5   excelent
> 
> Future Prospects:
> poor    0    1    2    3    4    5   excelent
> 
> Consistent Good Growth:
> poor    0    1    2    3    4    5   excelent
> 
> Immunity from Competition:
> poor    0    1    2    3    4    5   excelent
> ___________________________________________
> 
> Regards,
> Mr Bo



 Hi Mr Bo
Appreciate the excellent work you have done there on the website. Is the idea to input data for a company you are interested in and then this is held on site for others to view and correct if we make a mistake and for our future use or do you correct it we err?


----------



## MrBoJangles

Bunter221 said:


> Hi Mr Bo
> Appreciate the excellent work you have done there on the website. Is the idea to input data for a company you are interested in and then this is held on site for others to view and correct if we make a mistake and for our future use or do you correct it we err?




Well, I'm no Roger, so I won't be correcting anyone's entries.
The 'Demo' entry is the 'sandbox' for anyone to play in - if you want your own private area, just use the Menu option to the left and I'll set that up for you.

I have thought I may add an option whereby, once in your own private area, you'd have an option to 'copy' one of the stock records you had set up, to the 'public' demo area. But I may just wait for user suggestions before making tweaks and enhancements.

Mr Bo


----------



## Bunter221

MrBoJangles said:


> Well, I'm no Roger, so I won't be correcting anyone's entries.
> The 'Demo' entry is the 'sandbox' for anyone to play in - if you want your own private area, just use the Menu option to the left and I'll set that up for you.
> 
> I have thought I may add an option whereby, once in your own private area, you'd have an option to 'copy' one of the stock records you had set up, to the 'public' demo area. But I may just wait for user suggestions before making tweaks and enhancements.
> 
> Mr Bo



Thanks Mr Bo created my own space and logged in however that area is missing the titles over the boxes Equity per Share etc Current Price etc. If its not too much trouble!
Also I am happy to be able to send stocks to the general area!

Now advertise on your site with Google and generate some revenue form hits!


----------



## verati6

Keegan88 said:


> Hello all,
> 
> Since you are all working out the intrinsic value of stocks, and coming up with different values, either through different methods or different inputs, I have been trying to put together an excel spreadsheet that will do this all for me rather than doing it by hand. The problem is I am not 100% sure that it is correct. I just changed the ROE so it was calculated from the average of the BOY Equity and the EOY Equity so thanks for that point ubtheboss.
> 
> If any one is interest by all means take a look, run your numbers though to see what you get, any suggestions will also be appreciated.




Not sure if you are still following this thread, Keegan, but if you are, would you mind answering the following about your valuation model:

Why do you use BOY equity (Cell E23) to calculate your Forecast ROE for the second year in the series (Cell E26)? Is this a mistake or is there a reason for using BOY equity as opposed to the Average Equity?

Great model, nevertheless - a clever 'live' integration with the Valuation tables.


----------



## Bunter221

I own RMD and used a valuation from Suncorp that shows $8.04 it has no debt 14.8% ROE but when I do IV I get a really low result of $1.98. This is a big difference and I know they are not same thing but! Have I made an error?


----------



## LiL_JaSoN

How are you guys finding this book?

Iv been following Roger's videos and they seem interesting.


----------



## Bunter221

LiL_JaSoN said:


> How are you guys finding this book?
> 
> Iv been following Roger's videos and they seem interesting.




Its a very enlightening read - will change the way you think about companies and investing in them.


----------



## LiL_JaSoN

Nice, i might buy the book..

Just looking at others review before i decide if it's worth it


----------



## ubtheboss

Highly recommended.  The portfolio of companies I analyzed using the intrinsic valuation method- which includes doing some quantitative and qualitative research- is up by an average of 57% right now.  The market has been in a general uptrend for weeks but because of the quality of the companies I have bought I'm not concerned if there is a pullback.  To me that represents and opportunity to buy more at a cheaper price (if I have the cash).  Averaging down on a spec stock is NOT recommended but with a value company it can be (assuming it is just general market sentiment that is making it retrace and not bad news of course).


----------



## ubtheboss

I heard Roger on Sky Business the other day mention he is a believer in the coal and iron ore stories right now. Does anyone know which companies in those areas he favours? He did mention ATLAS which is iron ore. What about coal?

I'd like to buy Atlas (nearly did when it was $3) but a caller on that show said iron ore prices tend to dip during northern hemisphere summers. Atlas did dip in sp between May and Aug last year. Anybody else agree with that view?


----------



## tinhat

ubtheboss said:


> I heard Roger on Sky Business the other day mention he is a believer in the coal and iron ore stories right now. Does anyone know which companies in those areas he favours? He did mention ATLAS which is iron ore. What about coal?
> 
> I'd like to buy Atlas (nearly did when it was $3) but a caller on that show said iron ore prices tend to dip during northern hemisphere summers. Atlas did dip in sp between May and Aug last year. Anybody else agree with that view?




Did Roger give his IV opinion on the stock? It's certainly had a hard run up as of late.


----------



## Tightwad

I cant remember seeing anything by Roger, but there are a couple of valuations and comments by posters on the blog, should find it if you search for it.   

At the moment Im looking at ARB (code ARP) and MIN and thinking i should have gone for more MCE when i topped up the other day at just over 8.35.  Was thinking the Libya crisis may be unsettling for oil, rather than perhaps making offshore oil drilling more viable.


----------



## RogueTrader273

Just got RM's book a few days ago and was wondering a couple of things:

1. Why should your RR affect the IV of a company?

2. Nice worksheet Keegan88! Does a 2011 IV for *ARP *of $8.57 sound right? (11.72 2012)

I entered RR 10, EqPS 1.54, EPS 2011 0.49, EPS 2012 0.553, DPS 2011 0.21, DPS 2012 0.23, Shares 72.5 mill. (data from Etrade.)


----------



## Billyb

RogueTrader273 said:


> Just got RM's book a few days ago and was wondering a couple of things:
> 
> 1. Why should your RR affect the IV of a company?




Forget about shares and think about intrinsic values of bank accounts

What is the intrinsic value of a bank account today at 10% interest with $1000 in it (and the money will be payed out to you at the end of the year)

Assume the next best account in the market offers 5%. So basically, we would be happy with something in between, say 7% (this is now or RR)

To get a 7% return on the bank account, we would be happy to pay 10/7 x 1000 = $1428.  

so RR is very important to determine how much is sensible to pay for something

I personally think RM's method is too reliant on RR, in reality there is no 'correct' RR so we use it primarily as a risk input in the equation, high risk companies get lower IVs meaning less likely to buy it unless it is substantially discounted.

Finding good companies with good prospects in my view is a lot more important than calculating IVs, after all the market doesn't give a damn about IVs, quite simply they will price a business high when they feel good about the business, and this is what will happen for companies with good prospects.


----------



## tothemax6

Billyb said:


> Forget about shares and think about intrinsic values of bank accounts
> 
> What is the intrinsic value of a bank account today at 10% interest with $1000 in it (and the money will be payed out to you at the end of the year)
> 
> Assume the next best account in the market offers 5%. So basically, we would be happy with something in between, say 7% (this is now or RR)
> 
> To get a 7% return on the bank account, we would be happy to pay 10/7 x 1000 = $1428.
> 
> so RR is very important to determine how much is sensible to pay for something
> 
> I personally think RM's method is too reliant on RR, in reality there is no 'correct' RR so we use it primarily as a risk input in the equation, high risk companies get lower IVs meaning less likely to buy it unless it is substantially discounted.
> 
> Finding good companies with good prospects in my view is a lot more important than calculating IVs, after all the market doesn't give a damn about IVs, quite simply they will price a business high when they feel good about the business, and this is what will happen for companies with good prospects.



Morningstar has a useful value model (available in my CRC markets brokerage account), in which they use a 'discount rate', that looks very much like an RR (around 10%), but which claims to be weighted according to a companies beta, risk etc. Might be worth a look.
Also regarding Rogers method, he does use a second filter - his so called 'ratings' from 'A1 to C5', with A1 being 'top company, good management, low change of liquidity event, likelihood of increasing IV' etc, and with C5 being 'big pile of debt-ridden poop'.


----------



## RogueTrader273

Thanks for that guys!  Was having trouble figuring out why my own return requirements should affect the valuation of a company.

Btw has anyone worked out the IV of Mastermyne (MYE)?  Good chart, good looking figures, and in the mining services sector (picks and shovels.)


----------



## moreld

RogueTrader273 said:


> 1. Why should your RR affect the IV of a company?
> )




RT, Bilyb gave you a great answer, a 1% move in the RR has a massive effect on valuation. Here is some more reading from a value investing guru, James Montier.
http://www.simoleonsense.com/wp-content/uploads/2008/11/dangers-of-dcf.pdf

While Montier is dissing DCF it is not much of a mental stretch to apply many of his concepts to Roger's valuation work. I'm not saying that thinking about IV is not a worthwhile step, but as Billyb said, it should only be one tool in your toolbox.

Any methods that rely on beta are moving even further aways from reality and should be trusted even less.


----------



## RogueTrader273

Yes you're right, very helpful answers, looks like it might be as much art as science. 

Just fiddling around with putting this on a spreadsheet, any feedback welcome.


----------



## Bunter221

RogueTrader273 said:


> Yes you're right, very helpful answers, looks like it might be as much art as science.
> 
> Just fiddling around with putting this on a spreadsheet, any feedback welcome.




Thanks for sharing RogueTrader all assistance appreciated. Run some stocks through before Monday and leave feedback for you.


----------



## RogueTrader273

No probs-  currently working on a version that will save all data to a seperate sheet, should be done in a day or two.


----------



## Bunter221

RogueTrader273 said:


> No probs-  currently working on a version that will save all data to a seperate sheet, should be done in a day or two.




I normal have the master and then save as say BHP as an example, works fine for me.


----------



## RogueTrader273

I'm saving it so that each record is in a single row, similar to Mr Bojangles web page.
Is the worksheet giving you the correct answers?


----------



## Bunter221

RogueTrader273 said:


> I'm saving it so that each record is in a single row, similar to Mr Bojangles web page.
> Is the worksheet giving you the correct answers?




Oh YES the one row and all stocks on the one page would be fantastic. I still haven't had a chance to check how your sheet performs. Been working very hard on other issues. Will definately do some stocks today and check against the Intrinsic Value web page provided by Mr Bo which is all I have used up to date.


----------



## RogueTrader273

Ok this version's much better (see attached).  I haven't finished the record saving module yet, as I haven't decided yet which data I want to save.  Not being a finance wiz, I'd appreciate any feedback on that.  Also I've improved the tables so they use units of one instead of 2.5, so no need to select an ROE value manually.


----------



## Bunter221

RogueTrader273 said:


> Ok this version's much better (see attached).  I haven't finished the record saving module yet, as I haven't decided yet which data I want to save.  Not being a finance wiz, I'd appreciate any feedback on that.  Also I've improved the tables so they use units of one instead of 2.5, so no need to select an ROE value manually.




Thanks RT I like to refer to Stock Code and of course Excel lets the individual sort alphabetically - but you could put a button, the entered price - lets you how out of date the data is if you are aware of current price,  also the date data entered would also clarify this, ROE  and the amount of debt, safety margin and intrinsic value. 
Basically if you want to enter more individuals can hide columns or colour the ones they want to monitor.
Hope that helps!
The explanations could go as "comments" under the applicable headings if you wanted to tidy up the front end. Thanks for your efforts!


----------



## RogueTrader273

Actually I'm thinking now I should save everything including formulas so that 'what if?' calcs can be done such as changing the RR and putting in the latest SP etc.  Lots more can be added too - how about cash flow, and Roger's A1-C5 rankings?


----------



## Bunter221

RogueTrader273 said:


> Actually I'm thinking now I should save everything including formulas so that 'what if?' calcs can be done such as changing the RR and putting in the latest SP etc.  Lots more can be added too - how about cash flow, and Roger's A1-C5 rankings?




RT I guess the more you show the better the chance of differentiating between several buying opportunities, everything helps. Lets face it, once developed columns can be hidden or taken out based on the feedback later. Roger's A1 -A5 etc may be somewhat subjective but he obviously relies on the management factors (not really measureable apart from figures revealling a well managed company and reading reports) the stocks could be sorted off the data that way you may achieve a ratings column similar to Roger's. Obviously, with this process in place all my life I wouldn't have made as many bad choices on stock purchases based on tips and wrong fundamentals.


----------



## Bunter221

RogueTrader273 said:


> Actually I'm thinking now I should save everything including formulas so that 'what if?' calcs can be done such as changing the RR and putting in the latest SP etc.  Lots more can be added too - how about cash flow, and Roger's A1-C5 rankings?




Hi RT just looking at your good work ARP V3 you have 72(000000) its actually 72.5 and this makes a large variation to the IV. I use Suncorp data so there may be a variation. It would be nice if others calculating more manually could share their thoughts!
On the RR matter of riskier stocks you use a higher RR in the calc which will reduce their IV, less riskier investments say banks have a lower RR say 8 instead of 12 which will raise their IV relatively speaking making them good buys because of the lower risk in the calcs.


----------



## RogueTrader273

Thanks Bunter I use Etrade which seems to be the same as Comsec.

Anyway here's the new version (attached) which saves the records to a new sheet; haven't tested it a lot yet so any feedback appreciated.  Note that you can change the
data on the 'Saved' sheet to try out different scenarios.

Oops cancel that, the file is 822k and it seems the max is 488k. Any ideas?


----------



## Bunter221

RogueTrader273 said:


> Thanks Bunter I use Etrade which seems to be the same as Comsec.
> 
> Anyway here's the new version (attached) which saves the records to a new sheet; haven't tested it a lot yet so any feedback appreciated.  Note that you can change the
> data on the 'Saved' sheet to try out different scenarios.
> 
> Oops cancel that, the file is 822k and it seems the max is 488k. Any ideas?




Use some form of compession say Winzip or similar most people will find a way to open it anyway.
http://download.cnet.com/1770-20_4-...Name=platform=Windows&filter=platform=Windows Just checked ETrade they list shares on issue 72.5 as well it makes a big difference!


----------



## RogueTrader273

Ok it's an .rar file but I had to change the extension to .txt to upload it, so just change it back to .rar and you should be able to open it.


----------



## Bunter221

RogueTrader273 said:


> Ok it's an .rar file but I had to change the extension to .txt to upload it, so just change it back to .rar and you should be able to open it.




Thanks RT I downloaded and just opened with WinRaR - its not easy to change the extension in Win 7. I feel that all the important columns should be grouped first after Price - IV ROE RR, Quality Rating C1 etc and MOS. If you feel that any others are part of your decision making process, group them there as well. Its reasonable to have info available but you don't want it to cloud decision making. Nor do you want to be completing and adding more data than absolutley necessary to get the final decision making tool to work. Keep in mind there are lots of stocks to check once you have identified run a stock screener!


----------



## RogueTrader273

Yes sadly I had to put all that data in so as to be able to perform calculations on the 'Saved' sheet - you can change price, RR etc and note the effects.
Still trying to test things are working properly before I fine tune the layout; of course you can hide columns as you said too.
Do the calcs on the 'Main' sheet seem to be giving the right answers to you? I haven't spent too much time checking those yet.


----------



## notabclearning

Was wondering if anybody can tell me how to I work out an intrinsic value for half year results.

Thanks


----------



## Bunter221

RogueTrader273 said:


> Yes sadly I had to put all that data in so as to be able to perform calculations on the 'Saved' sheet - you can change price, RR etc and note the effects.
> Still trying to test things are working properly before I fine tune the layout; of course you can hide columns as you said too.
> Do the calcs on the 'Main' sheet seem to be giving the right answers to you? I haven't spent too much time checking those yet.




RT work through some today and put them on the site to hopefully get comfirmation.


----------



## RogueTrader273

Ok, not too sure about some of these results, e.g for NVT I get a CY IV result of 1.78, 
(RR of 12) from:

  ....      Curr  2011 2012 
  EPS 18.8  20.4  23.9 
  DPS 18.8  20.3  24.0 

 .................                                              2008/06    2009/06      2010/06 
Book Value ($) --   .... ..                                               0.29    .....       0.31 
Shares Outstanding (m)                                          342.2   ...      342.4 

Maybe someone more expert than me can check my calcs?  Here's a better link to the workbook:   http://www.sendspace.com/file/h045m1


----------



## notabclearning

RT I would like to congratulate you on making such a cool excel spreadsheet I love it.


----------



## Bunter221

RogueTrader273 said:


> Ok, not too sure about some of these results, e.g for NVT I get a CY IV result of 1.78,
> (RR of 12) from:
> 
> ....      Curr  2011 2012
> EPS 18.8  20.4  23.9
> DPS 18.8  20.3  24.0
> 
> .................                                              2008/06    2009/06      2010/06
> Book Value ($) --   .... ..                                               0.29    .....       0.31
> Shares Outstanding (m)                                          342.2   ...      342.4
> 
> Maybe someone more expert than me can check my calcs?  Here's a better link to the workbook:   http://www.sendspace.com/file/h045m1



 Hi RT I tried to enter BHP using RR 10 EPS 262.0 DPS 102.1 Shares 5589.5 EqPS 10.19 ie the Book Value and get IV today of $315. The future years are less of a concern as the anticipated sometimes changes so you check your holdings bty re enteriing the data. It seems in the EqPS you require additional maths. If thats the case it should be cells completed from the Balance Sheets and the calcs done in the spreadsheet.


----------



## Bunter221

RT I also put data into Mr Bo's Intrinsic site after you I guess, use EPS as Book Value so I get $1.57. Suncorps value model says $3.06. So I guess there may be two computer programs I am not good at right now. 
I guess I will lose more money today. LOL Hopefully having stocks with good ROE and low debt will look after me long term. Until I read Roger's book I was a product of Phil Town's Payback Time, this guided me out of managed funds in a hurry!


----------



## RogueTrader273

notabclearning said:


> RT I would like to congratulate you on making such a cool excel spreadsheet I love it.




Thanks notabc!  Hopefully it's spitting out the right answers, as I'm better at Excel/VBA than I am at valuing companies.

Bunter did you move the decimal point two places to the left entering those cents?  Here's my latest version, where I get an IV of $78.90 for BHP:

http://www.sendspace.com/file/cmzern


----------



## RogueTrader273

I should point out too that I've set up the calcs based on Roger's 'Holiday Homework' article: (near the bottom of the page)

http://blog.rogermontgomery.com/category/insightful-insights/


----------



## Bunter221

RogueTrader273 said:


> Thanks notabc!  Hopefully it's spitting out the right answers, as I'm better at Excel/VBA than I am at valuing companies.
> 
> Bunter did you move the decimal point two places to the left entering those cents?  Here's my latest version, where I get an IV of $78.90 for BHP:
> 
> http://www.sendspace.com/file/cmzern




RT that number would be miles to high for BHP, IMO.  I entered 262.0 because that's how many cents per share it is and probably would be the best way to calc your worksheet. If you said $ at the top then we would enter 2.62 - your thoughts?
Suncorp Values them at $31.75 I appreciate its a different calc but if the $78.90 was right we should be ripping in. Mr Bo comes in at $44.21


----------



## RogueTrader273

Yes I was thinking of changing that to avoid confusion, currently I enter the cents the same as if I was typing them into a calculator.

As far as I can see though my calculations are the same as RM's - do you agree with that or have I missed something out somewhere?


----------



## Bunter221

RogueTrader273 said:


> Yes I was thinking of changing that to avoid confusion, currently I enter the cents the same as if I was typing them into a calculator.
> 
> As far as I can see though my calculations are the same as RM's - do you agree with that or have I missed something out somewhere?




Well Roger said in 10 July 2010 that BHP was at about its IV - the price on that day was $38.50. I dont think a lot has changed since then BHP has outpaced the XJO so it would suggest it has moved ahead of IV. http://www.youtube.com/watch?v=4S3cFIG6LUo&feature=related
Always happy to be corrected!


----------



## Bunter221

RogueTrader273 said:


> Yes I was thinking of changing that to avoid confusion, currently I enter the cents the same as if I was typing them into a calculator.
> 
> As far as I can see though my calculations are the same as RM's - do you agree with that or have I missed something out somewhere?




I think its always better to enter the raw data as displayed - if BVP is 10.62 thats how its entered, if .31 then that's it the less thought and change from displayed financials would be better in the long term.


----------



## Intrinsic Value

Bunter221 said:


> Well Roger said in 10 July 2010 that BHP was at about its IV - the price on that day was $38.50. I dont think a lot has changed since then BHP has outpaced the XJO so it would suggest it has moved ahead of IV. http://www.youtube.com/watch?v=4S3cFIG6LUo&feature=related
> Always happy to be corrected!




RM's more recent IV on BHP was somewhere between 45-50. He gave this on Switzer not that long ago.


----------



## Bunter221

Intrinsic Value said:


> RM's more recent IV on BHP was somewhere between 45-50. He gave this on Switzer not that long ago.




Guidance when we err or when more recent info is available is greatly appreciated. 

Have you calculated the IV for NVT and BHP it would be great to get others calcs so we can determine the extent of our errors.


----------



## RogueTrader273

Actually if you get Keegan88's worksheet (page 1 of this thread) he gets exactly the same result as me (after you change his value in B26 from 34.99 to 35, since he's omitted the ROUND function.)  He also uses RM's formula, so maybe we need RM on here to speak up for his work


----------



## Bunter221

RogueTrader273 said:


> Actually if you get Keegan88's worksheet (page 1 of this thread) he gets exactly the same result as me (after you change his value in B26 from 34.99 to 35, since he's omitted the ROUND function.)  He also uses RM's formula, so maybe we need RM on here to speak up for his work




I went and downloaded the sheet so have the latest version B26 has his formulas within. Using the same numbers in both sheets current year RR 12 get $37.85 on yours and $30.92 on Keegan's. Please check numbers from the top on Keegan 12,10.19,2.62,1.021,5589.5.
Just to digress aquaity company such as BHP rates at worst RR 10% as the risk is lower, the quality is high. 
Once again correct me if I have erred.


----------



## Bunter221

RT apologies - I missed the Debt/Equity way down the end. Now I find that entering the debt/equity makes no difference should it in your spreadsheet? I believe it should have an effect but I have never done a Roger manually.


----------



## Bunter221

Another query  - Roger speaks highly of ARP yet it has an IV of $1.44 on IV website site and on Keegans worksheet $0.91.:newbie: 
Suncorp values it at $7.87, not the same process I know but we have large discrepancies in values here!
Roger wouldn't talk of having this stock in his SMSF with these calculated values surely!


----------



## RogueTrader273

From the following:

    .......              EqPS   	# Shares DPS ($)	 EPS ($) 	RR
Next Yr	13.58	5589.5	0.983	4.113	12
Curr Yr	10.45	5589.5	1.021	2.620	12
Prior Yr	8.85	5589.5

I get:

Intrinsic
Value
76.55  2011
36.61  Curr Yr

Actually I was putting the Current Yr data into Prior Yr before which would obviously upset the results: like I said I'm no finance expert 
How does this look to you?  Also RR 10 sounds fine, I wasn't worrying about that much before as I was only testing the calcs.

Re Debt/Equity yes that's only for record purposes.


----------



## RogueTrader273

Bunter221 said:


> Another query  - Roger speaks highly of ARP yet it has an IV of $1.44 on IV website site and on Keegans worksheet $0.91.:newbie:
> Suncorp values it at $7.87, not the same process I know but we have large discrepancies in values here!
> Roger wouldn't talk of having this stock in his SMSF with these calculated values surely!




I get the following for ARP:

Intrinsic
Value
9.34  Next Yr
1.01  Curr Yr


...........	EqPS..# Shares...DPS($)...EPS($)...RR
Next Yr	1.82 ...	72.5 ...	0.210 ...	0.491 ...	10
Curr Yr	1.54 ...	72.5 ...	0.695 ...	0.463 ...	10
Prior Yr	1.38 ...	66.6			


Hopefully I put the numbers in the right years....


----------



## RogueTrader273

Here's BHP  - how do these figures look?


----------



## kermit345

Using my own equation i have a current IV of about $7.20 and a future target of $8.57 however this is assuming in both circumstances that they were to pay our 100% of EPS as dividends. As this is unlikely to be the case my IV and future target for ARP would increase as the dividend payout ratio reduces from 100%.

This is just a simple calculation i've done at work and doesn't take into account all aspects of the spreadsheet i've developed over the last 12 months. 

If your interested in under-valued companies maybe take a look at MML as well. I have it as being well undervalued currently, particularly given recent falls. While not typically one of Roger's picks as it is simply a gold miner with no significant competitive advantage or barriers to entry. It does produce gold at a very low cost, has loads of cash, expansion potential and exploration potential.


----------



## RogueTrader273

Sorry about the pic - have to find out how to upload a normal size pic when I have time.
In the meantime hitting Ctrl-+ on your keyboard a few times should help.

Interesting result Kermit - are you using RM's equation as shown in his book?  My calcs are based on that and his 'Homework' assignment (which I've tried to use exactly the same as he does), but since everyone is getting different results is that because people using different input data, or using other formulas?


----------



## kermit345

I use my own formula which is an adapted version of other share pricing equations which I learnt through university. They aren't very complex in nature (in the basic form) so I adapted it to be more earnings based, as it applies a discount to the DPS factor of a company, but allows for the full EPS side to shine through.

So essentially my equation is built into two parts, a DPS factor and an EPS factor. Typically companies that achieve a high IV through my equation are those with high growth/ROE, low debt and are reinvesting majority of earnings into the company rather then paying dividends, which is in essense what Roger targets as well. I use excel to compute my propper IV's as my equation has over time became slightly more complex and i just used the simplified version for those ARP IV's.

Should also note that for the current IV, i disregarded the fact that DPS was almost 1.5 times EPS and simply concluded that all of the EPS was paid as a dividend as I think you'll find it unlikely the trend of paying our more dividends then earnings for ARP will not continue. So maybe try doing a current valuation with the EPS at 0.463 and the DPS at 0.463 and see if its closer to the current SP.


----------



## RogueTrader273

Thanks kermit, I tried those numbers for ARP, does the following look plausible to you? 

*INPUT:	* 
*...........	EqPS 	..	Shares 	..	DPS 	..	EPS	..	RR*
Next Yr .	1.82	..	72.50	...	0.21	..	0.49	..	10
Curr Yr ..	1.54	..	72.50	...	0.46	..	0.46	..	10
Prior Yr ..	1.38	..	66.60						

*OUTPUT:	* 
*.............	IV:	....	ROE	..	NPAT	....	POR* 
Next Yr ..	9.34	...	29	..	35.598	..	42.77%		
Curr Yr ..	5.08	....	33	..	33.568	..	100.00%


----------



## Bunter221

RogueTrader273 said:


> Thanks kermit, I tried those numbers for ARP, does the following look plausible to you?
> 
> *INPUT:	*
> *...........	EqPS 	..	Shares 	..	DPS 	..	EPS	..	RR*
> Next Yr .	1.82	..	72.50	...	0.21	..	0.49	..	10
> Curr Yr ..	1.54	..	72.50	...	0.46	..	0.46	..	10
> Prior Yr ..	1.38	..	66.60
> 
> *OUTPUT:	*
> *.............	IV:	....	ROE	..	NPAT	....	POR*
> Next Yr ..	9.34	...	29	..	35.598	..	42.77%
> Curr Yr ..	5.08	....	33	..	33.568	..	100.00%




Hi RT one of the biggest factors in the calc going wrong in some of these programs is the POR when you give a low guess POR you get a high IV such is the case with the IV site. Inputs for ARP (I left a note there) I used the POR direct from Suncorp and its is 150 I checked using RM's process and its is 150 someone has used 42.7 and it gives great IV but its wrong. The result with the correct numbers is also wrong it must be more than $1.16!
I usually cut and paste from the balance sheets to get % growth ROE BV DPS etc then adjust to be realistic. BHP to go from $50 to $90 is unlikely but many of us would be happy if it did. eg the average/year increases over 9 years for ARP is  ROE 2.8% BVPS 15.27% Revenues 14.52% so we should expect changes much outside these parameters. I think most companies follow a pattern that you can calculate then adjust to be close to the last years performance. This is my opinion but I did buy BHP today hoping you are correct! I thinks its IV is $44.14 say $56.39 next year.


----------



## RogueTrader273

Yes Bunter it certainly seems you've got to get all your numbers right else the results can vary markedly.
For instance one stock strongly recommended tonight on YMYC was WSA, for which I get the following result :

*Code:	WSA	.....Price: 	6.01	* 

*INPUT:	* 
*...........	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
Next Yr .	1.42	..	180.00	...	0.223	..	0.687	..	10
Curr Yr ..	0.96	..	179.70	...	0.060	..	0.080	..	10
Prior Yr ..	0.77	..	178.90						

*OUTPUT:	* 
*.............	IV:	....	ROE	..	NPAT	....	POR* 
Next Yr ..	25.44	...	58	..	123.66	..	0.32		
Curr Yr ...	0.85	....	9	..	14.38	..	0.75

... so I'm not quite sure what's happening there.

They also loved Cockatoo Coal (CKO) which gives (just guessing #Shares Next Yr):

*Code:	COK	.....Price: 	0.48	* 

*INPUT:	* 
*...........	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
Next Yr .	0.17	..	810.00	...	0.000	..	0.005	..	11
Curr Yr ..	0.16	..	702.80	...	0.000	..	0.001	..	11
Prior Yr ..	0.12	..	553.70						

*OUTPUT:	* 
*.............	IV:	....	ROE	..	NPAT	....	POR* 
Next Yr ..	0.02	...	3	..	4.05	..	0.00		
Curr Yr ...	0.00	....	1	..	0.70	..	0.00


----------



## RogueTrader273

Latest version btw lets you copy and paste results like the above to forums, since normally everything gets bunched up with no formatting:

http://www.sendspace.com/file/30kib7


----------



## Bunter221

RogueTrader273 said:


> Yes Bunter it certainly seems you've got to get all your numbers right else the results can vary markedly.
> For instance one stock strongly recommended tonight on YMYC was WSA, for which I get the following result :
> 
> *Code:	WSA	.....Price: 	6.01	*
> 
> *INPUT:	*
> *...........	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
> Next Yr .	1.42	..	180.00	...	0.223	..	0.687	..	10
> Curr Yr ..	0.96	..	179.70	...	0.060	..	0.080	..	10
> Prior Yr ..	0.77	..	178.90
> 
> *OUTPUT:	*
> *.............	IV:	....	ROE	..	NPAT	....	POR*
> Next Yr ..	25.44	...	58	..	123.66	..	0.32
> Curr Yr ...	0.85	....	9	..	14.38	..	0.75
> 
> ... so I'm not quite sure what's happening there.
> 
> They also loved Cockatoo Coal (CKO) which gives (just guessing #Shares Next Yr):
> 
> *Code:	COK	.....Price: 	0.48	*
> 
> *INPUT:	*
> *...........	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
> Next Yr .	0.17	..	810.00	...	0.000	..	0.005	..	11
> Curr Yr ..	0.16	..	702.80	...	0.000	..	0.001	..	11
> Prior Yr ..	0.12	..	553.70
> 
> *OUTPUT:	*
> *.............	IV:	....	ROE	..	NPAT	....	POR*
> Next Yr ..	0.02	...	3	..	4.05	..	0.00
> Curr Yr ...	0.00	....	1	..	0.70	..	0.00




A quick look at financials tells me not to bother WSA debt 63% ROE 8.3% to wade into this one put RR at 20+ thats the sort of return you need to justify the risk - with stats like this I wouldnt buy it - there are plenty of sound well managed stocks with the runs on the board.
As COK it has potential but no performance figures as RM says if you can't really value it etc! ROE 0.8% but no debt watch it for a couple years it may lock in improved performances. 
Basically you need good ROE low debt and a record of improving performance before you bother.
MAP is a share I purchased before I got started on this routine - I would never buy it now but I hung on until I got a profit at $3.11 and jumped ship. I'd rather have cash than be in this company right now as an example - may come good over time but there better businesses.


----------



## kermit345

As Bunter has said RT, you need to be wary of a companies debt/equity and their forecasted EPS as well as the required return that your using. For example the reason for such a large jump in IV for your WSA calcs is that you have EPS increasing a very large about, and have your RR at just 10%.

If you take the conservative view and reduce the forecasted EPS by say 10-15% and then also increase your RR due to the high debt to something like 13-14% i'd imagine you will see that IV reduce quite a bit. Even more so if you maintain a 75% Payout Ratio. Try changing the following figures and see what you come up with as the forecasted IV:

EPS - 0.58
RR - 13.5
DPS - 0.43

At least this will give you a more conservative IV and then if it surprises to the upside, they will be in a better position then you thought/calculated.

Not sure if either of you have read my previous posts on ASF but as a rule of thumb for my own value investment calcs. I don't generally look at something unless it has ROE > 15%, D/E < 30% and a market cap about $100 mill. I actually filter on Etrade using these factors to identify companies ill research first, and typically a lot of them are high ranking companies through Roger's MQR system. Most of his A1's are there.


----------



## RogueTrader273

Actually one miner I do like from a risk/reward situation is AVQ, a $40 million co'y which recently gained 80% rights to a $60 billion resource.  The speculation factor has been largely reduced since it's been known for many years that the resource actually exists.  It being a miner though I doubt Roger would consider it.

Re my previous post I'm just plugging in random companies I hear about now that I've done Roger's A1's (not seriously considering the ones I mentioned) - am I missing any from this list? : 

A1's:
Monadelphous	MND
Forge Group	FGE
Carsales	CRZ
DWS Advanced	DWS
SMS Management	SMX
Navitas	NVT
JB Hi Fi	JBH
Cochlear	COH
Matrix C & E	MCE
Ross Human Directions	RHD
Lycopodium	LYL
REA Group	REA
Fleewtood	FWD
Blackmores	BKL
Thorn Group	TGA
Webjet	WEB
Fiducian Portfolio Services	FPS

A2's	
CSL	CSL
The Reject Shop	TRS
Dominos Pizza	DMP
Credit Corp	CCP
Slater & Gordon	SGH
Commonwealth Bank	CBA
Oakton	OKN
ITX Group	ITX
News Corp	NWS
West Australian Newspapers	WAN
Computershare	CPU


----------



## Odeon

Hi All

First time poster here.

I was putting together a quick spreadsheet to do Roger's IV calculation and stumbled upon this thread whilst looking for the underlying formula to table 11.2. 

Since I then found that you guys have posted a spreadsheet to do the same thing, I downloaded it to take a peek. One thing I noticed in the discussion and the spreadsheet that doesn't appear to have been picked up is the change in the formula used by Roger to calculate table 11.2. 

whilst he does seem to use ROE/RR^1.8 for most values, for low values of ROE, he appears to actually use ROE/RR^2.2. Whilst this wouldn't affect most companies adhering to Roger's criteria (with high ROE) it does affect a couple of examples I noticed in the most recent version of the spreadsheet posted above by RogueTrader (for example STO with a ROE of 5%).

I have attached an image (i hope) which shows the values in the table for which the different power applies.

My apologies if this has been addressed elsewhere in the thread, I have only had the time to skim through the posts.


----------



## RogueTrader273

Well spotted Odeon! Good to see someone's checking my figures.  Here's the new improved version:

http://www.sendspace.com/file/w4yswx


----------



## RogueTrader273

Thanks Kermit, with those figures I now show:

*Code:	WSA	.....Price: 	5.80	* 

*INPUT:	* 
*...........	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
Next Yr .	1.43	..	180.00	...	0.223	..	0.688	..	13
Curr Yr ..	0.96	..	179.70	...	0.430	..	0.580	..	13
Prior Yr ..	0.77	..	178.90						

*OUTPUT:	* 
*.............	IV:	....	ROE	..	NPAT	....	POR* 
Next Yr ..	16.28	...	58	..	123.84	..	0.32		
Curr Yr ...	8.42	....	67	..	104.23	..	0.74

and with an RR of 14:

*Code:	WSA	.....Price: 	5.80	* 

*INPUT:	* 
*...........	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
Next Yr .	1.43	..	180.00	...	0.223	..	0.688	..	14
Curr Yr ..	0.96	..	179.70	...	0.430	..	0.580	..	14
Prior Yr ..	0.77	..	178.90						

*OUTPUT:	* 
*.............	IV:	....	ROE	..	NPAT	....	POR* 
Next Yr ..	14.35	...	58	..	123.84	..	0.32		
Curr Yr ...	7.56	....	67	..	104.23	..	0.74

Is that anything close to what you get?


----------



## kermit345

I haven't calculated the IV myself and don't use Roger's formula anyway. However I suggest you maintain the same payout ratio in the forecasted year as well, unless there is significant evidence to suggest it will be reduced for some reason?

Essentially what you've placed in your most recent set of calculations as the 'Current Year' is what i'd suggest to be a conservative view of the 'Forecasted Year' however after looking at the results using a RR of 13, i'd suggest using an RR of 14 or 15 given the D/E ratio of the company, 13 was previously a guess but to be more conservative stick with 14 or 15 for this situation I think.

I can't really provide my IV in relation to this company as my valuation model isn't suited to companies with a D/E ratio above 30%. If your looking down the value investing route i'd suggest looking at companies with less debt and more sustained cash flows & ROE.


----------



## RogueTrader273

Thanks again kermit!
Yes I'm not considering buying this one either, as like RM I don't like the debt, just doing it as an exercise.  I think I see what you're saying about the POR, it's certainly greatly reduced from the Current Yr in Next Year's data.  My POR is calculated by using the forecast EPS and DPS data from Etrade, so in this case to get the POR for next year the same as Curr Yr I'd have to change Etrade's forecast DPS from 22.3c to 51c (or change the #Shares and EPS I suppose.)  Would you tend to do that or something
else? Here's how it looks anyway:

*Code:	WSA	.....Price: 	5.80	* 

*INPUT:	* 
*............	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
Next Yr ..	1.14	..	180.00	...	0.510	..	0.688	..	14
Curr Yr ...	0.96	..	179.70	...	0.430	..	0.580	..	14
Prior Yr ...	0.77	..	178.90						

*OUTPUT:	* 
*.............	IV:	....	ROE	..	NPAT	....	POR* 
Next Yr ..	8.78	...	66	..	123.84	..	0.74		
Curr Yr ...	7.56	....	67	..	104.23	..	0.74


----------



## kermit345

I'd maintain everything the same as what Etrade provides you except maintain the payout ratio at the current ratio. So essentially everything remains the same except you apply last years POR of 74% against the forecast EPS and change the DPS figure. Everything else should remain as is forecasted.

That way if they pay out less in DPS your IV will surprise to the upside, IF they can re-invest the earnings and maintain a decent ROE. Of course the reverse is true if for some reason they decided to pay out all earnings.


----------



## RogueTrader273

Thanks kermit, are you saying then to always change the figures to make the POR about the same as the previous year?  I can see the sense behind that, though this seems to be different to Roger's method where he simply plugs the analyst's DPS and EPS figures in.

Also btw I just had another look at Etrade and WSA figures are now:

....  Curr 2011 2012 
EPS 8.0 68.8 65.8 
DPS 6.0 22.3 24.8

If I simply plug those figures in I get the following, which really looks weird:

*Code:	WSA	.....Price: 	6.03	* 

*INPUT:	* 
*............	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
Next Yr ..	1.43	..	180.00	...	0.223	..	0.688	..	14
Curr Yr ...	0.96	..	179.70	...	0.060	..	0.080	..	14
Prior Yr ...	0.77	..	178.90						

*OUTPUT:	* 
*.............	IV:	....	ROE	..	NPAT	....	POR* 
Next Yr ..	14.35	...	58	..	123.84	..	32%		
Curr Yr ...	0.55	....	9	....	14.38	...	75%


----------



## notabclearning

when imputting numbers it seem like the net profit is not being worked out properly


----------



## RogueTrader273

notabclearning said:


> when imputting numbers it seem like the net profit is not being worked out properly




Easy to check:  NPAT = EPS x #Shares


----------



## titus

Hi all
I’m basically still a Value-able noob so I hope I can ask for some guidance on calculating IVs.  When simply plugging in numbers in the formula, you need 5 components:
1.	NPAT
2.	Equity
3.	Last year’s equity
4.	No. of shares
5.	Dividends (to calculate the POR)

I was quite happily calculating *future* IVs using these figures in the formula but then came across a comment on RM’s blog site that hadn’t previously considered.  That is, if the company’s ‘implied growth rate’ (see p111-112 in Value-able) is too high (and therefore probably unsustainable), you need to increase the POR to a more ‘realistic’ level.  Now because POR is a calculated value, not one of the 5 input values, this involves changing the dividends (per share) figure to a value which gives a more ‘realistic’ POR.

So it seems like it is not simply enough to plug in the forecast DPS figures as these analyst forecast figures do not take into consideration, that the ‘implied growth rate’ may be too high.  Or do they?

Have I read this correctly?  Is this what we should be doing?  I understand that what one calls ‘realistic’ as I’ve used above is an exercise in judgement so it really sounds like calculating future IVs is more of an art than science.

If anyone can help, that would be most appreciated as I’m sure we all know, even a slight change in figures can significantly affect IVs.  Cheers.


----------



## Bunter221

titus said:


> Hi all
> I’m basically still a Value-able noob so I hope I can ask for some guidance on calculating IVs.  When simply plugging in numbers in the formula, you need 5 components:
> 1.	NPAT
> 2.	Equity
> 3.	Last year’s equity
> 4.	No. of shares
> 5.	Dividends (to calculate the POR)
> 
> I was quite happily calculating *future* IVs using these figures in the formula but then came across a comment on RM’s blog site that hadn’t previously considered.  That is, if the company’s ‘implied growth rate’ (see p111-112 in Value-able) is too high (and therefore probably unsustainable), you need to increase the POR to a more ‘realistic’ level.  Now because POR is a calculated value, not one of the 5 input values, this involves changing the dividends (per share) figure to a value which gives a more ‘realistic’ POR.
> 
> So it seems like it is not simply enough to plug in the forecast DPS figures as these analyst forecast figures do not take into consideration, that the ‘implied growth rate’ may be too high.  Or do they?
> 
> Have I read this correctly?  Is this what we should be doing?  I understand that what one calls ‘realistic’ as I’ve used above is an exercise in judgement so it really sounds like calculating future IVs is more of an art than science.
> 
> If anyone can help, that would be most appreciated as I’m sure we all know, even a slight change in figures can significantly affect IVs.  Cheers.




It’s not an exact science but POR inputs when incorrect give a big variation in the IV. 

Most financial pages give the information you need without too much recalculation. Equity use Book Value, they give POR (that when I check are the same as you calculate), shares outstanding, Earnings per share and dividend per share, future years can be forecast ahead using calculation but be realistic look at most shares growth in any aspect will be basically linear and follow past trends unless something major occurs. NPAT is listed there as well, no need to reinvent the wheel.

ORL is a good example forecasts would have shown continued increases in all aspects and then the company gives a report that doesn’t align with forecasts so bit of confidence is lost in the stock. 

Low debt and high ROE enable the setting of a lower RR as there is less risk involved in owning that stock.  Hope that helps!


----------



## stargazer

Hi all

This Value-able book was very dissappointing for me.   thats what i got out of it.



Cheers
SG


----------



## kermit345

Titus/RT,

As Bunter has commented, its probably not best to simply rely on the consensus forecasts of brokers etc. For instance in the case of WSA you have to grasp an understand of WHY the EPS is going to change to dramatically that it causes such an increase in IV or WHY the EPS was so bad last year and what caused this drop when it is usually x or y.

If you simply grab the figures off of a website, plug them in and hope your valuation problems are solved forever your going to be bitterly disapointed. For instance RogueTrader in the case of WSA you need to understand, even if its a little, about why the EPS and DPS would change so dramatically. Is this due to ompimistic forecasts of what they may achieve this year? Are they recovering from what was an awful year last year?

I haven't looked at WSA myself so I can't answer these for you. However on the face of it there does look to be something there that needs further explanation (i.e. they are ramping up which means a large EPS increase, or last year was an extremely bad year). Look at the POR of the previous 3-5 years if possible and make an assumption for the purposes of your forecast POR based on this. If they have not been paying dividends for this long, then you take the view of being more conservative with your IV so use a higher POR (i.e. the 74% of curent year instead of the 32% forecasted). Adjust your DPS accordingly and then at least your mind can be put at ease knowing you've calculated a forecast IV which is more on the conservative side with potential for upside.

I'm not saying this is 100% the correct way to go about it, but rather the path I would take to ensure that you don't have large discrepencies in IV such as you've calculated for WSA RT. I hope this makes sense as we've kinda covered this POR stuff for a few posts now.

My 2 main thoughts would be, think of the WHY behind large changes in EPS/DPS and ensure that any IV calcs are possibly adjusted for the more conservative outlook on a company rather the optimistic, PARTICULARLY companies with volatility and/or higher debt.

Hope that helps.


----------



## titus

Hi

Thanks for your replies.  Calculating future IVs certainly is the most challenging for me as you need to understand why these consensus forecasts are what they are.  Next time I'll certainly question the analysts' forecast EPS and DPS.  Cheers


----------



## kermit345

An anylsts forecasts may well be in line with the companies growth pattern in earnings over a number of years, or it may be in line with other companies within the sectors earnings growth for a forecasted basis.

It's not necessarily that the analysts or consensus is wrong, they get paid to make those forecasts. However its about knowing yourself in your own mind that those forecasts or figures you use will accurately represent where to company is heading or potentially heading.

Satisfy yourself rather then trusting the bloodsucking analysts haha. happy valuing!

p.s. would be interested to see what IV's you come up with in regards to FGE and MML, two of my favourites.


----------



## RogueTrader273

Some good points kermit, though aren't analysts supposed to get paid to visit companies and talk to management, something us amateurs can't really do?  Of course I know they don't always, so maybe you have to assess the quality of the analyst?  No wonder so many people give up and turn to charts... 

MML looks interesting, what do you think of my results? (Etrade give 12.3c for the 2011 DPS, but I changed it to 7.4c to keep a similar POR) :

*Code:	MML	.....Price: 	7.24	* 

*INPUT:	* 
*............	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
Next Yr ..	1.58	..	187.50	...	0.074	..	0.554	..	14
Curr Yr ...	1.10	..	187.50	...	0.059	..	0.442	..	14
Prior Yr ...	0.71	..	185.60						

*OUTPUT:	* 
*.............	IV:	....	ROE	..	NPAT	....	POR* 
Next Yr ..	10.09	...	41	..	103.88	..	13%		
Curr Yr ...	9.60	....	49	..	82.88	..	13%		


And FGE had a 2011 DPS of 9c, I changed it to 8c (what's a good RR here?):

*Code:	FGE	.....Price: 	6.50	* 

*INPUT:	* 
*............	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
Next Yr ..	1.57	..	78.80	...	0.080	..	0.456	..	12
Curr Yr ...	1.19	..	78.80	...	0.070	..	0.397	..	12
Prior Yr ...	0.71	..	68.30						

*OUTPUT:	* 
*.............	IV:	....	ROE	..	NPAT	....	POR* 
Next Yr ..	8.73	...	33	...	35.93	..	18%		
Curr Yr ...	10.93	..	44	..	31.28	..	18%


----------



## kermit345

RogueTrader I probably should have explained myself a little better in terms of the POR and dividends. Remember that a higher POR or dividend will provide a lower IV and hence a more conservative estimation. POR's in general will be around the 50-75% range for most company's as they head towards maturity as a POR of 10-30% cannot be maintained as the company will simply accumulate cash with no other ways of growing the business at previous Returns on Equity.

So in terms of both the cases below it is probably best to retain the brokers/analysts dividend forecasts, sorry if this adds to the confusion. Just remember to review your inputs on a case by case basis and remember the effect these inputs have on your IV's.

In terms of MML your IV's are reasonably close to mine I believe (not at home currently so can't confirm) and show the effect their low cost high margin mining has on earnings. With expansions planned and costs unlikely to move higher coupled with what seems a rising gold price, gives a good indication that the SP has potential to head north. One thing to note is that this is almost like betting on gold to retain current price or head further north, so take that risk into consideration.

Your IV's for FGE are interesting and from memory a little different to mine. Particularly that you see IV declining after the current year. I think this is due to the large change you have in EQps. If I get the chance tonight i'll provide my IV's for both of these companies.


----------



## titus

My IVs for FGE for 2010 and 2011 are pretty much close to RT's IV.  I've used the Commsec 2011 forecast EPS and DPS as per below (for the 2011 IV):
EPS = 45.6c
DPS = 9c

which give the same NPAT and POR figures as RT.


----------



## bigdog

Was the IV for CCV Cash Converters?

today EZCROP (32.8% CCV shareholder) offered 91 cent per share.


News article:

http://www.wabusinessnews.com.au/en-...=article_click

Cash Converters enters US alliance
22-March-11 by AAP


Pawn broker Cash Converters International will sell majority ownership in the company as part of a strategic relationship to be formed with US-based EZCORP.

The strategic alliance is to develop and introduce a suite of financial services products under the Cash Converters brand globally, Perth-based Cash Converters said in a statement.

As part of the alliance, EZCORP will buy 30 per cent of Cash Converters shares it doesn't already own, taking its stake in the Australian company to a controlling 53 per cent.

EZCORP is offering 91 cents cash per share, which is a 9.6 per cent premium to Cash Converters' last closing price of 83 cents per share.

EZCORP's offer is worth a total $70 million and will be completed through a scheme of arrangement..

Cash Converters said it had formed an independent board committee, excluding the EZCORP nominees of the board, to consider the offer.

The independent committee unanimously supports the proposed offer, in the absence of a superior proposal.

Cash Converters chief executive Peter Cumins said EZCORP had already been a good partner and the alliance would enhance the relationship.

"By giving us access to EZCORP's financial resources, management expertise and systems, this strategic alliance both expands and accellerates our strategic growth plan, opening up many new opportunities for Cash Converters," he said.

EZCORP CEO Paul Rothamel said Cash Converters had a great business model and brand.

"Having it recognised in 21 countries accellerates our long-term strategic goal of being a global provider of integrated financial solutions to our customer demographic," he said.


----------



## RogueTrader273

kermit345 said:


> RogueTrader I probably should have explained myself a little better in terms of the POR and dividends. Remember that a higher POR or dividend will provide a lower IV and hence a more conservative estimation. POR's in general will be around the 50-75% range for most company's as they head towards maturity as a POR of 10-30% cannot be maintained as the company will simply accumulate cash with no other ways of growing the business at previous Returns on Equity.
> 
> So in terms of both the cases below it is probably best to retain the brokers/analysts dividend forecasts, sorry if this adds to the confusion. Just remember to review your inputs on a case by case basis and remember the effect these inputs have on your IV's.
> 
> In terms of MML your IV's are reasonably close to mine I believe (not at home currently so can't confirm) and show the effect their low cost high margin mining has on earnings. With expansions planned and costs unlikely to move higher coupled with what seems a rising gold price, gives a good indication that the SP has potential to head north. One thing to note is that this is almost like betting on gold to retain current price or head further north, so take that risk into consideration.
> 
> Your IV's for FGE are interesting and from memory a little different to mine. Particularly that you see IV declining after the current year. I think this is due to the large change you have in EQps. If I get the chance tonight i'll provide my IV's for both of these companies.




Hi kermit, yes I'm starting to get more of a feel for which numbers can be tweaked or investigated further, up until lately I was mainly a technical trader.  How many years into the future do you forecast on your spreadsheet?  I'm planning to add at least one extra year once I'm sure mine is giving reasonably correct results.


----------



## rogerd

kermit345 said:


> RogueTrader I probably should have explained myself a little better in terms of the POR and dividends. Remember that a higher POR or dividend will provide a lower IV and hence a more conservative estimation. POR's in general will be around the 50-75% range for most company's as they head towards maturity as a POR of 10-30% cannot be maintained as the company will simply accumulate cash with no other ways of growing the business at previous Returns on Equity.
> 
> So in terms of both the cases below it is probably best to retain the brokers/analysts dividend forecasts, sorry if this adds to the confusion. Just remember to review your inputs on a case by case basis and remember the effect these inputs have on your IV's.
> 
> In terms of MML your IV's are reasonably close to mine I believe (not at home currently so can't confirm) and show the effect their low cost high margin mining has on earnings. With expansions planned and costs unlikely to move higher coupled with what seems a rising gold price, gives a good indication that the SP has potential to head north. One thing to note is that this is almost like betting on gold to retain current price or head further north, so take that risk into consideration.
> 
> Your IV's for FGE are interesting and from memory a little different to mine. Particularly that you see IV declining after the current year. I think this is due to the large change you have in EQps. If I get the chance tonight i'll provide my IV's for both of these companies.




Not sure how RT derived his future IV, but that looks a little off for me. Did you add the change in EQPS over the time period calculate given the lower ROE? Looks like you used the same EQPS from a quick glance.


----------



## RogueTrader273

Here's the latest version of my IV Calculator, try it out for yourself:

http://www.sendspace.com/file/uskj59


----------



## kermit345

Only just remembered to check my spreadsheet before bed to post figures here. At the moment my spreadsheet only looks 1 year forward. 2 years could be implemented however i think it provides more noise then guidance as a lot can change within 3 months rather then 2 years.

My FGE valuations:

Current Year - $7.40
Forecast - $9.80

My MML valuations:

Current Year - $9.19
Forecast - $13.02

My MML ones probably need some adjustments. I rate MML very highly and think their earnings will continue to expand both via current mine expansion and exploration. I think the EPS and DPS figures I use are same as you RT as we both get them from etrade. However I used the DPS of 12c from etrade for MML.


----------



## Intrinsic Value

RogueTrader273 said:


> Some good points kermit, though aren't analysts supposed to get paid to visit companies and talk to management, something us amateurs can't really do?  Of course I know they don't always, so maybe you have to assess the quality of the analyst?  No wonder so many people give up and turn to charts...
> 
> MML looks interesting, what do you think of my results? (Etrade give 12.3c for the 2011 DPS, but I changed it to 7.4c to keep a similar POR) :
> 
> *Code:	MML	.....Price: 	7.24	*
> 
> *INPUT:	*
> 
> 
> 
> 
> *............	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
> Next Yr ..	1.58	..	187.50	...	0.074	..	0.554	..	14
> Curr Yr ...	1.10	..	187.50	...	0.059	..	0.442	..	14
> Prior Yr ...	0.71	..	185.60
> 
> *OUTPUT:	*
> *.............	IV:	....	ROE	..	NPAT	....	POR*
> Next Yr ..	10.09	...	41	..	103.88	..	13%
> Curr Yr ...	9.60	....	49	..	82.88	..	13%
> 
> 
> And FGE had a 2011 DPS of 9c, I changed it to 8c (what's a good RR here?):
> 
> *Code:	FGE	.....Price: 	6.50	*
> 
> *INPUT:	*
> *............	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
> Next Yr ..	1.57	..	78.80	...	0.080	..	0.456	..	12
> Curr Yr ...	1.19	..	78.80	...	0.070	..	0.397	..	12
> Prior Yr ...	0.71	..	68.30
> 
> *OUTPUT:	*
> *.............	IV:	....	ROE	..	NPAT	....	POR*
> Next Yr ..	8.73	...	33	...	35.93	..	18%
> Curr Yr ...	10.93	..	44	..	31.28	..	18%




I think your figures are a little optimistic for FGE.

I am not sure how you calcualted your ROE but my ROE is around 30 for this year.

What figure are you using for average equity?

With a RR of 11 I get 7.21 for FGE this year.


----------



## RogueTrader273

Actually kermit for NPAT I was using EPS x #Shares, but now I see in the balance sheet that that gives 'Net Profit before abnormals' which is a higher figure than the NPAT they give.  What have you been doing for NPAT?  Plugging that figure in I get:

*Code:	FGE	* 
*Price: 	6.50	* 

*INPUT:	* 
*............	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
Next Yr ..	1.56	..	78.80	...	0.090	..	0.456	..	12
Curr Yr ...	1.19	..	78.80	...	0.070	..	0.397	..	12
Prior Yr ...	0.71	..	68.30						

*OUTPUT:	* 
*.............	IV:	....	ROE	..	NPAT	..	POR* 
Next Yr ..	8.56	...	33	..	35.93	..	20%		
Curr Yr ...	9.67	...	41	..	29.50	..	18%		

Re ROE query I use RM's formula of NPAT/ Avge of Curr and Prior Yr Equity.


----------



## RogueTrader273

And entering NPAT the same way from the balance sheet for MML (and using RR of 14) I get the following now:

*Code:	MML	* 
*Price: 	7.16	* 

*INPUT:	* 
*............	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
Next Yr ..	1.53	..	187.50	...	0.123	..	0.554	..	14
Curr Yr ...	1.10	..	187.50	...	0.059	..	0.442	..	14
Prior Yr ...	0.71	..	185.60						

*OUTPUT:	* 
*.............	IV:	....	ROE	..	NPAT	..	POR* 
Next Yr ..	9.62	...	42	..	103.88	..	22%		
Curr Yr ...	8.59	....	46	..	77.20	..	13%


----------



## titus

For FGE, I'd be interested in what others get too as like RogueTrader I get a falling IV from 2010 to 2011.

My figures are basically the same as RT's but I am using:
2010: NPAT = 31 (off Commsec 's Net Profit before abnormals figure).  This in turns increases the ROE, EPS and EqPS figures from RT's output figures
2011: NPAT = 39 (estimated from the half yearly report.  They reported half yr profit as $20m so I added 20 to the original projected half yr of 19).  Also, shares outstanding = 82.8m (as per the half yearly report, up from 78.8m) and dividends = 9c per share (in the half yearly report they paid 5c per share in the half year plus they announced an upcoming 4c per share).

I calc my ROE the same as RT's i.e. NPAT/(av Equity).  However for the lookup ROE figure for the table, I round down to the nearest 2.5% (e.g. ROE of 44% gets a ROE lookup table value of 42.5%)

So my IVs, using 12% RR are 2010: $10.19 and 2011:$9.53.  If someone gets anything drastically different than I'd be interested in how as it probably means I screwed it along the way


----------



## VSntchr

I think the important thing you guys may be missing is that for 2010 using average equity may not be suitable. This is because ending equity is quite a big larger than beginning equity...and as such a higher estimate of equity may be suitable.

Even after doubling my POR for 2011 (I dont think it will double but may come close..and plus POR wont stay low for ever...so you must factor this into your valuation ) I still get a 20% increase in forecast IV.


----------



## cm5762

RogueTrader273 said:


> And entering NPAT the same way from the balance sheet for MML (and using RR of 14) I get the following now:
> 
> *Code:	MML	*
> *Price: 	7.16	*
> 
> *INPUT:	*
> *............	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
> Next Yr ..	1.53	..	187.50	...	0.123	..	0.554	..	14
> Curr Yr ...	1.10	..	187.50	...	0.059	..	0.442	..	14
> Prior Yr ...	0.71	..	185.60
> 
> 
> *OUTPUT:	*
> *.............	IV:	....	ROE	..	NPAT	..	POR*
> Next Yr ..	9.62	...	42	..	103.88	..	22%
> Curr Yr ...	8.59	....	46	..	77.20	..	13%






Hi, Just wanted to query your prior year book value of 71c is at June 2009, 1.10 is at June 2010, if we are calculating for (current year) June 2011, should the prior year starting point be 1.10, sorry I am a bit confused. Many thanks for the calculator it has been a great help.


----------



## RogueTrader273

cm5762 said:


> Hi, Just wanted to query your prior year book value of 71c is at June 2009, 1.10 is at June 2010, if we are calculating for (current year) June 2011, should the prior year starting point be 1.10, sorry I am a bit confused. Many thanks for the calculator it has been a great help.




Hi cm, maybe one of the valuation experts here could answer that, I'm mainly a spreadsheet guy new to valuing coy's, so don't take any results you get from my sheet as gospel.


----------



## Intrinsic Value

I was looking at RMs blog today and noticed he had his IV for FGE this year which is around 7.35 which is about the same as i get and also for MCE it is around the same as I get as well.

BTW Their margins of safety are quite thin now. 13percent for FGE and 8 percent for Matrix.

He is also has another couple of new stocks, CDA and ZGL which might be worth a look.


----------



## titus

Intrinsic Value said:


> He is also has another couple of new stocks, CDA and ZGL which might be worth a look.




Ah, the power of RM!  I see both stocks are up considerably this morning especially CDA.

Intrinsic Value, are you able to share your input values for FGE to get a 2011 IV of $7.35?  I still get mine around $9.53 and I'm thinking I may need to increase my POR a little (I currently have it at around 19%)

Cheers


----------



## VSntchr

Has anyone here read Brian Mcniven's book on value investing?
It was published long before RM's book...and if you read Brian's you will find it hard to see that RM hasn't just copied the book but simply marketed it a hell of a lot better...

Whilst RM is viewed as a god by many of his 'students' and blog participants...it is important to remember that everyone must do their own research...by building up the image that he has..all he has to do now is buy a stock then recommend it...and he can make an easy 10 - 30% in a day...

Im not dissing RM, but what I am saying is that too many people appear to be blindly following what he says, which is largely due to how he has gone about marketing himself and his methods...
To get an alternative view check out what happened with RM and how he had a falling out with Clime Capital...a lot of bridges burnt there and definitely another side to the story!


----------



## Intrinsic Value

titus said:


> Ah, the power of RM!  I see both stocks are up considerably this morning especially CDA.
> 
> Intrinsic Value, are you able to share your input values for FGE to get a 2011 IV of $7.35?  I still get mine around $9.53 and I'm thinking I may need to increase my POR a little (I currently have it at around 19%)
> 
> Cheers




I get 9.01 for next year.


----------



## Intrinsic Value

VSntchr said:


> Has anyone here read Brian Mcniven's book on value investing?
> It was published long before RM's book...and if you read Brian's you will find it hard to see that RM hasn't just copied the book but simply marketed it a hell of a lot better...
> 
> Whilst RM is viewed as a god by many of his 'students' and blog participants...it is important to remember that everyone must do their own research...by building up the image that he has..all he has to do now is buy a stock then recommend it...and he can make an easy 10 - 30% in a day...
> 
> Im not dissing RM, but what I am saying is that too many people appear to be blindly following what he says, which is largely due to how he has gone about marketing himself and his methods...
> To get an alternative view check out what happened with RM and how he had a falling out with Clime Capital...a lot of bridges burnt there and definitely another side to the story!




You are sort of right but the good thing about RM is that he has reached a whole new audience that now are starting to think more seriously about their investment strategies.
Most people would never have heard of value investing if there wasn't a RM type character to spruik it.

In the long term what RM says will have little effect on the share price. Yeah you might get a spike in short term but the fundamentals will eventually dictate the price.


----------



## ENP

http://www.your-roth-ira.com/calculating-a-stocks-intrinsic-value.html

Does anyone calculate intrinsic value like the link above?

What are the pros and cons of finding it out this way? Also what do you do different to the above method?


----------



## isplicer

Hi everyone,

I'm an 18 year old student studying medicine and tried to calculate my first IV last night, after reading Roger Montgomery's book - I ended up with a value close to $119 for BHP. Could anyone please confirm this?

Values used from report released by southern cross equities:

Shares on Issue:	5.52E+09
Equity	7.93E+10
roe	39
equity per share	14.37481884

The value did seem very far off, so I tried again with RIO and got something insane again (close to $200). I then tried wtih a few other companies and started getting pretty decent values, so I'm quite confident my methodology is correct. Also, my IV for FFF is 16c (now trading at 5.9c), and using the same method, my IV for WPL is well below its current trading price. The current multipliers I'm using are the ones from Roger's book. Comments/criticism appreciated - is there any way I can improve my method?

HOLDING: AUT, RIO, SXY and WPL


----------



## titus

isplicer said:


> Hi everyone,
> 
> I'm an 18 year old student studying medicine and tried to calculate my first IV last night, after reading Roger Montgomery's book - I ended up with a value close to $119 for BHP. Could anyone please confirm this?
> 
> Values used from report released by southern cross equities:
> 
> Shares on Issue:	5.52E+09
> Equity	7.93E+10
> roe	39
> equity per share	14.37481884
> 
> The value did seem very far off, so I tried again with RIO and got something insane again (close to $200). I then tried wtih a few other companies and started getting pretty decent values, so I'm quite confident my methodology is correct. Also, my IV for FFF is 16c (now trading at 5.9c), and using the same method, my IV for WPL is well below its current trading price. The current multipliers I'm using are the ones from Roger's book. Comments/criticism appreciated - is there any way I can improve my method?
> 
> HOLDING: AUT, RIO, SXY and WPL




I am by no means experienced in RM's IVs either but BHP was one company I did try out.  I have a 2010 IV of $36.75 but that was based on the FY 2010 figures and not on the H12011 update.  My inputs are different from yours (I get my figures from Commsec).  These are my inputs (the first 4 figures are in millions):
BOY Equity = 49240
EOY Equity = 56934
Shares on Issue = 5589
NPAT = 14629
DPS = 102.2c
RR = 12%

This gives an ROE of about 27%, a EPS of around 262c and a POR of around 40%. 

I haven't looked at the actual financial statements to confirm whether the Commsec figures are correct.

Hope that helps.


----------



## isplicer

Thanks a lot titus, your post was very helpful. 

I'm pretty sure you've used a different methodology to what I used - I just got the forecasted equity and divided it by the number of shares to find the equity per share. I used the forecasted ROE as well, which is 39.2% (I think that's where our calculations differed the most - I got my data from SCE research). Then I just consulted Roger's table for 10% return, and applied the multipliers whilst taking into account the payout ratio. We used the same equity (approx).

I notice that you generated your own ROE, and used NPAT and DPS in your calculations, none of which I've considered. Could you (or anyone else) please provide some input regarding how I should change my calculating method? I feel my current one (the exact method provided in the book) is a bit simplistic. I realise that I'm a beginner but I'm very keen to learn!


----------



## titus

isplicer said:


> Thanks a lot titus, your post was very helpful.
> 
> I'm pretty sure you've used a different methodology to what I used - I just got the forecasted equity and divided it by the number of shares to find the equity per share. I used the forecasted ROE as well, which is 39.2% (I think that's where our calculations differed the most - I got my data from SCE research). Then I just consulted Roger's table for 10% return, and applied the multipliers whilst taking into account the payout ratio. We used the same equity (approx).
> 
> I notice that you generated your own ROE, and used NPAT and DPS in your calculations, none of which I've considered. Could you (or anyone else) please provide some input regarding how I should change my calculating method? I feel my current one (the exact method provided in the book) is a bit simplistic. I realise that I'm a beginner but I'm very keen to learn!




Hi isplicer
Yes, my ROE, EPS and POR are calculated values derived from the 6 inputs.  My formula pretty much follows Ch11 of RM's book.  My ROE formula is NPAT/av Equity where av Equity = (BOY Equity + EOY Equity)/2.  Others use EOY only or BOY only or even a more weighted Equity for more accuracy.  By all means use the analysts' calculated ROE as an input but as RM said in his book, the given ROE may not be the same calculation as RM prefers (using av Equity as the denominator).  I think RM goes through a step by step working example in Ch11 using JB HiFi.

You may find the following link helpful in finding what I follow in using what inputs to use:
http://blog.rogermontgomery.com/how-do-your-value-able-valuations-compare/#comment-6865

For forecast IVs for future years, I use the same 6 inputs but instead of using declared figures off the annual report, you have to use forecast analysts' figures and best estimates.  This may help you:
http://blog.rogermontgomery.com/how-do-value-able-graduates-calculate-forecast-valuations-2/
Cheers


----------



## zac

Im curious as to why there are so many IV variations,
with my calcs and a 10%RR, for FGE I get $9.96 and $9.67 for next year.

MCE $19.22 and $13.03 for next year.
Not sure why its value dropped, i think the forecast profit yet raising equity may have something to do with it.


----------



## RogueTrader273

I get the following using Etrade data, please let me know if any of 
my calcs look wrong:

*Code:	BHP	* 
*Price: 	44.76	* 

*INPUT:	* 
*........	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
2012	17.28	..	5589.50	...	1.075	..	5.027	..	10
2011	13.33	..	5589.50	...	0.975	..	4.117	..	10
2010	10.19	..	5589.50	...	1.021	..	2.620	..	10
2009	8.85	..	5564.40						

*OUTPUT:	* 
*.........	IV:	....	ROE	..	NPAT	..	POR*
2012	112.13	...	33	..	28098.42	..	21%
2011	108.07	...	35	..	23011.97	..	24%
2010	50.80	....	28	..	14927.00	..	39%

and with an RR of 12:

*Code:	BHP	* 
*Price: 	44.76	* 

*INPUT:	* 
*........	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
2012	17.28	..	5589.50	...	1.075	..	5.027	..	12
2011	13.33	..	5589.50	...	0.975	..	4.117	..	12
2010	10.19	..	5589.50	...	1.021	..	2.620	..	12
2009	8.85	..	5564.40						

*OUTPUT:	* 
*.........	IV:	....	ROE	..	NPAT	..	POR*
2012	82.14	...	33	..	28098.42	..	21%
2011	79.08	...	35	..	23011.97	..	24%
2010	37.85	....	28	..	14927.00	..	39%


And for MCE (just plugging the numbers in, no idea why the POR for 2012 suddenly jumps up) :

*Code:	MCE	* 
*Price: 	9.15	* 

*INPUT:	* 
*........	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
2012	1.72	..	70.00	...	0.211	..	0.582	..	10
2011	1.35	..	70.00	...	0.070	..	0.559	..	10
2010	0.86	..	70.00	...	0.040	..	0.294	..	10
2009	0.00	..	64.00						

*OUTPUT:	* 
*.........	IV:	....	ROE	..	NPAT	..	POR*
2012	18.52	...	38	..	40.74	..	36%
2011	23.02	...	51	..	39.13	..	13%
2010	19.39	....	60	..	18.20	..	14%

and an RR of 12:

*Code:	MCE	* 
*Price: 	9.15	* 

*INPUT:	* 
*........	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
2012	1.72	..	70.00	...	0.211	..	0.582	..	12
2011	1.35	..	70.00	...	0.070	..	0.559	..	12
2010	0.86	..	70.00	...	0.040	..	0.294	..	12
2009	0.00	..	64.00						

*OUTPUT:	* 
*.........	IV:	....	ROE	..	NPAT	..	POR*
2012	13.60	...	38	..	40.74	..	36%
2011	16.68	...	51	..	39.13	..	13%
2010	14.05	....	60	..	18.20	..	14%

New spreadsheet version here:  http://www.sendspace.com/file/rmv7sx


----------



## zac

Hey there Rogue, Your IV's are slightly different to what I get.
Can I ask why you use a RR of 12 and 14????
I find that if I tweak the RR above 10 it makes the IV alot less and unrealistic.
Having said that I then add a Margin of Safety of 25%. I take it your margin of safety is less?
 my BHP iv is (with 10% RR)
2012  $113.81
2011  $97.02
2010  $45.26

for MCE iv is:- (10% RR)
2012  $13.03
2011  $19.22
2010  $5.86

Interesting why your MCE values are so much higher.
My data comes from BellDirect which is consistent i know with CommSec and CMC. Not sure about Etrade.


----------



## RogueTrader273

Hi Zac

I'm just using RM's rules for RR's - have you read his book? Billyb explains it here too in post #166: https://www.aussiestockforums.com/forums/showthread.php?t=20847&page=9

MOS is just the diff between the share price and the IV using RM's method.


----------



## zac

Yeah ive read the book.
Thanks for that link and as I thought RR is a return youd be content/happy with.
For now as im new to it im happy with 10% as thats more than any bank.
Altho because IV isnt static it obviously affects the RR.
so my rule of thumb as such for now is 10% RR with a safety margin of 25%. Looking at charts etc, it seems to be relatively on par with historic prices and performance.

Also the spreadsheet I use to workout IV, i go back as far as 2002 if the data allows it, then I can see how IV has changed through the years.
I hate just looking at a 3 year snapshot as such, but of course with companies such as FGE and MCE its all you get due to their recent listing on the ASX.


----------



## isplicer

Hi all,

Using the spreadsheet from roguetrader, I get the following for FFF:


*Code:	FFF	* 
*Price: 	0.06	* 

*INPUT:	* 
*............	EqPS 	..	Shares 	...	DPS 	...	EPS	...	RR*
2012	0.06	..	761.08	...	0.000	..	0.011	..	10
2011	0.05	..	761.08	...	0.000	..	0.011	..	10
2010	0.04	..	761.08	...	0.000	..	0.008	..	10
2009	0.01	..	761.08						

*OUTPUT:	* 
*.............	IV:	....	ROE	..	NPAT	..	POR* 
2012	0.27	...	21	..	8.37	..	0%		
2011	0.27	...	26	..	8.37	..	0%		
2010	0.19	....	25	..	4.80	..	0%		

The IV of 27c seems really, really extravagant, unless of course I'm doing something dead wrong. Data from report: 

Year end 30 June 2010 2011e  2012e 2013e
EBITDA (A$m) 9.1 16.3  18.1 20.4
NPAT (normalised) (A$m) 4.8 8.2  8.5 10.2
EPS (normalised) (cps) 0.8 1.1  1.1 1.3
EPS growth (%) 23% 40%  1% 20%
PER (x)  7.5 5.3  5.3 4.4
P/Book (x) 1.6 1.2  1.0 0.8
EV/EBITDA (x) 9.1 5.1  4.6 4.1
Dividend ( ¢ps) 0.0 0.0  0.0 0.0
Yield (%)  0% 0%  0% 0%
ROE (%)  18% 23%  19% 19%

Also, with the insane IV's of BHP doubling from 50 to 100+, does that mean we're likely to see a skyrocket this year? Sorry if my question sounds stupid, the figures are quite stunning and I'm just trying to straighten it all out.

Kindest Regards.


----------



## RogueTrader273

Big oops, found some errors in my spreadsheet affecting the 2012 results, new improved version here:  http://www.sendspace.com/file/9vd5bd

isplicer re FFF R.M. would probably use an RR of 14 (though it wouldn't come up in his scans because of that huge debt/equity ratio.)


----------



## isplicer

Interesting... according to my analyst's report RE FFF, the net debt in 2011 is forecast to be: 37.8M, with the shareholders equity being about 38M, equating to a debt/equity ratio of approximately 1:1 - isn't that acceptable, or am I calculating it completely and utterly wrong?

To add to my confusion, on my broker's page it says: Debt/Equity Ratio	153.80. Could someone kindly clear this up for me? That figure seems a tad alarming.

EDIT: Oh wait, the 153.8 seems to be a percentage figure, haha. Still, isn't that sort of an acceptable figure? And my calculations still say 1:1 or below, no idea where my broker got the 1.5:1 ratio

EDIT: thanks a lot for the updated spreadsheet roguetrader, your work is much appreciated. Also, could you please explain to me how you came to the conclusion that FFF should use an RR of 14%?


----------



## kermit345

isplicer, certainly not acceptable, not in the value investing terms of RM.

I won't even look at companies with greater then 30% D/E. Not sure about Roger's parameters but i'm almost certain he would value a company with D/E of 100% at $0.


----------



## RogueTrader273

Yes the word 'alarming' seems about right; which RR to use is moot as the debt level is off the charts.


----------



## isplicer

Roguetrader, could you please have a go at throwing down a valuation of SXY? I've had a go but am having trouble obtaining EPS forecasts. Please do let me know how you fare.


----------



## robusta

isplicer said:


> Roguetrader, could you please have a go at throwing down a valuation of SXY? I've had a go but am having trouble obtaining EPS forecasts. Please do let me know how you fare.




To obtain a EPS forecast the analyst will have to work out; resources reserves, cost of extraction, value of takeover of Stuart, future prices of resources....

The above IMO would contain too many variables and guestimates to value SXY without speculating.


----------



## RogueTrader273

Yes to value spec explorers you'd want one of those crystal ball thingy's;  RM wouldn't even look at it I'm afraid.  Though I don't ignore spec's myself, I bought into AVQ a few weeks ago at 3.1c when they were awarded the rights to a PROVEN resource, and again at 4.1c when they pulled back from their highs.  I also like MGO at the moment.


----------



## isplicer

RogueTrader273 said:


> Yes to value spec explorers you'd want one of those crystal ball thingy's;  RM wouldn't even look at it I'm afraid.  T




I suspect the same applies to AUT?


----------



## Bunter221

kermit345 said:


> isplicer, certainly not acceptable, not in the value investing terms of RM.
> 
> I won't even look at companies with greater then 30% D/E. Not sure about Roger's parameters but i'm almost certain he would value a company with D/E of 100% at $0.




I am in Kermits camp avoid high debt - 30% is a good place to separate the goodies from the baddies.
 FFF has 55% so you don't even bother to calculate IV there are lots of stocks with low debt!


----------



## Bunter221

isplicer said:


> Roguetrader, could you please have a go at throwing down a valuation of SXY? I've had a go but am having trouble obtaining EPS forecasts. Please do let me know how you fare.




Coming In -- SXY has an IV of 2 cents - just one look at the growth and ROE its hardly worth the effort. Debt less than 30% ROE better than 12% at least or look elsewhere!


----------



## Bunter221

isplicer said:


> I suspect the same applies to AUT?




AUT has no cash flow and no earnings haemorraging badly and a negative ROE. There are much better opportunities!


----------



## notabclearning

Hey guys I have just started a blog dedicated to value investing 

http://valueinvest101.blogspot.com/

I will be discussing various stocks and market situations on it and I invite you to share your views about any company.


----------



## sultanmudo

RogueTrader273 said:


> Big oops, found some errors in my spreadsheet affecting the 2012 results, new improved version here:  http://www.sendspace.com/file/9vd5bd
> 
> isplicer re FFF R.M. would probably use an RR of 14 (though it wouldn't come up in his scans because of that huge debt/equity ratio.)




Thanks RogueTrader.
Why are most columns in your spreadsheet set to 13 decimal places. I presume it's because it makes the values more precise.


----------



## notabclearning

Hey Guys,

Just posted a new blog post. Its about the current IPO market and im sharing a company I think is at a large discount to IV.

http://valueinvest101.blogspot.com/2011/04/ipo-delight.html

I encourage all to subscribe to my blog and will love to hear comments and further discussions.


----------



## tothemax6

Bunter221 said:


> AUT has no cash flow and no earnings haemorraging badly and a negative ROE. There are much better opportunities!



Its a different kind of company to that which Montgomery invests in. He is looking for companies with high current ROE with high prospects of expansion, and at a good price based on the ROE. This cannot include companies which by their very nature, take a long period of initial development (ROE below 0%), but which if successful completed, will have a massive ROE upon completion. That doesn't mean they can't be good buys, so long as the project is completed successfully and the stock price is valued against the expected earnings.


----------



## RogueTrader273

sultanmudo said:


> Thanks RogueTrader.
> Why are most columns in your spreadsheet set to 13 decimal places. I presume it's because it makes the values more precise.




I thought I'd formatted most columns to a max of 3 decimal places.  Are you referring to the Formula Bar?


----------



## RogueTrader273

New version of IV Calculator using cents instead of dollars for EPS and DPS to speed data entry.
Also used some AND and OR statements to check for missing or negative values:

http://www.sendspace.com/file/8fozkz


----------



## zac

Im surprised no one has incorporated an Excel sheet that can tabulate historic data also.
Ive just found as part of the analysis and for my requirements that the company IV should be on the rise, (atleast 70-80%) of the time.

For example yesterday I worked out VRL (Village) and altho its under its IV and appears to have low amounts of debt, im not happy with it, the way the IV has jumped around over the years.

2003  $2.72
2004  $3.17
2005  $0.85
2006  $2.83
2007  $3.47
2008  $4.64
2009  $5.31
2010  $0.69
2011  $10.58
2012  $11.44

Altho now that I look at it like this, there are only 2 bad years there 2005 & 2010. The rest are upward trends.
Still id need to further analyse the company. Now im intrigued.


----------



## zac

zac said:


> I
> 2003  $2.72
> 2004  $3.17
> 2005  $0.85
> 2006  $2.83
> 2007  $3.47
> 2008  $4.64
> 2009  $5.31
> 2010  $0.69
> 2011  $10.58
> 2012  $11.44




Please disregard all that, I realise now I was looking at the wrong stats. Those IV's are for ARP. No wonder I thought the results were pleasing lol and ARP I consider a good purchase if it gets under IV.

Anyway here are the correct quotes for VRL and I have VRL as trading well and truly under IV making it look like a good purchase but when you factor in the historic data and IV it looks more risky.
Here tis:-

2003  $8.37
2004  $1.74
2005  $4.61
2006  $(nil) due to loss
2007  $3.01
2008  $40.68
2009  $3.27
2010  $11.60
2011  $9.52

So as you see very erratic (im not sure ive done anything wrong with the calcs) but ive used the same source as I get all my calcs from.

Anyway there you have it, ive given IV's for 2 companies 

By the way I love this thread, im still new but would love somehow to be part of a brainstorming group. Investor chat group to research, discuss fundamentals and make decisions.


----------



## RogueTrader273

Have you found Roger's blog?  Plenty of investor chat there (much more than here so far):

http://blog.rogermontgomery.com/

Check out the 'comments' for chat, feedback etc.


----------



## zac

RogueTrader273 said:


> Have you found Roger's blog?  Plenty of investor chat there (much more than here so far):
> 
> http://blog.rogermontgomery.com/
> 
> Check out the 'comments' for chat, feedback etc.




Yeah I check that out all the time. 
Its not laid out very well and people can only comment on the relevant blog. So although useful, would be much nicer in a forum like this.


----------



## titus

I hate the way RM's blog comments are set out.  It's hard to find new comments that you haven't read before.  It's easier now in that brand new comments are at the top but if anyone replies to an existing comment, you still have to trawl through all the old comments.


----------



## zac

titus said:


> I hate the way RM's blog comments are set out.




Youd hope that one day maybe he creates a forum but I guess that will create more work for him.

Are there any other forums as popular as ASF, ive had a look and doesnt seem to be.
I really like brainstorming companies/decisions/fundamentals etc and find forums a great way to expand my own knowledge and that of others.


----------



## sultanmudo

RogueTrader273 said:


> I thought I'd formatted most columns to a max of 3 decimal places.  Are you referring to the 0.611156582832336?




Yes you are right. I meant to referto the Formula Bar. E.g., the cell at E3 for Hansen Tech shows as 0.611156582832336 in the Formula Bar.


----------



## notabclearning

titus said:


> I hate the way RM's blog comments are set out.  It's hard to find new comments that you haven't read before.  It's easier now in that brand new comments are at the top but if anyone replies to an existing comment, you still have to trawl through all the old comments.




I actually asked if about creating a forum but he insists on reviewing each comment made on his blog.


----------



## GG999

I haven't been able to understand why there is such an emphasis on return on equity rather than return on something else - such as assets or capital or 'invested capital'. 

Presumably it's not good if you buy a company with a high P/B but such a company might have a very high ROE simply because it's profits are compared to that small fraction of what it's using which is the shareholder's equity.

Once I've bought into a company shouldn't I care more about the profits compared to everything the company is using to make those profits? Why should it matter more to consider the profits compared to just the shareholder's equity? Is there any easy way to explain why ROC, ROCE etc is less important than ROE?

If everyone has considered this and think that it's obvious that you would use only ROE as input to calculating any sort of intrinsic value then I'm happy to just go along with the idea 
Many thanks for reading!


----------



## zac

Im new to all this as well, but just remember ROE is just 1 of the many calculations.
RM explained the importance of ROE, im not going to give the answer justice by commenting but something along the lines of, after all liabilities and factoring the size of the company, a good ROE means a strong company and less likely to bust or have any issues.

Even when IV is worked out properly, you shouldnt be relying on that to make your decisions, its just a piece of information in consideration with the rest, it will give you a good appreciation of what is an adequate price to buy shares at.


----------



## skc

GG999 said:


> I haven't been able to understand why there is such an emphasis on return on equity rather than return on something else - such as assets or capital or 'invested capital'.
> 
> Presumably it's not good if you buy a company with a high P/B but such a company might have a very high ROE simply because it's profits are compared to that small fraction of what it's using which is the shareholder's equity.
> 
> Once I've bought into a company shouldn't I care more about the profits compared to everything the company is using to make those profits? Why should it matter more to consider the profits compared to just the shareholder's equity? Is there any easy way to explain why ROC, ROCE etc is less important than ROE?
> 
> If everyone has considered this and think that it's obvious that you would use only ROE as input to calculating any sort of intrinsic value then I'm happy to just go along with the idea
> Many thanks for reading!




ROE is one of the most important measures in this sort of methodologies because you want the company to internally compound return for you. 

A high ROE means that for every $1 the company retains, it is able to earn a high return. Do that over a number of years and you have a snowball effect.

On the other hand, let's say a company has a really high Return on Assets. But the assets may require funds that are not adquately generated by the company itself. In such case they may have to raise capital or debt to purchase such assets. What you have then is only linear return (or simple interest), rather than internally compounded returns.


----------



## GG999

skc said:


> ROE is one of the most important measures in this sort of methodologies because you want the company to internally compound return for you.
> 
> A high ROE means that for every $1 the company retains, it is able to earn a high return. Do that over a number of years and you have a snowball effect.
> 
> On the other hand, let's say a company has a really high Return on Assets. But the assets may require funds that are not adquately generated by the company itself. In such case they may have to raise capital or debt to purchase such assets. What you have then is only linear return (or simple interest), rather than internally compounded returns.




Hi, I guess it must be something to do with that. It still doesn't make complete sense to me. 

Companies A and B manage a 10% return on invested capital.
Company A did it without taking on any debt, and so ROE is 10%
Company B needed a lot of debt, and has a ROE of 40%

We work out that the Intrinsic Value of Company B is much higher than company A.
I guess I must have misunderstood something along the way


----------



## notabclearning

GG999 said:


> Hi, I guess it must be something to do with that. It still doesn't make complete sense to me.
> 
> Companies A and B manage a 10% return on invested capital.
> Company A did it without taking on any debt, and so ROE is 10%
> Company B needed a lot of debt, and has a ROE of 40%
> 
> We work out that the Intrinsic Value of Company B is much higher than company A.
> I guess I must have misunderstood something along the way




Debt artificially increases ROE. Rule of thumb I use is a company should have 30% or less net debt to equity.


----------



## Tysonboss1

notabclearning said:


> Debt artificially increases ROE. Rule of thumb I use is a company should have 30% or less net debt to equity.




Off course that depends on the industry, and also the type of debt.

For example a company involved in long term infrastructure assets with regulated income that allows for charges above interest rates can sustain more debt. Or a company that has a high return on invested capital may suit higher debt if the debt is in the form of company issued 10 year bonds at low fixed interest. 

In my view debt is neither good or bad, and "rules of thumb" do not work. You have to make an assessment on each case.


----------



## zac

notabclearning said:


> Debt artificially increases ROE. Rule of thumb I use is a company should have 30% or less net debt to equity.




Which raises a good question as I get confused.
When calculating debt from the balance sheet. What are we looking for?
Total Liabilities, Long Term debt, or is there something else?


----------



## So_Cynical

zac said:


> Which raises a good question as I get confused.
> When calculating debt from the balance sheet. What are we looking for?
> Total Liabilities, Long Term debt, or is there something else?




You should be looking at all the debt, some where in all annual reports will be a debt maturity profile usually looking 5 years ahead showing debt maturity's for each year...over the last 18 months or so there have been quite a few easy money opportunity's buying into stocks that needed to refinance large debts with approaching maturity's.

Easy money as in believing that they will be able to refinance as Mr Market doesn't like the uncertainly of will they or wont they be able to refinance.


----------



## luckyforteja

I completed reading Value.able. Is their any other book that your guys suggest reading to nail down the concepts ?

Thanks in advance.


----------



## Tightwad

I have one called Streetsmart Guide to Valuing a Stock by mcgraw-hill... ive only skimmed it so far.


----------



## luckyforteja

Tightwad said:


> I have one called Streetsmart Guide to Valuing a Stock by mcgraw-hill... ive only skimmed it so far.




Thanks for your reply. I will definitely have look at it. Let us know if its a good read.

Thanks for your prompt reply


----------



## kermit345

Hi guys,

I've posted previously here some of my favourites and their IV's that I currently had for each. Thought i'd do a little follow up post as they have moved a bit recently and are approaching my current IV's. Also interested if anyone else has had some success lately with the recent run in stocks approaching their IV's?

I bought into FGE @ $6.30 with an IV of $7.40. Its now moved to $6.90 and approaching my current IV. Will be interesting to see where it goes from here and if there is any small market pullback if FGE can hold or falls as well.

I bought into MML @ $6.90 with an IV of $9.19. Its now moved to $8.26 with lots of recent momentum both due to the gold price and recent exploration results. Will be interesting to see how the MML share price moves should gold pullback slightly, or how high it can go if gold continues to run towards $1,500 / ounce. Lot's of earning potential here the longer that gold remains at $1,400+.

Interested in other peoples succesful value investments of recent times. These are the only two stocks i've purchased using my own valuation method and after they were a bit shakey to begin with looks like the recent makret uptrend has carried them towards my IV's.


----------



## VSntchr

kermit345 said:


> Hi guys,
> 
> Interested in other peoples succesful value investments of recent times. These are the only two stocks i've purchased using my own valuation method and after they were a bit shakey to begin with looks like the recent makret uptrend has carried them towards my IV's.




I got into TSM at $0.68 with a projected value of over $0.80. They have deals with the category killers in Australia (JB Hi-Fi, Woolies) and I beleive the expansion in the UK will prove fruitfull in coming years..


----------



## skc

zac said:


> Which raises a good question as I get confused.
> When calculating debt from the balance sheet. What are we looking for?
> Total Liabilities, Long Term debt, or is there something else?




Only interest bearing debt. 

Liabilities like provisions, payables etc can be left out imo.


----------



## skc

GG999 said:


> Hi, I guess it must be something to do with that. It still doesn't make complete sense to me.
> 
> Companies A and B manage a 10% return on invested capital.
> Company A did it without taking on any debt, and so ROE is 10%
> Company B needed a lot of debt, and has a ROE of 40%
> 
> We work out that the Intrinsic Value of Company B is much higher than company A.
> I guess I must have misunderstood something along the way




Correct. All things being equal. Leverage increases ROE and makes a company more valuable. 

But all things are rarely equal. Companies in different industries have different levels of debt that are deemed appropriate. Companies in the same industries have different operating efficiencies and margins so their ROE / ROC are different on those grounds.


----------



## Bobcol

RM mentioned CCV positively on his blog today , I guess tomorrow we will see the price go up again on what will possibly be another negative day.


----------



## Intrinsic Value

Bobcol said:


> RM mentioned CCV positively on his blog today , I guess tomorrow we will see the price go up again on what will possibly be another negative day.




He has been spruiking CCV for a long time. I remember when it was about 58c he was very positive on it but I was already fully loaded up.

It is more tempting now given that there are not so many decent looking opportunities around.


----------



## redMax

On the program your money your call this week. Roger hinted that he was accumulating shares in a gold producer.
He didn't want to say what the company was as this may effect the price he is paying.
I remember that the same type of comment was made before he spoke at length about MCE

Anyone got an idea on what the gold stock maybe?


----------



## VSntchr

redMax said:


> On the program your money your call this week. Roger hinted that he was accumulating shares in a gold producer.
> He didn't want to say what the company was as this may effect the price he is paying.
> I remember that the same type of comment was made before he spoke at length about MCE
> 
> Anyone got an idea on what the gold stock maybe?




haha, just wondering...did you sign up just to find this out?

I have a strong inclination that the company would be RMS. It ticks alot of the boxes from a Value Investing perspective...has a new mine opening soon...low cost producer...good ROE, virtually no debt...and its small cap...
Expect RMS to hit $2 when he mentions it...

 he spruiks these stocks after he buys them...knowing the effect it will have..

He virtually has a license to print money...


----------



## redMax

Thanks for that.

No I haven't just signed up. Mainly just read what others have to say. I just noticed that nothing was said about his appearance on YMYC and the hint he dropped

Will have some reading to do.


Hold AUT HOG FGE


----------



## titus

VSntchr said:


> I have a strong inclination that the company would be RMS.




No it's not RMS.  I thought it would be too but Roger said it isn't.  I've been looking at RMS for a bit now.  I have an idea but I'm not at liberty to say until I buy some too!


----------



## kermit345

Could it be MML? understand MML is a rather large company, but has a rediculous margin on its production (cost less than $200 per ounce while gold price is currently $1,480 per ounce).

Note MML is a favourite of mine which I think is undervalued and I currently hold. But it has zero debt, growth prospects and significant cash flows. Just my 2c.


----------



## VSntchr

Yeah MML does look good for a gold stock. Another interesting one that appears very undervalued is GDO..

Im not too sure if my valuations are spot on for these companies but GDO definitely shows value...


----------



## kermit345

VSntchr said:


> Yeah MML does look good for a gold stock. Another interesting one that appears very undervalued is GDO..
> 
> Im not too sure if my valuations are spot on for these companies but GDO definitely shows value...




VS, just ran some quick numbers with a combination of consensus estimates, recent quarterly activities and quarterly costs.

Looks like they could be well on track for EPS of around the 8-9 cents mark and with minimal debt (EDIT: Looks like they do have some debt actually, explains why they didn't show in my personal screener, this could alter the valuation a bit, still looks promising though). This would value them at least in the $1.00+ mark by my simple calculations at the moment (still at work).

Could potentially be a good find . Interested in the views of others and note I haven't looked at their history or potential in depth, just ran some quick numbers. Certainly on the very brief face of it though has some potential to have an intrinsic value well above today's prices.


----------



## VSntchr

kermit345 said:


> VS, just ran some quick numbers with a combination of consensus estimates, recent quarterly activities and quarterly costs.
> 
> Looks like they could be well on track for EPS of around the 8-9 cents mark and with minimal debt (EDIT: Looks like they do have some debt actually, explains why they didn't show in my personal screener, this could alter the valuation a bit, still looks promising though). This would value them at least in the $1.00+ mark by my simple calculations at the moment (still at work).
> 
> Could potentially be a good find . Interested in the views of others and note I haven't looked at their history or potential in depth, just ran some quick numbers. Certainly on the very brief face of it though has some potential to have an intrinsic value well above today's prices.




Im at work at the moment but ill get back to you this evening with a more detailed view of my thoughts...i too still have a lot more research to do so it will be good to work as a team


----------



## drlog

Hmm, yes, GDO does look undervalued.

At the current forecast EPS, the ROE will be around 60%(ish) for the next year. I have a forecast IV of $2.20 for the next FY.

That's a massive discount to IV at the current price.

For the current year, the IV is about $0.14  (ROE was 17% and I have a RR of 15%).

Of course, all of this is based on the FORECAST EPS of 8.9c from commsec with its consensus of one analyst (hardly a "consensus"). Therefore, I take the above future IV with a huge grain of salt. Thoughts on the future NPAT anyone?


----------



## nomore4s

Just a suggestion.

It would probably be better if you take discussions & valuations of particular stocks to the relevant stock thread as you may get more feedback from followers of that stock who don't follow this thread and also this thread won't get cluttered and important info missed on both new value stocks posted here and info on the stocks you are all researching.

Thanks


----------



## notabclearning

drlog said:


> Hmm, yes, GDO does look undervalued.
> 
> At the current forecast EPS, the ROE will be around 60%(ish) for the next year. I have a forecast IV of $2.20 for the next FY.
> 
> That's a massive discount to IV at the current price.
> 
> For the current year, the IV is about $0.14  (ROE was 17% and I have a RR of 15%).
> 
> Of course, all of this is based on the FORECAST EPS of 8.9c from commsec with its consensus of one analyst (hardly a "consensus"). Therefore, I take the above future IV with a huge grain of salt. Thoughts on the future NPAT anyone?




I get what you get. For some reason I just dont feel secure with the resource sector.


----------



## kermit345

nomore4's, we are a little off track however the stocks were looking at are in relation to Roger Montgomery's style and valuation method.

drlog, agree with you a little as a lot of what i've been reading lately is pointing towards a China slowdown either way. It could be a gradual slowdown starting now with mild pain, or it could be a real shock to the system in possibly 2-4 years time.

This would really hurt our resource sector, even if India does pick up some of the slack. However that may mean that gold retains its time in the spotlight and remains at record levels, so value companies like GDO or MML could still be making these exceptional margins.

Any idea when we will find out what Roger's gold pick is?


----------



## stargazer

Hi all

In regards to companies and value, E trade have a stock valuation tool GDO indicates last price 0.50 stock value is $1.12.

Anyone have an opinion of how accurate this is with this tool.  Does it seem accurate based on your own way of evaluation of a company

last price...0.50
book value per share $0.11
discount rate 10.75%
dividend $0
first year forecast EPS 0.089
second year forecast EPS 0.086
long term EPS growth 30%
long term industry average return on equity 10.1%
Stock Valuation 1.124

Cheers
SG


----------



## oxygen

I've got a suspicion the gold stock is CAH. Have heard several sources say it's undervalued but yet to value it myself. It's a cheap producer, about to start producing significantly more and lots of room to increase reserves. The Speculator and Fat Prophets like it and are buying. Any thoughts?


----------



## zac

A quick question in relation to Value.Able graduates. I notice RM comments about V.A graduates from 2010 and 2011 etc.
Is there an actual course, if so how does one get on it, or are the graduates simply people that have read the book?


----------



## Silhouetteau

Hey Zac,

There isn't a course, I'm pretty sure it relates to generally when people have read the book/contributed to the blog.


----------



## Pioupiou

I wrote this blurb to clarify some thoughts that flowed from thinking about Roger Montgomery's  value investing methodology.  I applied the RM methodology (as far as I understood it) to TGA because it is the stand-out investment I have in terms of performance and relative value to my total portfolio.   I have also some of the words below in the TGA thread of this forum.

Because TGA was rarely mentioned in the financial media, and it was illiquid, I worried that my affection for TGA might have been mistaken on the same basis that one does not pick up a $50 note, because were it a $50 note, somebody else would have picked it up earlier!  As an investor (not trader) I now ignore much of what is said or written by those who presume to know about investing on the ASX, and instead I look for the unheralded performers that are under valued, which can be fairly small companies.

Seeing that RM classed TGA as an A1 stock, over Easter I decided to see how TGA's “intrinsic value” pans out using RM's methodology, and these figures are set out below.  The results coincide reasonably well with my own crudely calculated intrinsic value of TGA, which was also the case with other stocks, so I conclude that although I do not agree 100% with RM's views, most of the differences are semantic (language pedantry).  For instance, if RM says a share's intrinsic value is $1 today (Y1), $2 in Y2 and $3 in Y3, I am sure that nobody would for $1 give me a thus-worded IOU that allowed me to opt to take $3K in Y3, because people would ascribe a higher present value to the IOU than the Y1 “intrinsic value”.  There is no problem using words in a specific way – for instance, economists use the word “utility” to have a unique meaning that does not accord with Mr Everyman's use of the word.

Also, RM denigrates using PER, and yet a target PER is the reciprocal of the RR (required rate of return), and one can arrive at the same conclusion using target PERs, just as one gets the same arithmetical result dividing by 2 as one gets multiplying by .5 (the reciprocal of 2).  To elaborate, if one could get a no-debt share with a long-term ROE of 15% for a PER of 6, one would buy the share, and likewise if one used RM-style logic because the following mathematics using ROE = 15% and RR = 10% would show it to be priced below “intrinsic value” with a good margin of safety:

*  If equity per share is E, and the ROE is 15%, then the EPS would be 0.15E.
*  If RR is 10%, and the EPS = DPS, then the RM factor is 15% divided by 10%, or 1.5
*  The RM “intrinsic value” would be 1.5 times E, or 1.5E
*  Consequently, for a PER of 6, the market price for an EPS of .15E would be .9E
*  One could consider buying because 1.5E > .9E with a margin of safety

If one did not think about ROE and intrinsic value, and one wanted an RR of 10% for a stock of this quality, one would use a target PER equal to the reciprocal of 10% (1 divided by 10%), which is 10.  With the market PER being 6, one would buy the stock because 10 > 6.   The margin of safety would be the same, because, not surprisingly, the ratio of 1.5E to .9E is the same as the ratio of 10 to 6.

RM's ROE-centric approach has the advantage of pushing one towards quality shares, but it can  throw up companies (e.g., financial planning firms) that rely on skillsets rather than capital, where senior staff may be able to walk off with both the skillsets and many of the customers, and the same applies to firms with business models that are easily replicated – e.g., The Reject Shop (TRS).

I am not comfortable with the factors that RM uses for zero-dividend  shares – I think they are too high.  I have not attempted to retro-calculate these factors, but I suspect that RM's calculation of them assumes that all the earnings can be employed at the current high ROE, and that the alternative use to which an investor can put the money is at the bank deposit rate, as opposed to superb alternative investments in the ASX, particularly if the funds are within a no-tax-pension-paying SMSF environment, as is the case for half of my total TGA holdings.

TGA's figures for YE 31/03/2011 and YE 31/03/2012 could be improved soon, because TGA should come out with the YE 31/03/2011 preliminary report on 24 May 2011, and this should provide a better basis for YE 31/03/2012 than my guesstimates below, where I guesstimated:

*  31/03/11 equity by adding for H2 the increase for H1;
*  31/03/12 equity by adding 50% of the estimated earnings;
*  31/03/11share # by adding the performance rights # to the 30/09/11 #;
*  31/03/12 share # by simply adding a further 1.5 million shares;
*  YE 31/03/11 earnings by taken the mid point of the forecast $22M to $23M; and
*  YE 31/03/12 earnings by adding $3M to YE 31/03/11 earnings,

and I assumed the payout ratio is a consistent 50% and an RR of 10% was suitable for TGA (an A1 company), plus I arrived at the RM factor for zero dividends by primitive interpolation from the table on page 184 of  RM's book “VALUABLE”.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . YE 3/2009 . . YE 3/2010 . . YE 3/2011 . . YE 3/2012
Earnings YE 31/3 . . . . . . . . . . . . . . . . . . $12,320K . . . $19,495K ,. . $22,500K . . .$25,500K
Equity - start of year . . . . . . . . . . . . . . . . $66,162K . . $69,262K . . $81,767K . . . $94,791K
Equity – end of year . . . . . . . . . . . . . . . . $69,262K . . $81,767K . . $94,791K . .. $107,541K
Average Equity . . . . . . . . . . . . . . . . . . . . $67,712K . . $75,514K . . $88,279K . . $101,166K
Earning/Average Equity . . . . . . . . . . . . . . . 18.19% . . . 25.82% . . . . 25.49% . . . . 25.21%
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 128726K . . 129441K . . . 130737K . . . 132237K
Av Equity per shre . . . . . . . . . . . . . . . . . . $0.5260 . . .. $0.5834 . . . $0.6752 . . . $0.7650
EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.57c . . . . . 5.06c . . . . 17.21c . . . .. 19.28c
RR (required rate of return) 10%
Assume Payout Ratio 50%
RM's factor where DPS=EPS . . . . . . . . . . . .. 1.8195 . .. . 2.5816 . . . . 2.5487 . . . . 2.5206
RM's factor where no div . . . . . . . . . . . . . . . 2.9447 . .. . 5.5210 . . . . 5.3929 . . . . 5.2833
Factor (average above) . .. . . . . . . . . . . . .. . 2.3821 . .. . 4.0513 . . . . 3.9708 . . . . 3.9020
Intrinsic Val (Factor x av equity per share) . .. $1.253 . . . . $2.363 . . . . $2.681 . . . . $2.980

Remember, in the table above the words “intrinsic value” are used in RM's time-static way, whereas it is normal to consider the time-value of money when estimating value for a point in time.  This is why one needs to guesstimate a string of “intrinsic values” to get a feel for whether one should invest or not.  Also, I am a tad apprehensive of the row of numbers for “RM's factor if no dividend” - too high, maybe. 

If one simply dreamed up conservative PERs for each of RM's classifications A1 to C5 for an EPS=DPS setting, and another for a no-dividend setting, one could quickly arrive at a list of investment candidates by comparing the market PER to this list.  For TGA, one could simply assume that a share of this quality should enjoy a PER  of say 14.5, which to err on the conservative side is an average PER, and arrive at 17.21 cents x 14.5 = $2.50 as an intrinsic value.  TGA is better than average, which is why RM classes it as an A1, so one could use a higher target PER and get a higher value – e.g., 17.5 would give $3.01.  In my view, TGA is worth somewhere between $2.50 and $3.00.   

RM's views helped me consolidate my own investing approach, and to a degree, thanks to his book, ROE is central to my stock-picking approach now, but more for “soft” reasons than as the core of an arithmetical exercise.  As I wrote earlier, some businesses thrown up via the RM methodology require little capital, and hence they can generate high ROE, but if  managers can walk off with a slice of the client base and the intellectual capital between their ears, things can quickly go awry.  This perhaps is why Fiducian (FPS) does not excite me, although it has high ROE. lowish PER, good dividend yield, no debt, low Aspect Earnings Model, et cetera - although I would look at it again if I had the readies to invest, and I have invested in SGH which has a similar risk of senior staff walking away with a chunk of the business, rather than sharing the loot with pesky shareholders, particularly the Chardonnay socialists who floated SGH and gave themselves fat salaries and millions of share as quid pro quo for the original legal practice.

I do not comprehend the Aspect Earnings model as well as I would like to, but if it is less than unity, then at least somebody reckons the share is worth considering.  In a different but similar vein (easy replication of business model), when I walked through Tuggeranong Mall in the ACT last year, I noticed that more than one Asian-owned-and-staffed business competing with The Reject Shop (TRS) had popped out of the woodwork, which is part of the reason why I opted for Cash Converters (CCV) at a SP of 63 cents instead of TRS or JBH.


----------



## bigdog

Are their any guess on the gold stock that Roger is buying?


----------



## kermit345

bigdog said:


> Are their any guess on the gold stock that Roger is buying?




My guess was MML but thats because it meets my criteria which is a lot like Roger's and is a bit of a favourite of mine. Someone else mentioned GDO I believe but I don't know enough about GDO to comment.


----------



## Intrinsic Value

kermit345 said:


> My guess was MML but thats because it meets my criteria which is a lot like Roger's and is a bit of a favourite of mine. Someone else mentioned GDO I believe but I don't know enough about GDO to comment.





Maybe RMS Ramelius. I like this one and bought in the other day at 1.17. It's intrinsic value is more than double this by my calculations.

I don't know that Roger would be so keen on GDO after their recent expensive acquisition.


----------



## zac

I watched an ASX investor hour presentation last night and the lady on that was talking about valuing companies as such but from a very different approach.
IV is only one measure but definitely one I place a lot of weight on. Company fundamentals are also important but this other measure got me thinking, PER (Price Earning Ratio) ie Share Price / Earnings Per Share.

I know in simple this can be flawed but what is the concensus on this as an additional checklist.

The other interesting thing was how it was mentioned that the best companies for long term growth are SmallCaps and also low PER.
Something ive thought to be true, ie TRS, JBH are good examples of that.

On the presentation they funnily enough mentioned Finbar which I bought into the other week. It has a low PER at the moment.
Anyway on my Excel sheet ive added it as another indicator,


----------



## luckyforteja

Hi All,

I have read  Roger Montgomery's book and I have question about adopting this strategy.

How do you guys do basic filtering to eliminate all the junk ?
Is there any way to say I want a list of all these companies meeting these ratios so the you can put time into researching their fundamentals. 

Hope I make some scenes 

Thanks in advance

Cheers
Sri


----------



## ton69

luckyforteja said:


> Hi All,
> 
> I have read  Roger Montgomery's book and I have question about adopting this strategy.
> 
> How do you guys do basic filtering to eliminate all the junk ?
> Is there any way to say I want a list of all these companies meeting these ratios so the you can put time into researching their fundamentals.
> 
> Hope I make some scenes
> 
> Thanks in advance
> 
> Cheers
> 
> Hi a read throe this forum might help i have just read all 17 pages interesting stuff, then there is etrade quotes and research/ tools were you can use the stock filters go advanced ROE above .2 =20% for a start.
> 
> Hope that helps
> cheers ton
> Sri




Hi a read throe this forum might help i have just read all 17 pages interesting stuff, then there is etrade quotes and research/ tools were you can use the stock filters go advanced ROE above .2 =20% for a start.


----------



## luckyforteja

ton69 said:


> Hi a read throe this forum might help i have just read all 17 pages interesting stuff, then there is etrade quotes and research/ tools were you can use the stock filters go advanced ROE above .2 =20% for a start.




Thanks for the reply mate,

I have been following this this thread on and off. The biggest problem that I have is I was looking to filter stocks based on custom ROE and D/E. I am with comsec and couldn't find a way. 

Is there anyway to do this in comsec ?

Cheers,
Sri


----------



## ton69

luckyforteja said:


> Thanks for the reply mate,
> 
> I have been following this this thread on and off. The biggest problem that I have is I was looking to filter stocks based on custom ROE and D/E. I am with com-sec and couldn't find a way.
> 
> Is there anyway to do this in com sec ?
> 
> Cheers,
> Sri




Hi Sri
Sorry i am only a Etrade customer mainly because i love there Etrade Pro software but its expensive for a value investor at $77 a month but i do over 200 buy sells a year so free when you are paying that sort of brokerage. 
I am such a fan of the RM value style of investing that i am considering giving up on the sole-trader [higher tax] and concentrate on the value investing.
Someone made a list of stocks a couple of pages back that are a excellent start but really no mater how good your stock filter is its going to chuck out 70 to 150 stocks to look throe which is a lot of work and sometimes that may be a property investor with a 1 off  sale of a building so have a ROE of 80% but for this year only 
This value investing is great and i am a huge RM fan but he makes it look and seem relatively simple mainly because he is very smart and secondly he has been doing it a long time. I might spend 2 hours looking into a company and its annual report to see if its any good RM could probably do that in minutes and he would still be more right that me. Also i notice in this forum several people are using Etrades data or Com-sec. We should be using the annual reports as the data all the online brokers use is entered in by low paid often overseas opperators and can be prone to mistakes

Open a acc with Etrade its free but only if you want to sort thou a fairly long list of company's and even then the filter might miss some i know Etrades does
Its allot of work the only true way and the way RM does himself is to go thou all 2400 odd stocks annual reports some you discard strait away but thats how the master does it
cheers


----------



## zac

I love the RM style of investing too.
I was lucky to meet a guy who really is into trading and cant speak highly enough of RM so therefore told me when it comes to trading, that if I only read one book, then value.able is it.
Ive been confident enough now to make my own trades.
Ive purchased in MCE, FGE, TGA and FRI.

I'd love to know where RM gets his figures from for some of the intrinsic values, as his latest entry on his blog re MCE has them with a declining IV over the next 3 years. Also his IV is lower than the 1 I worked out.


----------



## Julia

Wow, Roger certainly doesn't need to pay for advertising with spruiking such as is exhibited in the above two posts going on!
Hope your discipleship is being well rewarded, fellas.


----------



## zac

Thanks Julia, 
Im new to all this, but the rewards have been the excitement and thrill/addiction of investing so far.
Its been since March I made my 1st buys, and its really a long haul so time will tell.


----------



## kermit345

haha Julia he certainly does have a following. I haven't read his book and don't really plan to at the moment as i'm not much of a book reader myself anyway. But if you've read some of his blog, the people who have read his book seem to swear by it. Probably doesn't hurt that they all follow him when he mentions a stock now and get the initial burst from it which just makes him look even more like a god.

Don't get me wrong, I really like his approach and adopt something similar for the 'value investing' portion of my portfolio. The two stocks i've invested in so far using my formula's are FGE and MML. FGE hasn't really gone anywhere but MML has done reasonably well.

I simply use the etrade data, and you can usually tell if their figures are around the mark. You have to remember that while valuing a company and what you think its worth, it is never going to be an exact science. Is a business that you value at $6.13 really a better venture then one valued at $6.00? As long as your formula takes into account the risks and your data is approximately correct or to the conservative side then you will be comfortable with your valuations.


----------



## luckyforteja

ton69 said:


> Hi Sri
> Sorry i am only a Etrade customer mainly because i love there Etrade Pro software but its expensive for a value investor at $77 a month but i do over 200 buy sells a year so free when you are paying that sort of brokerage.
> I am such a fan of the RM value style of investing that i am considering giving up on the sole-trader [higher tax] and concentrate on the value investing.
> Someone made a list of stocks a couple of pages back that are a excellent start but really no mater how good your stock filter is its going to chuck out 70 to 150 stocks to look throe which is a lot of work and sometimes that may be a property investor with a 1 off  sale of a building so have a ROE of 80% but for this year only
> This value investing is great and i am a huge RM fan but he makes it look and seem relatively simple mainly because he is very smart and secondly he has been doing it a long time. I might spend 2 hours looking into a company and its annual report to see if its any good RM could probably do that in minutes and he would still be more right that me. Also i notice in this forum several people are using Etrades data or Com-sec. We should be using the annual reports as the data all the online brokers use is entered in by low paid often overseas opperators and can be prone to mistakes
> 
> Open a acc with Etrade its free but only if you want to sort thou a fairly long list of company's and even then the filter might miss some i know Etrades does
> Its allot of work the only true way and the way RM does himself is to go thou all 2400 odd stocks annual reports some you discard strait away but thats how the master does it
> cheers




Thanks for the reply ton69. It has cleared lots of doubts that I had about getting data. I would agree with you that we should be using annual reports, I would agree that it would be lot of work but as we all know there is nothing like free lunch.

No Pain......No gain.

I still need to workout a way to create a basic filter for comsec so that I can get my list down to 50 - 100 and go from there.

Cheers,
Sri


----------



## Noddy

luckyforteja said:


> Thanks for the reply mate,
> 
> I have been following this this thread on and off. The biggest problem that I have is I was looking to filter stocks based on custom ROE and D/E. I am with comsec and couldn't find a way.
> 
> Is there anyway to do this in comsec ?
> 
> Cheers,
> Sri




Yes there is.
Tick on NEWS & RESEARCH,
Then on COMPANY RESEARCH,
Then on ADVANCED SEARCH TOOL.

Can then make a list of whatever you like - ROE,D/E etc. etc.

Simple as that.

Good luck with it.


----------



## oxygen

Has anyone had a look at JB Hifi since the buyback?

Using some rough calculations i now have the IV rising from $22.76 to $23.96 for 2011. Puts it at quite a nice discount at current prices.


----------



## skc

oxygen said:


> Has anyone had a look at JB Hifi since the buyback?
> 
> Using some rough calculations i now have the IV rising from $22.76 to $23.96 for 2011. Puts it at quite a nice discount at current prices.




How is JBH going to keep increasing EPS? The only means seem to be through buyback. 
Buying back indicates that they have no other better use for their cashflows. If that is the case, the cash won't be generating returns at historical ROE, which is what the IV method assumes.


----------



## VSntchr

skc said:


> How is JBH going to keep increasing EPS? The only means seem to be through buyback.
> Buying back indicates that they have no other better use for their cashflows. If that is the case, the cash won't be generating returns at historical ROE, which is what the IV method assumes.




Still have quite a few stores to open which will increase EPS for at least a few years. I do however see your point once they reach their goal of 210 stores or whatever it is...


----------



## Tysonboss1

VSntchr said:


> Still have quite a few stores to open which will increase EPS for at least a few years. I do however see your point once they reach their goal of 210 stores or whatever it is...




The point he is making is that you can't use their existing return on equity figure to value the company, Because future deployments of capital will not produce the same returns as past deployment.

Even new store openings are likly in second tier markets producing less returns, and cash deplyed into the buy back is buying back equity at well above book value.

No doubt JB is a sound business producing good results. But Caution should be taken when working out how much above book value you are willing to pay, considering the dividend and the rates of return that will be achieved on retained earnings.


----------



## kermit345

Hi All,

Recently i've been working on and upgrading my value investing spreadsheet so that it automatically provides some more interesting and relevant graphs of the information and the IV's. As a practice run i've added 4 stocks to the spreadsheet to produce some graphs. I personally use a value rating system that rates each stock between 0-100 based on their own metrics and how they compare to the other stocks included. Therefore 4 stocks isn't exactly a great starting point, but as I said its more a test run and will add more stocks once i finalise the layout etc. The reason i've posted this here as Roger has had a huge influence on my thoughts around value investing and i've basically taken everything on board when creating my spreadsheet and the only element I haven't used is his actual formula.

The following graphs are what my spreadsheet outputs at the moment. I'm interested to know some thoughts from others on what else I could include or how I could change these to look better or provide greater information.

*PTM*







*MML*






All suggestions etc welcome!


----------



## VSntchr

Very nice work there!
how do you create a line chart that moves up in yearly increments? My excel knowledge is basic and my valuation line is an average line 

Also nice work with putting in the share price for comparison, does that go in automatically for you?


----------



## tinhat

kermit345 said:


> Hi All,
> 
> ...
> 
> The following graphs are what my spreadsheet outputs at the moment. I'm interested to know some thoughts from others on what else I could include or how I could change these to look better or provide greater information.
> 
> ...
> 
> All suggestions etc welcome!




Stock market pr0n. Awesome.


----------



## kermit345

VSntchr,

Historical prices aren't automatic unfortunately, i'm sure its possible with more advanced programs that probably require some coding and/or $$, but using excel means I have to manually enter the historical prices, using yahoo finance.

In terms of the incremental valuation, its a matter of maintaining the same figure for a number of lines. Fore instance say your valuation during 2011 is $5.74 for stock A.

The share price in May could be $4.64 in column B (in excel) so in column C you would have the $5.74. Then SP in June may become $4.75 but the valuation column in C remains $5.74 and only changes when there is a new years valuation.

Hope that makes sense, if you need help PM me and I can try explain better or provide an excel spreadsheet with an example.

Any suggestions for other graphs/information which I could include within the spreadsheet as an output? I was thinking of a chart where it shows the percentage of the margin of safety to the valuation. I'll work up an example and post it here as well.


----------



## luckyforteja

Noddy said:


> Yes there is.
> Tick on NEWS & RESEARCH,
> Then on COMPANY RESEARCH,
> Then on ADVANCED SEARCH TOOL.
> 
> Can then make a list of whatever you like - ROE,D/E etc. etc.
> 
> Simple as that.
> 
> Good luck with it.




You are a star


----------



## luckyforteja

kermit345 said:


> Hi All,
> 
> The following graphs are what my spreadsheet outputs at the moment. I'm interested to know some thoughts from others on what else I could include or how I could change these to look better or provide greater information.
> 
> All suggestions etc welcome!




Great Job and thanks you for sharing. I started working on something similar but you are way ahead of me. 

Can you explain how your rating system works ? What metrics are being used etc ?

Cheers,
Sri


----------



## kermit345

luckyforteja said:


> Great Job and thanks you for sharing. I started working on something similar but you are way ahead of me.
> 
> Can you explain how your rating system works ? What metrics are being used etc ?
> 
> Cheers,
> Sri




luckyforteja, the ratings system works by comparing all the companies researched using the following metrics:

- Margin of Safety (Current Valuation vs Current Share Price)
- Return on Equity
- Debt to Equity
- Growth
- Market Capitalisation
- Market Liquidity
- Capital Gain 1 Year (Same as Margin of Safety, but on 1 year forward valuation)
- Capital Gain 2 Year (Same as Margin of Safety, but on 2 year forward valuation)

I then allocate scores to each of the metrics to total 100 so for example:

- Margin of Safety - 22 points
- Return on Equity - 22 points
- Debt to Equity - 18 points (Reverse order, lower debt = higher points)
- Growth - 8 points
- Market Capitalisation - 6 points
- Market Liquidity - 6 points
- Capital Gain 1 Year - 10 points
- Capital Gain 2 Year - 8 points

I also remove outliers by taking away 15% at the higher and lower level of the stocks i've researched. So say i've researched 20 stocks, i'll remove the 3 highest and 3 lowest margins of safety to ensure no outliers have great effect on the scores of other stocks.

So for instance, with Margin of Safety, Stock A might have an MOS of 18% and Stock B is 10%.

Therefore Stock A would score 22 for MOS and Stock B would score 12.22.

Hope that makes some sense, probably the best I can explain it without showing you the full spreadsheet with all the calculations etc. Took me a while to develop.


----------



## luckyforteja

kermit345 said:


> luckyforteja, the ratings system works by comparing all the companies researched using the following metrics:
> 
> - Margin of Safety (Current Valuation vs Current Share Price)
> - Return on Equity
> - Debt to Equity
> - Growth
> - Market Capitalisation
> - Market Liquidity
> - Capital Gain 1 Year (Same as Margin of Safety, but on 1 year forward valuation)
> - Capital Gain 2 Year (Same as Margin of Safety, but on 2 year forward valuation)
> 
> I then allocate scores to each of the metrics to total 100 so for example:
> 
> - Margin of Safety - 22 points
> - Return on Equity - 22 points
> - Debt to Equity - 18 points (Reverse order, lower debt = higher points)
> - Growth - 8 points
> - Market Capitalisation - 6 points
> - Market Liquidity - 6 points
> - Capital Gain 1 Year - 10 points
> - Capital Gain 2 Year - 8 points
> 
> I also remove outliers by taking away 15% at the higher and lower level of the stocks i've researched. So say i've researched 20 stocks, i'll remove the 3 highest and 3 lowest margins of safety to ensure no outliers have great effect on the scores of other stocks.
> 
> So for instance, with Margin of Safety, Stock A might have an MOS of 18% and Stock B is 10%.
> 
> Therefore Stock A would score 22 for MOS and Stock B would score 12.22.
> 
> Hope that makes some sense, probably the best I can explain it without showing you the full spreadsheet with all the calculations etc. Took me a while to develop.




Thanks for the reply mate,

Wouldn't Capital Gain 1 Year and Capital Gain 2 Year be already factored into the IV calculation ? 

You said that you are getting the values directly from Yahoo, do you look at Financial statements as well (Cash Flow, Income statement, balance sheet etc).

Suggestions: I would prefer to have IV separate to the rating system, to me having a matrix like RM makes more sense. 

Cheers,
Sri


----------



## kermit345

The Value Rating system I've developed is simply for comparison puposes between the stocks i've identified and researched as 'value stocks'. It's a bit of a guide to say for example, Stock XYZ has a Value Rating of 75 which is quite high and therefore must be meeting my criteria to a high standard in comparison to the other 'value stocks' i've researched.

Capital Gain 1 and Capital Gain 2 aren't factord into the IV, they are in fact seperate IV's. IV = Instrinsic Value which is the valuation you or I have determined for a particular business/stock.

So the current year IV takes into account current Earnings, Debt, Equity, ROE etc etc. Capital Gain 1 is next years IV based on next years estimates of those metrics, Earnings, Debt, Equity, ROE etc etc. Same goes for Capital Gain 2. Hence why if you look at the charts I posted, you can see the Valuation increasing against the current share price as i've estimated earnings increases etc which increase the intrinsic valuation at a future point in time. Hope this makes sense.

I stated I get the historical share price data from yahoo. In terms of financial data, i'll usually obtain from etrade/yahoo first and if the details look promising i'll investigate further and use annual statements for a more 'exact' computation of intrinsic value.

I haven't read RM's book so can't exactly comment on is A1, B3 system but it is my understanding that a number of metrics go into his rating system. He has said in basic terms that it relates to the return opportunities of the business and its ability to repay debt or provide capital in any unforseen event. So not precisely sure what he includes within his system to arrive at his ratings.

Can understand where your coming from with keeping valuations external, however this is why in my points system i've allocated a smaller amount of points to Capital Gain 1 and 2 as they are less certain so less important. Roger continually states how important low D/E, high ROE and a high Margin of Safety is to value investments and seems to be the key themes of his blog posts. Hence i've allocated the most points to these areas and still included the MOS in my points system.

Each to their own I guess, its just a method i've developed to identify not only value investments, but the premium of these value investments as well. I should also re-iterate that my value ratings probably don't provide a good comparison until i've researched at least 20+ stocks for comparison.

Also, in case you were wondering how I identify what stocks to research in the first place. I run a filter against the ASX for stocks with the following properties:

Market Cap - greater than $100,000,000
Return on Equity - Greater than 15%
Debt to Equity - Less than 30%

I think Roger is slightly more relaxed on his Debt to Equity screen however might be a little more aggresive on his required Return on Equity.

Anyway look forward to more thoughts/discussion


----------



## Macros

Kermit,

Your graphs look great.

I see that you have the future valuation ahead of the price, as is with Roger's graphs. I prefer to match the 2 year forward valuation with the current price. It seems to me, based on looking at many many different companies, the current price is best matched with expectations of future value (2 years). I believe that in most cases the current price often factors in expectations of forward earnings. Obviously it isn't efficient and this is where we come in, but I strongly feel that this is the case.

I tried to make a post when Roger released images of his own system around a month ago. However, he seemed to block any comments regarding excel based systems - I think he is looking to monetize his system and doesn't want any discussion about alternatives.

I've built my own excel program. Initially I had a huge database of different sheets with exported Commsec financial data, combined with an automatic feed from Yahoo to track the share price for the graph. However, once this grew to over 80mb it started to chug! (It uses VB script).

Since then, I've restarted it with just a one page excel sheet. All I need to do is to put in the asx code and the required rate of return. The financials and share price data are all picked up from the web within 3 seconds so its a very quick process. It took me quite a while before I got it all down pat. The only problem is that some companies have their data reported based on the currency of the annual report - e.g. MML in USD. However, this doesn't seem to make too much of a difference for the valuation.

I do a commsec download with qualifying criteria, as others do, and then do a bulk filter with the valuations on each line. Once I've done the filter, I then plug the code into my excel tool to get a more specific understanding of the stock.

I'll post a copy of how mine looks later today and hopefully can get some feedback.


----------



## Macros

Here is an example of MML.

All of this is automated. All I have to insert is the code and required return. It is up to date. In this case, I've used consensus EPS forecasts (I think it can exceed them).


----------



## kermit345

Macros, here I was thinking I had a decent handle on excel, but if you've managed to get all of that flowing through simply by typing in the code etc then that is amazing. Everything is manually entered on mine in terms of historical prices (copy pasted from yahoo) and financial data (grab it from etrade and enter myself making adjustments where i see fit).

I have a seperate sheet per company, however only have around 20-30 sheets as I filter it down to this number that i monitor.

Would be very interested to email and discuss with you further as it sounds like your achieving exactly what i'm after. Also if your into value investing have some other things i'm putting some time/effort into that may be of interest to you.

If you could PM me with your email address i'd very much look forward to emailing you and discussing further.

Also agree with you i.e. Roger. Recently someone mentioned on his blog regarding the tedious task of manual entry into excel and looking for easier software. He replied saying to 'stay tuned' which would indicate as you say, he has something cooking that will probably charge a fee.

Look forward to hearing from you, that output from your excel spreadsheet has me very intrigued.


----------



## Macros

Kermit,

Thanks for the feedback. I originally used Commsec for both prices and historical data. However I quickly grew tired of this process and the time involved (repetition). 

The next step was to automate prices, which helped significantly. After that, it took me ages to figure out how to obtain the historical financials - almost everything that I've seen online (US based) is focused on prices and technical trading.

I've got to the point where I'm very happy with the outcome. I'm continuing to tweak it, but overall it now seems to do the job very quickly and easily.


----------



## Macros

Oh, and I received an email today relating to Roger's blog and the imminent release of his service.


----------



## skc

Macros said:


> Here is an example of MML.
> 
> All of this is automated. All I have to insert is the code and required return. It is up to date. In this case, I've used consensus EPS forecasts (I think it can exceed them).




Not sure about you saying today's price target should be the IV in 2 years time. At a minimum that IV should be discounted by the risk free rate, if not the actual rate of return. E.g. IV in 2013 is $10.59, then one would pay $9.4 (at 6% risk free rate) or $8.44 (at 12%).

Otherwise, very very impressive Excel and VB skills. Thanks for sharing.


----------



## Macros

Skc,

Everyone has a different view. I understand why you disagree. The reason why I think the forward 2 year value is important is that, based on my calculations, it tends to be reflected in price within 12 months in many cases.

I've attached an example of Coca Cola. You can see the price history very closely matches the forward 2 year earnings. It is one of many examples that I have found. 

I'm not suggesting that the price will necessarily hit the forward target within 12 months, however it is possible and provides me with an indication of risk/reward. Refer to Decmil. For me, the price action definitely tends towards the forward expectations.


View attachment CCL 26.05.11.pdf
View attachment DCG 26.05.11.pdf


----------



## skc

Macros said:


> Skc,
> 
> Everyone has a different view. I understand why you disagree. The reason why I think the forward 2 year value is important is that, based on my calculations, it tends to be reflected in price within 12 months in many cases.
> 
> I've attached an example of Coca Cola. You can see the price history very closely matches the forward 2 year earnings. It is one of many examples that I have found.
> 
> I'm not suggesting that the price will necessarily hit the forward target within 12 months, however it is possible and provides me with an indication of risk/reward. Refer to Decmil. For me, the price action definitely tends towards the forward expectations.




It sounds like you know where I am coming from and I trust that you are aware of time value of money concept. Happy to just agree to disagree 

Can I ask where can I see on your screen shot the rate of return used in the calculations?


----------



## Macros

skc said:


> It sounds like you know where I am coming from and I trust that you are aware of time value of money concept. Happy to just agree to disagree
> 
> Can I ask where can I see on your screen shot the rate of return used in the calculations?




The asx code and RR are to the left of the screenshot and are excluded from the print area. In my examples MML is 14%, CCL is 9% and DCG is 12%.


----------



## luckyforteja

Macros said:


> Here is an example of MML.
> 
> All of this is automated. All I have to insert is the code and required return. It is up to date. In this case, I've used consensus EPS forecasts (I think it can exceed them).




Awesome Work mate. Very Impressed. 

Can you let us know the data source for your valuation?

Thanks in advance

Cheers,
Sri


----------



## Macros

luckyforteja said:


> Awesome Work mate. Very Impressed.
> 
> Can you let us know the data source for your valuation?
> 
> Thanks in advance
> 
> Cheers,
> Sri




Thanks for the feedback.

Data is from a combination of Yahoo Finance and MSN Money Central.


----------



## skc

Macros said:


> The asx code and RR are to the left of the screenshot and are excluded from the print area. In my examples MML is 14%, CCL is 9% and DCG is 12%.




Thanks. Those are very fair RRs for the respective companies. BTW whoever priced the IPO for DCG should receive no business ever again.


----------



## luckyforteja

Macros said:


> Thanks for the feedback.
> 
> Data is from a combination of Yahoo Finance and MSN Money Central.




Thanks for your reply mate. I got couple more questions which I will PM you since its more to do with programming.

Cheers,
Sri


----------



## jrc77

Wondering if anyone out there has computed their own IV for RIO, REF and SFH based off RM's methods?  I am playing around and would be interested in comparing.

Regards,

Jason


----------



## Macros

I have RIO forward IV at $106 giving it a 33% MOS. 

However I think that it will need every % of that MOS in that I'm not a big fan of iron ore at present.


----------



## zac

Macros said:


> I have RIO forward IV at $106 giving it a 33% MOS.
> 
> However I think that it will need every % of that MOS in that I'm not a big fan of iron ore at present.




BHP is around 50% of its IV, depending what figures and RR used but its not that attractive when you look at its previous comparison of SP vs IV.
Also theres the fact they cant rely on China so much to buy their product.


----------



## InvisbleInvestor

And today is a perfect example of why value investors don't follow day to day price movements. Forge (FGE) Was down as low as 4.5% today, but finished even. 

Does an IV of $7.87 sound close to the mark for FGE?


----------



## Ves

InvisbleInvestor said:


> And today is a perfect example of why value investors don't follow day to day price movements. Forge (FGE) Was down as low as 4.5% today, but finished even.
> 
> Does an IV of $7.87 sound close to the mark for FGE?



I'm getting $8.26.

2011 est. figures.

IRR 12%
DPS $0.11
EPS $0.479
ROE 35.6%
Weighted Ave Eq: $109mil
NPAT $38.80mil
Weighted Ave Shares 81 mil

I'm new to this kind of valuation, so please let me know if I have gone astray somewhere.


----------



## InvisbleInvestor

Sounds great to me, I was using 13% IRR and didn't have the same inputs as you. I was being quite conservative actually.

Try checking the IV for LEI. I have it in the $27 mark, current SP @ $22.03. Given its not perfectly stable management is this coming up on anyone's radar as value.able?


----------



## notabclearning

i get 22.40


----------



## InvisbleInvestor

Thanks, obviously I'm not being conservative enough. I thought as much.


----------



## notabclearning

im using a 13% rr


----------



## Tightwad

Roger mentioned CSL and FLT recently, from memory i think CSL was around value, but as cheap as its been in a long time and FLT with an IV of $23, currently its down to about $20.

Anyone got any thoughts on these?


----------



## InvisbleInvestor

Using a 10% IRR I'm getting an IV of $19.61 for FLT. Perhaps I'm doing something wrong. In any case, I'm going to have a proper look tonight. Also Webjet trading at a _slight_ premium but in a quick glance seems the more favourable. $0 long term debt for WEB! Now that's nice to see!


----------



## kermit345

I haven't included my charts however here are my quick valuations:

FGE - Current = $7.24 // Target = $8.00
FLT - Current = $24.07 // Target = $27.04
LEI - Current = $33.91 // Target = $0 (Too much debt and earnings have been all over the place, wouldn't buy myself)
CSL - Current = $34.64 // Target = $33.80
WEB - Current = $2.26 // Target = $2.20

Forge easily the best value opportunity out of these at the moment if you ask me. If flight centre fell some more, could become a reasonable choice, the other 3 don't interest me much at the moment, particularly LEI.

Note i've only plugged them quickly into my spreadsheet and haven't done a full lookthrough of these companies. So DYOR.


----------



## VSntchr

kermit345 said:


> I haven't included my charts however here are my quick valuations:
> 
> FGE - Current = $7.24 // Target = $8.00
> FLT - Current = $24.07 // Target = $27.04
> LEI - Current = $33.91 // Target = $0 (Too much debt and earnings have been all over the place, wouldn't buy myself)
> CSL - Current = $34.64 // Target = $33.80
> WEB - Current = $2.26 // Target = $2.20
> 
> Forge easily the best value opportunity out of these at the moment if you ask me. If flight centre fell some more, could become a reasonable choice, the other 3 don't interest me much at the moment, particularly LEI.
> 
> Note i've only plugged them quickly into my spreadsheet and haven't done a full lookthrough of these companies. So DYOR.





Would be good to have a bit of discussion about FLT if anyone else is interested...could do it here or on the FLT thread?

I have est. NPAT of 160m for this year (giving ROE of roughly 20%)..and I think a RR of 11% is appropriate...10% is not out of the question for FLT in my opinion..but some of their new ventures are quoted by management to be high risk (and thus low capax so far)...thus why I have adopted 11%..
So with that in mind, I have a value of $18.50 heading towards $20 in 2012...

I really do like FLT so I'm hoping for a severe drop down to ~$15...wishful thinking at this stage!


----------



## Ves

Kermit, or even someone else, can you give me a quick run-down of how you choose which IRR to use?

I posted this in another thread, but haven't had any answers.


----------



## Intrinsic Value

kermit345 said:


> I haven't included my charts however here are my quick valuations:
> 
> FGE - Current = $7.24 // Target = $8.00
> FLT - Current = $24.07 // Target = $27.04
> LEI - Current = $33.91 // Target = $0 (Too much debt and earnings have been all over the place, wouldn't buy myself)
> CSL - Current = $34.64 // Target = $33.80
> WEB - Current = $2.26 // Target = $2.20
> 
> Forge easily the best value opportunity out of these at the moment if you ask me. If flight centre fell some more, could become a reasonable choice, the other 3 don't interest me much at the moment, particularly LEI.
> 
> Note i've only plugged them quickly into my spreadsheet and haven't done a full lookthrough of these companies. So DYOR.




Have you looked at CCP. It is starting to look interesting.

I get an IV of 5.70 for this year and it is trading at 4.40 today.


----------



## InvisbleInvestor

Ves said:


> Kermit, or even someone else, can you give me a quick run-down of how you choose which IRR to use?
> 
> I posted this in another thread, but haven't had any answers.




The _standard_ IRR that I use is usually 10%. But having a one size fits all approach is a recipe for disaster. If the business you are looking at doesn't have the strongest management team you may think of increasing it by half a percent, or a full percent. If it has very tolerable debt levels you may think of lowering it half a percent. I'm fairly certain that is the line of thinking you should be on when deciding what IRR to use.

Basically, many people simply use it to make their calculations of IV more or less conservative. As it directly affects the multiper you use it is an easy way of doing just that.

Anyone feel free to correct me.


----------



## Ves

My line of thinking was basically more risk = higher IRR, less risk = lower IRR. You seem to agree with this. Although, I might be a bit more conservative, I have been using 11-13%, especially in this market environment. This also increases the margin of safety.


----------



## zac

Ves said:


> This also increases the margin of safety.




Just on Margin of Safety, what to people use as their margin. For me its 25%.
I have used 10%RR but now more so like to use 11-12%, still with MoS of 25%.


----------



## kermit345

Comparing each others RR is only relevant if the equation we are using is exactly the same. My equation differs to Roger Montgomery's, so even if I say my usual RR is 11%, this may not reflect the same outcome using Roger's valuation method even if all other variable are held constant such as earnings, debt etc etc.

However, for discussions sake, I use an RR of 11% usually as a starting point. You then have to manipulate this based on the risk of the company you are valuing. Higher debt, poor management, minimal competitive advantage, low number of producing assets etc etc all should play on your mind when allocating an RR to a company.

In my calcs above I placed an RR of 11% to FGE and 13% to LEI.

FGE management have done a good job to date besides some minor issues, have minimal debt, contracts still flowing and only small let down is the number of companies entering the industry so competitive advantage starts to diminish.

Then you look at leighton, has reasonable debt, management issues, and that alone is enough for me to put an RR of 13% on it, and i probably could have even increased this to 13.5 or 14%.

Anyway as I said, while comparing RR's does have some minor use, each individuals equation will typically vary and therefore mitigate the value in using someone elses RR.

EDIT: I did have an MOS of 20% in my graphs, recently increased this to a desired 25% just to add that extra conservatism to my approach so that if a company is trading with a MOS of 25% I can be reasonably confident that it will eventually move towards the value so I at least make some profit, even if my valuation is out by say 5-10%.


----------



## Ves

I have been looking at ASG Group (ASG Group). I don't see profit being any more than $13-14 million for the 2011 Financial Year based on the data available. If I am conservative and take $13mil NPAT I get an eps of about 8.1 cents. This is lower than 2010. ROE slightly down at 12%. Possible that the growth in earnings from the recent new contracts will show up in the 2012 year.

Instrinsic value of $0.69 with 11% IRR. Still some way to come down to be solid buy in my eyes, but they do however offer lots of potential.

Does anyone have their own calcs for this? Have I been too conservative?


----------



## notabclearning

Can anyone give me a valuation of mortgage choice. I have it at $1.50


----------



## InvisbleInvestor

notabclearning said:


> Can anyone give me a valuation of mortgage choice. I have it at $1.50




Will do when I get home.


----------



## Noddy

InvisbleInvestor said:


> Sounds great to me, I was using 13% IRR and didn't have the same inputs as you. I was being quite conservative actually.
> 
> Try checking the IV for LEI. I have it in the $27 mark, current SP @ $22.03. Given its not perfectly stable management is this coming up on anyone's radar as value.able?




On 16th May 2011, LEI put out a statement that they had ran at a loss for the 9 months to 31/3 2011 of $382 Million.
So this financial year LEI will return a negative ROE.
Many of their projects are runniing at a loss, with more bad news today.
How could you calculate an intrinsic value using a negative ROE ?

LEI also claim they will make a profit next financial year 2011/2012.
They may or they may not.
 But their performance would have to be a lot better than this year just to break even.
Using the I/V method of RM, you need to start with a company at least showing a ROE of 12 - 15%, and preferably a lot higher.

For the RM system you are using on this thread, can't understand why LEI would even be worthy of consideration until their results improve considerably.


----------



## InvisbleInvestor

notabclearning said:


> Can anyone give me a valuation of mortgage choice. I have it at $1.50




I'm obviously doing something wrong. Getting around $5. No idea what I've done either lol.




Noddy said:


> On 16th May 2011, LEI put out a statement that they had ran at a loss for the 9 months to 31/3 2011 of $382 Million.
> So this financial year LEI will return a negative ROE.
> Many of their projects are runniing at a loss, with more bad news today.
> How could you calculate an intrinsic value using a negative ROE ?
> 
> LEI also claim they will make a profit next financial year 2011/2012.
> They may or they may not.
> But their performance would have to be a lot better than this year just to break even.
> Using the I/V method of RM, you need to start with a company at least showing a ROE of 12 - 15%, and preferably a lot higher.
> 
> For the RM system you are using on this thread, can't understand why LEI would even be worthy of consideration until their results improve considerably.




I was using data from Commsec, had no idea about that announcement.


----------



## InvisbleInvestor

notabclearning said:


> Can anyone give me a valuation of mortgage choice. I have it at $1.50




Think I know what I did wrong, but still getting $2.30. What IRR did you use?


----------



## Noddy

InvisbleInvestor said:


> I'm obviously doing something wrong. Getting around $5. No idea what I've done either lol.
> 
> 
> 
> 
> I was using data from Commsec, had no idea about that announcement.




Info is on the commsec website.

Tick on News & Research

Company Research

Company profiles

Under ASX code - LEI then enter

Announcements

Scroll down to 16/5 2010 -2011 third quarter results.

PS. LEI had a capital raising, in April from memory, at $22.50 followed by a bookbuild at $22.70. Closed at $21.69 today. Already lost a dollar since the capital raising. LEI has been a cronic underperformer for some time now.
Often pays to go through this exercise before trying to calculate a valuation.
May save you a lot of money.


----------



## InvisbleInvestor

Noddy said:


> Info is on the commsec website.
> 
> Tick on News & Research
> 
> Company Research
> 
> Company profiles
> 
> Under ASX code - LEI then enter
> 
> Announcements
> 
> Scroll down to 16/5 2010 -2011 third quarter results.
> 
> PS. LEI had a capital raising, in April from memory, at $22.50 followed by a bookbuild at $22.70. Closed at $21.69 today. Already lost a dollar since the capital raising. LEI has been a cronic underperformer for some time now.
> Often pays to go through this exercise before trying to calculate a valuation.
> May save you a lot of money.




Cheers, thanks Noddy.


----------



## notabclearning

Im using a RR of 15%


----------



## InvisbleInvestor

Fair enough, I'm using 13%.


----------



## notabclearning

I really liking Mortgage choice, High yeild grossed up at almost 15%. No debt. But you gotta believe in australian housing markets for the future.


----------



## zac

notabclearning said:


> I really liking Mortgage choice, High yeild grossed up at almost 15%. No debt. But you gotta believe in australian housing markets for the future.




Given mortgage lending is a competitive market, what makes MC stand out??

There also have been some interesting articles written about housing in the forseeable future.
In Sydney certain suburbs since 2004 have either remained at the same value or gone slightly backwards.

RM also has added food for thought by commenting on the baby boomers that are retiring selling their home/s to fund retirement. All the extra supply will also lower prices, assuming thats what the baby boomers will do.


----------



## notabclearning

zac said:


> Given mortgage lending is a competitive market, what makes MC stand out??
> 
> There also have been some interesting articles written about housing in the forseeable future.
> In Sydney certain suburbs since 2004 have either remained at the same value or gone slightly backwards.
> 
> RM also has added food for thought by commenting on the baby boomers that are retiring selling their home/s to fund retirement. All the extra supply will also lower prices, assuming thats what the baby boomers will do.




its an a2 on his list


----------



## skip9

Hey guys, just wondering what people come of for RIO

This is my first attempt at valuing so i just chose RIO for no particular reason. 

Here is what i did, please correct me if i did something wrong..

Equity (As of 15th June '11) = 57,397,000
Shares Outstanding = 1,962,000
EqPS = $29.25

EPS = 699 cents
DPS = 106 cents
Payout Ratio = 15.16%

Return on Equity (Could not find NPAT - where do i look?) = 24%

IRR = 12%

Table 11.1 (100% Payout) 12% x 22.50% = 1.875
Table 11.2 (0% Payout) 12% x 22.50% = 3.100

Table 11.1: $29.95 x 1.875 = $56.16
Table 11.2: $29.95 x 3.100 = $92.85

56.16 x .15 = $8.42
92.85 x .85= $78.92

$8.42 + $78.92=

Intrinsic Value of $87.34


How did i go? Where does Margin of Safety come into this?


----------



## skip9

That was done without EPS and DPS of december '10 and not forecast.. does this matter?


----------



## McLovin

zac said:


> Given mortgage lending is a competitive market, what makes MC stand out??
> 
> There also have been some interesting articles written about housing in the forseeable future.
> In Sydney certain suburbs since 2004 have either remained at the same value or gone slightly backwards.
> 
> RM also has added food for thought by commenting on the baby boomers that are retiring selling their home/s to fund retirement. All the extra supply will also lower prices, assuming thats what the baby boomers will do.




I'm fairly bearish on housing credit, I just don't see how you can keep stuffing the pinata; eventually something's gotta give.

I owned MOC way back in about 2002, it did pretty well, of course back then getting into debt was the flavour of the day. I just don't see where the growth in lending is going to come from. They do have a pretty good network of brokers, so maybe they'll look into utilising that asset to develop other revenue streams.

Not using a strict RM methodolgy, I get a value of $1.10 for MOC. RM got $0.99.


----------



## notabclearning

McLovin said:


> I'm fairly bearish on housing credit, I just don't see how you can keep stuffing the pinata; eventually something's gotta give.
> 
> I owned MOC way back in about 2002, it did pretty well, of course back then getting into debt was the flavour of the day. I just don't see where the growth in lending is going to come from. They do have a pretty good network of brokers, so maybe they'll look into utilising that asset to develop other revenue streams.
> 
> Not using a strict RM methodolgy, I get a value of $1.10 for MOC. RM got $0.99.




I think mortgage choice is appealing for a number of reasons:
Strong yield, around 15% grossed up. Quite impressive in itself. 
Increasing IV. In 2008 I have it for .70, 2009 .90, 2010 1.60 and 2011 1.50
High ROE
No Debt

Definitely one to keep an eye on. Also I would like to see Kermits and Macros valuations using their cool programs.


----------



## kermit345

My current valuation on MOC is $2.10 falling to $1.60 according to the data feeding into my spreadsheet. I haven't actually had an in depth look their revenue streams or made any estimates of future earnings myself so will just have to trust my data flow for now.

While a decent yield may be appealing, its not what i'd be looking for in a value investment. I have the IV falling from a current view to a forecasted view and it looks like you do as well notabclearning.

MOC doesn't interest me greatly. Banks are being shorted by international fund managers at the moment because its the only way they can gain exposure to a property downturn in Australia. While MOC may make money out of a fall once it hit the floor and start to make gains, its not a scenario that would occur overnight. My understanding is they don't really have a competitive moat either however i'd have to look into it further. I see other opportunities more worthy of being researched though compared to MOC at the moment.


----------



## tollbridge

Excuse my lack of Roger's current I/V method and input into this thread but I'd just like to point out that I first met Roger Montgomery in 2005 when the ASX was still conducting their face-to-face "Introduction to the Sharemarket" course. He ran a module called "Selecting and Analysing Shares" and not one person walked out of the auditorium in Sydney without a degree of excitement or belief that his long term strategy "works". 

At this point in time he was the founder and director of Clime Asset Management which at the time was trading at $1.00 (currently trading at $1.015) which goes to show the "long term approach". I believe CAM was a fund specifically tailored to sophisticated investors and speculate it was a project on which Roger could trial his I/V strategy according to the risk appetite of his clients. Originally based in a small office in Balmain, CAM is now located in Macquarie Place. I specifically remember Roger stating he didn't personally live the typical "Fund Manager" lifestyle and flew economy everywhere he could. His old website supported this ideal. On the 4/5/09 Roger resigned as Chairman but still remains on the board of directors.

I've watched Roger over the past 7 years and certainly believe he's one of Australia's leading "long-term" investment educators. He's commitment to educating the public is beyond anything I've seen before. 

Unfortunately I'm not in the position to be able to commit to long-term investments due to my age, impatience and focus on quick profit. When I'm approaching 40+ though I'd certainly be following Roger's advice.

Cheers

Alexander


----------



## Huskar

tollbridge said:


> Excuse my lack of Roger's current I/V method and input into this thread but I'd just like to point out that I first met Roger Montgomery in 2005 when the ASX was still conducting their face-to-face "Introduction to the Sharemarket" course. He ran a module called "Selecting and Analysing Shares" and not one person walked out of the auditorium in Sydney without a degree of excitement or belief that his long term strategy "works".
> 
> At this point in time he was the founder and director of Clime Asset Management which at the time was trading at $1.00 (currently trading at $1.015) which goes to show the "long term approach". I believe CAM was a fund specifically tailored to sophisticated investors and speculate it was a project on which Roger could trial his I/V strategy according to the risk appetite of his clients. Originally based in a small office in Balmain, CAM is now located in Macquarie Place. I specifically remember Roger stating he didn't personally live the typical "Fund Manager" lifestyle and flew economy everywhere he could. His old website supported this ideal. On the 4/5/09 Roger resigned as Chairman but still remains on the board of directors.
> 
> I've watched Roger over the past 7 years and certainly believe he's one of Australia's leading "long-term" investment educators. He's commitment to educating the public is beyond anything I've seen before.
> 
> Unfortunately I'm not in the position to be able to commit to long-term investments due to my age, impatience and focus on quick profit. When I'm approaching 40+ though I'd certainly be following Roger's advice.
> 
> Cheers
> 
> Alexander




For the sake of balance it should be observed that Roger was at Clime when it was over-exposed to Credit Corp as it imploded from $12 to 50c. He lost his investors a lot of money on that one (perhaps he has made it back since...).


----------



## ROE

Huskar said:


> For the sake of balance it should be observed that Roger was at Clime when it was over-exposed to Credit Corp as it imploded from $12 to 50c. He lost his investors a lot of money on that one (perhaps he has made it back since...).




that the beauty of fund managers, when the good time roll on you rack in fees
when bad time arrives you lose other people money 

Is there a better job out there?


----------



## Macros

RE: Mortgage Choice - MOC

My 2c...

I think that the more confident people are in purchasing property, the higher the turnover. Higher turnover = good for MOC. Lower turnover = bad for MOC. MOC therefore should be highly correlated to the property markets.

Confidence would be impacted by:
Expectations of price growth
Confidence in the economy
Confidence in the security of employment tenure
Expectation for steady or affordable interest rates
Ease of access to additional lending
-> all of which then increases confidence and turnover and has a virtuous cycle on the way up and a destructive cycle on the way down.

From the points listed above, none are currently in MOC's favour and this won't be turning around soon. 

The exponential growth in credit the world (incl Aus) has had for the past few decades has ended as with all exponential increases. Credit growth can not return to its previous trajectory.

I'll make a call and suggest that MOC will need to raise capital in the next 12 months. This is a risky business, possibly likely to experience liquidity issues and declining profitability. The trend is definitely down.


----------



## Macros

I've recently conducted an analysis of the ASX20 by creating a weighted average aggregate.

Would appreciate feedback.

http://macrovalueinvestment.blogspot.com/2011/06/what-do-aussie-markets-look-like-asx20.html


----------



## kermit345

Macros just thought i'd let you know that your valuations of MOC are almost identical to mine, however yours are 2 years earlier (as per your other recent comments on future valuations being realised earlier).


----------



## Macros

Thats good to hear Kermit


----------



## skip9

Quick Question guys...

If a company retains all its profits do you simply multiply EqPS by Table 11.2 Multiplier to produce the Intrinsic Value?

I attempted to do FML and result was $0.05 but am not sure where i have gone wrong..

2010 EOY Equity x Shares Outstanding = EqPS $0.034c 
Payout Ratio is 0%
ROE of 15%
Investor Required Return of 12%

Any tips?

Sorry for being a Newbie to Rogers Method..


----------



## kermit345

Sorry but I can't help there skip. I'm only familiar with the essence of Roger's investing principles but not the actual formula.


----------



## InvisbleInvestor

skip9 said:


> Quick Question guys...
> 
> If a company retains all its profits do you simply multiply EqPS by Table 11.2 Multiplier to produce the Intrinsic Value?




Page 184, second sentence of his book clearly gives the answer. I'll try getting an iv for it now...


----------



## InvisbleInvestor

I got an IV lower than yours, not sure how you got such a high ROE. Did you average it over the past two years at least? In any case, the ROE would be much too low for me to consider buying.

For the purposes of valuing it, I don't think you've done anything terribly wrong. I would probably give it a much higher IRR than you did though.


----------



## skip9

Invisible i used Broker Forecast 2011 NPAT divided by 2010 EOY Equity.. Should i be using 2010 EOY NPAT?


----------



## InvisbleInvestor

It's what I do. Off the top of my head, not sure what it says in the book, but I do use last eofy npat.


----------



## skip9

Ahh i have been using Forecasted EOY NPAT rather than Reported NPAT from previous financial year.. may be my problem..


----------



## McLovin

skip9 said:


> Invisible i used Broker Forecast 2011 NPAT divided by 2010 EOY Equity.. Should i be using 2010 EOY NPAT?




You have assumed a zero payout ration but then used 2010 EOY equity. If a company is retaining all its earnings then 2011 EOY equity will be significantly higher (hopefully) than 2010. I'd use the average of the two.


----------



## skip9

Figured a bit of stuff out today.. 

Did a Valuation of MML as shown below.. how does it stack up compared to others?

ROE is calculated by adding BOY Equity + Forecasted EOY Equity / 2 which is then divded into the NPAT.

Forecasted NPAT is done via calculating EPS Growth % from EPS Forecasts and then added onto previous NPAT figure.. e.g. if EPS growth Rate is 5% then 5% of Previous NPAT is added onto that total figure giving a rough forecasted NPAT.. 

IRR of 12%


----------



## waimate01

skip9 said:


> Figured a bit of stuff out today..
> 
> Did a Valuation of MML as shown below.. how does it stack up compared to others?




Looks to me like you've got Shareholders Equity in the wrong years.

From the company accounts, 2010A was $175m, but you're showing that for 2011E.

Also note that these equity figures are in US$ -- But your earnings figures seem to be in A$. Thus ROE seems wide of the mark.


----------



## VSntchr

For the techies out there, does anyone know how to code a cell so that the multiplier values can automatically appear after entering the RR and ROE? its such a pain entering it manually every time a change occurs!


----------



## McLovin

VSntchr said:


> For the techies out there, does anyone know how to code a cell so that the multiplier values can automatically appear after entering the RR and ROE? its such a pain entering it manually every time a change occurs!




If you copied the entire table into Excel, then using the INDEX function with a couple of nested MATCH functions will do what you want.

The formula is floating around on here somewhere that shows how RM developed that table.


----------



## kermit345

I'm an excel junkie so could probably work up the equations for you if you had the spreadsheet handy.

I'm assuming you would like to enter the RR and ROE so that it automatically drops the correct multiplier value from a table into a particular cell or the equation.

I don't use Roger Montgomery's method of valuation so don't have the spreadsheet coded up already myself, but if you can upload the excel doc i can code it in for you if you like. Keep in mind I stick to using the equations I know best in excel which may not always be the most efficient but get the job done. So if your looking for a neat way of doing it you may be best to ask someone else.


----------



## skip9

waimate01 said:


> Looks to me like you've got Shareholders Equity in the wrong years.
> 
> From the company accounts, 2010A was $175m, but you're showing that for 2011E.
> 
> Also note that these equity figures are in US$ -- But your earnings figures seem to be in A$. Thus ROE seems wide of the mark.




Ahh i didnt realise that the figures were $US - jsut checked the broker report and they are in $US.

Do i just use the current exchange rate or is there an average or what not exchange rate that i should calculate it off?


----------



## waimate01

skip9 said:


> Ahh i didnt realise that the figures were $US - jsut checked the broker report and they are in $US.
> 
> Do i just use the current exchange rate or is there an average or what not exchange rate that i should calculate it off?




It can be fairly complicated. Most businesses apply a weighted exchange rate month by month, and then there's an adjusting entry for realised exchange gains or losses. Doing it yourself is fraught with error because its exceedingly unlikely you'll choose the same method as whoever is generating the AUD figures you're also using, and even modest timing differences can produce large differences.

The best approach, IMO, is to grab your data from a single source in a single currency. Grab a free morningstar account and you can get all your data there. Or use your comsec or etrade account and grab it from there. Same same.


----------



## InvisbleInvestor

Can anyone give me an IV for IDE? Thanks in advance.


----------



## notabclearning

Can anyone give me an IV for HFA? Thanks in advance


----------



## kermit345

You guys need to provide your own IV's and info on why these are businesses worth valuing rather than just asking people to value you them for you.


----------



## rx2

Macros said:


> RE: Mortgage Choice - MOC
> 
> My 2c...
> 
> I think that the more confident people are in purchasing property, the higher the turnover. Higher turnover = good for MOC. Lower turnover = bad for MOC. MOC therefore should be highly correlated to the property markets.
> 
> Confidence would be impacted by:
> Expectations of price growth
> Confidence in the economy
> Confidence in the security of employment tenure
> Expectation for steady or affordable interest rates
> Ease of access to additional lending
> -> all of which then increases confidence and turnover and has a virtuous cycle on the way up and a destructive cycle on the way down.
> 
> From the points listed above, none are currently in MOC's favour and this won't be turning around soon.
> 
> The exponential growth in credit the world (incl Aus) has had for the past few decades has ended as with all exponential increases. Credit growth can not return to its previous trajectory.
> 
> I'll make a call and suggest that MOC will need to raise capital in the next 12 months. This is a risky business, possibly likely to experience liquidity issues and declining profitability. The trend is definitely down.
> 
> 
> View attachment 43323
> 
> View attachment 43322
> 
> View attachment 43321
> 
> View attachment 43324




Macros - I have to say I am impressed with your presentation of data! I thought my excel presentation was pretty good, but you take it to another level.

Are you able to share what tools you are using to creating and managing your reports? Is it purely excel? 

*Update: Ok I have just been going back and reading older posts and Macro clearly tells us that he is using Excel. Great achievement - it looks fantastic. However I have a quick question. If a company is looking like an opportunity do you then manually open up the annual reports to validate your numbers? I remember Roger mentioning that frequently data is often incorrect on brokerage sites, or they report different date (I must say in my experience I haven't observed this).*


----------



## kermit345

rx22,

I use Excel in a quite similar way to Macros and have established a graphical output similar to what Macros has achieved however with less detail and a different look. His suits his purposes, mine suits mine, however I believe both are quite efficient and effective in portraying the value of a company.

Anyhow, not sure about Macros approach, but what you've described is certainly what I aim to do. Use excel to basically punch in a stock code, FGE for example, all relevant data updates automatically whether its pulled from morningstar, Ninemsn, yahoo etc etc. Usually the ballpark of this data is correct so if the graphs and information it provides shows a good case for further information, then annual statement can be used to manually enter any errors, revisit info and charts, if still compelling case then the next part is choosing when to enter.

Thats the basics of it, and validates what you've said about checking online data vs the annual statements. I'll post an example tonight when i'm home from work of my excel output.

Cheers


----------



## kermit345

Forge Group Ltd below, tell me what you think.


----------



## Intrinsic Value

kermit345 said:


> Forge Group Ltd below, tell me what you think.
> 
> View attachment 43545




Interesting your valuations are about the same as mine.

I am using RMs model.

FGE is still one of the few companies out there with a reasonable MOS along with MCE. TSM, and CCP.


----------



## rx2

kermit345 said:


> Forge Group Ltd below, tell me what you think.
> 
> View attachment 43545




Good work Kermit... Like Macro's, it provides an easily interpret-able form. Last night I started on revising my spreadsheet to now incorporate automated feeds and include a few new charts. Unfortunately time is limited, work, wife and kids seem to take a majority of this. So in between all that I am updating my spreadsheet, hopefully have something in a couple of weeks which I will post.

Charts last night was interesting in excel, especially putting together a combined area chart + stepped chart with a single axis timeline..... all part of the fun though


----------



## kermit345

Intrinsic Value - My model is completely different to Roger's, but i'm glad it yields close to the same results as your workings, puts my mind at ease a bit.

rx2 - I have the advantage of being 24 years old and having minimal responsibilities and workingin the finance industry . If you need any help with the excel charting side of things feel free to PM me, i'll help where i can. The actual Excel help is pretty useful as well


----------



## McLovin

kermit345 said:


> Intrinsic Value - My model is completely different to Roger's, but i'm glad it yields close to the same results as your workings, puts my mind at ease a bit.
> 
> rx2 - I have the advantage of being 24 years old and having minimal responsibilities and workingin the finance industry . If you need any help with the excel charting side of things feel free to PM me, i'll help where i can. The actual Excel help is pretty useful as well




Hi kermit

I assume you wrote code to pull the data from Yahoo? If so, you don't know any sites that show how to work with the individual table fields do you? It's a 5 minute job to pull the data in with an automated web query, but I'm hoping there's a way to actually pull in the individual fields. Appreciate any links or hints you might have 

Thanks


----------



## kermit345

Macros put me onto an addin for excel which then allows you to put in equations that draw from yahoo. I used these equations with some manipulation to get to the point i'm at. I can't remember the name of the addin off top of my head, but if you google you may be able to find it.


----------



## ljsalda

ubtheboss said:


> Roger Montgomery's new book expounds and expands Warren Buffet's methods of calculating/ forecasting a share price based on the intrinsic value of a company.
> 
> Roger has a blog but not an efficient forum where students can help each other. If you are a student of Montgomery/ Buffet and want to share or ask questions about your calculations/ methods post your thoughts here.
> 
> All for one and one for all!



The tables 11.1 and 11.2 which are used to obtain the Multiplier end at a ROE of 60%. How does one extrpolate for companies with Roe above 60%.

ljsalda


----------



## waimate01

kermit345 said:


> Forge Group Ltd below, tell me what you think.




A lovely looking graph, without doubt.

It looks like you've defined 'value' to be  EPS * 20, all the way from 2007 to 2013, using the Morningstar EPS forecasts.


----------



## kermit345

waimate01 said:


> A lovely looking graph, without doubt.
> 
> It looks like you've defined 'value' to be  EPS * 20, all the way from 2007 to 2013, using the Morningstar EPS forecasts.




The equation I use is definitely not as simple as multiplying EPS by 20.

Takes into account EPS, DPS, ROE, D/E and Required Return. I also discount the DPS component as I believe theirs more benefit in retained EPS if the ROE can be replicated at an ongoing basis rather then paying a dividend.

Glad you like the look of the graph, but do i detect some sarcasm and skepticism in your post?


----------



## waimate01

kermit345 said:


> The equation I use is definitely not as simple as multiplying EPS by 20.
> 
> Takes into account EPS, DPS, ROE, D/E and Required Return. I also discount the DPS component as I believe theirs more benefit in retained EPS if the ROE can be replicated at an ongoing basis rather then paying a dividend.
> 
> Glad you like the look of the graph, but do i detect some sarcasm and skepticism in your post?




No no, I do like your graphs -- no sarcasm -- they're very visually appealing.

But looking at your FGE "EPS vs DPS vs valuation chart", the valuation pips pretty much sit at the top of the earnings bars, and since the ratio between the LHS and RHS scales is 1:20, that means the valuation is pretty much 20 times earnings, from 2007 to 2013.  

I don't doubt that you're using all those factors you describe, but the result is a simple "value = eps*20", or very close to it. If it was anything different, the value pips would sit at a different place relative to the top of the EPS bar.  Hard to judge the exact values from the graph, but I'm just going from the fixed relativity between EPS and value.


----------



## kermit345

Ah ok fair enough, sorry thought you were having a bit of a crack.

The equation puts a high emphasis on Earnings re-invested back into the company (EPS less DPS). Therefore typically as a company maintains EPS growth with a relatively constant payout ratio you'll typically see my valuations trend as you've indicated. Not always typically by a multiplier of 20 as thats not what the equation follows. Must also make mention that it remains at the tip of each EPS bar simply due to the max and min axis values as automatically determined by Excel. I could change these and it wouldn't fit as closely but I guess it just shows the relevance of EPS and DPS to my valuation model.

If Forge was to increase its payout ratio, you'd see the valuation change quite a bit.

I can see where your coming from though, and I think that consistency is also due to the required rate of return staying the same. I'd be very interested in putting together an equation that automatically determines this rather then manually entering based on my assumptions but i'm not sure how exactly to go about it. Roger has basically said he won't be dropping any hints on how the equation he uses to automatically determine Required Rate of Return either.


----------



## New Stratos

Hi Kermit, 
   what are you measuring for 'Management' (shown at the bottom of your graphical presentation)?

Chris


----------



## kermit345

Just a manual allocation I make on what I think the ability of management is which has a very slight effect on the overall valuation equation.

Basically when i'm looking at a company, I enter 3 things into my spreadsheet. The stock code, a management allocation (100% being normal) and the required return. That entire graphic then automatically populates and then if fixes need to be made to any of the financials I can manually adjust myself as well.

I'd like to have the required return automated with an in-built equation but haven't looked into it enough yet. I could probably remove the management allocation part as it has a tiny effect on the valuation anyway, but believe its important to recognize good management as well.

Some people will agree or disagree with it, but I'm not too fussed as its the system i've developed over more than 12 months now and i'm very happy with where it has ended up. I'm building up capital now to start aggressively investing in stocks my spreadsheet and further research identify. I'm already invested in FGE and MML which have came down quite a bit recently, but I believe as risk returns to the market and their reporting takes place they will recover well.


----------



## Macros

I have no problem with Roger's valuation techniques or assessment of businesses based on sound fundamentals. However, I would like to point out here that a big flaw with Roger's approach, and many value investors, is to avoid the big issues. Roger states that he is a terrible economist, but I think understanding the economy and direction is a very important factor with investing.

I used to use Roger's blog on a regular basis but have found that Roger has has somehow turned it into a resource that caters to popular opinion. With investing, everyone has a different view, but it doesn't mean that every view is correct all the time.

For some reason, many value investors love retail companies. Roger states that they have a sustainable competitive advantage and can create economic moats. Well what has happened to David Jones? Where has their moat gone? Was it ever there? DJS is down from over $5 in Sept last year to $3.15 today (-37%). I'm not surprised in the least. Retail stocks are suffering due to a structural issue in that we have ended an exponential credit expansion cycle. This is a big problem! The adjustment to online retailing etc is, in my opinion, based primarily on consumers adjusting to lower cost options as a result of the massive change to the credit cycle.

Given that valuations are driven by earnings strength and direction, is it not of vital importance to have an indication of where earnings are likely to head?

Also with the banks. Why does Roger like banks? They are also supported and liked by many 'value' investors due to their apparent safety and high dividends. In my view they are a terrible place to be given the credit cycle and global credit issues. 

Roger mentioned that he either owned, or was looking at a gold producer. It wasn't very clear and gave the impression that it was a temporary issue. Why are companies such as BHP and RIO acceptable, yet exceptionally profitable companies such as Medusa MML and Ramelius RMS frowned upon. The gold thread that Roger started was closed fairly quickly, and instead of addressing the issue, it was treated as wild speculation.

If you aren't seriously looking at gold producers, then you have your held in the sand with regards to the global debt crisis which is ongoing and will end with a bang. Yet somehow, gold producers and gold in particular, is seen as almost sacrilegious to many value investors. Why? This is not a religion. As an investor one should never close their eyes to the big issues or have preconceived ideas as to what is good or bad.

If one can accept that the big trends are important, why is it that retailers = safe and profitable gold producers = speculation? Surely it depends on the environment and economic landscapes which can last for many years if not decades.

Thoughts?


----------



## The Trooper

I agree with you in regard of the intrinsic valuation method if only considering the calculations. This is not what Roger is saying though as his definition of excellent businesses are those that also have future prospects and sound management. It is understandable how a business with sound qualities and good underlying return on equity is likely to withstand market or global trends better than a business which is overcapitalised for the same. Buffet also avoided stocks where he did not understand the underlying business well enough, even if some of those businesses had good return on equity and profits. Each investor will have their own market (business) knowledge and understanding of different fields which is crucial to be exercised in addition to valuation.


----------



## Macros

Understand where you are coming from Trooper, but I guess my view is this: regardless of the fact that investors have area's of competence, one should be aware of the big issues.

Is it not better to invest in areas which have an economic tail-wind and also have sound qualities? If a business has sound qualities, it can still fail to adapt to difficult economic head-winds should they last longer than expected. So while these barriers can provide protection in the short-term, I don't think they last unless the business is able to adapt. It is also apparent to me that many do not succeed at adaptation when required (e.g. Colorado, Angus & Roberson etc etc) and are replaced with new companies that better understand the environment.

I think that sometimes people who have specific knowledge of a particular industry can fail to appreciate some of the risks that that industry faces. I think that this is due to familiarity resulting in a greater comfort level and lower appreciation of risk.


----------



## The Trooper

I tend to agree with you and you have raised some very good points. These are things the investor rather than the speculator should understand relative to their investment. If a good business fails to adapt it ceases to be a good business. Hopefully by understanding the financial indicators of this failure as well as keeping abreast of the global information available an investor would recognise this before the market. There is however no certainty in sharemarket investment and i think you have touched on this well.


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## Tysonboss1

Macros said:


> If one can accept that the big trends are important, why is it that retailers = safe and profitable gold producers = speculation? Surely it depends on the environment and economic landscapes which can last for many years if not decades.
> 
> Thoughts?




Is buying and holding gold Investing?

In Security Analysis, Benjiman Graham proposed a clear definition of investment that was distinguished from what he deemed speculation. It read,

"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

No doubt that Gold purchased outside of bubble conditions meets the first condition being safty of principle, But it fails the second test of generating an adequate return, you could say it actually creates a negative return due to storage costs.

So buying gold is not investing, it is speculating. Now there can be intelligent speculation just as there is intelligent investing, Whether buying gold at 100year highs is intelligent only time will tell. But it is not investing in the true sense of the word. 

Is owning a gold producer Investing?

On the face of it, yes.

A gold producer is in the business of digging up a commodity and selling it, It's profit depends on the sale price being well above it's cost of production.

Now to truely be considered an investment there must exist a margin of safty. For a producer with exposure to a single commodity you would not only want to be able to by the producer at a price that low enough that it's current earnings will generate a sound return, but also that it will still generate a sound return based on a fall in commodity prices.

Gold is currently at a 100year high, it is selling for over 5 times it was just 10 years ago. Some might agree gold is in a speculative bubble and when working out whether a gold producer is profitable a much lower gold price should be used.

Not many gold producing companies have all the attributes that attract value investors based on a much lower gold price.


----------



## notting

I am glad Roger claims to be a crap economist. Better the churl who knows he's a churl than the scholar who's proud of his scholarship.
I'v never seen a good economist. Only those who think they are or those who are popular for a minute. Every one loved Greenspan, some even had expensive paintings of him on there corporate walls! Then came the GFC!!!  The pictures were swiftly hidden away in cuboards etc.

Hmmmmmm the world is rather fullish. Seems food,water and resources are looking a little shortish.
The breadliners have stopped working because they can't afford food,the tucks have stopped transporting because the fuel is costing them more than their profits. One things for sure housing, land and comodities aintever going to be cheaper. What all the economists have to say. 'It's a sub prime credit squeeze'

All together now....
On the count of three 1,2,3.
'Well we can grow our way out of this crisis.'
Anyone got a better idea?............
Another Idea?
An idea? Lets have a drink, it's Friday.

PS if you want to forcast global growth or no growth look at oil now! if its above 75 tepid to zero growth shortly.


----------



## Macros

Tysonboss1,

This is a great post in that you have demonstrated the exact frustration that I have with investors that follow the traditional 'value' philosophy.

You quote: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

You conclude that gold fails the second test.

If you were to 'invest' in physical gold, you are not investing as it doesn't provide a return on capital. You are correct in your conclusion on this point, but for the wrong reason. Gold does not provide a return on capital because there is no liability and no counter-party. 

Gold held in storage is exactly the same as a bunch of cash notes held in storage. The difference being that cash notes are fiat currency and are eroded in their purchasing power over time whilst gold protects against monetary debasement. Neither are a true investment until they are lent out and receive interest in return, which takes on the counter-party risk that you expect return of your capital. We perceive that lending cash to the bank is a risk free transaction, but it isn't.

So when looking at investing in companies, I find it curious that those who say 'why invest in gold companies?' and use the case of holding physical bullion to conclude that it is speculation. It should be clear that there is a delineation between investing in gold producers and physical bullion. One is an act of investment and the other is just money.

When investing in gold producers, I believe that you are investing in the profitability of these companies as opposed to the resources in the ground. On this basis, they are no different to any other business. I've written more about this issue here http://macrovalueinvestment.blogspot.com/2011/06/valuing-resource-companies-including.html which takes the concept of investing in the flow (profits) as opposed to stock (resources in the ground).

You say:
"Now to truely be considered an investment there must exist a margin of safty. For a producer with exposure to a single commodity you would not only want to be able to by the producer at a price that low enough that it's current earnings will generate a sound return, but also that it will still generate a sound return based on a fall in commodity prices."

First of all, as with investing in any business, I believe that you should be aware of the big issues and trends. There is no difference between a fall in commodity prices and a retailer in a deflationary environment where you have to sell your goods for lower prices.

Therefore you must have an idea of where the trend lies. If you don't, then you are speculating, regardless of it is a resource producer, retailer or technology business. It is clear that any business that has tight margins between cost of goods and sale prices is a higher risk business.

You say:
"Gold is currently at a 100year high, it is selling for over 5 times it was just 10 years ago. Some might agree gold is in a speculative bubble and when working out whether a gold producer is profitable a much lower gold price should be used."

I'm not having a go at you personally here, because I've heard this sort of view many times and I believe that it demonstrates a complete lack of understanding on this issue and the issues that the world faces. Gold is at a 100 year high because the fiat based currencies are at a 100 year low. Gold hasn't changed in price, it is only the paper currencies that are losing purchasing power that have decreased. If you think that gold is in a speculative bubble, then you have not truly considered the issues we face in world currency systems and where they are headed. On an inflation adjusted basis, based on the traditional measure of inflation, gold would be $5,000 per ounce today. This doesn't take in to account the level of global debt outstanding that needs to be defaulted via monetary debasement. You may disagree with me on this, but it isn't a matter of contention.

You say that "a much lower gold price should be used" when working out valuation. Well, no. You don't do this for other businesses, so why would you apply it here. The only reason that this should be the case is if you know which direction it is headed and why. You could apply this concept to an iron ore producer, but if you were to apply it to a gold producer it only means that you have not performed sufficient research. Yes, there can be short-term fluctuations, but this applies to all things.

What if the actions taken by world leaders were responsible and we were on a semi-gold standard like the great depression? Retail stocks would get CRUSHED in massive deflation as the price of their goods would suffer massive falls. The valuation is based on future earnings and the earnings you thought they had would disappear rapidly.

This is my point. You need to know what is going on and where things are headed. Otherwise you are in the dark and don't have the margin of safety that you thought you did.

There are quite a few gold Australian producers have total cost of production around $600 per ounce. Current AUS gold price is heading towards $1,500 per ounce. Is a 60% margin not enough for you? Gold is heading MUCH higher due to world currency issues. This is not speculation, it is fact. We either default on all debt and have a great depression or the debt is inflated away and purchasing power is eroded even further. Given actions to date, we are already on the inflation pathway and it snowballs from here.

I'm not a gold bug or have any particular affinity to gold, however I do read in to what is going on from a big picture point of view. As someone with this perspective and as a value investor, there is many attributes that attracts me to gold producers given the environment ithat we face.


----------



## Tysonboss1

Macros said:


> Is it not better to invest in areas which have an economic tail-wind and also have sound qualities? If a business has sound qualities, it can still fail to adapt to difficult economic head-winds should they last longer than expected.
> 
> I think that sometimes people who have specific knowledge of a particular industry can fail to appreciate some of the risks that that industry faces. I think that this is due to familiarity resulting in a greater comfort level and lower appreciation of risk.




yes, that comes under the "Understanding the business" to be able to say that you truely understand the business, you have to have an understanding of the risks faced by that business and the likly outcomes economic factors will have on the operating performance.

Offcourse no matter how good your understanding, and how good a certain business is, it can still end badly so the margin of safty principle also calls for some diversfication, So even if part of you portfolio goes badly in aggregate you will still do welll


----------



## Macros

Notting,

My point is that we need to call a spade a spade. 'Economists' like Alan Greenspan are the sorts of people that assisted and responsible in the mess we find ourselves today. Most traditional economists don't look at the world as it is and instead look at it with the tinted glasses of their failed traditional Keynesian economic models.

My point is that as investors we need to be economists. Not economists as in the profession, but we need to watch the economy and figure out what is going on. I believe that the better that this is done, the more successful one can be.

Yes, oil is a massive issue and it seems that we could have a supply/demand shortfall in the second half of this year. Clearly this is negative for economic growth. We can still have growth in nominal terms but it will be a severe drag in real terms unless there are some solutions found quickly. Given shenanigans like the US and IEA selling 60 million barrels, which is around 2/3 of one day usage, in order to try to pull down the price, it seems that there are no near term solutions that are being supported by governments.


----------



## Tyler

Macros said:


> Tysonboss1,
> 
> This is a great post in that you have demonstrated the exact frustration that I have with investors that follow the traditional 'value' philosophy.
> 
> You quote: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."
> 
> You conclude that gold fails the second test.
> 
> If you were to 'invest' in physical gold, you are not investing as it doesn't provide a return on capital. You are correct in your conclusion on this point, but for the wrong reason. Gold does not provide a return on capital because there is no liability and no counter-party.
> 
> Gold held in storage is exactly the same as a bunch of cash notes held in storage. The difference being that cash notes are fiat currency and are eroded in their purchasing power over time whilst gold protects against monetary debasement. Neither are a true investment until they are lent out and receive interest in return, which takes on the counter-party risk that you expect return of your capital. We perceive that lending cash to the bank is a risk free transaction, but it isn't.
> 
> So when looking at investing in companies, I find it curious that those who say 'why invest in gold companies?' and use the case of holding physical bullion to conclude that it is speculation. It should be clear that there is a delineation between investing in gold producers and physical bullion. One is an act of investment and the other is just money.
> 
> When investing in gold producers, I believe that you are investing in the profitability of these companies as opposed to the resources in the ground. On this basis, they are no different to any other business. I've written more about this issue here http://macrovalueinvestment.blogspot.com/2011/06/valuing-resource-companies-including.html which takes the concept of investing in the flow (profits) as opposed to stock (resources in the ground).
> 
> You say:
> "Now to truely be considered an investment there must exist a margin of safty. For a producer with exposure to a single commodity you would not only want to be able to by the producer at a price that low enough that it's current earnings will generate a sound return, but also that it will still generate a sound return based on a fall in commodity prices."
> 
> First of all, as with investing in any business, I believe that you should be aware of the big issues and trends. There is no difference between a fall in commodity prices and a retailer in a deflationary environment where you have to sell your goods for lower prices.
> 
> Therefore you must have an idea of where the trend lies. If you don't, then you are speculating, regardless of it is a resource producer, retailer or technology business. It is clear that any business that has tight margins between cost of goods and sale prices is a higher risk business.
> 
> You say:
> "Gold is currently at a 100year high, it is selling for over 5 times it was just 10 years ago. Some might agree gold is in a speculative bubble and when working out whether a gold producer is profitable a much lower gold price should be used."
> 
> I'm not having a go at you personally here, because I've heard this sort of view many times and I believe that it demonstrates a complete lack of understanding on this issue and the issues that the world faces. Gold is at a 100 year high because the fiat based currencies are at a 100 year low. Gold hasn't changed in price, it is only the paper currencies that are losing purchasing power that have decreased. If you think that gold is in a speculative bubble, then you have not truly considered the issues we face in world currency systems and where they are headed. On an inflation adjusted basis, based on the traditional measure of inflation, gold would be $5,000 per ounce today. This doesn't take in to account the level of global debt outstanding that needs to be defaulted via monetary debasement. You may disagree with me on this, but it isn't a matter of contention.
> 
> You say that "a much lower gold price should be used" when working out valuation. Well, no. You don't do this for other businesses, so why would you apply it here. The only reason that this should be the case is if you know which direction it is headed and why. You could apply this concept to an iron ore producer, but if you were to apply it to a gold producer it only means that you have not performed sufficient research. Yes, there can be short-term fluctuations, but this applies to all things.
> 
> What if the actions taken by world leaders were responsible and we were on a semi-gold standard like the great depression? Retail stocks would get CRUSHED in massive deflation as the price of their goods would suffer massive falls. The valuation is based on future earnings and the earnings you thought they had would disappear rapidly.
> 
> This is my point. You need to know what is going on and where things are headed. Otherwise you are in the dark and don't have the margin of safety that you thought you did.
> 
> There are quite a few gold Australian producers have total cost of production around $600 per ounce. Current AUS gold price is heading towards $1,500 per ounce. Is a 60% margin not enough for you? Gold is heading MUCH higher due to world currency issues. This is not speculation, it is fact. We either default on all debt and have a great depression or the debt is inflated away and purchasing power is eroded even further. Given actions to date, we are already on the inflation pathway and it snowballs from here.
> 
> I'm not a gold bug or have any particular affinity to gold, however I do read in to what is going on from a big picture point of view. As someone with this perspective and as a value investor, there is many attributes that attracts me to gold producers given the environment ithat we face.




lol,
Resource prices revert the the marginal cost of production


----------



## Macros

Lol wrong. Marginal cost of production on marginal projects catch up to prices.


----------



## Tysonboss1

Macros said:


> 1, This is a great post in that you have demonstrated the exact frustration that I have with investors that follow the traditional 'value' philosophy.
> 
> 2, If you were to 'invest' in physical gold, you are not investing as it doesn't provide a return on capital. You are correct in your conclusion on this point, but for the wrong reason. Gold does not provide a return on capital because there is no liability and no counter-party.
> 
> 3, Gold held in storage is exactly the same as a bunch of cash notes held in storage. The difference being that cash notes are fiat currency and are eroded in their purchasing power over time whilst gold protects against monetary debasement.
> 
> 4, So when looking at investing in companies, I find it curious that those who say 'why invest in gold companies?' and use the case of holding physical bullion to conclude that it is speculation. It should be clear that there is a delineation between investing in gold producers and physical bullion. One is an act of investment and the other is just money.
> 
> 5, When investing in gold producers, I believe that you are investing in the profitability of these companies as opposed to the resources in the ground. On this basis, they are no different to any other business. I've written more about this issue here http://macrovalueinvestment.blogspot.com/2011/06/valuing-resource-companies-including.html which takes the concept of investing in the flow (profits) as opposed to stock (resources in the ground).
> 
> 6, First of all, as with investing in any business, I believe that you should be aware of the big issues and trends. There is no difference between a fall in commodity prices and a retailer in a deflationary environment where you have to sell your goods for lower prices.
> 
> 7,  It is clear that any business that has tight margins between cost of goods and sale prices is a higher risk business.
> 
> 
> 8, Gold is at a 100 year high because the fiat based currencies are at a 100 year low. Gold hasn't changed in price, it is only the paper currencies that are losing purchasing power that have decreased.
> 
> 9,  If you think that gold is in a speculative bubble, then you have not truly considered the issues we face in world currency systems and where they are headed. On an inflation adjusted basis, based on the traditional measure of inflation, gold would be $5,000 per ounce today.
> 
> 10, You say that "a much lower gold price should be used" when working out valuation. Well, no. You don't do this for other businesses, so why would you apply it here.
> 
> 11, What if the actions taken by world leaders were responsible and we were on a semi-gold standard like the great depression? Retail stocks would get CRUSHED in massive deflation as the price of their goods would suffer massive falls. The valuation is based on future earnings and the earnings you thought they had would disappear rapidly.
> 
> 12, This is my point. You need to know what is going on and where things are headed. Otherwise you are in the dark and don't have the margin of safety that you thought you did.
> 
> 13, There are quite a few gold Australian producers have total cost of production around $600 per ounce. Current AUS gold price is heading towards $1,500 per ounce. Is a 60% margin not enough for you? Gold is heading MUCH higher due to world currency issues
> 
> 14, I'm not a gold bug or have any particular affinity to gold, however I do read in to what is going on from a big picture point of view. As someone with this perspective and as a value investor, there is many attributes that attracts me to gold producers given the environment ithat we face.
> .




1, Why be frustrated, Just run your own race. If you believe one thing just follow that and forget what others believe.

2, thats exactly what I said, physical gold can be held as a store of value and a hedge against inflation. But it will only work out well if you buy it outside of bubble conditions. Is gold in a bubble, who knows, But it has gone up at 19.8% pa in the last 10 years, when inflation has been very much less.

3, Yes again I aggree, Holding cash under the matteress is a terrible idea. Holding gold in this situation is better, because gold and most real assets with have their value increase inline with inflation. 

However cash at bank earning 6% will still cover inflation and provide about 0.5% real growth after tax. offcourse if hyper inflation came this would change. but at present and in the recent past cash at bank with reinvested interest has been a good hedge against inflation.

4, yes, which is why in my post I distingished between the two.

5, yes, which is why I said that on the face of it buying a gold producer is investing, I then said you had to conduct calculation to work out cost of production vs sale price etc. etc.

6, I can see a big difference, if a producer is producing gold at $500 and selling for $1400 his profit will be under huge pressure should the sell price drop to $400. where as if a retailer simply buys at $X and sells at $X+ regardless whether inflation or deflation pushes his buy price up or down he will just sell at a higher or lower price.

7, Only where they can not raise or lower their sell price to match. Miners have some what fixed cost of production and have no control over the sale price.

8, In 10 years gold has gone from $250AUD to over $1400AUD 19.8%pa growth, The Australian dollar has not been devalued by 19.8% pa. So there has to be another factor causing this rise. I am not an expert though. If it is a rise caused by speculative enthusiasim or fear, it may eventually reverse and people that bought it as an inflation hedge may regret it.

9, Consider this, since 2000 property values have gone from $200 to $450 leading to wide spread claims of a speculative bubble. In the same time gold has gone from $250 to $1400. But I guess some believe gold is different, gold only goes up, gold never falls.

10, Yes, I would apply the same to other miners, when valuing a mining operation with a life of 20 years I would not use an all time high Iron ore, coal or oil price in my calculation. I would use some conservative. for example valuing an oil company based on the $140 per barrel we saw in 2008 would be a big mistake, a conservative person would apply a margin of safty and use per haps $75 per barrel.

11, only the stock they have on the floor would be devalued, once thats gone they would buy in replace ment stock at the cheaper price and sell at a cheaper price, this happens every time the aussie dollar goes up, 

12, thats right, but just because a vaule investor using figures to value investments does not mean he is not also drawing on a body of experiance, education and sound economic logic, Ben graham says in the intelligent investor with out it (experiance, education and sound economic logic) you can't say a margin of safty exists.

13, there was also australian oil companies producing oil at $20 per barrel and oil was $140 per barrel, what happened to their share prices and earning when oil dropped to $50. Using a record high spot price is a mistake, But do what ever you like.

14, good, it does all opinions to make up a market, if over time your opinion proves right, you will do well. Still having a real margin of safty and diversification will protect you if you are wrong.


----------



## Tysonboss1

Macros said:


> There are quite a few gold Australian producers have total cost of production around $600 per ounce. Current AUS gold price is heading towards $1,500 per ounce. Is a 60% margin not enough for you? Gold is heading MUCH higher due to world currency issues. This is not speculation, it is fact. We either default on all debt and have a great depression or the debt is inflated away and purchasing power is eroded even further. Given actions to date, we are already on the inflation pathway and it snowballs from here.




Sorry just one more thought,

Buffett visited some canadian tar sands projects will production costs for oil of about $40 / barrel. When question about whether he would invest it he said he wasn't sure that with such high production costs he could say he had a margin of safty.

Now, oil was about $90 a barrel at the time. and buffett is a believer in peak oil.

But he refused to enter because he doesn't know where the oil price will go over the next 5 years. and the investment even would not produce the returns he wanted if $50 oil came back.


----------



## skc

Macros said:


> When investing in gold producers, I believe that you are investing in the profitability of these companies as opposed to the resources in the ground. On this basis, they are no different to any other business. I've written more about this issue here http://macrovalueinvestment.blogspot.com/2011/06/valuing-resource-companies-including.html which takes the concept of investing in the flow (profits) as opposed to stock (resources in the ground).




Read your blog... Looks like you put a fair bit of effort in that. Good stuff.

Not sure I agree with your "invest in the flow"... you may end up paying a much higher share price than someone else if you place too much faith in management to reproduce historical returns. 

Take for instance a gold miner who has 2 years left in their mine, with forecast cashflow of $25m for each of the remaining 2 years. They also have $150m in cash, no other asset or debt, and their historical ROE is 25%.

Can you show us how much you are willing to pay for their share (say they have 100m shares)?


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## Macros

Tysonboss1

1, Why be frustrated, Just run your own race. If you believe one thing just follow that and forget what others believe.

- I run my own race and don't need others to see what I see in order to be able to know that I'm doing the right thing. I have no one else to blame but myself if I go astray. However, for some reason, I have some compulsion to share my views, which I think is helpful for myself in being able to express them more clearly.

2, thats exactly what I said, physical gold can be held as a store of value and a hedge against inflation. But it will only work out well if you buy it outside of bubble conditions. Is gold in a bubble, who knows, But it has gone up at 19.8% pa in the last 10 years, when inflation has been very much less.

- 10 year window is the problem. You need a 200+ year window to see clearly. The bubble does not lie currently in gold, but in other forms of currency, which makes for interesting times ahead.

3, Yes again I aggree, Holding cash under the matteress is a terrible idea. Holding gold in this situation is better, because gold and most real assets with have their value increase inline with inflation. 

However cash at bank earning 6% will still cover inflation and provide about 0.5% real growth after tax. offcourse if hyper inflation came this would change. but at present and in the recent past cash at bank with reinvested interest has been a good hedge against inflation.

- Cash at bank currently just covers our headline inflation at 6%. After tax (depending on tax rate) it likely makes a negative real rate. This will not always hold true as there are pressures to keep the official CPI figures down and the bank rate probably not cover inflation in the years ahead (IMO). In the US for example, you are getting closer to 0% with 5% headline (from memory) and 10% based on traditional metrics (shadowstats.com - e.g. including food and energy prices). Technically you could also lend out your gold for a similar rate of return if you were in the ability to do so.

4, yes, which is why in my post I distingished between the two.

- I realise this, but needed to make a point here as there is often some confusion on this issue. Sorry if it didn't exactly match your case.

5, yes, which is why I said that on the face of it buying a gold producer is investing, I then said you had to conduct calculation to work out cost of production vs sale price etc. etc.

6, I can see a big difference, if a producer is producing gold at $500 and selling for $1400 his profit will be under huge pressure should the sell price drop to $400. where as if a retailer simply buys at $X and sells at $X+ regardless whether inflation or deflation pushes his buy price up or down he will just sell at a higher or lower price.

- I don't agree with you here. I think it works in the same way, but with varying outcomes depending on the circumstances. E.g. margin on a widget of 10% at sales price of $100 = $10 versus same margin at 10% on $50 = $5 (e.g. discounting or deflation). Earnings are impacted and depending on the scenario margins might change too.

7, Only where they can not raise or lower their sell price to match. Miners have some what fixed cost of production and have no control over the sale price.

- I'd argue that many industries only have marginal control over the sale price. In more favourable conditions they might have more control and in unfavourable conditions they might have no control (e.g. retailer desperately needing to sell inventory). There isn't a fixed cost of production as it depends on how management tackles the problems - the cost of production could vary a lot with different management and different strategies. The price trend, no matter what the business, should be judged by the investor in my opinion.

8, In 10 years gold has gone from $250AUD to over $1400AUD 19.8%pa growth, The Australian dollar has not been devalued by 19.8% pa. So there has to be another factor causing this rise. I am not an expert though. If it is a rise caused by speculative enthusiasim or fear, it may eventually reverse and people that bought it as an inflation hedge may regret it.

- 10 years ago gold was way too low due to sales from central banks (who now have to buy it back) and a loss of understanding of its value as a currency - it was out of favour (e.g. barbarous relic comments). This period is a time for it to catch up to where it should have been and it hasn't got there yet - let alone deal with the outstanding debt issues we face. It isn't a true inflation hedge as many see it - it is a true currency which holds as a store of value. We are going through a currency collapse and if the fiat currency is the denominator the theoretical price is infinite. I believe that gold will be used once a new currency system is found and will balance out in order to act as a long term store of value. For further information read fofoa.blogspot.com/ if you are interested in this concept.

9, Consider this, since 2000 property values have gone from $200 to $450 leading to wide spread claims of a speculative bubble. In the same time gold has gone from $250 to $1400. But I guess some believe gold is different, gold only goes up, gold never falls.

- the property values have been pushed by a exponential credit growth cycle globally, which is now finished its run. Gold is the inverse to this, so yes, gold is heading up at this point of time as it counteracts the incredible amount of debt in the global system that will never be paid. This is not a speculative bubble like the 70s. The 70s started the unstable credit cycle that is now ending.

10, Yes, I would apply the same to other miners, when valuing a mining operation with a life of 20 years I would not use an all time high Iron ore, coal or oil price in my calculation. I would use some conservative. for example valuing an oil company based on the $140 per barrel we saw in 2008 would be a big mistake, a conservative person would apply a margin of safty and use per haps $75 per barrel.

- I don't agree. I think it is more important to understand the fundamentals of the particular good, the same way you would analyse the direct of sales prices for any other item (e.g. TV, shoes, engineering service). The margin of safety should be applied by investing in companies at large discounts and with resources that are heading up and not down. The oil price crash in 2008 was based on futures contracts. In reality the spot price did not go down so low and was a temporary blip and has been held up by the significant supply/demand metrics that we face.

11, only the stock they have on the floor would be devalued, once thats gone they would buy in replace ment stock at the cheaper price and sell at a cheaper price, this happens every time the aussie dollar goes up, 

- sales prices fall, the dollar value of the margins then fall. total demand can fall leading to greater discounting and further falls margins.

12, thats right, but just because a vaule investor using figures to value investments does not mean he is not also drawing on a body of experiance, education and sound economic logic, Ben graham says in the intelligent investor with out it (experiance, education and sound economic logic) you can't say a margin of safty exists.

13, there was also australian oil companies producing oil at $20 per barrel and oil was $140 per barrel, what happened to their share prices and earning when oil dropped to $50. Using a record high spot price is a mistake, But do what ever you like.

- again, temporary price falls can occur in all industries. high margins of safety and larger profitability margins mitigate the short term effects for strong companies. 

14, good, it does all opinions to make up a market, if over time your opinion proves right, you will do well. Still having a real margin of safty and diversification will protect you if you are wrong.

- agreed.


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## Macros

skc said:


> Read your blog... Looks like you put a fair bit of effort in that. Good stuff.
> 
> Not sure I agree with your "invest in the flow"... you may end up paying a much higher share price than someone else if you place too much faith in management to reproduce historical returns.
> 
> Take for instance a gold miner who has 2 years left in their mine, with forecast cashflow of $25m for each of the remaining 2 years. They also have $150m in cash, no other asset or debt, and their historical ROE is 25%.
> 
> Can you show us how much you are willing to pay for their share (say they have 100m shares)?




Thanks for the feedback SKC.

I stand by the flow concept as it is the most logical view for me.

Regardless of a theoretical price, I wouldn't invest in a company such as the scenario you provide. It is clearly going out of business, perhaps due to mismanagement, and management may do anything they can to extend their time and destroy shareholder value.

It would only make sense to me as an opportunistic short-term investment if you had information that suggested that there could be a way for cash to be extracted from the business and that you could pay less for the sum of parts value.


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## Macros

Tysonboss1 said:


> Sorry just one more thought,
> 
> Buffett visited some canadian tar sands projects will production costs for oil of about $40 / barrel. When question about whether he would invest it he said he wasn't sure that with such high production costs he could say he had a margin of safty.
> 
> Now, oil was about $90 a barrel at the time. and buffett is a believer in peak oil.
> 
> But he refused to enter because he doesn't know where the oil price will go over the next 5 years. and the investment even would not produce the returns he wanted if $50 oil came back.




There is always another side to the coin. Buffet has not proven to be an expect in this area and it is something that I personally think he continues to struggle with (I'm not suggesting that the tar sands are necessarily a good investment). I'm guessing here, but I think that Buffet is struggling since the end of the credit cycle. His actions in taking advantage of tax payer funded government bail-outs and support of the big US banks shows that he isn't perfect. In the meantime, Jim Rogers has been successful in making calls on where the commodity trends are headed.

The spot prices fell only temporarily and the futures prices fell by more. There was speculative activity on the top and the price falls were out of line with supply/demand and were therefore short-lived. We are back to $100+ oil and could be looking at $200 oil over the next few years unless drastic changes occur.


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## notting

When oil heads for 200 China will have a billion starving people and Bob Brown be Pope.  Ain't going to happen.


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## Macros

China, like many other nations, subsidises their oil local oil prices, which is part of the problem and makes it more likely to happen as it drives the shortages. Don't be so quick to discount possibilities.


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## Julia

Macros said:


> China, like many other nations, subsidises their oil local oil prices, which is part of the problem and makes it more likely to happen as it drives the shortages. Don't be so quick to discount possibilities.




Agree.  Appreciate your posts Macros.  A lot of common sense there.
Have sent you a PM.


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## notting

China inc is the problem alright. However their pockets aren't that deep. They import food, for example! Oil makes everything go up. 
With a manipulated low currency pegged to the US they are going to be dishing out more and more to keep the force over their slaves, I mean employees, DOH! people. That makes it more extreme, more expensive whilst US prints away. Tick Tock. Go Uncle Sam!
The other point was that not even the oil companies whant it that high because it generates demand and legitimizes alternatives.  So if it gets too high they'll pump, release, what ever.


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## skc

Macros said:


> Thanks for the feedback SKC.
> 
> I stand by the flow concept as it is the most logical view for me.
> 
> Regardless of a theoretical price, I wouldn't invest in a company such as the scenario you provide. It is clearly going out of business, perhaps due to mismanagement, and management may do anything they can to extend their time and destroy shareholder value.
> 
> It would only make sense to me as an opportunistic short-term investment if you had information that suggested that there could be a way for cash to be extracted from the business and that you could pay less for the sum of parts value.




When everyone of the gold stocks you are valuing on your blog are substantially higher than their current prices, I think a sense check of your methodology / assumptions is in order.

Your logic that the flow is more important than stock is true in some aspect of the valuation. But from what I can see you are extrapolating current flow into the future without discounting the uncertainty enough. Every now and then your valuation will prove correct when such uncertainty comes true, but that's just like a pokie machine paying out every so often.

Anyway, I have no time for 15-bullet-point reponses so will leave that to you and Tysonboss


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## Tightwad

Value is more art than science, of all the rules for picking a stock you can break some of them some of the time.   

I'm pretty sure Roger has pointed out with banks that you want to buy at a high margin of safety and they are leveraged, and also the probs with retail.  He's picked decent retailers and avoided the dj's and myer.

My real issue is with the other value buyers out there jumping in on a stock when I want to buy it 10c cheaper.


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## Tysonboss1

Macro's,

we will agree to disagree then.

I certainly do not hold the same faith you do in Gold, I may be wrong. 

I think you are putting to much faith in the "crash of the dollar". I can see it a bit like peak oil. Alot of people got hit hard by investing in the oil companies based on oil prices that were really high.

The thing is even if you are right in the direction, you may be wrong in the timing.


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## waimate01

Agreed that investing in gold producers is different to holding physical gold. 

One has a yield, one does not.

Kinda the same that investing in tulip producing farms is different to holding physical bulbs.

The yield of the producers is dependent on the health of the product. Same for retailers, for that matter. The underlying issue is that which has already been highlighted:- has gold gone up or currency gone down?  Bit of both in my book. 

Gold is a placeholder for wealth in the same way that a tribe on a remote island might use blue shells. We would laugh at them doing so, and the fat man with the largest hut carefully guarding his large pile of blue shells would be an anathema. How silly to covet blue shells. We covet shiny metal instead.

But gold is not a placeholder for wealth. Wealth is created by building something or doing something. 

You cannot increase the wealth of the world by digging a hole and finding something at the bottom of it, any more than the island becomes more prosperous by finding another reef of blue shells.


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## Tysonboss1

waimate01 said:


> You cannot increase the wealth of the world by digging a hole and finding something at the bottom of it, any more than the island becomes more prosperous by finding another reef of blue shells.




And there lies the truth.

outside of the jewellery and the few industrial application gold has no real value, except that people have faith that other people at some stage in the future will give them real assets for them gold.

And there is so much gold stock piled around the globe already, it would cover the industrial uses and jewellery for hundreds of years.


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## Intrinsic Value

Macros said:


> I have no problem with Roger's valuation techniques or assessment of businesses based on sound fundamentals. However, I would like to point out here that a big flaw with Roger's approach, and many value investors, is to avoid the big issues. Roger states that he is a terrible economist, but I think understanding the economy and direction is a very important factor with investing.
> 
> I used to use Roger's blog on a regular basis but have found that Roger has has somehow turned it into a resource that caters to popular opinion. With investing, everyone has a different view, but it doesn't mean that every view is correct all the time.
> 
> For some reason, many value investors love retail companies. Roger states that they have a sustainable competitive advantage and can create economic moats. Well what has happened to David Jones? Where has their moat gone? Was it ever there? DJS is down from over $5 in Sept last year to $3.15 today (-37%). I'm not surprised in the least. Retail stocks are suffering due to a structural issue in that we have ended an exponential credit expansion cycle. This is a big problem! The adjustment to online retailing etc is, in my opinion, based primarily on consumers adjusting to lower cost options as a result of the massive change to the credit cycle.
> 
> Given that valuations are driven by earnings strength and direction, is it not of vital importance to have an indication of where earnings are likely to head?
> 
> Also with the banks. Why does Roger like banks? They are also supported and liked by many 'value' investors due to their apparent safety and high dividends. In my view they are a terrible place to be given the credit cycle and global credit issues.
> 
> Roger mentioned that he either owned, or was looking at a gold producer. It wasn't very clear and gave the impression that it was a temporary issue. Why are companies such as BHP and RIO acceptable, yet exceptionally profitable companies such as Medusa MML and Ramelius RMS frowned upon. The gold thread that Roger started was closed fairly quickly, and instead of addressing the issue, it was treated as wild speculation.
> 
> If you aren't seriously looking at gold producers, then you have your held in the sand with regards to the global debt crisis which is ongoing and will end with a bang. Yet somehow, gold producers and gold in particular, is seen as almost sacrilegious to many value investors. Why? This is not a religion. As an investor one should never close their eyes to the big issues or have preconceived ideas as to what is good or bad.
> 
> If one can accept that the big trends are important, why is it that retailers = safe and profitable gold producers = speculation? Surely it depends on the environment and economic landscapes which can last for many years if not decades.
> 
> Thoughts?




From your post I dont think you have read RMs comments on his blog very carefully or fully understood what he is on about.

I dont think he avoids the direction of the economy rather he finds it more beneficial to look at the medium to long term picture when investing in individual businesses. To put it more succinctly there will always be recesssions,booms and headwinds of various types but these will pass.  So what you need to do is concentrate what you have control over and that is investigating businesses and looking at their fundamentals eg debt,roe, cash flow. competitive advantage etc and then apply the formula and buy only those business who have a large margin of safety and the best fundamentals. As long as the fundamentals continue to point to a margin of safety then all things being equal he will continue to hold. In the short term he is not worried about share price as he believes over time the share price will revert to its intrinsic value. 

Re retail stocks. I dont think he is invested in any retail stocks. He was keen on JBHIFI at one stage but not now and he did make a lot of money out of the Reject Shop but again he doesn't think there is any margin of safety on this stock at the moment.

Does Roger love banks? I have never seen that but if banks were trading at a significant discount to their intrinsic value then yes he would probably buy the banks providing of course that there werent better companies at better margins to safety available.

As for gold or any other commodity for that method he has consistently maintained that in the main part he steers clear of price takers and true to form the stocks he has spruiked over the last year or so have been mining services companies like FGE, and MACCA. 

I suggest you get a copy of his book valueable because from your post you only really half understand what he is on about.


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## So_Cynical

Tysonboss1 said:


> And there lies the truth.
> 
> outside of the jewellery and the few industrial application gold has no real value, except that people have faith that other people at some stage in the future will give them real assets for them gold.
> 
> And there is so much gold stock piled around the globe already, it would cover the industrial uses and jewellery for hundreds of years.




Fact is all people covet gold to a certain extent...where as only people on the island covet blue shells, Gold has some real value because its has a global audience, global cultural significance, high production costs and is a currency that cant be printed.


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## Tysonboss1

So_Cynical said:


> Fact is all people covet gold to a certain extent...where as only people on the island covet blue shells, Gold has some real value because its has a global audience, global cultural significance, high production costs and is a currency that cant be printed.




Yes, I agree.

All those lovely points do not mean it is impossible for it's price to be to high and have a correction.

My posts if you read them were simply saying the following.

1, Gold fails as an investment because it generates no income, so at best it is a speculative play for capital gains or can be used as a store of value and hedge against inflation.

2, If it is at a speculative high it will probably fail as a store of value and an inflation hedge

3, If it is at a specualtive high it will also fail as a capital gain play.

4, Gold producers can be investments, but do have high costs of production, so a fall in value may wipe some of them out and make the remainder crummy investments. So when valuing them using an all time high gold price is unwise.

Gold is just a commodity, it is not magical. It's price will rise and fall along with supply and demand, At the moment their is massive demand from speculaters and fearful people, this may pass eventually and demand will turn to excess supply as people unload.

There is also crap loads of supply coming on market from new mines, this too will add to supply.

All I am saying is make rational, dispassionate assessments. Follow facts, not fear and greed.

I know you follow BPT, what happen to their share price when the fear and greed of  the peak oil spec bubble collasped, and that happened to a commodity that is essential to life as we know it, it being pumped out and destroyed at a rate of 83 million barrel daily, not stock piled by the tonne and collect to be sold later


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## Tysonboss1

Gold does fall,

look at this chart of the late 70's boom. it certainly is a tale of boom and bust rather than the safe stable store of value people make out.


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## Macros

Julia - thanks!

SKC - thanks for not posting a multi-point response  The problem is that many are becoming exceptionally profitable in the next couple of years - on the condition that they meet their stated objectives and control costs.

Tysonboss1 - you use the word faith, which I find interesting. This is not guesswork or belief. If you really study the problems then there are certain rational conclusions that can be made in terms of potential outcomes and the approximate timing involved. Basically, from a timing perspective, these issues are happening right now and already have significant momentum. So I really don't worry about timing - this is a issue for now and the years to come. The problems are huge and aren't going away with a magic wand.

Tightwad - you say:


> I'm pretty sure Roger has pointed out with banks that you want to buy at a high margin of safety and they are leveraged, and also the probs with retail. He's picked decent retailers and avoided the dj's and myer.




My point is that you don't want to own banks at all in this environment if you have looked at what is happening to the credit system. Regardless of margin of safety as you have no idea what that margin is in the next few years.

My point about retailers is that they will be a great buy soon, but being aware of the issues that they face and that are starting to flow through to earnings like the banking system.

waimate01 - you say:


> But gold is not a placeholder for wealth. Wealth is created by building something or doing something.



Gold does not increase wealth, it is a STORE of wealth. Gold is simply money in the function of a long term store of value.



> You cannot increase the wealth of the world by digging a hole and finding something at the bottom of it, any more than the island becomes more prosperous by finding another reef of blue shells.




Sorry, but that is rubbish. Our whole human experience has been improved by expanding our resource usage and improving our understanding how that can be better used in everything we do. 

Tysonboss1:


> outside of the jewellery and the few industrial application gold has no real value, except that people have faith that other people at some stage in the future will give them real assets for them gold.
> 
> And there is so much gold stock piled around the globe already, it would cover the industrial uses and jewellery for hundreds of years.




Herein lies the problem. You don't understand gold. You don't understand what it does. I find many value investors don't. Gold's only function is a long term store of value. Why do you think that the European Central Bank lists gold as its first asset on its balance sheet? It doesn't really matter if you don't understand why gold should be used as the store of value function for currency, but it matters when the world uses it to perform that function.

My purpose of posting here was not really to discuss gold, but the problem in that many value investors, in my opinion, limit their view of the world. For example, have you studied the global debt problem? Have you studied the usage of gold and the movement towards it becoming part of the new monetary system? These concepts are incredibly important, however most people don't bother to look or just dismiss these issues out of hand.

Please don't go on about gold, because most people haven't done their homework. We could go around in circles and talk forever about it. If you want to challenge me on the issue, I have no problem with that at all - I like my views to be challenged because if I can't defend myself then I clearly haven't thought it through. Please understand me, I really don't mean to be condescending on this issue, however I have no doubt that 99% of people haven't really thought about these issues and tend to just use worn-out lines that others have used, similar to concept that 'property prices always go up'.

Essential reading:
http://fofoa.blogspot.com/2010/12/value-of-gold.html
http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html
http://fofoa.blogspot.com/2011/05/return-to-honest-money.html


Intrinsic Value

I don't think that you have read in to my own comments vary carefully and judge too quickly. I may be wrong, but I believe that I understand what Roger is on about. I love his work, however these are my criticisms. I've read most things that he has written and have read his book in full.

You say:


> he finds it more beneficial to look at the medium to long term picture when investing in individual businesses



My point is this: Roger has stated, and I agree, that in the Australian market we are limited in size and therefore you cannot have an investment time-frame that extends forever as the successful companies become too big and mature too quickly, which rapidly impacts on the ability for them to grow in value over time. Therefore, an investor cannot have a time horizon that goes on forever.  Also, the problems and issues that I'm talking about, are big issues and are not one to two year problems. These are decade long problems. Is ten years not enough of a time horizon to be reasonably long term?

I think that as an individual Roger understand the economy very well, however there are issues at stake here that are really important. We aren't talking about the short-term business cycles that we have become accustomed to over recent years with a year here or two years there. These are long term structural problems that could have resulted us being in a world-wide great depression had there not been intervention and a fiat currency system. This is big. An individual business is like leaf floating on the river when dealing with these sorts of issues.

Now, I'm not saying that individual businesses cannot do well during difficult periods, however if you understand the difficulties, I believe that you have a much better capability to judge whether the company that you wish to invest in is able to do well. Why don't we have control over understanding the big trends as well as the individual business? I believe that many limit themselves by not adequately thinking about the issues which inevitably impact the individual.

I understand value investment in terms of looking at profitability etc and competitive advantage. I think those things are fairly easy to determine. But I believe that you need to put the individual in context as a piece in the overall puzzle. My point is that the big issues impact on where the intrinsic value will head in the future years. You cannot invest based on past intrinsic value because it may not be where you thought it was.

Retail stocks. This is something an industry that many value investors love. Not sure why. I have nothing against them, but my point is for the investor to understand where they are headed because it isn't always straight-forward. This is not all about Roger. I agree that Roger isn't a big investor in retail stocks. But many are. My contention is that the issues that I speak of aren't really being dealt with before the problems arise and many simply say 'well, who could have known?'.

Banks. Roger has had banks in his ValueLine portfolio, has supported them and said that he prefers ANZ. None of the big issues that they face have been addressed. I think that he probably knows the issues, but doesn't want to talk about them because many people are psychologically against talking about the problems. For me its a logical extension - there are problems - I'm going to deal with them - but many people will think I'm alarmist or don't know what I'm talking about. My point is that if you look into the problems, you shouldn't be touching a bank right now as a long term investor.

Mining service companies. I just don't get it. I have no problems with mining service companies, but it is so irrational for value investors to say that resource producers are price takers whilst mining service companies are not. This is illogical and makes no sense to me. The revenues of mining service companies are a function of supply demand mechanics. In favourable conditions they will have more leeway over their pricing. In unfavourable conditions they will have little to none. Therefore, the most important factor should be the supply demand mechanics and this applies to producers, service companies, retailers, everything. Think about this - if there are more and more service companies that are created, but limited projects, eventually there will be a surplus of services greater than the demand for projects. This would impact revenues as competition ensues and impacts even the highest quality businesses, who may be able to ride it out, but nonetheless it impacts on the value of their business.

Roger is a smart guy. I think that Roger avoids some of these issues due to the fact that the act of discussing them immediately polarises opinion and therefore isn't the most efficient route of having as many people interested in what you say. All I'm getting at is that these issues are important regardless of whether you think it applies and whether you agree with me or not. 

I'm sick and tired of the amount of obfuscation that exists today. It has lead it into the mess that the world is having to deal with. Its not all doom and gloom, but the sooner we start recognising important issues and finding solutions to deal with them, the sooner we can get back to a sustainable pathway.


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## Macros

Tysonboss1


> Gold is just a commodity, it is not magical."]Gold is just a commodity, it is not magical.



Gold is not a commodity, it has the single useful property of acting as money.



> There is also crap loads of supply coming on market from new mines, this too will add to supply.



Wrong. There is a lot of supply coming from small producers, but the global supply is declining - please do some research before assuming this. The increase is around 2.5%pa - what is the global population growth can I ask? I understand that between 2001 and 2008, global gold production declined around 1.3% per year on average - why would this happen with rising prices?



> All I am saying is make rational, dispassionate assessments.



This is what I'm saying. My argument is that many who argue against gold are often not making dispassionate assessments.



> look at this chart of the late 70's boom. it certainly is a tale of boom and bust rather than the safe stable store of value people make out."]look at this chart of the late 70's boom. it certainly is a tale of boom and bust rather than the safe stable store of value people make out.



You time scale is off. You should have it from the 1800s. The whole credit expansion debt binge that the world has had started in the 1970s as we entered a fully fiat currency system (which usually last around 40 years). Your conclusions are faulty. Please read in full my links on FOFOA. Once you have read it in full and can still state a case why it will not continue to form a role as long term store of value, I'll be very impressed and would love to have an informed debate on the issue (I'm always willing to change my mind if I get it wrong).


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## Macros

Tysonboss1



> 1, Gold fails as an investment because it generates no income, so at best it is a speculative play for capital gains or can be used as a store of value and hedge against inflation.




Sorry but you aren't being logical here. Have you already forgotten that we discussed this point and that gold in a vault is like cash in a vault? It is not until you take on counter-party risk and lend it out that you generate income.


----------



## InvisbleInvestor

Macros, have you read value.able? Because half the things you are saying is what Roger says. It's quite funny actually.


----------



## Tysonboss1

Macros said:


> Tysonboss1
> 
> 
> 
> gold in a vault is like cash in a vault?




Yes, that is if it is bought outside bubble conditions, 

gold purchased at the peak in 1979 and taken out in 1985 is worth much less than the same dollar value of cash put in the vault, so you would have been better with cash.

And if you kept it in the vault 26 years till 2005, it would still only be worth the same dollar amount, even though the dollars had be hacked by inflation the gold had not increased in value.


----------



## Macros

InvisbleInvestor said:


> Macros, have you read value.able? Because half the things you are saying is what Roger says. It's quite funny actually.




I read it last year. I mentioned that I had earlier. I agree with what Roger says and I am a value investor. I wouldn't make be saying these things if hadn't as that would be incredibly hypocritical of me.

All I'm trying to get across, is that I don't think that value investment should be applied in a vacuum.

Issues with certain sectors and the economy can be more important than current margin of safety as they drive future earnings and future value. My assertion is that many investors who use a value approach have mental baggage from Buffett and Graham and therefore find it difficult to be adaptive and critically think about issues like gold as a currency, credit super cycle and the implications on all investments such as Australian banks, retail sector, future interest rates, monetary systems, consumer discretionary spending and the impact on retailers, viewing a producing resource company completely different to mining services due to misperceptions on how they should be judged, sometimes viewing resources as an unknown or sometimes worthless when the flow through the whole economy.

I truly do not think that these issues are tackled well at all by the majority of traditional value investors, and my one criticism is that is that Rogers approach is perpetuating this problem. I think they are incredibly important for short, medium and long term term investing.

As a result of my comments on gold, the typical responses indicate a lack of research and understanding of the issues. In no way am I suggesting that value investors should invest in this area, but if you don't understand the full picture you shouldn't be reaching a hasty conclusion. Economic systems are interconnected.

The bank issue is important as you can't invest with a margin of safety unless you are fully aware of the risks involved. I haven't mentioned them here, but I think that most Australians under-appreciate the issues we face.

My suggestion is that these issues are just as important as investing with a margin of safety. An investor should make themselves aware as much as possible and be willing to adapt.


----------



## Macros

Tysonboss1 said:


> Yes, that is if it is bought outside bubble conditions,
> 
> gold purchased at the peak in 1979 and taken out in 1985 is worth much less than the same dollar value of cash put in the vault, so you would have been better with cash.
> 
> And if you kept it in the vault 26 years till 2005, it would still only be worth the same dollar amount, even though the dollars had be hacked by inflation the gold had not increased in value.




Have you read my links yet to FOFOA? It cannot be explained in one paragraph and you don't have a full understanding of the issue and you will go round in circles.

You are making up arguments that require very specific conditions to achieve the conclusion that you seem to be after. Therefore you are not taking a balanced approach. Just read FOFOA.


----------



## InvisbleInvestor

Macros said:


> I read it last year. I mentioned that I had earlier. I agree with what Roger says and I am a value investor. I wouldn't make be saying these things if hadn't as that would be incredibly hypocritical of me.




Righto, must have missed it.


----------



## waimate01

Macros said:


> Julia - thanks!
> 
> 
> Gold does not increase wealth, it is a STORE of wealth. Gold is simply money in the function of a long term store of value.
> 
> 
> 
> Sorry, but that is rubbish. Our whole human experience has been improved by expanding our resource usage and improving our understanding how that can be better used in everything we do.




Improved by digging things up and *using* them. Gold is not resource usage (industrial and ornamental applications aside). We dig up iron and copper and coal and palladium and we *use* them. We dig up gold, shiny it up, and sit it on a shelf in a darkened room. 

Sure, gold may be a another form of money, but its an exceptionally inefficient form of money. If wealth is created by doing something, and you need more blue-shell-equivalents to represent the greater prosperity of civilization, you can either print more fiat currency, or you 'print more gold' by stumbling around in the bush digging holes. 

The complete silliness of gold is highlighted by the fact that as a wealth-store, it abounds with friction. If the purpose of something is to represent stored wealth, then why choose something that itself consumes (destroys) wealth in the process of obtaining? 

Ahh - because it has to be rare in order to act as an effective storage mechanism! Well, no, not really. It has to be controlled and restricted, and indeed the problem with fiat currencies has been amply demonstrated in recent times. 

I see little difference between the US pressing the 'go' button on their printing presses, and digging a hole and finding some shiny rocks at the bottom of it. Neither increases wealth. Both increase the 'wealth store' without anything useful having been done. 

Oh ok, there is one difference. Running the printing presses is at least cheap. Finding more shiny rocks is costly and inefficient. Both increase the 'wealth-store' by increasing the 'store' and not by increasing the 'wealth'. Gold actually decreases the 'wealth'.

And as for the notion that gold is completely different to blue shells because 'everyone' agrees gold is valuable but not everybody agrees blue shells are valuable, well, really!  For a start, ask the people on the fictional island. They'll tell you everyone agrees. But also, have a look what this discussion is about. Not everyone agrees! Bretton Woods?


----------



## Macros

waimate,

Thank you for thinking about this concept in a bit more detail.



> We dig up gold, shiny it up, and sit it on a shelf in a darkened room.




Why do you think this is the case? Clearly it is different from other resources such as iron and coal. It has only one function and that is storage of wealth.



> Sure, gold may be a another form of money, but its an exceptionally inefficient form of money. If wealth is created by doing something, and you need more blue-shell-equivalents to represent the greater prosperity of civilization, you can either print more fiat currency, or you 'print more gold' by stumbling around in the bush digging holes.




If the most efficient form of money is to print pieces of worthless paper, they will eventually return to their intrinsic value, which is zero. Gold on the other hand requires effort and is limited in availability, therefore is value. The value that is has depends on the requirement for its use as a long term store and this will be dictated by market forces by big money, such as central banks and big money private demand.



> The complete silliness of gold is highlighted by the fact that as a wealth-store, it abounds with friction. If the purpose of something is to represent stored wealth, then why choose something that itself consumes (destroys) wealth in the process of obtaining?
> 
> Ahh - because it has to be rare in order to act as an effective storage mechanism! Well, no, not really. It has to be controlled and restricted, and indeed the problem with fiat currencies has been amply demonstrated in recent times.




Yes, you are right, it has to be controlled and restricted. Fiat currencies throughout human history have never been up to the task. Bitcoin was a potential alternative but clearly has its own drawbacks that gold does not have. Therefore, on this point I think you are getting to the reason for gold as a store of value and haven't argued against it.



> I see little difference between the US pressing the 'go' button on their printing presses, and digging a hole and finding some shiny rocks at the bottom of it. Neither increases wealth. Both increase the 'wealth store' without anything useful having been done.




You can't add another zero in the ground like you can on a keyboard. The gold supply in the ground is limited. The wealth store concept only works if the only real utility is for this very function and why silver isn't ideal.



> Oh ok, there is one difference. Running the printing presses is at least cheap. Finding more shiny rocks is costly and inefficient. Both increase the 'wealth-store' by increasing the 'store' and not by increasing the 'wealth'. Gold actually decreases the 'wealth'.




http://fofoa.blogspot.com/2009/10/gold-is-money.html
http://fofoa.blogspot.com/2009/10/gold-is-money-part-2.html
http://fofoa.blogspot.com/2009/10/gold-is-money-part-3.html

From FOA:
"By accepting and using dollars today that have no inherent value, we are reverting to simple barter by value association. Assigning value to dollar units that can only have worth in what we can complete a trade for. In effect, refining modern man's sophisticated money thoughts back into the plain money concept as it first began; a value stored in your head!

So you think we have come a long way from the ancient barter system? Where uneducated peoples simply traded different items of value for what they thought they were worth? Crude, slow and demanding, these forms of commerce would never work today because we are just too busy, right? Think again!

Unlike the efficient market theory that was jammed down our throats in school, we all still use value associations to grasp what things are worth to us. Yes, the market may dictate a different price, but we use our own associations to judge whether something is trading too high or too low for our terms. We then choose to buy or sell at market anyway, if we want to.

In this, we have moved little from basic barter. In this, we are understanding that an unbacked fiat works because we are returning to mostly bartering with one another. A fiat trading unit works today because we make it take on the associated value of what we trade it for; it becomes the very money concept that always resided in our brains from the beginnings of time.

In this, a controlled fiat unit works as a trading medium; even as it fails miserably as the retainer of wealth the bankers and lenders so want it to be."

From FOFOA:
"Modern fiat currency, our modern physical transactional medium fits best in the means of exchange function. And real wealth, with gold as the most liquid, durable and portable example par excellence, fits best in the store of value function."

From FOA:
"We were first alerted to the "gold is money" flaw years ago. When considering the many references to gold being money in ancient texts, several things stood out. We began to suspect that those translations were somewhat slanted. I saw many areas in old texts where gold was actually referenced more in a context of; "his money was in account of gold", or; "the money account was gold", or; "traded his money in gold". The more one searches the more one finds that in ancient times gold was simply one item that could account for your money values. To expand the reality of this thought; everything we trade is in account of associated money values; nothing we trade is money!"

FOFOA again:
"And can we now agree on these three statements at least? 1) Gold is a form of wealth. 2) The pure concept of money fits best within the unit of account function. 3) The word currency best describes what we currently use in the medium of exchange role.

Our modern gold market price illusion is little more than a product of the fiat dollar system; a design that denominates gold credits in a contract form. Is it a free market? Why yes, very free. But... TOO free, in the sense that contract supply is totally unlimited. Investors bought into this market even though they fully well knew 90% of the volume was represented by only cash equity on the other side. Knowing that, they somehow expected that those contracts were limited in creation by the fixed amount of gold in the world. Their mistake, not the market's.

And as we pass through this phase transition, as gold switches from the transactional track to the wealth-reserve track, it will take on a whole new meaning... and a whole new value! The non-dollar part of the world already knows this. This is why they are buying gold now! You see, as a truly demonetized wealth asset, gold has a much much higher value to mankind than it does as a transactional money. To get an idea of the difference, just compare the basic transactional money supply with the vast quantity of so-called "paper wealth dollar derivatives". This should give you an idea of what is coming!"



> And as for the notion that gold is completely different to blue shells because 'everyone' agrees gold is valuable but not everybody agrees blue shells are valuable, well, really!  For a start, ask the people on the fictional island. They'll tell you everyone agrees. But also, have a look what this discussion is about. Not everyone agrees! Bretton Woods?




Given that we don't live on an island and therefore the island concept is irrelevant to this discussion, we know of many different concepts that could perform a store of value function for currency. Knowing what is out there, eventually everyone agrees that gold is unique for this function.



> The complete silliness of gold is highlighted by the fact that as a wealth-store, it abounds with friction. If the purpose of something is to represent stored wealth, then why choose something that itself consumes (destroys) wealth in the process of obtaining?




Because you cannot obtain wealth for free. It requires effort. 

From FOFOA:
"What will happen is a paradigm shift. The paradigm shift will be the sudden planetary recognition that the global debt(concept)-based paper investment pyramid is collapsing from its own weight and size. And that the best safe haven retreat is physical possession of the one and only hard asset that is globally recognized as an official monetary wealth reserve, an officially recognized hard collateral asset, a true national treasure, and an historic denominator of wealth with a history longer than recorded history itself!"


----------



## Macros

About the Bretton Woods point and recent history:

From FOFOA:
Gold Exchange Standard

Our most recent experiment with gold as the conceptual medium of exchange ended badly. The purist understanding of money, the common medium of exchange, longs for it to be a real commodity, or at least linked to a commodity so that the actual medium can have a relatively stable value and double as a store of wealth. But when we lock a finite commodity into a parity relationship with an inflating paper currency, we only drag down that commodity's relative value compared to the rest of the real world as the related currency is inflated.

Over time, pressure builds up in this relationship set at par, the same as pressure builds between two business partners where one is lazy and unproductive and the other must carry the business through hard work. Sooner or later some of that pressure must be released and parity must be broken. Perhaps the lazy partner's equity position in the business is cut or reduced to reflect his lack of contribution, buying the ill fated relationship a little more time. This is what Roosevelt did with the dollar/gold relationship in 1933. But eventually these mismatched partners will have to part company once and for all. Just as gold and the dollar did in 1971.

In 1971 official parity was broken, but not forgotten. In the years since, an unofficial parity of sorts has been maintained through the paper gold market. Paper gold, like dollars, can be expanded and inflated while being locked at a par with the real thing. This is still going on today. But the pressure has been building for a long time now. This pressure held in the parity relationship between paper and physical gold is about to blow.


Long versus Short

Today's paper currencies are not just a medium of exchange, but they are still a pretty good store of value in the short term. The greater the rate of price inflation, the shorter the term that you will want to be holding the actual currency. Wealth assets, on the other hand, are the store of value for the long term. This differentiation is understood by almost everyone today. And it is so close to the concept of Freegold that it will not be "a giant leap for mankind" to get there.

The only difference is that right now, most of the public has come to believe that wealth is simply paper ownership of wealth producing industries and paper claims on real assets that can never be recovered at today's values. This is true for most all items, not just gold. And as we hold these paper documents for the long term, understanding them to be better than holding the actual currency because they provide a "yield", the recoverability of the underlying real asset is being constantly eroded away. In other words, we are unknowingly losing principle at the same time as we think we are gaining a yield!

From 1980 to 2001, the expansion of the financial industry far beyond the means of its parallel real world counterpart was a signal that our human instinct to buy things, or assets (even if only paper debt assets), rather than to hold the actual currency, was still intact. But the fact of the matter was that the dollar currency itself was expanding during this time period at a furious pace to meet its global usage demand WITHOUT causing the price inflation that should have accompanied such an expansion.

This strange "pseudo-deflationary" signal (versus gold) during a time of high currency inflation might have told the people that it was okay to hold the currency itself during this period. That something odd was afoot. As the currency was expanding with such ease, but at the same time gaining purchasing power especially against gold and oil. But the people only spent their currency, which demonstrated their natural inclination. To spend currency, and to buy real wealth assets for the long term (even if those assets were little more than a value illusion).

But today a totally different signal is being broadcast loud and clear, and being equally ignored. That gold is now about to resume its historic role and value as a wealth asset, long suppressed by its troubled association with inflating transactional currencies.


Gold Coin Standard

Even the gold coin standard we had leading up to the creation of the Federal Reserve System ended badly. You see, people put their gold coins into the banks and the banks lent them out. And then when confidence suffered a shock and the banks faced a run on gold, the system collapsed, many banks failed, and people lost their gold.

Human people want to be able to borrow money in the present that they plan to earn in the future. Not all people want to do this, but enough to influence the system certainly do. And this practice, by its very nature, expands the money supply beyond its physical commodity limits, even in a pure gold coin standard.


The point here is that our modern understanding of money, or any money concept for that matter, combined with our modern taste for borrowing, lending and trading of credit and debt, may not NECESSARILY be a perfect fit with a pure gold standard. Even a gold standard, with gold as the actual currency, is manipulated by the banks through confidence-based lending schemes. Sure, a gold standard somewhat limits the collective in its more nefarious pursuits, but it also has flaws that always seem to lead to the same conclusion... failure.

Perhaps it is time for us to consider another alternative, even a natural one that is happening whether we like it or not. How about a new, de facto, free market-driven stasis instead of the old de jure (rigged) false parity relationship... how about Freegold?

The Fourth Dimension: Time

At any given moment, a snapshot of our world appears to be only three dimensions; left/right, backwards/forwards, up/down. But with the passage of each and every moment, the world changes. Values change! People change. Everything changes. And all of these changes happen as we move through the fourth dimension, time.

This fourth dimension is very important as we consider the pure concept of money. For it is in this fourth dimension that our pure concept of money resides!

If time was not a factor, then anything accepted as a generic medium of exchange could perfectly perform all the functions commonly linked to the term 'money'. You do your work (somehow without the passage of time) and get paid, and then spend your money on anything within that same moment in which your work's value was judged against the entire universe of real things. A perfect stasis of values would exist everywhere, all at once.

But here in the real world we must be concerned about how far we carry our money through the fourth dimension. Without this vital consideration, we stand to lose everything!


----------



## Intrinsic Value

Macros said:


> I read it last year. I mentioned that I had earlier. I agree with what Roger says and I am a value investor. I wouldn't make be saying these things if hadn't as that would be incredibly hypocritical of me.
> 
> All I'm trying to get across, is that I don't think that value investment should be applied in a vacuum.
> 
> Issues with certain sectors and the economy can be more important than current margin of safety as they drive future earnings and future value. My assertion is that many investors who use a value approach have mental baggage from Buffett and Graham and therefore find it difficult to be adaptive and critically think about issues like gold as a currency, credit super cycle and the implications on all investments such as Australian banks, retail sector, future interest rates, monetary systems, consumer discretionary spending and the impact on retailers, viewing a producing resource company completely different to mining services due to misperceptions on how they should be judged, sometimes viewing resources as an unknown or sometimes worthless when the flow through the whole economy.
> 
> I truly do not think that these issues are tackled well at all by the majority of traditional value investors, and my one criticism is that is that Rogers approach is perpetuating this problem. I think they are incredibly important for short, medium and long term term investing.
> 
> As a result of my comments on gold, the typical responses indicate a lack of research and understanding of the issues. In no way am I suggesting that value investors should invest in this area, but if you don't understand the full picture you shouldn't be reaching a hasty conclusion. Economic systems are interconnected.
> 
> The bank issue is important as you can't invest with a margin of safety unless you are fully aware of the risks involved. I haven't mentioned them here, but I think that most Australians under-appreciate the issues we face.
> 
> My suggestion is that these issues are just as important as investing with a margin of safety. An investor should make themselves aware as much as possible and be willing to adapt.




One of the important points that RM makes in his book is about 'turning off the noise' and concentrating on the fundamentals of the company. 

Of course that doesn't mean ignoring other factors at play in the greater economy but it does mean not being overly distracted by every prediction, movement up and down and day to day machinations of the market.

In his analysis he talks about government legislation that might affect future earnings. The advent of new technology on a business and of course he has mentioned quite often the downturn in retail as result of lack of consumer confidence and less discretionary spending due to higher energy costs etc. 

And whilst I haven't heard RM talk about a GFC2 it seems he must have factored it in to his thinking as his fund is holding predominantly cash or he might rationalise that there are not enough A1s at sufficient discount to their IV to warrant investment.

So really even thou he might say he is not an economist and he is a fundamental investor he is still looking at anything that might affect a business and its future earnings and then factors this into his valuation.

So I suppose Macros it then comes down to what is 'noise' and what is real information that needs to be factored in to future stock valuations?

Finally and fundamentally what you are saying is what RM is for the most part doing anyway.


----------



## Tysonboss1

Charlie munger says you should focus your efforts on becoming a good swimmer rather than trying to pick the tides. 

I tend to agree, Warren says that if he made investments based on macro predictions he would have missed some of his best investments, and he has also said some of his biggest mistakes were when he followed macro predictions. 

He bought conoco based on a very high oil price,


----------



## Macros

Intrinsic value,

I agree that Roger does think about this stuff. I'm not suggesting that he is unaware personally.

My points are based on the duality which results in many having very mixed perceptions about some of these issues.

It seems that some topics such as discussing gold and the meaning of money is very difficult to do with a balanced and considered discussion. There is a significant lack of willingness in general to discuss these issues and actually assess the facts, in my opinion.


----------



## Macros

Tysonboss1 said:


> Charlie munger says you should focus your efforts on becoming a good swimmer rather than trying to pick the tides.
> 
> I tend to agree, Warren says that if he made investments based on macro predictions he would have missed some of his best investments, and he has also said some of his biggest mistakes were when he followed macro predictions.
> 
> He bought conoco based on a very high oil price,




Their track record speaks for itself no doubt.

However you cannot take everything they say at face value or as gospel.

For example, when Buffett purchased the Goldman Sachs preference shares, he did it on making a call that the Government would bailout the banks. This was a call on macro and political predictions that may have also involved privelidged information.

They do not always act in line with what they say in public. Buffett bought silver bullion in 2001 or so, which goes against everything he says on the topic.


----------



## So_Cynical

Tysonboss1 said:


> Charlie munger says you should focus your efforts on becoming a good swimmer rather than trying to pick the tides.




Being a good swimmer is of almost no use at all in a survival situation...swimming against the rip/current will get you killed quick smart, you need to go with the flow and don't panic, be prepared and have an understanding of what strategy is needed to survive.


----------



## Macros

Interesting that discussion died out after the FOFOA comments. Did anyone find this view and the concept of a Freegold system informative, insightful or have any criticism?

I know there is a fair bit of information, but did anyone check put the FOFOA links?


----------



## PeterHercules

Keegan88 said:


> Hello all,
> 
> Since you are all working out the intrinsic value of stocks, and coming up with different values, either through different methods or different inputs, I have been trying to put together an excel spreadsheet that will do this all for me rather than doing it by hand. The problem is I am not 100% sure that it is correct. I just changed the ROE so it was calculated from the average of the BOY Equity and the EOY Equity so thanks for that point ubtheboss.
> 
> If any one is interest by all means take a look, run your numbers though to see what you get, any suggestions will also be appreciated.




Hi,
I'm PeterHercules.  Just joined this forum.  I've downloaded your spreadsheet but can't figure out how to use it.  It just looks like an empty spreadsheet from where I'm sitting . . . Can you give some "get started" hints, please?
Peter


----------



## Tysonboss1

Macros said:


> I know there is a fair bit of information, but did anyone check put the FOFOA links?




No. Not really interested.


----------



## Macros

Tysonboss1 said:


> No. Not really interested.




Thanks. You have highlighted the whole point of my discussion - a lack of motivation to think from a wider point of view, driven by a desire to cling to long-held beliefs and lack of personal research. What is the point of discussing a particular topic if you are unwilling to consider all aspects and be informed? If you don't, bias is highly probable.


----------



## waimate01

Macros said:


> Interesting that discussion died out after the FOFOA comments. Did anyone find this view and the concept of a Freegold system informative, insightful or have any criticism?
> 
> I know there is a fair bit of information, but did anyone check put the FOFOA links?




I read the links. It strikes me as almost a religious discussion, with differing points of views looking at the same set of facts and coming up with conclusions diametrically opposed.

In the end, I got bored.  These people seem to be going to a lot of effort to establish that gold is better than cash, when in my view neither is the answer. Gold holds some value over time (with the odd wild swing). Cash depreciates ever onward, but with a yield that goes a long way to ameliorate the decline. Holding cash comes at a cost; holding gold comes with risk. My view is you should only use either of them when you must. Represent your wealth in property you can rent out, ownership of viable businesses that earn profit, and failing that, baked beans and ammunition *.

( * The ammunition is to defend the bunker full of baked beans from the slathering hoards).


----------



## Tysonboss1

Macros said:


> Thanks. You have highlighted the whole point of my discussion - a lack of motivation to think from a wider point of view, driven by a desire to cling to long-held beliefs and lack of personal research. What is the point of discussing a particular topic if you are unwilling to consider all aspects and be informed? If you don't, bias is highly probable.




I understand it enough to know their are better ways to allocate my funds,


----------



## Tysonboss1

=waimate01

I agree totally, 

One thing gold bugs always say is gold is the only real "money". So what, just own long term assets that generate "money" and you will do well no matter what happens to the gold price or currency.


----------



## PeterHercules

PeterHercules said:


> Hi,
> I'm PeterHercules.  Just joined this forum.  I've downloaded your spreadsheet but can't figure out how to use it.  It just looks like an empty spreadsheet from where I'm sitting . . . Can you give some "get started" hints, please?
> Peter




*****************
It's OK - it has an empty sheet2 and I was looking at that.  Your spreadsheet looks good.  I'm going to try it out.  Thanks, Keegan for making it available.


----------



## Macros

Tysonboss1 said:


> =waimate01
> 
> I agree totally,
> 
> One thing gold bugs always say is gold is the only real "money". So what, just own long term assets that generate "money" and you will do well no matter what happens to the gold price or currency.




Look, I'll leave it at that, as it is clear that my views aren't useful to anyone here. I was never suggesting that you should buy gold over good companies. My whole purpose was to highlight the issue that I think that many important economic concepts are difficult to discuss within this paradigm. 

My point about gold was only that it is extremely difficult to have a reasonable disucssion and consider all points of view (most people seem to have a rigid belief and unwilling to consider adaptation) and any potential investment implications eg gold stocks or the impact to global monetary systems. My other points were about the consideration of credit cycles and the current issues we face having impacts on banking, retail and other sectors impacting now and for years to come.

Good luck.


----------



## New Stratos

*Valuation when the company reports a loss*

I've asked Roger this question in email and on his facebook page and not got a reply from him (I can guess why - it gets into the guts of his model):

"when applying your valuation method to companies that paid a dividend despite a negative NPAT, what should I do with the Pay Out Ratio? Call it 100%? 0% or -X%. The choice makes a significant difference to the valuation."

Id did get replies form a few people on the facebook page claiming it would value the company at $zero, to which I replied:

"So Westfield, Equity of $16.5 billion even after losing $2.1billion in 2009 and paying dividends of the same, is suddenly worth $0? I think not  "

The thing is they obviously basically think the model IS those two tables, whereas they are just a print out of the results of two simple formulae. Because they don't provide numbers for negative ROE they think the model says negative ROE => $0 This is unrealistic. 

Assuming you do calculate the relevant figures the crux of my question is - what you decide the payout ratio is makes a big difference eg if you say they paid out more than they earned ie a number for the dividend but a negative number for NPAT, so POR is 100% you get a negative value; if POR is set to 0% then it gives a positive valuation. IF it is simply calculated mathematically (in this example essentially -100% it gives a large positive valuation)

If Roger's model really produced a negative or zero value in the example given, then it wouldn't be doing a good job; on the other hand it seems counter-intuitive that in some case going from a small profit to a large loss increases the valuation....


So, some of you guys have published beautiful Excel output with nice graphs - what do you do when NPAT is negative?


----------



## ROE

*Re: Valuation when the company reports a loss*



New Stratos said:


> I've asked Roger this question in email and on his facebook page and not got a reply from him (I can guess why - it gets into the guts of his model):
> 
> "when applying your valuation method to companies that paid a dividend despite a negative NPAT, what should I do with the Pay Out Ratio? Call it 100%? 0% or -X%. The choice makes a significant difference to the valuation."
> 
> Id did get replies form a few people on the facebook page claiming it would value the company at $zero, to which I replied:
> 
> "So Westfield, Equity of $16.5 billion even after losing $2.1billion in 2009 and paying dividends of the same, is suddenly worth $0? I think not  "
> 
> The thing is they obviously basically think the model IS those two tables, whereas they are just a print out of the results of two simple formulae. Because they don't provide numbers for negative ROE they think the model says negative ROE => $0 This is unrealistic.
> 
> Assuming you do calculate the relevant figures the crux of my question is - what you decide the payout ratio is makes a big difference eg if you say they paid out more than they earned ie a number for the dividend but a negative number for NPAT, so POR is 100% you get a negative value; if POR is set to 0% then it gives a positive valuation. IF it is simply calculated mathematically (in this example essentially -100% it gives a large positive valuation)
> 
> If Roger's model really produced a negative or zero value in the example given, then it wouldn't be doing a good job; on the other hand it seems counter-intuitive that in some case going from a small profit to a large loss increases the valuation....
> 
> 
> So, some of you guys have published beautiful Excel output with nice graphs - what do you do when NPAT is negative?




Head line profit doesn't mean much ... look at the underlying operating profit ..
Westfield is a good example ..their headline profit is a loss due to asset
re-valuation and write down ...but their operations is generating a profit
so they are in no danger of disappearing..

Not saying Westfield is a good buy or a good stock just an example...

Beware the one that report mass profit but underlying profit is shaky or negative cash
flow ..... you see lot of these before GFC and they all gone to grave yards during GFC


----------



## notabclearning

I advise everyone on this forums to have a look at myclime. In my opinion they use a better valueation technique as they take franking credits into account.


----------



## New Stratos

*Re: Valuation when the company reports a loss*



ROE said:


> Head line profit doesn't mean much ... look at the underlying operating profit ..
> Westfield is a good example ..their headline profit is a loss due to asset
> re-valuation and write down ...but their operations is generating a profit
> so they are in no danger of disappearing..




Exactly, one or two bad years is not going to wipe them out, unlike many small businesses. Some industries are also 'lumpy', yet still worth investing in. However RM's model explicitly uses NPAT, which brings us back to my question  When it IS negative, what do we do?


----------



## notabclearning

With RM's method it will always be zero.


----------



## New Stratos

notabclearning said:


> With RM's method it will always be zero.




With Roger's Method applied using the information he supplies in the book it will be zero, because you can't apply it - the tables don't have the appropriate fields. 

But if you use his method and the formulae he generates the tables from, you do get values, as explained above.


----------



## Tysonboss1

New Stratos said:


> With Roger's Method applied using the information he supplies in the book it will be zero, because you can't apply it - the tables don't have the appropriate fields.
> 
> But if you use his method and the formulae he generates the tables from, you do get values, as explained above.




In the situation you would use free cash flow. NPAT is not always the best thing to use, because it includes alot of non cash items, for example depreciation, also you can see a company like westfield book a profit of several million dollars because they revalue a property then two years later a loss of several million dollars because a revaluation lowered the value, So in this case I find it better to use the free cashflow that is being generated by the asset.


----------



## New Stratos

Yes, I had a go at using the Free Cash Flow for companies where they had negative NPATs, but I felt that you really need to use it for all years so that you don't end up comparing apples and oranges, so to speak.

There were a couple of problems with doing this, firstly it is considerably more time-consuming to enter the data (and one of the advantages of the RM formula is it supposed to be quick); Secondly, I still ended up with IV figures that were all over the place.

(What was a significant improvement in reducing the number of spurious PORs of 100% was accounting for the Dividend payments in the year they were earned, not paid. So if you have a big profit and total dividend one year, the dividend doesn't swamp a smaller profit the following year.)

So, yes, the FCFF may be 'better' in some regards, but I'm really interested in working out how best to handle this particular issue (NPAT losses) in Roger's Model; he obviously does handle them but is loath to say how


----------



## Tysonboss1

New Stratos said:


> Yes, I had a go at using the Free Cash Flow for companies where they had negative NPATs, but I felt that you really need to use it for all years so that you don't end up comparing apples and oranges, so to speak.




Yes, Just remember cashflows are real. NPAT is not always real, hence why some companies end up with negative npat.

For example if you were tracking Westfields NPAT over 20 years it would be a real story of boom and bust, with big valuations increases followed by valuation decreases. 

However if instead you tracked the free cash flow produced, it would be a much truer picture of earnings growth and at the end of the day it is the free cashflow that is paid in dividends and reinvested so I would say that is more important.


----------



## McLovin

New Stratos said:


> So, yes, the FCFF may be 'better' in some regards, but I'm really interested in working out how best to handle this particular issue (NPAT losses) in Roger's Model; he obviously does handle them but is loath to say how




How do you know he uses that model when a company is making a loss?


----------



## Tysonboss1

McLovin said:


> How do you know he uses that model when a company is *making *a loss?




switch that to reporting a loss, there is a slight difference.


----------



## New Stratos

McLovin said:


> How do you know he uses that model when a company is making a loss?




I don't know for sure which model he uses when a company reports a loss - I'd like to know, but he won't tell 

However, it would be seriously dodgy to switch models (or inputs to models) to suit the results - it would mean inter-year comparisons were invalid or at least less valid.

Despite the fact that the published tables don't let you use the model in the book for negative NPAT situations (or RR outside 8-14%, ROE outside 5-60%), he has said he does use it, and that the tables are just to make things simpler ... If you use the formulae he generates the tables from you can generate values for any value of RR and ROE and from there calculate IV for negative NPAT. 

The issue is how do you treat the Pay Out Ratio:

* cap the POR at 100% on the basis that you paid out more dividends than you made profit and Roger has said to cap POR at 100% => positive value for the dividend portion, large negative figure for the equity portion = - IV  (which is nonsensical)
* simply divide Dividends by the Negative Number, result = -POR =>positive value for the Dividend part of the formula and a larger positive figure for the equity part (because 1--POR = POR of 1.something) = exaggerated? IV 
* set POR = 0 => dividend portion = 0 (silly if dividends have been paid as they have a value) equity value is positive = a positive value for IV

See the attachment for examples in the order shown above

View attachment POR demo.xlsx


----------



## New Stratos

Tysonboss1 said:


> Yes, Just remember cashflows are real. NPAT is not always real, hence why some companies end up with negative npat.
> 
> For example if you were tracking Westfields NPAT over 20 years it would be a real story of boom and bust, with big valuations increases followed by valuation decreases.
> 
> However if instead you tracked the free cash flow produced, it would be a much truer picture of earnings growth and at the end of the day it is the free cashflow that is paid in dividends and reinvested so I would say that is more important.




I'm not entirely convinced that the cashflows are any more real than the NPAT  They are still subject to all sorts of accounting chicanery. Yes, it is that free cashflow that pays the dividends, but did it come from productive activity or financial activity? eg borrowing money, demergers which then 'pay' money back to the mother company (eg Westfield's various antics in this arena  )


----------



## McLovin

New Stratos]I don't know for sure which model he uses when a company reports a loss - I'd like to know said:


> I'm not entirely convinced that the cashflows are any more real than the NPAT  They are still subject to all sorts of accounting chicanery. Yes, it is that free cashflow that pays the dividends, but did it come from productive activity or financial activity? eg borrowing money, demergers which then 'pay' money back to the mother company (eg Westfield's various antics in this arena  )




If you glance at the cashflow statement it's pretty easy to tell where the money funding dividends came from.


----------



## ROE

McLovin said:


> Look, Roger's book is pretty good, but in the end he is in it to make money. The evidence of that is the fact that he is now trying to monetise his black box system (A1-C5). He has used a simple formula to allow people with not much time on their hands to "value" companies. The real value is in knowing how to grade a company, but he doesn't share that information. I don't believe he uses one single formula in isolation to make investment decisions. I think he probably uses a variety of valuation techniques, depending on the situation. He does also stress that a company making zero is worth zero. I'm not trying to be critical of him, but his formula is not a silver bullet that will work in every scenario. Your spreadsheet is locked btw.





I agree, Nothing Roger do is special it been around for a decades
he is just really good at re-selling old ideas...

look at the explosion of how to be frugal sites and pay down debt
pop up in the US since the GFC, again these ideas been around
since man kind walk the earth 

There is no magic formular or any sort of formular that make you
money, you have to have a reasonable understanding of the business
its balance sheet and factors in some risk associated with investing
in the stock market and away you go...

I dont think there is anything wrong taking on some good advices
people like Roger, Warren, Charlie do give out good advices, just dont
get too hang up on a specific calculation...


----------



## McLovin

ROE said:


> I agree, Nothing Roger do is special it been around for a decades
> he is just really good at re-selling old ideas...
> 
> look at the explosion of how to be frugal sites and pay down debt
> pop up in the US since the GFC, again these ideas been around
> since man kind walk the earth
> 
> There is no magic formular or any sort of formular that make you
> money, you have to have a reasonable understanding of the business
> its balance sheet and factors in some risk associated with investing
> in the stock market and away you go...
> 
> I dont think there is anything wrong taking on some good advices
> people like Roger, Warren, Charlie do give out good advices, just dont
> get too hang up on a specific calculation...




Exactly. So many people get hung up on coming up with a number. The key to value investing is, as you say, analysing and understanding the company and its business. If it really were so simple that you could take 3 variables plug them into a formula and get the intrinsic value of a company everyone would be doing it.


----------



## Intrinsic Value

McLovin said:


> Exactly. So many people get hung up on coming up with a number. The key to value investing is, as you say, analysing and understanding the company and its business. If it really were so simple that you could take 3 variables plug them into a formula and get the intrinsic value of a company everyone would be doing it.




The good thing about RM is that he has made a lot of people aware of value investing.

His media profile has been good at bringing value investing techniques to the attention of the general public.

It makes a nice counter balance to the mumbo jumbo that seems to sprout out from lots of techincal analysts.

IVs is never going to be an exact science but at the very least you can identify potential investments and filter out all the rubbish.


----------



## Julia

Intrinsic Value said:


> It makes a nice counter balance to the mumbo jumbo that seems to sprout out from lots of techincal analysts.



 I'm not sure why you couldn't record your praise about your 'value investing'  without feeling obliged to make pejorative comments about a different style which fairly obviously you don't understand.


----------



## New Stratos

McLovin said:


> Look, Roger's book is pretty good, but in the end he is in it to make money. The evidence of that is the fact that he is now trying to monetise his black box system (A1-C5). He has used a simple formula to allow people with not much time on their hands to "value" companies. The real value is in knowing how to grade a company, but he doesn't share that information. I don't believe he uses one single formula in isolation to make investment decisions. I think he probably uses a variety of valuation techniques, depending on the situation.




I'd agree with most of that  My question is though; using his published method (but with non published figures for the multipliers) how do you deal with POR to get a somewhat realistic figure?



McLovin said:


> He does also stress that a company making zero is worth zero.




Where has he said that? If so then that's pretty dumb, which Roger doesn't strike me as being. If Westfield, for example, closed all it's Shopping Centres tomorrow ie no rental income, it would still have value. 



McLovin said:


> I'm not trying to be critical of him, but his formula is not a silver bullet that will work in every scenario. Your spreadsheet is locked btw.




Let's try again 
View attachment POR demo.xlsx








McLovin said:


> If you glance at the cashflow statement it's pretty easy to tell where the money funding dividends came from.




Sure, but my point was about trying to replace one single figure with another, when either can be dodgy.


----------



## McLovin

Intrinsic Value]The good thing about RM is that he has made a lot of people aware of value investing.

His media profile has been good at bringing value investing techniques to the attention of the general public.[/QUOTE]

This is true said:


> I'd agree with most of that  My question is though; using his published method (but with non published figures for the multipliers) how do you deal with POR to get a somewhat realistic figure?




No idea. I guess you could just assume the company comes back into profit the following year get an IV for that year then discount it back.





			
				New Stratos said:
			
		

> Where has he said that? If so then that's pretty dumb, which Roger doesn't strike me as being. If Westfield, for example, closed all it's Shopping Centres tomorrow ie no rental income, it would still have value.




He's said it on numerous occassions, on his blog and on the various Sky Business shows. Usually it is when someone asks about ABC Exploration Ltd. Of course Westfield's assets would still have value. 





			
				New Stratos said:
			
		

> Sure, but my point was about trying to replace one single figure with another, when either can be dodgy.




Unless you have the world's dumbest auditor and/or a bank willing to forge bank statements, then it is 1,000x harder for a company to get creative with a cash flow statement. It's really not even comparable.


----------



## waimate01

McLovin said:


> Look, Roger's book is pretty good, but in the end he is in it to make money. The evidence of that is the fact that he is now trying to monetise his black box system (A1-C5).




Right on.  Roger's book talks about how you can easily value a company, but yet he disguises the actual equations in his two tables, saying it's to "avoid confusion and the possibility of mistakes", whereas I think really it's to create an air of mystique. 

Further, if you take the IV method he sells in Value.able and compare it to the IVs he sells in MyClime, you end up with two completely different IV's. They *have* to be different so people will *both* buy the book and subscribe to the service.

Roger's ostensibly selling the notion of making rational valuation decisions based on immutable facts, but when you get down to the core of it, he applies his own 'secret sauce' which is derived by taking a whole bunch of stuff into consideration and reaching into the far recesses of his mind.

When you take some accurate numbers and apply a precisely defined process to create a deterministic result ... and then multiply that deterministic result by a somewhat arbitrary number you've pulled out of your ear, well the quality becomes equal to that of the least deterministic component.

When you base a calculation on estimated sustainable ROE (a guess of what the future looks like), and RR (a guess of what the risk premium should be), the end result is just a guess.

Roger's talent lies in packaging that up and marketing it.  

I'm not saying there's no value to what he's offering, just that it should be seen for what it is.


----------



## Intrinsic Value

Julia said:


> I'm not sure why you couldn't record your praise about your 'value investing'  without feeling obliged to make pejorative comments about a different style which fairly obviously you don't understand.




Well I have listened to a lot of technical analysts and they seem to blow a lot of hot wind.

So many ifs and buts and maybes and using jargon that seems to have been created by martians to further confuse the layman.

That is why i counterbalance with RMs method because his method seems to make sense and theirs certainly doesn't.


----------



## Silhouetteau

Craft or anyone that can help,

Could suggest any other books/things that are worth reading?

I've read most of the prominent value investing books (Intelligent Investor, Common Stocks & Uncommon Profits, Margin of Safety, Roger's book, Berkshire Letters and Competitive advantages books)

I'd be specifically interested in anything relating to earnings risk and default risk?


----------



## craft

Silhouetteau said:


> Craft or anyone that can help,
> 
> Could suggest any other books/things that are worth reading?
> 
> I've read most of the prominent value investing books (Intelligent Investor, Common Stocks & Uncommon Profits, Margin of Safety, Roger's book, Berkshire Letters and Competitive advantages books)
> 
> I'd be specifically interested in anything relating to earnings risk and default risk?




Silloeuetteau

The three risks are intertwined and the authors I like best normally have a holistic approach. I guess if you just want information on say default risk you could Google it but that would probably bring up the ratings agencies and you would miss the big picture. O.k approach if you are at the stage where you are trying to answer specific question for yourself. 

The best reading by far is the Berkshire Letters (free on the Internet), but you need to know the questions you are trying to answer before you will get the answers from here. Anything Charlie Munger is also normally good. I have read these letters many times and still get something new each time.

Some others I like are:
Bruce Greewald 
James Montier
Michael Mauboussin 
Martin Leibowitz
Pat Dorsey

The best contemporary information is often in the Value Fund Managers newsletters and web sites (Legg Mason, GMO, tweedy Browne etc).  Also the Business schools have some good free info; Paul Johnson & Bruce Greenwald at Columbia, Robert Shiller (Yale) and Answath Damodaran (Stern)  for valuation stuff.

And don’t forget to read broadly – Good exponents of the other trading disciplines can offer much if you keep an open mind. For example some of the expectancy stuff in the front of Nick Radge’s Adaptive Analysis is as applicable and just as vitally important to Fundamental Investing as Technical Trading – I have never seen expectancy written about from a fundamental perspective.


----------



## Tysonboss1

McLovin said:


> . I think his method is better suited to the Bruce Greenwald approach of rarely paying for growth and thus valuing the company as though it's current earnings are what it will earn in perpetuity.




Yeah, Ben Graham warns against over paying for expected earnings growth, He suggests that maximum value for a "growth" company is 25 times the average earnings of the past 7 years, and offcourse a margin of safty would be applied.


----------



## New Stratos

McLovin said:


> I agree with you, although I also think everyone does make mistakes. From what I have seen, when it comes to assessing the earnings potential of a company his method comes back to sort of airy-fairy concepts "pick wonderful companies" etc and a few Mae West quotes. It's very easy to write that, it is, afterall, commonsense, who is buying bad companies? But for the novice investor, which his book is aimed at it really gives scant detail on how exactly to identify how safe a company's earning stream is.




I think that is a little harsh. There's plenty of advice in the book, and in other commonly available Value Investing books, on what constitutes a good company eg low debt-equity, steadily growing earnings, high ROE, Intrinsic Value increasing (and he gives one way to _estimate _the IV)

NOT share-price going up quickly.

And plenty of people buy bad companies, especially if they think share-price = value; share price is increasing therefore value is increasing.




McLovin said:


> There is a heavy reliance on RoE to be able to predict the future earnings potential of companies, I don't disagree that a high RoE can indicate a competitive advantage, but it doesn't always. I think his method is better suited to the Bruce Greenwald approach of rarely paying for growth and thus valuing the company as though it's current earnings are what it will earn in perpetuity.




Sounds quite sensible in a cautious way to me. I am willing to take some risk for some growth, but not everyone should.


----------



## McLovin

New Stratos said:


> I think that is a little harsh. There's plenty of advice in the book, and in other commonly available Value Investing books, on what constitutes a good company eg low debt-equity, steadily growing earnings, high ROE, Intrinsic Value increasing (and he gives one way to _estimate _the IV)




I was referring to assessing how safe a company's earnings are. Identifying a good/strong company at a point in time is not that hard.


----------



## VSntchr

I find it funny that all this criticism comes out once the market starts crashing!

Anyone who gets as big in the investing world (well, the local investing world) is bound to have their critics.

Like ROE states, he hasn't really come up with anything new. What he has done is show people the basics of value investing and given them some of the skills required to begin researching companies.

Yeah he has made a lot of money while doing this, but I know I'd do the same given the chance.

He has given quite alot of people at least a  _better_ understanding of what is involved in selecting companies and at what price....which is far more than what alot of spruikers out there have done


----------



## McLovin

VSntchr said:


> I find it funny that all this criticism comes out once the market starts crashing!




If you think this is the market crashing, wait 'til you see the market crashing!


----------



## Intrinsic Value

Wysiwyg said:


> After seeing the interest in Roger Montgomery on this thread, I listened to him speaking on "Your Money, Your Call" in March/April and two stocks he had interest in were Forge Group and Matrix CE. They had run a long way and as it turns out they had peaked.
> 
> These companies may come back and longer term the pull back could be a great buy but geez, buying in their infancy from ones own research is surely more rewarding than chasing them after a considerable run up.




To be fair to RM he was spruiking FGE and MCE when they were around 2 dollars and 3.40 respectively so even with the big pullback that has affected most of the market they are still substantially higher.

And in the long term they may go back to much higher levels. I think MCE is a better long term play than FGE but FGE still looks good at current buy levels. I think they are reporting next week and MCE towards late August so should get a better picture then.


----------



## kreagh

RandR said:


> I believe its only a demo. It shows the vast majority of share purchases as being on the 30 june 2010, so i dont really know how much you could take from the results of what is just a demo account. last update i can find was for jun 15.
> 
> I cant seem to copy any of the information over.
> 
> But for 2010 it says ROI of 27.59%
> 2011 = 9.28%
> 
> The usual suspects are in there - JBH, COH, CSL, WOW, Reece, Platinum ass man, Matrix, ANZ, Vocus, Zicom.
> 
> Anyone interested can sign up for 21 day free trial with eureka report and see it.
> 
> Really enjoyed your posts so far craft, I like Roger Montgomery, and own his book, but feel there is so much more to stock and market analysis then valuable. For me personally I find the insights that can be gained from the likes of Soros and Jim Rogers is invaluable.





I agree with R&R. Thank you Craft for mentioning the various reading materials and providing a counter-balancing viewpoint. I get a distinct 'cult' feeling from the value.able forum too.

The basics of value investing which Montgomery publicises are useful and have helped me affirm some of my own thoughts on investing as I am new to share trading. 

However, I am a little suspicious that he names stocks so readily and specifically - but is more vague in respect of the precise nature of his analytical method. 

If it is just to protect the future growth of his own fund managing or stock tipping business I guess it's fair enough - but it means his more ardent followers will have an incomplete education if they don't read more broadly than his publicised method and stock tips.


----------



## Muschu

IMO Roger needs to offer potential clients far more information in order that they can make informed decisions.

The man but be very genuine but I prefer less intrigue and more disclosure.


----------



## New Stratos

I think we are going to have to accept that he isn't going to reveal the inner workings of his full model eg what tools he uses to arrive at the A1-C5 ratings, as if he does anyone vaguely useful at excel would be able to reproduce the technique. That would be goodbye to his business model.

At least he does share what he's been interested in/bought after the event. And discusses and encourages discussion of company valuations.


----------



## notting

I do love Roger. If there is an analyst I want to listen to it's him. 
I used to think of Rivkin - it was funny how great stock pickers need only one thing to make money after they have baught, a follow_in _g.


----------



## McLovin

kermit345 said:


> Have to agree to some degree craft. If you read through the many comments throughout the blog the large majority are simply praising roger as the almightly value prophet. There are some quality posts that you can pull interesting bits of information from but you really have to skim through and do your best to find it.




Case in point:

http://blog.rogermontgomery.com/what’s-your-stock-market-survival-story/

I mean isn't Roger preaching to the converted with posts like that. It has absolutely no benefit, aside from maybe flogging a few more books. 

Roger's blog was pretty good about 18 months ago, he had some good thoughts and there were a few very good posters, now it is really nothing more than a way for him to get publicity.


----------



## waimate01

New Stratos said:


> That would be goodbye to his business model.




Indeed.

And it's important to appreciate what his business model is. *Our *business model is to make money from stocks. Roger's business model is to make money from *us*.

Of course, that doesn't make him wrong or invalidate any points he might be making. But it does mean he's not in the same boat, and hence it's a mistake to think that his perspective aligns with mine.

I know Buffet cops a whacking elsewhere in these forums, but I'd pay way more homage to Buffet than Montgomery any day, because:
i) he does make money through investments
ii) he has been rather successful at it
iii) he says it isn't that hard and shares his wisdom for free

If Roger was so amazing at investing, he'd have more money than god and wouldn't be touting himself as clever-clogs for a living.


----------



## New Stratos

I don't entirely disagree with you Waimate01, I think you're mostly right on most of your points 

I'd modify some of your points slightly though: PART of Roger's business model is making money from people looking for more certainty; I think the other part is investing and managing investors' money for them. Doubtless he is happily reinvesting the money he makes from book sales (which may not be much) and hopes to make from monetising his valuations through the much-touted A1 Service.

As for your Buffett list, Roger:
i) appears to make money through investments
ii) appears to have been rather successful at it (but over a much shorter period, so that could change)
iii) he says it isn't that hard and shares his wisdom for free, but wants to sell his valuation/data service

Roger is obviously quite clever and I don't have a problem with him trying to make money if the service he provides is decent.


----------



## New Stratos

Interesting stuff, Craft, were you one of the unfortunates?
Anyway, here are his recent results (sourced from his blog, so believe them or not, as you wish):


----------



## zac

New Stratos said:


> Interesting stuff, Craft, were you one of the unfortunates?
> Anyway, here are his recent results (sourced from his blog, so believe them or not, as you wish):




Considering he said most of his allocation was in cash/fixed interest until recently that chart is understandable.
Paints a narrow picture though as its not even a years worth of data.


----------



## RandR

zac said:


> Considering he said most of his allocation was in cash/fixed interest until recently that chart is understandable.
> Paints a narrow picture though as its not even a years worth of data.




90% of the fund has been cash until 2 weeks ago ... comparing it to an equities index performance is a bit daft. A Ubank account is looking the goods in comparison ....

Anyway ... Roger disclosed on Your Money Your Call tonight ... the gold stock he is in, is Silver Lake Resources.


----------



## Muschu

RandR said:


> ... Anyway ... Roger disclosed on Your Money Your Call tonight ... the gold stock he is in, is Silver Lake Resources.




Disclosed after the event and was there any indication of the level of investment?


----------



## RandR

Muschu said:


> Disclosed after the event and was there any indication of the level of investment?




Not after the event because he let slip he's still in it. No indication of level of investment ... but my guess is it isnt/wasnt a significantly large stake of the montgomery fund at all.


----------



## VSntchr

Have heard him mention SLR when it was around $2.00 a few weeks back...today wasn't the first time hes spoken of it..


----------



## zac

Id love to understand how some people can tell when the market will slow or dip.
Roger seems to and I spoke to a guy last night that just before the recent crash said he switched his Super to cash and a week later the crash happened.

He said he does this quite often but I dont know how you can tell with much accuracy and therefore make use of all the rises.


----------



## McLovin

RandR said:


> Anyway ... Roger disclosed on Your Money Your Call tonight ... the gold stock he is in, is Silver Lake Resources.




I'd been looking at SLR a bit over the last week, I guess I'll miss out now and it will shoot up 50% over the next week. 

Wasn't he saying a few weeks ago that he will never ever disclose what company it was? He must have needed to get the price moving.


----------



## kermit345

craft i'm in the same boat as you, he can blow his own horn about performance and how excited and happy he is, but it seems that as a newly set up fund he was just lucky enough to not have all the cash deployed yet. I think its a little silly for most fund managers to compare to index's anyway as many of them have high cash, or holdings that don't relate to the index anyway.

If roger could show how the invested portion of the fund has performed vs the index and its out-performed then good on him. But i'd want to see that he could achieve outperformance over 3-5 years on invested funds, ignoring cash, before i'd start clapping my hands.

I think his approach has merit and majority of the companies he discusses are great companies, but there seems to be a lot of patting on the back before it can really be gauged how its performed.

Would he have shown the same chart if equities had gone through the roof and he was playing catchup with even say still 50% in cash? I doubt it.


----------



## craft

I have asked and administration has kindly removed my posts from this thread. I believe posts that have quoted my posts have also been removed I apologise for that and for any inconvenience caused to anybody who tries to make sense of the recent discussion at a future date.

Read widely, think critically

Happy and successful investing to all.


----------



## Intrinsic Value

RM did have a competition going a year or two ago with some other fund managers and he significantly outperformed them. I think it was over a 6 month time frame. It should be on record somewhere.

Re Silverlake he let that one slip out a few weeks back on your money your call. 

Interestingly enough last night he never mentioned MCE which he had been spruiking a lot in the past. In fact even thou the share price is around 5.50 he didn't reveal that he bought any last week when the market was really down. He did deploy a lot of capital and revealed that he bought ANZ,CBA,WOW,FGE, G Engineering, JBHIFI that is all I can recall at the moment. Said he is still sitting on 70 percent cash.


----------



## notting

He won that competition using Dogs of the Dow stratergy!!!


----------



## Intrinsic Value

notting said:


> He won that competition using Dogs of the Dow stratergy!!!




I don't know what stocks he invested in never paid much attention just saw the results.

Where they all high yield stocks?

Even if they were he still signifcantly outperformed his competitors.


----------



## McCoy Pauley

Anyone care to take a look at ACR's numbers released this morning?  I'm stymied by the fact that ACR paid a special dividend of $100 million in the financial year just completed, which is well in excess of ACR's actual NPAT and which had a big effect on the ACR's equity.  Flat-chat at work and just can't find the time to work through the ramifications of whether to strip out the special dividend (and hence have a dividend payout ratio of 0%) or to account for it in some other way.


----------



## skc

McCoy Pauley said:


> Anyone care to take a look at ACR's numbers released this morning?  I'm stymied by the fact that ACR paid a special dividend of $100 million in the financial year just completed, which is well in excess of ACR's actual NPAT and which had a big effect on the ACR's equity.  Flat-chat at work and just can't find the time to work through the ramifications of whether to strip out the special dividend (and hence have a dividend payout ratio of 0%) or to account for it in some other way.




That's an one-off milestone payment from their partner. It's not recurring. You will overvalue them by several orders of magnitude if you include that figure.


----------



## Rau

*Sonic Healthcare (SHL)*

Hello all - my first post!

Has anyone done an intrinsic value calc for SHL?

My 2012 values are coming out surprisingly low, and wondering if I've stuffed something?   I've used 2011 actuals plus Forecast Data from a Commonwealth Private broker report:

2012 Equity/Share:     $6.63
2012 EPS / DPS:         $0.794 / 0.618
2011 Equity/Share:     $6.47
Required Return:        10%

[I note consensus EPS/DPS figures are a little higher, but doesn't change result much.]

So, Forecast ROE is 12% giving an intrinsic value of $8.46.    [Note that I'm using the underlying formulae to evaluate Roger's tables 11.1 and 11.2 rather than table lookup - but using the tables gets similarly lower IVs]

Brokers typically have  SHL as Hold or Buy and it currently trades over $11.

Only explanation I can think of is our high exchange rate.  SHL has significant overseas earnings which are depressed on translation to A$.    Is that an explanation for the low value?  If/when the $A falls, earnings will rise and value would go up with it.   Does that sound reasonable?


----------



## notting

Are we going to see a Roger Montgomery A1 stock collapse after the MCE tradgedy today?


----------



## notting

notting said:


> Are we going to see a Roger Montgomery A1 stock collapse after the MCE tradgedy today?




I should have remained suspicious after he went around saying his hard back book was going to be a one off print not to be repeated.  
As soon as he sold all the copies that he asked people to pre-order, the paperback edition was announced!!


----------



## ROE

You can't blame him.

He's out to make money like anyone else and if he has to spruik a few stocks to sell a few books he will 

I dont think he did anything wrong, it's the people who chose to listen to him and not doing proper home work.

Like I said many times before he's good at selling old ideas and make it fashionable.

If there is such a formula to make money well would he be spruiking his book?
his best formular ever was to sell the books ...that a 100% guarantee return on investment 

If you want to know a bit about his personality, read up on CCP debacle ...he spruik it on the way to glory
but on the way down he blame management for misleading him .... nothing sticks .... I take credit for stuff going up...I blame someone else for it when stocks fall ....


----------



## notting

You can pretty much come away from any managemnts presentation thinking you have found a cracker of a stock. If Roger can't read between the lines then he shouldn't be doing what he's doing!
Unless he doesn't care about ruining peoples lives which would make him a low life. 
Personally it's hardly an issue I made money on MCE going up and will again, there's plenty of work around and it should get another contract after it has finished tanking.
My concern is that this spuiker has walked onto the scene, putting incredably low valuations on things compared to other consensus valuations to then call out a few exceptions to make them look like absolute boomers to the unsuspecting. 
You are supposed to think, 'Wow this guy is smart, super conservative, when he calls an undervalied stock it has to a cracker!'
When he called Lynas at $8 or what ever it was that was : to say the least.
Spotlights on you Roger!


----------



## drlog

notting said:


> You can pretty much come away from any managemnts presentation thinking you have found a cracker of a stock. If Roger can't read between the lines then he shouldn't be doing what he's doing!
> Unless he doesn't care about ruining peoples lives which would make him a low life.
> Personally it's hardly an issue I made money on MCE going up and will again, there's plenty of work around and it should get another contract after it has finished tanking.
> My concern is that this spuiker has walked onto the scene, putting incredably low valuations on things compared to other consensus valuations to then call out a few exceptions to make them look like absolute boomers to the unsuspecting.
> When he called Lynas at $8 or what ever it was that was : to say the least.
> Spotlights on you Roger!




That price on Lynas has many caveats. They must ramp up their LAMP plant in Malaysia (which has a few question marks around it) and the price of rare earths must stay high. Roger made it clear that the $8 IV will only happen if everything goes to plan. Therein lies the risk (and hence why the share price hasn't gone up). I think LYC will succeed but not in the time frame they provide. I don't base this on much to be honest. I just know how difficult chemical processes like that can be. Once LAMP starts, I doubt it will be instant lollipops and red wine (or perhaps I should say ipods and hybrid cars?).

As for MCE, I think there is a buying opportunity right now. However, my holding is already large enough.

Disclaimer: I hold both MCE and LYC.


----------



## notting

If you are prepared to blatantly and publicly bullsh!t people to sell a book it's a red light about integrety. You'll not find that characteristic in people like Buffet and Jim Rogers. They have more vision, depth and consequent endurance - character!
Pretty important when it comes to trusting someone with your life savings, you'd think


----------



## waimate01

*Re: Sonic Healthcare (SHL)*



Rau said:


> Hello all - my first post!
> 
> Has anyone done an intrinsic value calc for SHL?
> 
> My 2012 values are coming out surprisingly low, and wondering if I've stuffed something?   I've used 2011 actuals plus Forecast Data from a Commonwealth Private broker report:
> 
> 2012 Equity/Share:     $6.63
> 2012 EPS / DPS:         $0.794 / 0.618
> 2011 Equity/Share:     $6.47
> Required Return:        10%
> 
> [I note consensus EPS/DPS figures are a little higher, but doesn't change result much.]
> 
> So, Forecast ROE is 12% giving an intrinsic value of $8.46.    [Note that I'm using the underlying formulae to evaluate Roger's tables 11.1 and 11.2 rather than table lookup - but using the tables gets similarly lower IVs]
> 
> Brokers typically have  SHL as Hold or Buy and it currently trades over $11.
> 
> Only explanation I can think of is our high exchange rate.  SHL has significant overseas earnings which are depressed on translation to A$.    Is that an explanation for the low value?  If/when the $A falls, earnings will rise and value would go up with it.   Does that sound reasonable?





Using the underlying formulas, but with a couple of differences (TTM figures rather than prospective), I come up with a similarly low 'valuation'. The formulas used in Roger's book frequently come up with wildly offbeat results (try CSR, WOW, WPL, CPB or a host of others). They're overly simplistic and I think their goal is just to whet your appetite and drive you over to MyClime.

However, you *can* take the notions espoused in Roger's book (which, to be clear, were not originated by him) and apply your own methods based on similar principles. For example, I apply a growth factor to dividends based on the minimum of recent history and future projections, discount that for an assumed inflation rate, apply a NPV and assume they will peter out after a certain number of years. That gives me the current value of future dividend flows. I also take the Book Value and grow it based on minimum of past and prospective EPS Growth, apply a discount factor and add that. Same key idea as Roger's formulas, just a bit more fancy. Anyway, after applying my 'secret sauce', I get a SHL valuation of $14.23, which is just under the high end of the broker recommendations.


----------



## Intrinsic Value

He does have to take some responsibility for the heavy spruiking of MCE especially when it was very high like around 8 dollars and he was still lauding its praises everywhere.

With all the spruiking he then says that his fund only held 1 percent in MCE.

It only had a couple of years of results so people should have been cautious of it from the beginning and RM should have been a bit more restrained in his enthusiasm for this stock.

I bought in at 4 dollars and would have sold but was waiting for the year so I didnt have to pay so much tax...ouch

Hopefully they will win some more contracts soon otherwise the share price might really tank.


----------



## McLovin

I wonder if he will postpone launching his rating tool. In light of the MCE result, how could you have any faith in a black box system that calls something an A2 one week and then next week "cannot currently be valued as a going concern any more confidently than I can a speculative exploration company".


----------



## skc

Everyone makes bad calls but the bad ones stick around longer that's for sure.

I am not that familiar with Roger's calls but the recent duds I know of are MCE, FGE, DCG, ZGL. 

Are there other duds?

What about the good calls? 

VOC? Others?


----------



## Intrinsic Value

skc said:


> Everyone makes bad calls but the bad ones stick around longer that's for sure.
> 
> I am not that familiar with Roger's calls but the recent duds I know of are MCE, FGE, DCG, ZGL.
> 
> Are there other duds?
> 
> What about the good calls?
> 
> VOC? Others?




ZGL is in there but FGE and MCE if you had of sold when they were high and bought when he first spruiked them you would have done pretty well. FGE is still good i reckon but I bought in at 2 dollars and 3 dollars sold some but still holding quite a few.


----------



## grug

McLovin said:


> I wonder if he will postpone launching his rating tool. In light of the MCE result, how could you have any faith in a black box system that calls something an A2 one week and then next week "cannot currently be valued as a going concern any more confidently than I can a speculative exploration company".




To be fair, the A1-C2 rating system has, and never has had, anything to do with the _value_ of the SP of the company.  It's a system that RM devised for defining the risk associated with something 'catastrophic' happening to the company itself - not the company's SP.

Yes, MCE has moved from an 'A1' to an 'A2' as of the last AR, although RM seems to be at pains to emphasise that this is still a relatively high rating.  He states this in exactly the same place he writes "cannot currently be valued as a going concern any more confidently than I can a speculative exploration company", again distinguishing between the rating system and the value of the SP (or lack thereof). (_I also think RM made a bit of a typo here as his sentence doesn't actually make sense!_) 

He's also been pretty clear about not investing in MCE even in light of the recent SP falls, and has also revealed only 1% of his capital is actually invested.  These aren't new facts, they've been up there for months.  I knew it before I invested this week - still struggling to figure why knowing this I still didn't do more of my own research! 

I think his initial 'spruiking' of the company back in 2010/early 2011 became something that was perpetuated by RM followers.  RM may have continued to talk about this as an 'A1' company, even recently, but has been - in my opinion - pretty clear about value or potential lack thereof here.

And just to confuse it even more - my understanding is that RM's 'A1 service' gives you both the A1-C3 rating of a company _and_ the calculated IV of the company.  It certainly will be interesting to see if the launch is still this month.


----------



## Intrinsic Value

grug said:


> To be fair, the A1-C2 rating system has, and never has had, anything to do with the _value_ of the SP of the company.  It's a system that RM devised for defining the risk associated with something 'catastrophic' happening to the company itself - not the company's SP.
> 
> Yes, MCE has moved from an 'A1' to an 'A2' as of the last AR, although RM seems to be at pains to emphasise that this is still a relatively high rating.  He states this in exactly the same place he writes "cannot currently be valued as a going concern any more confidently than I can a speculative exploration company", again distinguishing between the rating system and the value of the SP (or lack thereof). (_I also think RM made a bit of a typo here as his sentence doesn't actually make sense!_)
> 
> He's also been pretty clear about not investing in MCE even in light of the recent SP falls, and has also revealed only 1% of his capital is actually invested.  These aren't new facts, they've been up there for months.  I knew it before I invested this week - still struggling to figure why knowing this I still didn't do more of my own research!
> 
> I think his initial 'spruiking' of the company back in 2010/early 2011 became something that was perpetuated by RM followers.  RM may have continued to talk about this as an 'A1' company, even recently, but has been - in my opinion - pretty clear about value or potential lack thereof here.
> 
> And just to confuse it even more - my understanding is that RM's 'A1 service' gives you both the A1-C3 rating of a company _and_ the calculated IV of the company.  It certainly will be interesting to see if the launch is still this month.




I have defended RM on this blog before but in regards to MCE I really think he has to bear some responsibility for the hype he created around this stock.

He didn't put enough emphasis on the risk associated with this company , the lack of historical data for the company, and although he may have mentioned he only put a minuscule amount of his portfolio in it that too was not significantly reported.


----------



## McLovin

grug said:


> To be fair, the A1-C2 rating system has, and never has had, anything to do with the _value_ of the SP of the company.  It's a system that RM devised for defining the risk associated with something 'catastrophic' happening to the company itself - not the company's SP.




I thought the number rating gave some indication as to future prospects. Or is it just a simple ratio analysis that generates the rating? Either way I'm not sure that a lumpy contracting business in the mining sector could ever be considered the least at risk of a "catastrophic" event, just by the nature of the business.



grug said:


> Yes, MCE has moved from an 'A1' to an 'A2' as of the last AR, although RM seems to be at pains to emphasise that this is still a relatively high rating. He states this in exactly the same place he writes "cannot currently be valued as a going concern any more confidently than I can a speculative exploration company", again distinguishing between the rating system and the value of the SP (or lack thereof). (I also think RM made a bit of a typo here as his sentence doesn't actually make sense!)




Again it comes back to the same issue, how can you rate a company as the least riskiest, but consider its earnings visibility to be the same as a 2c explorer? I'm not questioning the actual valuation, I'm questioning the wisdom in placing the top rating on a contracting business in a volatile industry. It's almost like he is giving a credit rating, which is marginally useful when taking equity risk, IMO.


----------



## Intrinsic Value

McLovin said:


> I thought the number rating gave some indication as to future prospects. Or is it just a simple ratio analysis that generates the rating? Either way I'm not sure that a lumpy contracting business in the mining sector could ever be considered the least at risk of a "catastrophic" event, just by the nature of the business.
> 
> 
> 
> Again it comes back to the same issue, how can you rate a company as the least riskiest, but consider its earnings visibility to be the same as a 2c explorer? I'm not questioning the actual valuation, I'm questioning the wisdom in placing the top rating on a contracting business in a volatile industry. It's almost like he is giving a credit rating, which is marginally useful when taking equity risk, IMO.




Have to agree , not only are they in a risky environment but they also have little or no  track record.


----------



## notting

> With all the spruiking he then says that his fund only held 1 percent in MCE.



The point is how much did Roger Montgomery personally purchase before spruiking to anybody, before investing in a stock with other peoples money via the Roger - 'Follow me in Fund.'
I feel that if someone is going to spruik like he does and Rivkin did, they should be obliged to do it off market before they have entered the trade themselves.  Much less room for corruption to creep in which unfortunately it tends to and does not end particularly well for anybody.
They should be obliged to do the same before they sell.
That would be transparent, trustworthy and truly putting your money where your mouth is.
Not going to happen.


----------



## grug

McLovin said:


> I thought the number rating gave some indication as to future prospects. Or is it just a simple ratio analysis that generates the rating?




I've never understood it to be an indication of future prospects, purely just a risk assessment in investing in the company.  I understand that it is ratio analysis that generates the ratings, and RM has been pretty circumspect about what goes into generating the ratings.   

From his blog:


> Roger’s A1s aren’t necessarily ‘blue chips’. Wesfarmers and Qantas may be big businesses, but they don’t make his A1 grade. Businesses that achieve Roger’s A1 or A2 MQR have the lowest probability of a ‘liquidity event’. His A1s are less likely to raise capital, borrow more money, default on debt repayments of breach debt covenants – Roger would be very surprised if any of his A1s went bust!




Admittedly Roger will say things like:


> In aggregate however, we expect a portfolio of A1 businesses to outperform, over a long period of time, a portfolio of companies with lesser scores.




But that's pretty heavily couched in 'aggregate' and 'long period of time' - I've certainly never taken it as an indication a specific 'A1' company had particular prospects.



> Either way I'm not sure that a lumpy contracting business in the mining sector could ever be considered the least at risk of a "catastrophic" event, just by the nature of the business.




Yeah, agreed.  There are a few posts on his blog that talk about why he rates MCE as an 'A1', but I'm having difficulty digging them up.  But as you say...



> It's almost like he is giving a credit rating, which is marginally useful when taking equity risk, IMO.




Completely agreed.


----------



## McLovin

grug said:


> I've never understood it to be an indication of future prospects, purely just a risk assessment in investing in the company.  I understand that it is ratio analysis that generates the ratings, and RM has been pretty circumspect about what goes into generating the ratings.




Fair enough, I thought the purpose of the letter and number was to differentiate two factors. Still, even if it is just basic ratio analysis there must surely be some differentiation based on industry/business. The working capital requirements of a retailer will be very different to MCE by way of example.


----------



## So_Cynical

27 pages of Roger worship and now 2 pages of hate and fear...the guy was selling a book and somehow everyone confused that with him being an infallible investment genius.


----------



## Wysiwyg

So_Cynical said:


> 27 pages of Roger worship and now 2 pages of hate and fear...the guy was selling a book and somehow everyone confused that with him being an infallible investment genius.



My buy and hold experience was painful. I could not reason why I held for years as the share price went down and I sat on a significant loss. I won't give the mongrel (stock market) stuff all nowadays. It will take your shoes and socks if you let it.


----------



## So_Cynical

Wysiwyg said:


> My buy and hold experience was painful..




My low cost averaging / buy and build experience was somewhat (70% GFC unrealised loss) painful , and i feel that pain helped motivate me to maintain discipline and keep buying the lows, keep buying what i thought was cheap....i entered the market in 2007 just before the first warning market dip in July/august at arguably the worst possible time.


----------



## Tightwad

The flaw I see with value investing is buying and holding while all the while trusting the fundamentals are still strong and the falling price is all sector weakness, exchange rate issues, low oil price etc.  

Unless you really have your finger on the pulse, the report comes out and you find they didn't do much business.. you don't have a 'wonderful business' anymore, the price is then too low to offload it and still be in front.


----------



## RandR

Tightwad said:


> The flaw I see with value investing is buying and holding while all the while trusting the fundamentals are still strong and the falling price is all sector weakness, exchange rate issues, low oil price etc.
> 
> Unless you really have your finger on the pulse, the report comes out and you find they didn't do much business.. you don't have a 'wonderful business' anymore, the price is then too low to offload it and still be in front.




I think value investing works, you just need to actually be value investing ... and not merely relying on spending 5 minutes punching a couple of numbers and volla ! hey presto theres your intrinsic value ! You need to try to understand the cashflow in the business ... you need to understand what it is they actually do and what could go wrong.

IMO also, using value investing techniques such as roger montgomerys on companys like MCE and to the same extent forge ... are frought with real danger. These are not companies with strong histories of consistent earnings and earnings growth, these are cyclical companies that can very quickly ramp up profits, yet also very quickly ramp them down. They are not value investing companies imo. From a 'valuable' approach' I would much rather buy a business like CSL, CPU, WOW, Monadelphous if you want exposure to this particular sector. Its absolutely crazy that people can expect to value these two companies that are both what ? one our two years old in public listing  with a simple formula.


----------



## New Stratos

McLovin said:


> Fair enough, I thought the purpose of the letter and number was to differentiate two factors. Still, even if it is just basic ratio analysis there must surely be some differentiation based on industry/business. The working capital requirements of a retailer will be very different to MCE by way of example.




If I have understood what I have read correctly, the Letter gives you a quality rating and the number a liquidity event risk rating. An A1 is a high quality company (ie in the long run the group of A companies should, providing they stay solvent, produce better results than the B's and C's) with a very low (but not zero) risk of a 'liquidity event' occurring. 

MCE is an A2 (was A1) despite the lumpy cashflow because it supposedly has good management, technology, facilities, market share etc and because it has about two years worth of cash.


----------



## kreagh

ROE said:


> You can't blame him.
> 
> He's out to make money like anyone else and if he has to spruik a few stocks to sell a few books he will
> 
> I dont think he did anything wrong, it's the people who chose to listen to him and not doing proper home work.
> 
> Like I said many times before he's good at selling old ideas and make it fashionable.
> 
> If there is such a formula to make money well would he be spruiking his book?
> his best formular ever was to sell the books ...that a 100% guarantee return on investment
> 
> If you want to know a bit about his personality, read up on CCP debacle ...he spruik it on the way to glory
> but on the way down he blame management for misleading him .... nothing sticks .... I take credit for stuff going up...I blame someone else for it when stocks fall ....





Hi ROE, do you have any links for the CCP debacle?


----------



## FxTrader

kreagh said:


> Hi ROE, do you have any links for the CCP debacle?




When Montgomery was MD of Clime Capital, which also publishes a web based valuation tool called StockVal, some of his top value stock picks during the latter part of the Clime era were CCP and TRS.

With CCP Montgomery had overexposed Clime funds and his own portfolio to this stock.  In spite of his research and meetings with senior executives, CCP surprised the market and announced two consecutive profit downgrades that decimated the share price.  Roger and Clime sued for millions and I think this is still ongoing.  From memory the tally was a $15 million plus loss to Clime and over $1 million for Montogomery himself (he stubbornly held onto CCP until the second downgrade).

This is a core problem for the value investor who likes to buy and hold for long periods - a valuation is only as good as the information that goes into calculating it and only lasts until the next company report or market announcement. 

A key component of any investment strategy is when to sell.  A good example is a stock like TRS.  A Montgomery favourite for years, it's now in the doldrums down over 40% since December.  Such a price collapse was not foreseen by previous forecasts and valuation modelling but when it was trading well above intrinsic value it should have been sold down.


----------



## Mike23

FxTrader said:


> A key component of any investment strategy is when to sell.




I might agree with you but this is not the usual Buffet way which RM was spruiking. Has the leopard changing its spots? - as RM is now also talking about "when to sell" versus his old Buffet catch-cry "turn off the market noise". 

There are too many inconsistencies and black holes to RM for my liking.

- ditto - when RM says with strong conviction that P/E is not appropriate to value a company when in fact his "ROE/RoR x Equity per share" is of course P/E restated - do the math. That he gets away with this beats me.

- ditto - re. his "formula" giving added valuation weight (to power of 1.8  ) where ROE is greater than RoR - by definition means that sustainable earnings growth for companies with high ROE must be higher than companies with lower ROE. This is a bold and bogus assumption (as of course is not always true) and takes the important analysis out of people's hands. A company like JB-Hi-Fi had an IV of $30 about now per RM about 18 months ago because it is not a capital intensive business and had high ROE. This has nothing to do with sustainability of earnings. 

- ditto - his assumption of linking a company's sustainable earnings growth to its div. payout ratio. 

Rather than bogus methods for estimating, let's get directly of what we are trying to measure. i.e. sustainable earnings and sustainable earnings growth. The derive this from ROE>RoR and div. payout is frankly bogus - and to derive this without enlightening the audience (who might be investing real money) of the limitations and risks in this very basic approach (in the interests of selling a book) is a charlatan.  

- ditto - is RM's lack of depth in his book (because a difficult topic) of selecting an appropriate RoR for a company - and in not conveying to the audience the high risk in the RoR number itself and the consequences of getting this wrong (sensitivity of values derived) - which is easy to get wrong for all but the bluest of blue chips. For an "A1" to be an "A1" it should have strong prospect of remaining an "A1" for the next 10 years. Otherwise its not an A1. RoR can vary substantially from company to company based on its risk profile and only professionals and those with an in depth knowledge of the business can really assess this. The reason perhaps that Buffet's RoR's are reportedly constant at around 10% is perhaps because there is equally little risk in the companies in his selection portfolio. i.e. he has already picked companies he can understand (he admits to not understanding and not being interested in most) with a long proven record, large moats and excellent management.

I might add a caveat to my post, in case it comes across as someone who has followed RM advice and had sour grapes after losing money. Whilst I have been interested in RM's following, and I have read his book, I have personally never followed his advice or valuation methods for the reasons / reservations I have stated.


----------



## craft

Mike23 said:


> I might agree with you but this is not the usual Buffet way which RM was spruiking. Has the leopard changing its spots? - as RM is now also talking about "when to sell" versus his old Buffet catch-cry "turn off the market noise".
> 
> There are too many inconsistencies and black holes to RM for my liking.
> 
> - ditto - when RM says with strong conviction that P/E is not appropriate to value a company when in fact his "ROE/RoR x Equity per share" is of course P/E restated - do the math. That he gets away with this beats me.
> 
> - ditto - re. his "formula" giving added valuation weight (to power of 1.8  ) where ROE is greater than RoR - by definition means that sustainable earnings growth for companies with high ROE must be higher than companies with lower ROE. This is a bold and bogus assumption (as of course is not always true) and takes the important analysis out of people's hands. A company like JB-Hi-Fi had an IV of $30 about now per RM about 18 months ago because it is not a capital intensive business and had high ROE. This has nothing to do with sustainability of earnings.
> 
> - ditto - his assumption of linking a company's sustainable earnings growth to its div. payout ratio.
> 
> Rather than bogus methods for estimating, let's get directly of what we are trying to measure. i.e. sustainable earnings and sustainable earnings growth. The derive this from ROE>RoR and div. payout is frankly bogus - and to derive this without enlightening the audience (who might be investing real money) of the limitations and risks in this very basic approach (in the interests of selling a book) is a charlatan.
> 
> - ditto - is RM's lack of depth in his book (because a difficult topic) of selecting an appropriate RoR for a company - and in not conveying to the audience the high risk in the RoR number itself and the consequences of getting this wrong (sensitivity of values derived) - which is easy to get wrong for all but the bluest of blue chips. For an "A1" to be an "A1" it should have strong prospect of remaining an "A1" for the next 10 years. Otherwise its not an A1. RoR can vary substantially from company to company based on its risk profile and only professionals and those with an in depth knowledge of the business can really assess this. The reason perhaps that Buffet's RoR's are reportedly constant at around 10% is perhaps because there is equally little risk in the companies in his selection portfolio. i.e. he has already picked companies he can understand (he admits to not understanding and not being interested in most) with a long proven record, large moats and excellent management.
> 
> I might add a caveat to my post, in case it comes across as someone who has followed RM advice and had sour grapes after losing money. Whilst I have been interested in RM's following, and I have read his book, I have personally never followed his advice or valuation methods for the reasons / reservations I have stated.




Amen

+1

Be careful.


----------



## Billyb

Mike23 said:


> I might agree with you but this is not the usual Buffet way which RM was spruiking. Has the leopard changing its spots? - as RM is now also talking about "when to sell" versus his old Buffet catch-cry "turn off the market noise".
> 
> There are too many inconsistencies and black holes to RM for my liking.
> 
> 1. - ditto - when RM says with strong conviction that P/E is not appropriate to value a company when in fact his "ROE/RoR x Equity per share" is of course P/E restated - do the math. That he gets away with this beats me.
> 
> 2. - ditto - re. his "formula" giving added valuation weight (to power of 1.8  ) where ROE is greater than RoR - by definition means that sustainable earnings growth for companies with high ROE must be higher than companies with lower ROE. This is a bold and bogus assumption (as of course is not always true) and takes the important analysis out of people's hands. A company like JB-Hi-Fi had an IV of $30 about now per RM about 18 months ago because it is not a capital intensive business and had high ROE. This has nothing to do with sustainability of earnings.
> 
> 3. - ditto - his assumption of linking a company's sustainable earnings growth to its div. payout ratio.
> 
> Rather than bogus methods for estimating, let's get directly of what we are trying to measure. i.e. sustainable earnings and sustainable earnings growth. The derive this from ROE>RoR and div. payout is frankly bogus - and to derive this without enlightening the audience (who might be investing real money) of the limitations and risks in this very basic approach (in the interests of selling a book) is a charlatan.
> 
> 4.- ditto - is RM's lack of depth in his book (because a difficult topic) of selecting an appropriate RoR for a company - and in not conveying to the audience the high risk in the RoR number itself and the consequences of getting this wrong (sensitivity of values derived) - which is easy to get wrong for all but the bluest of blue chips. For an "A1" to be an "A1" it should have strong prospect of remaining an "A1" for the next 10 years. Otherwise its not an A1. RoR can vary substantially from company to company based on its risk profile and only professionals and those with an in depth knowledge of the business can really assess this. The reason perhaps that Buffet's RoR's are reportedly constant at around 10% is perhaps because there is equally little risk in the companies in his selection portfolio. i.e. he has already picked companies he can understand (he admits to not understanding and not being interested in most) with a long proven record, large moats and excellent management.




1. No. Its completely different. P/E ratio changes depending on the 'voting machine' - his formula for IV does not.
2. I partially agree with you. He assumes businesses are like bank accounts that earn interest depending on how much money you have in your account. This is too simplified but it does sort of make sense - if you have more equity, it means you probably have more stores/staff/resources and a bigger business - which means you are probably going to make more money that a business with little equity. It's the reason why Woolworths is making a lot more  money today than 10 years ago.
3. It is a simplified assumption again but makes sense, see above comment
4. He does take all this into account and talks about it but probably emphasises the formula too much

He's a guy who has managed to find a sweet spot - teaching his phiosophy but at the same time making a lot of money from selling it. I reckon his strategy is best for people who don't mind buying a stock and selling it 5 or 10 years later. I personally believe that's too long to hold any stock so I don't follow his philosophy although admittedly I did get a bit sucked in earlier in the year when I saw his forecasts for companies like ORL and MCE working out, a lot of people made money from his recommendations.


----------



## notting

> I did get a bit sucked in earlier in the year when I saw his forecasts for companies like ORL and MCE working out, a lot of people made money from his recommendations.



Yeah but they made money on 'follow Roger in rallies' as opposed to more fundamental market behaviour.  
That's a play you can make.  
You just need to know what you are doing and how it could suddenly end. 
If Roger loses the belief of the devoted follow me in fans then the more obscure stocks like MCE, FGE will get slammed.
I liked him because he was conservative but the Lynas thing really threw the cat among the pigeons.
Even though you can put caveats on such massively optimistic recommendations people will still hear the numbers and jump like they used to with Rivkin, simply because Rivkin had the ability to maintain the illusion of being a great tipster simply because he had a loyal fan base who would follow him in and off she goes!!
Wow what a legend!  90% success rate.


----------



## Mike23

Billyb said:


> 1. No. Its completely different. P/E ratio changes depending on the 'voting machine' - his formula for IV does not.





The only difference in fact is that the market price (P/E derived) is based on a cap rate (1/RoR) which is different to yours. I'd take a lot of notice from the market rather than a static RoR which you place in the bottom drawer. To assume that the market is irrational is a RM assumption I don't like.

The market price by definition constantly updates and re-assesses a cap rate based on all the noise around. Granted - some of this noise is irrational but mostly it is not. i.e. the market by it's P/E is saying the RoR at a point of time is "1 / P/E" - your say the RoR should be something else. Why would I take your RoR versus what the market is saying given all available data which goes into assessing company risk and price? To deny the efficient market hypothesis (per RM) does require some arrogance, or more politely "balls".


----------



## Muschu

I assume, maybe incorrectly, that Roger reads, or has access to, this thread.  I also imagine he is in a position to reply to the comments made.

Are these inaccurate assumptions?  [Noting that I am not suggesting that he would want to, or should, comment].


----------



## waimate01

Mike23 said:


> The only difference in fact is that the market price (P/E derived) is based on a cap rate (1/RoR) which is different to yours.




Amen to that. When I was reading Roger's book, I got to the point where I suddenly thought "hang on a minute!", and low and behold it is exactly as you say. 

The nonsense of coming up with a standalone valuation based on ROE is that ROE is based on the Book Value. A stock might look like a really good buy on that basis. But you can't buy it for the Book Value - it's not available at that price. It's only available at "BV * P/B" (a metric known by the more common term "price"). So you're left with the question of how much over BV you're prepared to pay ... what your acceptable P/B is before you decide you're paying too much over the odds. Or take the reciprocal and it's ROR.

P/B and ROR are the same thing.

Ultimately, it comes down to a "buy/don't buy" decision, and since you can only buy at the price, it's self-evident that price becomes a factor.

When Roger says you shouldn't use price in producing a valuation, all he does is defer the introduction of price to the next step in the process. He's not removing it from the formula -- he's just changing where the brackets go.


----------



## McCoy Pauley

FxTrader said:


> When Montgomery was MD of Clime Capital, which also publishes a web based valuation tool called StockVal, some of his top value stock picks during the latter part of the Clime era were CCP and TRS.
> 
> With CCP Montgomery had overexposed Clime funds and his own portfolio to this stock.  In spite of his research and meetings with senior executives, CCP surprised the market and announced two consecutive profit downgrades that decimated the share price.  Roger and Clime sued for millions and I think this is still ongoing.  From memory the tally was a $15 million plus loss to Clime and over $1 million for Montogomery himself (he stubbornly held onto CCP until the second downgrade).
> 
> This is a core problem for the value investor who likes to buy and hold for long periods - a valuation is only as good as the information that goes into calculating it and only lasts until the next company report or market announcement.
> 
> A key component of any investment strategy is when to sell.  A good example is a stock like TRS.  A Montgomery favourite for years, it's now in the doldrums down over 40% since December. * Such a price collapse was not foreseen by previous forecasts and valuation modelling but when it was trading well above intrinsic value it should have been sold down.*




To be fair to Roger, he did actually sell out of TRS near the top of its most recent high (ie., before its price was crunched after the Brisbane floods).

Also to be fair to him, he does devote a chapter in his book to selling a company holding.  He isn't strictly a "buy and hold" type of guy, it's just that many people construe his strategy as a "buy and hold".

I've read his book a few times through, and I use some of the techniques outlined in his book for my own research into companies I'd like to buy into and sell out of.  However, I'm not a slavish adherent to everything he writes and I no longer bother with his blog as it's basically full of subtle ramping of certain companies and subtle down-ramping of companies that have fallen out of favour with his disciples.

The ironic thing about Value.Able is that, at its heart is an exhortation to those reading it to think about their investments for themselves and to not be a sheep.  However, through his constant self-promotion through various media outlets, Roger has gathered together a flock of sheep who do nothing except what he does, except at a time really of Roger's choosing.

I was quite annoyed when I read that Roger had purchased into a gold stock but wouldn't disclose the name until much later (ie., when Roger needed a rally to increase the value of his holding).  That followed on the heels of Roger announcing that he had bought into a telco that appeared to violate his much-trumpeted rules.

Roger's actions in the past six months have left me feeling very cynical about him and his system he's peddling.


----------



## littleshire

*Re: Students of Roger Montgomery's intrinsic valuation method*

Hi all,

How people can blindly follow the advice of RM aka “Mr. -95%”  is beyond me (read CCP tread for an understanding of his ‘nickname’).

To consider an investor successful, he/she needs to have a solid record built up during years, bear/bull markets in and out. (Peter Lynch, WB). Seriously, even the title of this tread is wrong, how come we can even compare Buffet’s method with the one of RM?

RM advocates buying into super-cyclical companies, (MCE, FGE) and on top of that, uses a “one size fits all” valuation metric.

Come on! Nick Scali an A1/A2? That piece of garbage! And how come BHP, the best ever company Australia has ever seen is not one?

His method needs to be amended if not scrapped altogether to take into consideration:
•	The fact that some companies are cyclical
•	The fact that some extraordinary companies are capital intensive

Never have been a believer myself, and never will be, I will buy the index any day than following RM advice.

Regards,


----------



## skc

Mike23 said:


> - ditto - when RM says with strong conviction that P/E is not appropriate to value a company when in fact his "ROE/RoR x Equity per share" is of course P/E restated - do the math. That he gets away with this beats me.




I have been trying to convey this on another thread but you've described it way more eloquently than I ever could.

It is scary sometimes to read followers of this kind of valuation method say something like... 

"I use ROR of 10% because it's a low risk company and if you can get 10% from a bank I'd be happy".


----------



## Rau

*BHP and TLS as Value.able Examples*

There's a lot of strident criticism of the RM "method" in recent posts, and I wonder if some folks interpret Roger's book as advocating a simple and fail-safe investing formula.  i don't think he intends that, and I don't read it that way myself.

BHP is an interesting example (assuming I got my calcs right).  BHP has very high ROE currently and sky-high Intrinsic Values - multiples of the current share price.  I suspect the share price is not going to relect those IVs anytime soon because reality is just a little bit more complex than that!   BHP share price would in theory escalate dramatically if currrent BHP returns were likely to be maintained in perpetuity.   But we know commodities are highly cyclical, so that's not going to happen.  A more realistic valuation needs to rest on a longer term view than the next few years of earnings.

TLS is also interesting.  Its IV based on the 2011 result is in the vicinity of $2.30 (current share price around $3.05).   The market anticipates improving earnings (some mix of organic growth/market share gains & NBN related cash flows I assume) in subsequent years, and if those earnings pan out, then the IV in the next couple of years could be in the $3.50 vincity.

So I think the RM valuation approach is a reasonable tool, but it cannot tell you anything useful if you don't have a good view of future earnings (underpinned by many factors, including the economy, sustainable advantage, etc.)  and of other important financial parameters such as sustainability of debt, etc.


----------



## notting

Roger Montgomery has also been calling a property bubble in China for years.  The property boom in China is a massive part of it's growth and economic expansion. If you added this to the above posts outlook for BHP, the valuation should be lowered if you are making that call regardless of BHPs A1 performance to date.


----------



## FxTrader

McCoy Pauley said:


> To be fair to Roger, he did actually sell out of TRS near the top of its most recent high (ie., before its price was crunched after the Brisbane floods).
> 
> Also to be fair to him, he does devote a chapter in his book to selling a company holding.  He isn't strictly a "buy and hold" type of guy, it's just that many people construe his strategy as a "buy and hold".




True enough, RM does talk about when to "get out" in Valueable devoting 9 pages to the topic in a 250 page book (not much emphasis).  I think the CCP episode taught him a lesson about portfolio weighting and when to get out but he definitely has a strong bias toward buy and hold.  This can clearly be seen in his blog where he tries to calm his nervous flock about recent dramatic price falls in his A1s stemming from legitimate GFC2 fears in global markets.



> The ironic thing about Value.Able is that, at its heart is an exhortation to those reading it to think about their investments for themselves and to not be a sheep.  However, through his constant self-promotion through various media outlets, Roger has gathered together a flock of sheep who do nothing except what he does, except at a time really of Roger's choosing.




Think of his blog as a free investment newsletter that allows him to spruik his brand to millions instead of a small subscriber base.  He is a clever marketer and self-promoter in the internet age, no denying that.



> I was quite annoyed when I read that Roger had purchased into a gold stock but wouldn't disclose the name until much later (ie., when Roger needed a rally to increase the value of his holding).  That followed on the heels of Roger announcing that he had bought into a telco that appeared to violate his much-trumpeted rules.
> 
> Roger's actions in the past six months have left me feeling very cynical about him and his system he's peddling.




Roger's real "pot of gold" is not a stock but rather the The Montgomery [Private] Fund. A million dollar minimum investment required mind you.  Boutique funds management made him a millionaire and building up this business is where the real money is for him.  Writing books and blogs promote Roger Inc. at low cost while the real money is raked in by his funds management business.  Everything he does is self-serving, no altruism to be found here so your cynicism is appropriate.


----------



## Mike23

waimate01 said:


> The nonsense of coming up with a standalone valuation based on ROE is that ROE is based on the Book Value. A stock might look like a really good buy on that basis. But you can't buy it for the Book Value - it's not available at that price. It's only available at "BV * P/B" (a metric known by the more common term "price"). So you're left with the question of how much over BV you're prepared to pay ... what your acceptable P/B is before you decide you're paying too much over the odds. Or take the reciprocal and it's ROR.
> 
> P/B and ROR are the same thing.
> 
> Ultimately, it comes down to a "buy/don't buy" decision, and since you can only buy at the price, it's self-evident that price becomes a factor.
> 
> When Roger says you shouldn't use price in producing a valuation, all he does is defer the introduction of price to the next step in the process. He's not removing it from the formula -- he's just changing where the brackets go.




waimate01, you lost me there. ROE as used by Roger has nothing to do with using book values, it is just a metric used (inappropriately in my view) for estimating sustainability of earnings and growth - this then factored into his cap rate based on his "power of 1.8" formula - which may be (usually is in my view) totally inappropriate for a capital intensive business. And for non-capital intensive businesses, the ROE metric will give many false positives. The formula as I have said removes necessary judgement to value a business. i.e. sustainability of earnings and earnings growth. This is all that the market is interested in in giving you a price.  ROE and div payout metrics are not appropriate in my view without a first up handle on sustainability of earnings and earnings growth - as will give many false positives and vice versa. Know what you are doing is my message. I'm sure it is Roger's as well - however the failing of his book is to disguise (by his formula) the key metrics you need to assess - i.e. sustainability of  earnings and earnings growth.  That's all that matters!!


----------



## New Stratos

Mike23 said:


> There are too many inconsistencies and black holes to RM for my liking.
> 
> - ditto - when RM says with strong conviction that *P/E *is not appropriate to value a company when in fact his "ROE/*RoR* x Equity per share" is of course *P/E* restated - do the math. That he gets away with this beats me.
> 
> - ditto - re. his "formula" giving added valuation weight (to power of 1.8  ) where ROE is greater than *RoR* - by definition means that sustainable earnings growth for companies with high ROE must be higher than companies with lower ROE. This is a bold and bogus assumption (as of course is not always true) and takes the important analysis out of people's hands. A company like JB-Hi-Fi had an IV of $30 about now per RM about 18 months ago because it is not a capital intensive business and had high ROE. This has nothing to do with sustainability of earnings.
> 
> - ditto - his assumption of linking a company's sustainable earnings growth to its div. payout ratio.
> 
> Rather than bogus methods for estimating, let's get directly of what we are trying to measure. i.e. sustainable earnings and sustainable earnings growth. The derive this from ROE>*RoR* and div. payout is frankly bogus - and to derive this without enlightening the audience (who might be investing real money) of the limitations and risks in this very basic approach (in the interests of selling a book) is a charlatan.
> 
> - ditto - is RM's lack of depth in his book (because a difficult topic) of selecting an appropriate *RoR* for a company - and in not conveying to the audience the high risk in the *RoR *number itself and the consequences of getting this wrong (sensitivity of values derived) - which is easy to get wrong for all but the bluest of blue chips. For an "A1" to be an "A1" it should have strong prospect of remaining an "A1" for the next 10 years. Otherwise its not an A1. *RoR* can vary substantially from company to company based on its risk profile and only professionals and those with an in depth knowledge of the business can really assess this. The reason perhaps that Buffet's RoR's are reportedly constant at around 10% is perhaps because there is equally little risk in the companies in his selection portfolio. i.e. he has already picked companies he can understand (he admits to not understanding and not being interested in most) with a long proven record, large moats and excellent management.




Mike, am I right in assuming from the above that you are interpreting RR in the formula as 'Rate of Return'? It's not, it's 'Required Return' - the minimum return you'd be happy to accept for your investment. It has nothing to do with the P/E ratio. It shouldn't vary from company to company or from alternative investment to alternative investment.


----------



## waimate01

Mike23 said:


> waimate01, you lost me there. ROE as used by Roger has nothing to do with using book values




ROE = EPS / BV


----------



## Mike23

New Stratos said:


> Mike, am I right in assuming from the above that you are interpreting RR in the formula as 'Rate of Return'? It's not, it's 'Required Return' - the minimum return you'd be happy to accept for your investment. It has nothing to do with the P/E ratio. It shouldn't vary from company to company or from alternative investment to alternative investment.




New Stratos, I doubt this is an issue with RM's understanding but rather with RM not conveying a proper understanding or educated his followers properly in this important aspect of valuations.

The cap rate (RR or RoR call it what you will) has everything (or mostly) to do with the stock you are valuing. I say mostly because a small component being the the after tax "risk free rate of return" which does vary between investors depending on their tax status. (which I don't recall RM mentioning) The investor's risk free rate is then adjusted for (i) equity specific risk premium (increase) and (ii) sustainable growth in earnings (decrease) where sustainable = 10 years+ in my books. 

Both adjustments are subjective and very stock specific and nothing to do with your "personal required return".

I would almost agree with some means to take the growth factor adjustment out of the novice's hands (as has Roger tried to do via his ROE method) as small changes in growth estimates can have dramatic effects on valuations. For this reason (dramatic effects on valuations based on small differences in opinion on risk and on growth) I am very anti someone saying "an IV of a company is..." At best the IV of a company is within a range band and subject to the quality of your estimates of risk premium and growth. Whilst you should be open to ideas, you should not rely blindly on the estimates of others nor on valuation models that you do not understand.

Anyway Roger's method of adjusting RoR for growth (ROE/RoR to power of 1.8) is bogus because this is not done (taken out of the novice's hands) in a conservative manner - quite the contrary. If he admitted the bogus element and armed the audience with knowledge of what's going on and the need to review for false positive valuations (where IV is < than market) that would be a step in right direction.

I have read RM's book. I'd point you to Page 191 which says:

     "... you need to apply a discount rate (this is what I have referred to as the 'investor's required return')".

Whilst RM walks a fine line in not opening himself to critique here, my note in the margin of his book was that "this will mislead the novice."

On page 192, Roger gives one paragraph to what is perhaps the most important aspect in valuing a company. He says "Finally, the investor's required return should take into account a compensation for risk - what is known as the 'equity risk premium'. If this additional rate is ,*say*, 4 per cent, then the investors required return is: ...."  (emphasis added)

This is a very big "say"!! 

The risk premium attributable to a particular company takes into account market risk being your preparedness to expose yourself to the market incl. the company's volatility in the market (beta) + sector risk + company specific risk. 

Company specific risk is the risk attached to sustainability of earnings + sustainability of earnings growth (if you have allowed for this). To keep this premium low (as Buffet does by the way he selects potential investments) requires you to (1) fully understand the business; (2) have a business which has a sustainable competitive advantage relative to its peers; and (3) have management with integrity + excellent business development skills.  

Versus the above-mentioned single para by Roger, there are a number of books devoted entirely to this subject to equity risk premium assessment - but not very sexy.


----------



## New Stratos

New Stratos said:


> If I have understood what I have read correctly, the Letter gives you a quality rating and the number a liquidity event risk rating. An A1 is a high quality company (ie in the long run the group of A companies should, providing they stay solvent, produce better results than the B's and C's) with a very low (but not zero) risk of a 'liquidity event' occurring.
> 
> MCE is an A2 (was A1) despite the lumpy cashflow because it supposedly has good management, technology, facilities, market share etc and because it has about two years worth of cash.




Hmm, looking at this graphic it appears that my interpretation may not be correct (or perhaps this isn't showing the numerical part of A2, but a separate measure of performance?)):


----------



## Mike23

waimate01 said:


> ROE = EPS / BV




waimate01, I will reply with an example perhaps but no time right now. 

Although its true that "ROE = EPS / BV" - this has *nothing* to do with Roger's valuation method.  

As I said, as used by Roger, ROE has nothing to do with using book values, it is only a metric (used inappropriately in my view) to adjust cap rate for sustainability of earnings and growth.

This metric "ROE/RoR to power of 1.8" removes necessary judgement to value a business (sustainability of earnings and earnings growth), has a bias to penalise some valuations unfairly (capital intensive businesses) and has a bias to reward unfairly (false positives) companies with high ROE.


----------



## McLovin

Mike23 said:


> This metric "ROE/RoR to power of 1.8" removes necessary judgement to value a business (sustainability of earnings and earnings growth), has a bias to penalise some valuations unfairly (capital intensive businesses) and has a bias to reward unfairly (false positives) companies with high ROE.




Bingo!

Hence you have people on his blog making detailed posts about how they arrived at their IV, while making little comment about other aspects of the business.


----------



## Intrinsic Value

*Re: Students of Roger Montgomery's intrinsic valuation method*



littleshire said:


> Hi all,
> 
> How people can blindly follow the advice of RM aka “Mr. -95%”  is beyond me (read CCP tread for an understanding of his ‘nickname’).
> 
> To consider an investor successful, he/she needs to have a solid record built up during years, bear/bull markets in and out. (Peter Lynch, WB). Seriously, even the title of this tread is wrong, how come we can even compare Buffet’s method with the one of RM?
> 
> RM advocates buying into super-cyclical companies, (MCE, FGE) and on top of that, uses a “one size fits all” valuation metric.
> 
> Come on! Nick Scali an A1/A2? That piece of garbage! And how come BHP, the best ever company Australia has ever seen is not one?
> 
> His method needs to be amended if not scrapped altogether to take into consideration:
> •	The fact that some companies are cyclical
> •	The fact that some extraordinary companies are capital intensive
> 
> Never have been a believer myself, and never will be, I will buy the index any day than following RM advice.
> 
> Regards,




His rating system is misleading at best as you rightly point out. Rating companies like FGE and MCE as A1 sends the wrong message. These companies are speculatively to a degree because they have very little track record and they highly dependent on not only winning contracts but managing those contracts. Further as you mention they are cyclical.

On the plus side at least RM is out in the public domain lifting the profile of value investing and exposing many others in the business who are complete charlatans and con men.

Using RM as your starting point if you are a new investor is not such a bad thing. The next step is to start reading more literature on valuing investing and getting to the bits that RM glosses over and get a more rounded knowledge of value investing techniques


----------



## New Stratos

Mike23 said:


> I have read RM's book. I'd point you to Page 191 which says:
> 
> "... you need to apply a discount rate (this is what I have referred to as the 'investor's required return')".
> 
> Whilst RM walks a fine line in not opening himself to critique here, my note in the margin of his book was that "this will mislead the novice."
> 
> On page 192, Roger gives one paragraph to what is perhaps the most important aspect in valuing a company. He says "Finally, the investor's required return should take into account a compensation for risk - what is known as the 'equity risk premium'. If this additional rate is ,*say*, 4 per cent, then the investors required return is: ...."  (emphasis added)
> 
> This is a very big "say"!!
> 
> The risk premium attributable to a particular company takes into account market risk being your preparedness to expose yourself to the market incl. the company's volatility in the market (beta) + sector risk + company specific risk.
> 
> Company specific risk is the risk attached to sustainability of earnings + sustainability of earnings growth (if you have allowed for this). To keep this premium low (as Buffet does by the way he selects potential investments) requires you to (1) fully understand the business; (2) have a business which has a sustainable competitive advantage relative to its peers; and (3) have management with integrity + excellent business development skills.
> 
> Versus the above-mentioned single para by Roger, there are a number of books devoted entirely to this subject to equity risk premium assessment - but not very sexy.




Hi Mike, in discussing 'equity risk premium' (which you are interpreting as unique to each company, and I am interpreting as a general factor allowing for equities being riskier than T bonds or similar things) you've missed out Roger's very specific comments about CAPM and how he doesn't think it is appropriate to include 'beta' and why (pp191-2).

You are right there are lots of ways of arriving at a discount factor, and many books about them, but they mostly are derived from entirely different valuation models, so (arguably, obviously) are not appropriate here.

However, since we're basically taking about the Buffett approach (although in this case explained by RM), it makes sense to look at Buffett's comment, and those of his influences and other writing about him. They compare the required return - the minimum return you are willing to accept - to T Bonds or other 'good quality' low risk bonds. They usually talk about adding on a factor for inflation and your personal tax rate (eg in Graham's 'The Intelligent Investor'. Buffett and Clark in 'Buffetology' say that since in the US there have been lengthy periods of double digit inflation and tax rates over 50%, Warren Buffett usually simplifies it to requiring 15% (others claim 9% or 10%), but the main thing is - since we're trying to buy at _less than_ IV, not _at _IV, it doesn't have to be perfect, we can make up for it by a separate substantial Margin of Safety.

And to be fair to Rm, the IV chapter is 39 pages out of 251, less than 16%; so it's a pity that people don't take as much notice of the other 84% where he does look at a lot of the other things which should be considered.


----------



## New Stratos

*Re: Students of Roger Montgomery's intrinsic valuation method*



Intrinsic Value said:


> On the plus side at least RM is out in the public domain lifting the profile of value investing and exposing many others in the business who are complete charlatans and con men.
> 
> Using RM as your starting point if you are a new investor is not such a bad thing. The next step is to start reading more literature on valuing investing and getting to the bits that RM glosses over and get a more rounded knowledge of value investing techniques




Precisely!
And RM does mention the sources of 'his' IV formula - James E. Walter, "Dividend Policies and Common Stock Prices" _The Journal of Finance_, Vol. 11, No. 1 (Mar., 1956), pp. 29-41;
Warren Buffett, Benjamin Graham, and so forth - all good places to start reading.

Value Investing is _not_ calculating an IV and paying less than that for shares. I don't even calculate the IV until I've looked at at least 9 other factors (and I'm not claiming to be a paragon, by the way!)


----------



## skc

New Stratos said:


> They usually talk about adding on a factor for inflation and your personal tax rate (eg in Graham's 'The Intelligent Investor'. Buffett and Clark in 'Buffetology' say that since in the US there have been lengthy periods of double digit inflation and tax rates over 50%, Warren Buffett usually simplifies it to requiring 15% (others claim 9% or 10%), but the main thing is - since we're trying to buy at _less than_ IV, not _at _IV, it doesn't have to be perfect, we can make up for it by a separate substantial Margin of Safety.




The margin of safety is used to take into account of the future variables - revenue, costs and cash flow etc. You can't double use it to compensate for a smaller discount rate. Using a 9-10% discount will have you valuing something far higher than everyone else in the market, which means you will never have the opportunity to realise the gains.

Historical market risk premium for the Australian market is 6-7% (from memory of finance lectures) so the minimum anyone should use in the current environment is 12-13%. Err on the side of conservatism, 15% is a nice round number.


----------



## Mike23

Mike23 said:


> waimate01, I will reply with an example perhaps but no time right now.
> 
> This metric "ROE/RoR to power of 1.8" removes necessary judgement to value a business (sustainability of earnings and earnings growth), has a bias to penalise some valuations unfairly (capital intensive businesses) and has a bias to reward unfairly (false positives) companies with high ROE.






Mike23 said:


> waimate01, I will reply with an example perhaps but no time right now.
> 
> 
> This metric "ROE/RoR to power of 1.8" removes necessary judgement to value a business (sustainability of earnings and earnings growth), has a bias to penalise some valuations unfairly (capital intensive businesses) and has a bias to reward unfairly (false positives) companies with high ROE.




  waimate01, sorry to persist re. this but good to get off the chest so to speak, so I'll run through an example of where I'm coming from.


*Example of RM valuation model and   recon. to P/E method (EPS/RoR)*


*Assumptions:*






(a) earnings

$6,875​ k



(b) equity  (book value)

$25,000​ k



(c) # of shares

21,000​ k



RoR (or RR or whatever you wish to   call the cap. rate)
(say)
12.0%​ 



EPS    (a) / (c)

32.74​ cents per share


ROE    (a) / (b)

27.5%​ 










*RM valuation model  *

ROE/RoR x equity per share


*(where pays all earnings as dividends)*

27.5%/12%    x  $25m/21m shares



1.5833  x   $1.19 cents per share




$2.73











*restating*

ROE/RoR x equity per share



 =
(earnings / equity) / RoR x equity /   # of shares

 =
(earnings / # of shares) / RoR 



 =>>>
EPS / RoR    (i.e. P/E ratio)




 32.74 cents per share / 12%




$2.73





  As you might expect any valuation must go to capitalisation of a future earnings earnings stream and this is precisely what RM valuation model does. (i.e. it is a disguised PE - capitalising EPS)


  There is a fundamental issue with this basic formula (acknowledged by RM) in that PE values an annuity using the cap rate which means the earnings are achievable over an infinite period. Granted the first 30 years of infinity account for most of the value in PV terms, however you still need to have a 30 year outlook.


  If a company pays out all earnings as dividends the RM valuation model decides for you that the company cannot / is not entitled to any "earnings growth" adjustment. I'd like to decide that thank you.  Bogus #1.


  Secondly, if the company retains its earnings (dividend payout ratio of NIL) then the RM formula decides for you that the company has wonderful sustainable earnings growth into the future and is entitled automatically to a cap rate adjustment for acount for this growth. Bogus #2. No input by you or any reality check.


  The higher is ROE, the higher is the premium payable for sustainable earnings growth (per RM model to power of 1.8 of ROE/RoR) notwithstanding that this might be a low capital intensity business with an average or dare I say it a negative earnings growth outlook.
  Let's use above same assumptions on the basis that the company retains all its earnings.


*RM valuation model *

ROE/RoR x equity per share

*(where retains all earnings)*

(27.5%/12%)^1.8  x    $25m/21m shares


4.449    x $1.19 cents per share



$5.30










  What has changed to the fundamentals of the earnings power of the business? Not much say I. But the value (purely based on dividend retention policy) increases valuation per RM model by 94%.


  We have already established that RM's formula does no more than apply a cap rate to EPS in a disguised manner. So for an investor who has dilligently considered an appropriate 12% RoR for a company based on his or her analysis of a suitable risk premium to be applied to earnings, the RM model discards this (without telling you) and applies a cap rate of 6.2% in this instance - equivalent to bluest of blue chips which was obviously not your assessment in picking a RoR of 12%.


*solving for cap rate given the EPS   which we know:*

cap rate   = ​ 
EPS / $5.30 
 =>>>​ 
.3274 / $5.30


6.2%


  This is based on an ROE of 27.5%.


What happens if your assessment of fundamentals is unchanged, still deserving of a RoR of 12% by your earnings outlook assessment - and the ROE for this company happened to be 55%? Close your eyes and go for the supersonic valuation ride. Sorry to put a dampener on this forum. I think the ideals of sharing knowledge are great - but not with eyes wide shut which appears to be by design by the undisclosed mechanics of the RM valuation model. 
  [FONT=&quot]
I regard myself as a value investor and would far rather be see analysis and discussion about company's earnings power sustainability and growth leading to an educated risk + growth premium assessment with eyes wide open.  My objection to RM is goes to this objective of the value investor (RM follower) being defeated.[/FONT]


----------



## New Stratos

skc said:


> The margin of safety is used to take into account of the future variables - revenue, costs and cash flow etc. You can't double use it to compensate for a smaller discount rate.




Actually, that's what I've been restraining myself from saying with regard to people (including Roger) who want to double up by building an MOS into their RR.



skc said:


> Using a 9-10% discount will have you valuing something far higher than everyone else in the market, which means you will never have the opportunity to realise the gains.
> 
> Historical market risk premium for the Australian market is 6-7% (from memory of finance lectures) so the minimum anyone should use in the current environment is 12-13%. Err on the side of conservatism, 15% is a nice round number.




I entirely agree 9 or 10%, like I keep seeing people use, is just silly. I use 15%, but that's me, it's not necessarily 'right'


----------



## Mike23

New Stratos said:


> I am interpreting as a general factor allowing for equities being riskier than T bonds or similar things ....




humbug



New Stratos said:


> you've missed out Roger's very specific comments about CAPM and how he doesn't think it is appropriate to include 'beta' and why (pp191-2).....





humbug




New Stratos said:


> .. but they mostly are derived from entirely different valuation models, so (arguably, obviously) are not appropriate here.




humbug - all valuation models (incl. RM) do the same thing - discount an earnings stream - the judgement is only in an approriate cap. rate - which by defninition requires your judgement on risk in sustainable earnings and on earnings growth.




New Stratos said:


> Warren Buffett usually simplifies it to requiring 15% (others claim 9% or 10%) ...




humbug




New Stratos said:


> ... but the main thing is - since we're trying to buy at _less than_ IV, not _at _IV, it doesn't have to be perfect, we can make up for it by a separate substantial Margin of Safety.




humbug ... you won't have a chance to buy (or you'll stay in too long with a false positive sense of security) if your IV calc. is grossly excessive. 




New Stratos said:


> ... And to be fair to Rm, the IV chapter is 39 pages out of 251, less than 16%; so it's a pity that people don't take as much notice of the other 84% where he does look at a lot of the other things which should be considered.




humbug ... notwithstanding that you've read the other 84%, if you decide to follow his model, it is the IV calc. which will mainly dictate your investment decision.


----------



## Mike23

New Stratos said:


> I entirely agree 9 or 10%, like I keep seeing people use, is just silly. I use 15%, but that's me, it's not necessarily 'right'




New Stratos, sorry the example I posted did not format right - but if you can follow you will see my point. If you have selected a conservative 15% (assume based on a dilligent risk premium assessment), how do you feel when that is stripped from you (by RM model without your knowldge) and a much lower cap rate substituted because of div. policy or ROE - both of which may have little or nothing to do with sustainable earnings or earning growth?


----------



## New Stratos

Mike23 said:


> humbug
> 
> humbug
> 
> humbug - all valuation models (incl. RM) do the same thing - discount an earnings stream - the judgement is only in an approriate cap. rate - which by defninition requires your judgement on risk in sustainable earnings and on earnings growth.
> 
> humbug
> 
> humbug ... you won't have a chance to buy (or you'll stay in too long with a false positive sense of security) if your IV calc. is grossly excessive.
> 
> humbug ... notwithstanding that you've read the other 84%, if you decide to follow his model, it is the IV calc. which will mainly dictate your investment decision.




Well, thanks for your thoughtful consideration of my points.
And your last point is wrong - the other 84% primarily determine what to buy; the 16% represented by the IV chapter mostly tells you when to buy it.


----------



## New Stratos

Mike23 said:


> New Stratos, sorry the example I posted did not format right - but if you can follow you will see my point. If you have selected a conservative 15% (assume based on a dilligent risk premium assessment), how do you feel when that is stripped from you (by RM model without your knowledge) and a much lower cap rate substituted because of div. policy or ROE - both of which may have little or nothing to do with sustainable earnings or earning growth?




Your algebraic manipulations are correct, but your interpretation of what things mean is wrong, in my view. You are equating the RR in the equation to the inverse of a PE ratio, but that's not it's purpose, and ROE/RR is not about 'adjusting the capitalization rate'; it's about recognising that when ROE is higher than your Required Return it's better left in the company than returned to shareholders as dividends. Both Graham and Walter had plenty to say about this. if your read them (though Graham was a bit skeptical about 'daddy knows best' boards).

I also think you should go back and read what Warren B has said in his letters to Berkshire Hathaway share holders about the merits of high ROE and low Capital Intensity. (You can find the same remarks in RM's book, but since you don't care for that, you may prefer reading WB)


----------



## waimate01

Mike23 said:


> waimate01, sorry to persist re. this but good to get off the chest so to speak, so I'll run through an example of where I'm coming from.




Nice worked example, and I appreciate the time you put into it.

But to recap, your statement was: "as used by Roger, ROE has nothing to do with using book values", but your example calculates ROE as exactly based on book value ("ROE (a) / (b)", a=earnings, b= equity (book value)).

Perhaps what you meant to say was "Roger's IV has nothing to do with book values", which is clearly correct simply by doing the algebra of "IV= ROE / RR * BV", and substituting for "ROE=EPS/BV", wherein the two BV's cancel out and you're left with "IV=EPS/RR".

In any event, I totally agree with your broader point about Roger's IV methodology -- it produces whacky results.


----------



## New Stratos

waimate01 said:


> Perhaps what you meant to say was "Roger's IV has nothing to do with book values", which is clearly correct simply by doing the algebra of "IV= ROE / RR * BV", and substituting for "ROE=EPS/BV", wherein the two BV's cancel out and you're left with "IV=EPS/RR".
> 
> In any event, I totally agree with your broader point about Roger's IV methodology -- it produces whacky results.




Three, perhaps minor, points:

that's only the formula for the 'all earnings paid out as dividends' part of the valuation;
it's not Roger's IV methodology - he's using well established valuation methods;
all valuation methods produce wacky results in some circumstances - hence Roger regularly mentions caveats and even has them incorporated into those tables in his book...


----------



## Intrinsic Value

New Stratos said:


> Three, perhaps minor, points:
> 
> that's only the formula for the 'all earnings paid out as dividends' part of the valuation;
> it's not Roger's IV methodology - he's using well established valuation methods;
> all valuation methods produce wacky results in some circumstances - hence Roger regularly mentions caveats and even has them incorporated into those tables in his book...




I think the IVs are a good starting point in that they filter out a lot of the rubbish and indeed i think this is what RM is getting at anyway.

Once you have what you consider an attractive IV with a large MOS of safety then you have to start doing the real digging. Looking at moat, track record, management, industry, etc And i am pretty sure this is what RM does anyway.


----------



## Mike23

New Stratos said:


> And your last point is wrong - the other 84% primarily determine what to buy; the 16% represented by the IV chapter mostly tells you when to buy it.




So you agree you can't buy until your decision is supported by a bogus formula?


----------



## Mike23

New Stratos said:


> Your algebraic manipulations are correct, but your interpretation of what things mean is wrong, in my view.




I have not interpreted anything - only given you the mechanics. 




New Stratos said:


> You are equating the RR in the equation to the inverse of a PE ratio, but that's not it's purpose, and ROE/RR is not about 'adjusting the capitalization rate'




The result of the mechanics is the result - regardless of any purpose. If the purpose is to est. risk premium for sustainable earnings and earnings growth then I agree with the purpose - just not the result.



New Stratos said:


> it's about recognising that when ROE is higher than your Required Return it's better left in the company than returned to shareholders as dividends.




What about a mature product business with low growth prospects but high ROE?
Therer are many examples of why you can't categorise sustainable earnings and growth based on their ROE.  This is bogus!



New Stratos said:


> Both Graham and Walter had plenty to say about this. if your read them (though Graham was a bit skeptical about 'daddy knows best' boards).




I have read The Intelligent Investor a couple of times.




New Stratos said:


> I also think you should go back and read what Warren B has said in his letters to Berkshire Hathaway share holders about the merits of high ROE and low Capital Intensity. (You can find the same remarks in RM's book, but since you don't care for that, you may prefer reading WB)




I beg you to find anything written by WB or Graham which contradicts my view expressed. I'd guess WB would be horrified by RM's formula for Mum's and Dad's investors.


----------



## Mike23

waimate01 said:


> But to recap, your statement was: "as used by Roger, ROE has nothing to do with using book values", but your example calculates ROE as exactly based on book value ("ROE (a) / (b)", a=earnings, b= equity (book value)).
> 
> Perhaps what you meant to say was "Roger's IV has nothing to do with book values", which is clearly correct simply by doing the algebra of "IV= ROE / RR * BV", and substituting for "ROE=EPS/BV", wherein the two BV's cancel out and you're left with "IV=EPS/RR".





What I was trying to say was that ROE is promoted by RM as being very important to valuations, yet it has nothing to do with his IV calc. except to adjust his cap. rate for EPS, which I further say is bogus as it takes out of your hands the important decision making for a suitable risk premioum for sustainability of earnings and earnings growth.


----------



## Tysonboss1

Mike23 said:


> So you agree you can't buy until your decision is supported by a bogus formula?




I think Roger is just trying to instill into investors an ability to measure and quantify what it is they are buying, I think that is a good thing.

Offcourse rogers book is not the be all and end all of all things value investing, But it is a good introduction into the subject.

Remember alot of new investors have never been exposed to the concept, and it can't hurt to get them thinking about the idea.

Most people who have lost money in the market, especcially "mum and dad" types have not lost money because they bought bad companies, But because they got excited at the wrong time and over paid for good ones, and then became disheartened and sold out of a good company right when it was actually becoming good value.


----------



## Macros

Whilst I disagree with some of RM's approach (had a futile attempt at explaining my view some pages back on this thread), particularly with regards to poor concepts in economics and the macro view/trends, which ultimately drive future earnings and therefore valuations, the valuations in themselves aren't necessarily a bad thing.

I think that the concept of RR or RoR is based on the markets expectation and not that of the individual investor. We can only control the decision of what to invest in and when to buy or sell. Our expectations are not necessarily that of the market.

Here is a graph of Cochlear - I think the valuations are fairly representative of the market expectations.




I think the problem is not in the valuation process, but rather in understanding that value is based on earnings expectations and the economic factors that drive those expectations. To be honest, I don't think that every single person can be an expert in understanding these factors, wherein the dangers of this process arise.


----------



## New Stratos

Intrinsic Value said:


> I think the IVs are a good starting point in that they filter out a lot of the rubbish and indeed i think this is what RM is getting at anyway.
> 
> Once you have what you consider an attractive IV with a large MOS of safety then you have to start doing the real digging. Looking at moat, track record, management, industry, etc And i am pretty sure this is what RM does anyway.




It's a bit "chicken and eggy" but I start with looking at whether the company is worth investing in for other reasons, then move to the price I think is reasonable (but it is iterative and you should keep looking deeper companies).


----------



## New Stratos

Mike23 said:


> I beg you to find anything written by WB or Graham which contradicts my view expressed.




OK, two examples - you don't seem to think a high ROE is important; you think there should be an individual equity risk premium (beta?) included in the 'capitalization rate' used for each different IV calculation.

"The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc) and not the achievement of consistent gains in earnings per share." (annual report, 1983:11)

"To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, options pricing, or emerging markets. You may, in fact, be better off knowing nothing of these. ... Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now." (annual report, 1996:12)

"What counts, however, is Intrinsic Value -- the figure indicating what all of our constituent businesses are rationally worth. With perfect foresight, this number can be calculated by taking all future cash flows of a business -- in and out -- and discounting them at prevailing interest rates." (RJ Connors, Warren Buffett on Business, Appendix F)


----------



## Mike23

New Stratos said:


> OK, ... you don't seem to think a high ROE is important




It was a rhetorical question. My views on ROE (which I have not actually shared) are consistent with the quotes you have posted. The last though needs to be in context. Discounting at prevailing interest rates was (i) with qualification "with perfect foresight" meaning no risk to cash flows; (ii) with WB as owner (hence theretical seller not buyer); and (iii) his quote if you read next sentence was merely using this as an example of equivalence or relative values.

FYI I think ROE is very important which I use as a filter, not in my IV calc.
What I had previously said about ROE is that "as used by RM" it is improperly used. i.e. used in IV calc by ROE/RoR^1.8 to adjust your cap rate. I have said this is bogus and will give false positives. It effectively substitutes your RoR (assuming properly considered) with a cap rate which may be not be justified by the business and market fundamentals. For high ROE companies it may give you a false sense of security of a company's IV and keep you in a stock when you should be selling; or support your buy decision when it is already over-valued. On other hand for a low ROE capital intensive company but with good EPS and good prospects, the RM method will undervalue these companies - and doubly so if it is a good dividend payer. I understand the apparent rationale given by RM - I just totally disagree with it. 



New Stratos said:


> ... you think there should be an individual equity risk premium (beta?) included in the 'capitalization rate' used for each different IV calculation.




Absolutely - and so do you if you use RM's formula -  by adjustment to your RR cap rate behind the scene. As to this "not being the purpose", the formula does not share its purpose - but you should know what it does. You have already agreed with the algebra - hence you should now know what it does.

re. beta, this is not a factor for long term > 5 year investors, but of course volatility risk, for market itself + stock relative to market (beta), is a factor for short term investors. (i.e. some people may need a short horizon due to possible short term need for funds - deposit for a house etc.. etc.. - not saying that these people should be in the market in first place but if they are...)


----------



## The Trooper

Attached is a spreadsheet i put together based on Chapter 11 of Value.Able. including an example for CCP. It requires some basic inputting but should be fairly easy to understand to anyone with a baclground in the RM IV method. Please feel free to critique as would love to improve on this.

IV is a tool in share valuing but obviously to be used in conjunction with understanding the business, cashflows, prospects and management.

My question is what weighting to apply to intangible assetts? In a pure ROE assessment they are included in the equity calculation but the level of goodwill and the "risk" of that goodwill is not easily ascertainable. In calculating IV would you include intangibles or reduce them by a risk factor to provide cover in event of a writedown of goodwill?
	

		
			
		

		
	

View attachment Intrinsic Value Calculation Template.xlsx


----------



## McLovin

The Trooper said:


> My question is what weighting to apply to intangible assetts? In a pure ROE assessment they are included in the equity calculation but the level of goodwill and the "risk" of that goodwill is not easily ascertainable. In calculating IV would you include intangibles or reduce them by a risk factor to provide cover in event of a writedown of goodwill?
> 
> 
> 
> 
> 
> 
> 
> 
> 
> View attachment 44361




How long is a piece of string?

Seriously, it's pretty hard to give a one size fits all answer. I guess as a first stop if a company has a lot of goodwill and their RoE is low then you could make the assumption that their goodwill is overvalued.


----------



## Intrinsic Value

RM is initiating his A1 service Skaffold with preliminary invites already being sent out with a sneak preview.

No mention of cost.

I wonder what sort of uptake it will get considering the MCE debacle!


----------



## Noddy

Intrinsic Value said:


> RM is initiating his A1 service Skaffold with preliminary invites already being sent out with a sneak preview.
> 
> No mention of cost.
> 
> I wonder what sort of uptake it will get considering the MCE debacle!




Sent back a response to RM's Skaffold invitation.
Very interested in what he has to offer.
Seems to be somewhat similar to Lincoln Indicators system to me, which retails a little under $2,000 or so for 12 months registration.


----------



## The Trooper

McLovin said:


> How long is a piece of string?
> 
> Seriously, it's pretty hard to give a one size fits all answer. I guess as a first stop if a company has a lot of goodwill and their RoE is low then you could make the assumption that their goodwill is overvalued.




True...I suppose i have come to distrust intangible assets after now being privy to the detail behind a few companies balance sheets. If one removes all intangible assets however this would decrease the company's equity per share while at the same time increasing its ROE. The net effect might be grossly undervaluing a business. My comment broadly i suppose is that i see goodwil as overpaying for an asset and is something that should be written to the profit and loss account as an expense rather than the balance sheet as an asset.


----------



## So_Cynical

Is Roger a sell out?

After 12 months + of selling his book, he seems to have switched to selling a promise/illusion of A1 wealth.
~


----------



## Tysonboss1

So_Cynical said:


> Is Roger a sell out?
> 
> After 12 months + of selling his book, he seems to have switched to selling a promise/illusion of A1 wealth.
> ~




He was a fund manager long before he was an auther,


----------



## notting

He was never an author. The book is  just an infomercial, which he got you to pay for!!!


----------



## McLovin

notting said:


> He was never an author. The book is  just an infomercial, which he got you to pay for!!!




I believe the book and blog exist solely to a) source investors b) create a pool of potential customers for his "valuation" service.

The comments on his blog have really gotten to the stage now where he could say the sky is green and everyone would agree.


----------



## investorpaul

I have never read Roger's book butI just checked his blog out and in the first post he made a mistake:



> Nine companies trading at a discount to intrinsic value that may be worthy of your attention.
> 
> Here they are: Seymour Whyte (ASX:SWL), Nick Scali (NCK), Codan (CDA), M2 Telecommunications (MTU), Credit Corp (CCP), Global Construction Services (GCS), *Breville Group (BBG), *GR Engineering (GNG) and Flight Centre (FLT).




BBG is not the code for Breville Group

I hope no one jumped on Billabong by accident. LOL


----------



## Tysonboss1

notting said:


> He was never an author. The book is  just an infomercial, which he got you to pay for!!!




Have you read it.


----------



## craft

Tysonboss1 said:


> Have you read it.




I wouldn't bother.


----------



## vkdirector

Tysonboss1 said:


> He was a fund manager long before he was an auther,




True as I dont think he made most of his wealth from just selling his book



investorpaul said:


> I have never read Roger's book butI just checked his blog out and in the first post he made a mistake:
> 
> 
> 
> BBG is not the code for Breville Group
> 
> I hope no one jumped on Billabong by accident. LOL




I had seen this typo also, but if you look just below that he has a chart there with the companies names and there codes. If anybody was silly enough to just jump in and try to buy Breville and used the BBG code without looking into it any further then bad luck for them


----------



## notting

McLovin said:


> I believe the book and blog exist solely to a) source investors b) create a pool of potential customers for his "valuation" service.




Totally agree!

And in general make the heard think/walk along his lines as much as possible.  

Follow me in faithful. I need the lift after I have bought. 
I'll also buy before I pour all your funds, managed by me, into the stock that'll give me plenty of support along with my banter on sky business about it  which may even crack a few trend lines to get the tech support from the general market too!!!



Tysonboss1 said:


> Have you read it.



It's been in my bookshelf for some time, so far I have read the title!!!
Maybe I'll read it if Lynas hits $8 in the next 18 months.


----------



## Tysonboss1

craft said:


> I wouldn't bother.




Well then you really can't judge it, 

I for one think it provides a good introduction to the idea of value investing, an I don't think it is a sales pitch at all.

It is not supposed to be the be all and end all of the topic, but it does give z basic outline of the topic and for a beginner trying to understand how the stock market works I think it is well worth the $40 something he sells it for.


----------



## craft

Tysonboss1 said:


> Well then you really can't judge it,





I have read it and I think its probable the biggest waste of $50 bucks that I ever spent. Mind you I was probably suckered into thinking it was going to be something more than it was.

The value investing framework is there which if you haven’t been exposed to it elsewhere then that is potentially useful but if you have much experience then the book is very disappointing with nothing new and I would not recommend it to beginners because of the following.

What makes you or breaks you as an investor based on fundamental valuation is your ability to understand the quality of a business and to calculate the underlying value better then the market.

The value investing frame work requires you to have ‘faith’ in your understanding and go against the market.  This faith will either make you or break you depending on how good you actually are. In the critical areas of quality assessment and valuation RM and his book are simplified and black box to boot.

The problem with a framework that requires faith occurs when somebody who purports themselves to be god exploits the faith required and positions themselves to provide you the answers to the tricky questions at the crux of the framework. (For a fee of course) or to manage the whole lot for you so long as you have the faith to not question.

It is my assessment that RM is a god of clay feet. I have serious doubts about his abilities, skills and integrity. I wouldn’t let him within a mile of 1 dime of my money let alone the 1 Million minimum you need for his exclusive only on application boutique fund. 

And as for his A1 service – exclusive to graduates, it will only help you with the quality/valuation crux questions if his judgement is any good and you won’t be able to assess that because he won’t give you the information you need to make an assessment of his methods. If he is no good you will be stuffed. CCP, MCE etc etc over and over until you leave, with him richer and you poorer.

I would encourage anybody interested in Value Investing to peruse it vigorously by reading widely and thinking critically – you don’t need to become a Roger Montgomery ‘Graduate’ (How demeaning is that term anyway). It could prove to be very detrimental to your wealth.


----------



## craft

Muschu said:


> I assume, maybe incorrectly, that Roger reads, or has access to, this thread.  I also imagine he is in a position to reply to the comments made.
> 
> Are these inaccurate assumptions?  [Noting that I am not suggesting that he would want to, or should, comment].




This was a part of one of the responses on his blog that prevoked me to ask admin to remove my posts from this thread.



> We don’t engage in personal judgement – we leave that to those that lurk behind ‘presumed’ anonymity in the dark crevasses of “forums” and engage in defamation, or encourage and solicit others to do the same. They know not what they reap.




You can make up your own mind if he lurks. But I doubt he would come and debate where he doesn't have editorial and censorship control. Hopefully he will suprise me but he certainly wasn't up for a frank discussion on his blog.

I've sought legal advice on defamation law and had a teaspoon of cement. I won't be asking for anymore posts to be removed and I'm happy to reap what I may. I think it is RandR that has the signature “Sooner or later, we sit down to a banquet of consequences"- - Robert Louis Stevenson (1885). I would rather speak my mind then cower to any big lawer employed to protect a manufactured image.


----------



## craft

This is a repost of a post I made on 17 August

It’s interesting that he can manufacture the illusion of making money through investments This is his verifiable public record.




3/2/04 he started his funds management business. (CAM)

24/7/05 he sold 75% of that funds management business to Loftus Capital who latter changed their name to Clime Investment Management. (CIW)

14/8/06 he sold the remaining 25% of the funds management business and the stock valuation business (Stock Val) also to Loftus. He was employed by Loftus to stay on as the investment manager and chairman of CAM.

16/2/09 Resigned as Investment manager. A Ceasing to be a substantial holder notification was lodged for CIW as he cashed in CIW shares received from selling the CAM business back in 06.

Does this process of establishing a funds management business and software valuation business sound familiar? I hope it works out better this time than last time for the fund investors (no doubt RM will make a buck by selling the investors out again).

And here’s the cynicism — Isn’t the statement that ‘its different this time’ one that he mocks.

And here is a part of a comment he made on his blog shortly aftwards.



> By the way the performance (in the public domain) of the previous firm to 31 May 2009 was: (Fund/S&P300 Accum) 1yr (-1.3%/-28%), 2yr (-29.4%/-41.7%), 3yr (+0.9%/-21.6%) 4yr(+24.4%/-10%). The outperformance was +26.7%, +12.3%, +22.5%, +14.4% respectively. Using the LIC share price chart to measure the old performance is nonsense 1) because the manager cannot control the price at which investors buy and sell shares and 2) because it doesn’t take into account bonus shares and dividends. More importantly the process and method is very different now.




My chart did take into account the bonus issue. It didn't take into account dividends but then the Index was NOT the accumulation index either. Using the LIC Market price makes perfect sense to me, why shouldn't the price impact of the markets judgement on the manager’s performance be included?  It is the reality of what the share can be sold for.

 I assume he is using NTA but his figures don’t seem to reconcile even on that favourable basis.  He resigned as investment manager on 16 Feb 09 so I am not sure why he is using 31 May 09.

This is the Morningstar total Return Chart for CAM. It does include dividends for both the company and the index and is adjusted for the bonus issue.




You make up your own mind - But I think he should be selling something  Teflon coated on infomercial TV - not managing people’s money.


----------



## Ves

Craft, factual evidence such as that posted above, if it is indeed his verifiable public record, cannot ever equate to defamation or a similar charge. I don't think you have anything to worry about.


----------



## Tysonboss1

I understand what you are saying about valuable book. I aggree, if you are already familiar with value investing it is alot of suck eggs, but as I said if you are not then it is a good introduction. 

As far as the rm grad stuff goes I have no opinion


----------



## Billyb

craft, are you saying Roger _underperforms_ the Australian market?


----------



## New Stratos

Nothing new there, his website has had that info on it since I first ran across him - let's not change your name from So_Cynical to So_Paranoid ....


----------



## Roberto

Dear all - just found the thread - thanks for this, it is a great read and really good to breathe the fresh air of freedom from commercialism.
I am however extremely grateful for Roger's book and blog.
It helps/ed me enormously in learning about fundamental analysis.
My main concern with Roger's formula has been touched on once in the last 32 pages - that it requires a forecast of ROE for many years into the future. This is similar to the problem with using discounted cash flow analysis, that no one can predict future earnings for next year let alone for 10 years.
Also, I have played with DCF trying to replicate the period which Roger's formula assumes this notional ROE number to extend onwards for. I got ~11 years. Of course I may be completely wrong about this. But if it is close, then forecasting earnings for that long is really stretching credulity. 
Roger deals with this problem via CONSERVATIVELY adjusting the POR, RR, forecast ROE and most importantly, carefully analysing if the business has the characteristics of a wonderful business. Then adds a margin of safety. This is a complete coverage but can be further investigated by reading the authors below.
I suggest people also read James Montier's 'Value Investing' and particularly Bruce Greenwald's 'Value Investing' books to be further convinced of the dangers and pitfalls associated with forecasting earnings and earnings growth and some excellent solutions. Greenwald suggests you use a method to value assets, a method to value the franchise value and a method to value the growth potential within the franchise. Each method in itself and compared to the other tells a story that clarifies to you the type of business you are looking at. The growth potential is the hardest to work out and the least reliable (so be conservative with the payout ratio of Roger's formula). Again this is no different to Roger's book or his careful cautions, it just clarifies and reinforces the finer points of what he says.
So I am thinking Roger's conservatism should be higher given the reliability problem of consensus forecast earnings. Montier and Greenwald provide the data ande arguments.
As regards the CAM performance charts shown earlier - sure it doesnt look good, but do we need longer to fairly assess this performance.
Lastly I add macro and market TA to my investment plan and see a reliance on equity fundamental analysis alone as an artifact of people turning this stuff into religion. I may be wrong of course.


----------



## skc

craft said:


> I assume he is using NTA but his figures don’t seem to reconcile even on that favourable basis.  He resigned as investment manager on 16 Feb 09 so I am not sure why he is using 31 May 09.
> 
> This is the Morningstar total Return Chart for CAM. It does include dividends for both the company and the index and is adjusted for the bonus issue.
> 
> View attachment 44537




Comparative performance analysis can tell very different stories by choosing different start and end dates. I think a more appropriate graphics would be a chart of rolling 3 year (say) +/- performance. Although with CAM having distinct events like RM starting and leaving, they appear to be the appropriate start and end dates.



Roberto said:


> Roger deals with this problem via *CONSERVATIVELY adjusting the POR, RR, *forecast ROE and most importantly, carefully analysing if the business has the characteristics of a wonderful business. Then adds a margin of safety. This is a complete coverage but can be further investigated by reading the authors below.




I have come across quite a few posters here (and on RM's blog) who think using a 10% RR is right (and more conservative than using a larger number). Any ideas why such a fundamental mistake seems so prominent?


----------



## New Stratos

SKC, I haven't noticed people claiming 10% is more conservative than, say, 15%, but what I have seen is them claiming that they are being conservative by using 10% in comparison to other people using, say, 9% for the same company, or to themselves using lower numbers for other companies.


----------



## Roberto

I have come across quite a few posters here (and on RM's blog) who think using a 10% RR is right (and more conservative than using a larger number). Any ideas why such a fundamental mistake seems so prominent?[/QUOTE]

Roger himself uses higher RRs for more risky companies. The 10% figure is what is commonly ascribed to Warren Buffett's writings. I think he keeps it low because he is so confident (clearly with good reason) of both his judgement  about risk assessing coys and his investment discipline that he will only invest where the risks are low (ie: the franchise is real, the management reliable etc etc).


----------



## McLovin

Roberto said:


> Also, I have played with DCF trying to replicate the period which Roger's formula assumes this notional ROE number to extend onwards for. I got ~11 years. Of course I may be completely wrong about this. But if it is close, then forecasting earnings for that long is really stretching credulity.




I don't understand this. The formula assumes the RoE continues forever not 11 years.


----------



## craft

McLovin said:


> I don't understand this. The formula assumes the RoE continues forever not 11 years.




Two parts

The paid out portion is calculated as a perpetuity.

The growth part has a time frame. Because the calculation raises (ROE/Required return) to the power of 1.8 it gives a varying time frame. For example an input of 30% ROE and a 10% required return is implied to last unchanged for 11.84 years. Whilst an input of say 15% ROE and 12% required return has an implied time frame of 15.2 Years.

To my way of thinking using a formula that implies arbitrarily the growth period, which is one of the most important assumptions is really stupid. It’s even more stupid if you don’t know what time frame the formula is implying and RM has tried his best to keep that secret – lest everybody would work out that his secret herbs and spices are just crap.


----------



## McLovin

craft said:


> Two parts
> 
> The paid out portion is calculated as a perpetuity.
> 
> The growth part has a time frame. Because the calculation raises (ROE/Required return) to the power of 1.8 it gives a varying time frame. For example an input of 30% ROE and a 10% required return is implied to last unchanged for 11.84 years. Whilst an input of say 15% ROE and 12% required return has an implied time frame of 15.2 Years.




Thanks craft.

I'm a little unsure on how you arrive at the implied time period. Can you work through one example?

Cheers


----------



## craft

McLovin said:


> Thanks craft.
> 
> I'm a little unsure on how you arrive at the implied time period. Can you work through one example?
> 
> Cheers




Taking the 30% ROE and the 10% required Return.

Divide 30%/10% = 3

Raise 3^1.8 = 7.225 (this is the amount he multiplies equity by for the retained % amount so that he can get a value for growth. [Lots of other problems with this assumption as well]

(1+30%)/(1+10%)-1 = 18.18% . This is the resultant % of compounding at 30% and discounting at 10%

NPER calculation with PV = -1, FV = 7.225 and rate 18.18% = 11.84 Years.

So only if the company happens to only grow via retained earnings and retain the exactly same amount of earnings and apply them at exactly the same historical  ROE for exactly 11.84 years and then suddenly go ex growth overnight will the formula accurately estimate the growth value. Its utter Bull.....


----------



## McLovin

craft said:


> Taking the 30% ROE and the 10% required Return.
> 
> Divide 30%/10% = 3
> 
> Raise 3^1.8 = 7.225 (this is the amount he multiplies equity by for the retained % amount so that he can get a value for growth. [Lots of other problems with this assumption as well]
> 
> (1+30%)/(1+10%)-1 = 18.18% . This is the resultant % of compounding at 30% and discounting at 10%
> 
> NPER calculation with PV = -1, FV = 7.225 and rate 18.18% = 11.84 Years.
> 
> So only if the company happens to only grow via retained earnings and retain the exactly same amount of earnings and apply them at exactly the same historical  ROE for exactly 11.84 years and then suddenly go ex growth overnight will the formula accurately estimate the growth value. Its utter Bull.....




Thanks again craft, makes perfect sense now. What's bizarre is that the formula assumes a higher risk company has better earnings visibility than a lower risk one.


----------



## craft

McLovin said:


> Thanks again craft, makes perfect sense now. What's bizarre is that the formula assumes a higher risk company has better earnings visibility than a lower risk one.




Many things are bizarre with the formula.

And as for the name of this thread. I think you could be pretty certain that Buffett does not use any such formula. His point of view is that a company is worth the PV of its future cash flow which indicates he is using DCF.

It just a case of a Local Districts second grade lower order batsman who has a record of underperforming the index trying to leverage his name to the Bradman of value investing.


----------



## New Stratos

It's not that "Roger's Formula" assumes infinity or 11 years, it's just that after a certain point future years tend to have a tiny effect on the result.


----------



## craft

New Stratos said:


> It's not that "Roger's Formula" assumes infinity or 11 years, it's just that after a certain point future years tend to have a tiny effect on the result.




Ummm.............


----------



## New Stratos

craft said:


> Ummm.............




My comment was actually a reply to McLovin, but go ahead, set me straight.


----------



## craft

New Stratos said:


> My comment was actually a reply to McLovin, but go ahead, set me straight.




Read the other posts in response to McLovin. Do you understand it?


----------



## New Stratos

craft said:


> Read the other posts in response to McLovin. Do you understand it?




yes. So what is wrong with how I summarised it? If you'd like a slightly longer version: 

It's not that "Roger's Formula" assumes infinity or 11 years, it's just that after a certain point future years tend to have a tiny effect on the result and the point where this occurs is nearer in time with higher ROE's.


----------



## kermit345

Essentially what your saying New Stratos is that high ROE's are not sustainable and so the higher they are the shorter period of time that it should apply to the equation.

I don't use Roger's formula so i'm not very familiar with it but this does make sense if it is what Roger is trying to achieve. Although just because a company has a high ROE and its 'unlikely' to sustain it for a number of years, i don't see why this should hurt the valuation.

Look at a company like PTM which i think is high quality. It will be punished by Roger's forumla due to the mechanics of their balance sheet and the nature of their business.

I believe a valuation equation should be almost solely based on the current earnings/debt/returns of the company as they are 100% correct and tangible. You then apply the same equation to previous or future years (estimates) and that helps you to identify a trend in the companies valuation to give you an overall picture of where their earnings/dividends are heading and hence eventually where their share price should move towards.

Thats my over-simplied take on intrinsic valuation anyway.


----------



## New Stratos

kermit345 said:


> Essentially what your saying New Stratos is that high ROE's are not sustainable and so the higher they are the shorter period of time that it should apply to the equation.




Actually, I wasn't saying that Kermit  It may be true, or not, but it's not my point. I was essentially just saying that when you discount the cash flow at a higher rate, the point where future years are insignificant is sooner.



kermit345 said:


> I believe a valuation equation should be almost solely based on the current earnings/debt/returns of the company as they are 100% correct and tangible.




I get your point, but I think it's a bit strong to say that the current figures are 100% correct - trickery and mistakes aside, they are still only estimates of the true state of affairs - hopefully good estimates ...



kermit345 said:


> You then apply the same equation to previous or future years (estimates) and that helps you to identify a trend in the companies valuation to give you an overall picture of where their earnings/dividends are heading and hence eventually where their share price should move towards.
> 
> Thats my over-simplied take on intrinsic valuation anyway.




Makes sense to me


----------



## odds-on

Long time lurker here. 

I personally enjoyed value.able, not great but not bad either. To be honest all I really want in an investment book these days is lots of examples of both good and bad investments by a respected value investor. I would quite happily pay $500 for a book by Joel Greenblatt detailing his 50 best and 50 worst investments to date.


----------



## craft

New Stratos said:


> yes. So what is wrong with how I summarised it? If you'd like a slightly longer version:
> 
> It's not that "Roger's Formula" assumes infinity or 11 years, it's just that after a certain point future years tend to have a tiny effect on the result and the point where this occurs is nearer in time with higher ROE's.




You discount using the required return not the ROE. The higher the RR the quicker future years become insignificant.  You are compounding at the ROE rate the higher it is the more impact on future years.


----------



## craft

*Roger Montgomery's crazy intrinsic valuation method*



kermit345 said:


> Essentially what your saying New Stratos is that high ROE's are not sustainable and so the higher they are the shorter period of time that it should apply to the equation.





You are correct, the higher the ROE the shorter implied growth period produced by the formula.  You could argue that this is a good thing because higher ROE’s are harder to sustain. But I maintain allowing a formula to imply the sustainable growth period is crazy.  Your example PTM is a low capital intensity business so high ROE's are potentially sustainable.  Allowing a formula to dictate that it will have a shorter growth period then a high capital intensive business with a lower ROE is crazy. 

The businesses where the realistic assumptions about their future most mismatch the assumptions embedded in the formula get the most mis-valued.  Resulting in some great business being passed up at cheap prices and others being brought as ‘bargains’ at ridiculously high prices.


----------



## kermit345

No arguements from me craft. I'm a fan of Roger's process which is essentially Buffet's process re-worded (low debt, high returns, good management, good cashflow). But i'm not a fan of the pumping of his newly revealed skaffold or how he dangles a carrot infront of everyone about his gold investment but waits weeks to say what it is. I understand he has investors to worry about and he was probably waiting to finish his buying but to me your either all in or all out with your disclosure, not half half when you feel like it.

Totally agree with the PTM example. An equation shouldn't have the ability to discard a company that essentially fits the criteria your going after anyway. PTM has continual cashflow from FUM, high ROE, low/zero debt and good management yet the equation would dictate that due to its high ROE, it can only be sustained for a very short number of years which, if you know the company, you know is not true.

Yes PTM is probably one of the more extreme examples but it does show you how equations and formula's which you design to achieve 1 thing, can ultimately miss those goals without further investigation. Thats why I like to have my equation based on earnings and dividends while allowing a small premium/discount based on ROE and D/E. I also attribute a premium/discount based on management qualities and that essentially gives my IV which still only completes a piece of the puzzle.


----------



## Macros

@ Craft

What you are saying is reasonable, however I think you are missing the point. Two people using a similar approach which mostly come up with different figures. The exact figure doesn't matter so much; what matters is the quality of assumptions and the conclusion. Using DCF to the Nth degree does not increase certainty as it is still based on the underlying assumptions.

In my opinion the application of a process is what counts. Being able to apply a consistent (ideally successful) process in all market conditions is the key.

From the way I look at investing, it is the market expectation of future earnings that generally will drive the price at move it towards the range of a reasonable value. Being able to understand and correctly predict where earnings are likely to head is much more important than getting valuation exactly right. Therefore, factors such as the macro environment and industry trends are very important drivers of company value in both the short and long run, as they generally impact on earnings.

With regards to Montgomery criticisms, I maintain that a lack of understanding of economic factors and change remains the biggest problem. This results in his A1 system having no meaning in my view.

@ Kermit

Again, harping on economic factors, PTM is a terrible example. Montgomery, from memory, had a value of $5 or so and listed as an A1. Not sure what he has it at now. In my view, PTM has had a value of around $2.50 to $3.00 for the past few years. From the price action, it looks like it could well head to $3 - and for good reason. PTM faces massive hurdles with significant market volatility, reduced investor interest in markets and a generally terrible environment. PTM would probably be a good play when these factors reverse (could be years), but how will they go until then?


----------



## Tysonboss1

kermit345 said:


> No arguements from me craft. I'm a fan of Roger's process which is essentially Buffet's process re-worded (low debt, high returns, good management, good cashflow). But i'm not a fan of the pumping of his newly revealed skaffold or how he dangles a carrot infront of everyone about his gold investment but waits weeks to say what it is. I understand he has investors to worry about and he was probably waiting to finish his buying but to me your either all in or all out with your disclosure, not half half when you feel like it.




Buffett never talks about what he is buying until the deal is complete or until he must legally disclose a holding.


----------



## craft

*Roger Montgomery's Crazy intrinsic valuation method*



Macros said:


> @ Craft
> 
> What you are saying is reasonable, however I think you are missing the point. Two people using a similar approach which mostly come up with different figures. The exact figure doesn't matter so much; *what matters is the quality of assumptions *and the conclusion. Using DCF to the Nth degree does not increase certainty as it is still based on the underlying assumptions.




Hi Macros
I have no problem with two people reaching different valuations for a business because they make different assumptions about the future. What I have a problem with is people thinking they are valuing a business using a rigid formula.

I agree that what matters is the quality of the assumptions and that is why I think it is crazy to let the formula make the assumptions for you. I agree that DCF is only as good as your assumptions and that is where the skill is required. But if you try to avoid having to get the assumptions right by  handing valuation over to a rigid formula like RM advocates then: 


If the actual growth period is different to the implied growth period the valuation estimate will be wrong.

If current ROE is impacted by historical write downs or accounting goodwill the estimate will be wrong.

If the business is subject to revenue cycles the estimate will be wrong.

If the business margins are increasing or decreasing the estimate will be wrong.

If the company uses funding other than retained earnings the valuation will be wrong.

If the companies business model can utilise customer cash flow to fund its growth, estimates will be wrong.

Blah Blah Blah.......

Nobody knows the future and your assumptions may turn out to be wrong this is the reason you need a Margin of Safety when using DCF valuations. The fact that the imbedded assumptions in a formula may bear no resemblance to what can be reasonably expected for a business means you are not really valuing a business with a formula you are just generating a figure and any MOS you think you are getting by buying at a discount to that figure could very easily be illusionary. Much like a stopped watch - the formula might be right by coincidence on the odd occasion but you wouldn't want to put any faith in it if being on time is important, and if you are betting that you can value a business better then the market then your valuation is critical.


----------



## craft

*Re: Roger Montgomery's Crazy intrinsic valuation method*



craft said:


> Much like a stopped watch - the formula might be right by coincidence on the odd occasion but you wouldn't want to put any faith in it if being on time is important, and if you are betting that you can value a business better then the market then your valuation is critical.




If you are thinking about wasting your money on his stock valuation service (how much does it cost?) I would have a think about this first.

RM had MCE valued at $11.13 for 2011 as recent as May. The watch had stopped a long way from reality in that case. On the other extreme have a good think about how the formula values something like NVT.


----------



## McLovin

Tysonboss1 said:


> Buffett never talks about what he is buying until the deal is complete or until he must legally disclose a holding.




Buffet also doesn't get on his blog and start talking about how is buying a stock in a certain industry and all will be revealed in due course.


----------



## Macros

*Re: Roger Montgomery's Crazy intrinsic valuation method*

Hi Craft,



> Nobody knows the future and your assumptions may turn out to be wrong this is the reason you need a Margin of Safety when using DCF valuations.




My point is that it all depends on where earnings are headed. If you get that right and can invest with a good margin of safety, then you are on a winner.



> crazy to let the formula make the assumptions for you




I think it depends on the application. With DCF you are assuming that future cash flows will be XYZ. With the application of a formula based on current earnings, you have not taken in to consideration what lies in the future and I agree with you here. I've heard many comments about not using analyst forecast earnings and that current earnings are all the matter. IMO current earnings are meaningless, it is future earnings that count. Therefore you either use consensus earnings as a guide or you think that they are wrong and use your own. 

The problem is with the application of the formula, not the formula itself. I've made certain alterations etc to suit my style, but my view is that it is a static value based on earnings power. Therefore you need to understand what the future earnings power will be. This is the same as DCF in that it all depends on the future.

I can tell you that with the way I use it as a representation of current versus future earnings power, it makes a lot of sense. I have not found any situations so far where I cannot find a suitable application. I first looked at DCF 10 years ago, but it never made a lot of sense to me because I don't believe anyone can map out the future sufficiently. I think viewing it as current earnings power and future earnings power make a lot more sense as it is simple and requires fewer assumptions which are inevitably wrong.

In my view the priorities are:
1. Macro environment and implications on the company, trends etc
2. Earnings and outlook
3. Using a valuation yardstick to determine value growth/decline and margin of safety


----------



## Macros

*Re: Roger Montgomery's Crazy intrinsic valuation method*



craft said:


> If you are thinking about wasting your money on his stock valuation service (how much does it cost?) I would have a think about this first.
> 
> RM had MCE valued at $11.13 for 2011 as recent as May. The watch had stopped a long way from reality in that case. On the other extreme have a good think about how the formula values something like NVT.




His valuation service would be a waste of time. The whole A1 system is a joke. MCE is still an interesting situation. I had a good ride up on MCE but was able to sell close to the top. Regardless of what valuation approach you use, if it is based on earnings and earnings stop, then you have a problem. Again, this comes down to more of an economic risk situation and that is why I sold out.


What do you mean about NVT? 




This is what i get out of it. I haven't had an in-depth look at it doesn't suit my investment criteria.

Issues that I see with NVT:
- priced to perfection with a low margin for error
- significant debt finance
- reducing cash flows from operations (rapid decline)
- bad economic environment - high $A - declining demand for their services

My conclusion would be that it is currently a high risk business and is probably suffering tremendously due to the strong exchange rate. Will probably have to raise capital to stay afloat unless the $A takes a big hit soon.


----------



## kermit345

A bit off topic but looks like one of our favourties keeps knocking on the breakout door Macros. Would be interested on where MML can go if it makes a sustained break through the $8.40 mark.

By the way, I think were all essentially saying the same thing just in different ways. We all understand future earnings are estimates which are meaningless unless based on reasonable and appropriate assumptions. It sounds like we all understand earnings is what eventually drives share price action, whether it be pro-active or re-active depending on the situation.

Valuation models/equations are essentially a way of manipulating the earnings past, present and forecasted into what some deem a meaningful comparison the current and historical share prices.

I also think we all agree that Roger's method/equation has some flaws which we don't agree with. 

@ Macros

Agree with you regarding PTM and the economic landscape presently. I work in the financial services industry and have quite a lot to do with PTM's managed funds, particularly their flagship Platinum International Fund. I agree that their price could go lower, but this is on the back of a poor 12-18 months particularly by their standards. Typically they take contrarian positions and their longer-term performance is absolutely exceptional.

You have to also remember that uniquely in Australia with our superannuation system, while people may not be actively investing personal funds, their superannuation still invests for the long-term. A lot of people will have money flowing into Platinum funds without even realising it through superannuation and that will allow FUM and their revenue generation to continue to grow or at the very least remain flat IMO.

Always interested in the thoughts of others but I just think that as PTM continues to decline, at the first sign of life in markets and/or their performance turns around back towards long-term performance then it will be a perfect opportunity to get in. All my opinion of course and DYOR, also happy to read opposing views.


----------



## Macros

Kermit,

Agreed - what I was trying to convey is that the detail doesn't matter too much. It is the application and quality of decisions made. There are a many ways to skin a cat, so to speak.

What you say about PTM is true. However, a lot of hedge funds have been having a very difficult time of this environment. My opposing view to your assumption is that things aren't going to bounce back. If volatility continues then confidence erodes and it isn't good for their model. I am aware of their funds and I think that they aren't doing well in this environment (happy to be corrected). I think they have haven't made the right currency calls and they like financials way too much.

If the markets bounce back, they would be worth $5 no problem. If they don't they are $3 (IMO) and negative outlook. Therefore the value depends on what you think is going to happen. My view is that things are going to be difficult for longer than most people expect.


----------



## Macros

Kermit,

Regarding MML, I'm thinking $12-$14. Production increases are substantial, however would be nice if they could come sooner


----------



## Tysonboss1

McLovin said:


> Buffet also doesn't get on his blog and start talking about how is buying a stock in a certain industry and all will be revealed in due course.




No he doesn't. However sometimes he hints at things in lectures he gives to students and in the odd interview.


----------



## kermit345

Agreed the upside to production can't come soon enough. Even at current gold prices and their low costs the expected 20,000 ounce increase in the near term adds approx $30 mill to the bottom line.

If $8.40 can be broken i'd be surprised if they didn't go to at least $9, possibly further.


----------



## craft

*Re: Roger Montgomery's Crazy intrinsic valuation method*



Macros said:


> What do you mean about NVT?.



What does the RM formula value it at? Anybody care to provide worked example.

View attachment 44578



What drives your dotted lines? I asume it is not the RM formula.


----------



## Macros

*Re: Roger Montgomery's Crazy intrinsic valuation method*



craft said:


> What does the RM formula value it at? Anybody care to provide worked example.
> 
> View attachment 44578
> 
> 
> 
> What drives your dotted lines? I asume it is not the RM formula.




The dotted lines are driven by my interpretation of the formula.


----------



## New Stratos

craft said:


> You discount using the required return not the ROE. The higher the RR the quicker future years become insignificant.  You are compounding at the ROE rate the higher it is the more impact on future years.




The RR is an ROE - the one I require, at a minimum, to make it worthwhile me investing in that company.


----------



## New Stratos

*Re: Roger Montgomery's crazy intrinsic valuation method*



craft said:


> You are correct, the higher the ROE the shorter implied growth period produced by the formula.  You could argue that this is a good thing because higher ROE’s are harder to sustain. But I maintain allowing a formula to imply the sustainable growth period is crazy.  Your example PTM is a low capital intensity business so high ROE's are potentially sustainable.  Allowing a formula to dictate that it will have a shorter growth period then a high capital intensive business with a lower ROE is crazy.
> 
> The businesses where the realistic assumptions about their future most mismatch the assumptions embedded in the formula get the most mis-valued.  Resulting in some great business being passed up at cheap prices and others being brought as ‘bargains’ at ridiculously high prices.




Yes, but all methodologies/formulae have unrealistic assumptions for some situations. That's why Buffett, for example, doesn't try to value high technology companies in the same way he values Coke or most of his other buys. The method Roger is espousing in his book should work quite well if you pre-screen the companies well to get ones with realistically predictable earnings and ROE


----------



## Tysonboss1

*Re: Roger Montgomery's crazy intrinsic valuation method*



New Stratos said:


> Yes, but all methodologies/formulae have unrealistic assumptions for some situations. That's why Buffett, for example, doesn't try to value high technology companies in the same way he values Coke or most of his other buys. The method Roger is espousing in his book should work quite well if you pre-screen the companies well to get ones with realistically predictable earnings and ROE




Bufett does not value many tech companies because they are outside his circle of competence.

He has always said he sticks to what he knows and that in investing is doesn't matter how big your circle of competence is but rather how well you know it's boundaries


----------



## craft

*Re: Roger Montgomery's crazy intrinsic valuation method*



Tysonboss1 said:


> Bufett does not value many tech companies because they are outside his circle of competence.
> 
> He has always said he sticks to what he knows and that in investing is doesn't matter how big your circle of competence is but rather how well you know it's boundaries



  The circle of competence idea is hugely important because it is only within that circle that you have any chance of making reasonable assumptions.



New Stratos said:


> The method Roger is espousing in his book should work quite well if you pre-screen the companies well to get ones with realistically predictable earnings and ROE




Not sure that I would go as far as 'quite well' but I would accept ‘less worse'.


----------



## craft

*Re: Roger Montgomery's Crazy intrinsic valuation method*



Macros said:


> The dotted lines are driven by my interpretation of the formula.




That's enlightening. Have you borrowed his approach to transparency as well?


----------



## Macros

*Re: Roger Montgomery's Crazy intrinsic valuation method*



craft said:


> That's enlightening. Have you borrowed his approach to transparency as well?




What is that supposed to mean? Have I written a book?


----------



## craft

*Re: Roger Montgomery's Crazy intrinsic valuation method*



craft said:


> What does the RM formula value NVT at?





Since 2006 NVT has had earnings of 82.4 cents and paid out dividends of 83.6 cents.
The RM logic is that if nothing is retained then no growth is included in the valuation.  The fact that earnings have grown from 8.9 cps in 2006 to 21.7 cents in 2011 defies his growth logic. 

Applying the formula produce increasing valuations as it captures the EPS growth AFTER THE FACT – and so the valuation rises but always below fair value because it is not factoring in future EPS growth. (This is one of the reasons the formula results jump around like a Jack Russel on steroids)

No takers on the RM valuation - so here goes, correct me if I am wrong.

Forecast Earnings (Morningstar) for 2012-2014 are 23.5; 26.6; 31.2
Corresponding forecast Dividends are 23.2; 26.6; 31.1.

Putting aside the validly of the forecasts. 

Using a required rate of 12% (putting aside the validity of this assumption)

Using RM Method. 
23.2/23.5 = 98.7% is paid out. It is valued at ROE / required return * equity.

Now if I understand it right he gets ROE as being 23.5 cents divided by 64 cents of book value = 36% (Ignoring the multiple problems with GAAP distortion of book value.)

So paid out portion is valued at 98.7% * 36%/12% * 64 cents = $1.90

The growth part of the calculation is 1.3% * (36%/12%)^1.8 * equity  = $.06

Total of $1.96

For 2013 the payout ratio is 100% . The 26.6 cent is earned on 64.3 cents of equity so the ROE is 41% and the valuation would be 100% * 41%/12% * 64.3 cents = $2.19

For 2014 the payout ratio is 99.7%. The 31.2 cents is earned on 64.3 cents of equity so the ROE is 48% and the valuation would be 99.7% * 48%/12% * 64.3 cents = $2.56 plus a couple of cents for the growth part of the equation on the .03% retained. So $2.58

Not sure what he would say about 2011with a payout of 20.8 cents and earnings of 20.3cents – probably conclude that the payout is not sustainable and value it as 100% payout. So 100% *32%/12%* 64 cents = $1.70.

So in summary valuation from 2011 -2014 = $1.70, $1.96, $2.19 & $2.58.

If the valuations were right and you could buy at valuation then you would buy at $1.70 and sell three years later at $2.58 whilst collecting 80.9 cents in dividends.  This would actually give you a return of 29% yet you were only factoring in a required return of 12%?????

*Why is this so – because the model is only picking up ROE growth after the fact and hence undervalues future increase in ROE. The reverse is also true – It overvalues companies with a forecast ROE decline.* (example FGE?)

NVT is a very low capital business and its growth is largely funded by growing course prepayments. So is its recent acquisition SAE which has distorted the BV and hence ROE figures. I largely disagree with most of Macros thoughts on the company but that is a discussion for another day and shouldn’t be relevant to what I am trying to point out about how the RM formula mis-values in many circumstances.


----------



## Ves

Slightly off-topic craft, but you mentioned broker / analyst forecasts. How much value do you put on these when making assumptions to plug into your own valuation formula? Or is it stating the obvious to say that this depends on how this reflects your own structural & competitive analysis of the company?

I also find it curious that RM (as an investor who has criteria that favours companies who make high returns off limited working capital) uses a valuation formula that disadvantages such businesses.


----------



## Muschu

*Re: Roger Montgomery's Crazy intrinsic valuation method*



Macros said:


> His valuation service would be a waste of time. The whole A1 system is a joke. MCE is still an interesting situation. I had a good ride up on MCE but was able to sell close to the top. Regardless of what valuation approach you use, if it is based on earnings and earnings stop, then you have a problem. Again, this comes down to more of an economic risk situation and that is why I sold out.
> 
> 
> What do you mean about NVT?
> 
> View attachment 44578
> 
> 
> This is what i get out of it. I haven't had an in-depth look at it doesn't suit my investment criteria.
> 
> Issues that I see with NVT:
> - priced to perfection with a low margin for error
> - significant debt finance
> - reducing cash flows from operations (rapid decline)
> - bad economic environment - high $A - declining demand for their services
> 
> My conclusion would be that it is currently a high risk business and is probably suffering tremendously due to the strong exchange rate. Will probably have to raise capital to stay afloat unless the $A takes a big hit soon.




Interesting.  NVT has suffered recently in Australia but is now a global company.  They floated at $1 in about 2004.  Pretty much every report has surpassed the previous one and dividends have consistently increased.
To my knowledge their debt level is minimal.
The SP during the GFC held up beautifully but they have suffered in Australia with the exchange rate.
Asian parents who can afford it put great importance on the education of their children and will often put money into this, even as an extended family, as a major priority.
The NVT SP recently seems to be looking for direction.  IMO their success, or otherwise, in entering into major educational centres in the USA [such as Boston] is critical.
I have held NVT in the past but do not presently. However I do "watch" them carefully.


----------



## ROE

*Re: Roger Montgomery's Crazy intrinsic valuation method*



> This is what i get out of it. I haven't had an in-depth look at it doesn't suit my investment criteria.
> 
> Issues that I see with NVT:
> - priced to perfection with a low margin for error
> - significant debt finance
> - reducing cash flows from operations (rapid decline)
> - bad economic environment - high $A - declining demand for their services
> 
> My conclusion would be that it is currently a high risk business and is probably suffering tremendously due to the strong exchange rate. Will probably have to raise capital to stay afloat unless the $A takes a big hit soon.




You don't understand NVT enough,  do some more research 
I have NVT for a long time now, I probably know more than the average person..

Most of your fear is justified if you don't know enough about NVT but if you do it's not a problem at all ....apart maybe valuation but valuation is a subjective unless
earning doesn't keep up or the business model is weak.

I can help allay your fears on other area.

NVT is debt free until they bought sae, the debt is not an issue for NVT they can easily fund it and I wrote to their management sometimes ago, they will pay down this debt from cash flow, not long before it knock it off.... 

If you know how NVT model works, you get between year with reduce cash flow because they need to open new school and require capital funding, once it's up and running it takes a very short period of time before it generate incredible earning for NVT.

Bad economy and High $A is not an issue for Asian and majority of NVT students are Asian, Immigration policy matter more to NVT than High Aussie dollar, if
the immigration policy is easy to get student into Australia, High $A dollar affect little...

Asian place very high emphasis on education, to them whatever it takes to educate their kids ..... High dollars mean they just cut back on other things rather than forgo education.... what sort of business get this sort of treatment? not many 

You can even see it here in Australia, lot of Asian migrants, their parents works in
factories and low paying jobs and their kids go to private school and get top class tutor ...it's in their DNA....

what else NVT got other business doesn't? pre-paid fees
Fees are paid up front, from that NVT use to fund their teachers, equipment etc..

it's like you walk into HVN you give them and say here have $2000 of mine...
go pay your staff, your rents and give me my TV in 6 months time

Happy investing, my post is just for information not a buy call, it's your call


----------



## New Stratos

*Re: Roger Montgomery's crazy intrinsic valuation method*



Tysonboss1 said:


> Bufett does not value many tech companies because they are outside his circle of competence.
> 
> He has always said he sticks to what he knows and that in investing is doesn't matter how big your circle of competence is but rather how well you know it's boundaries




The question is - "what is the circle of competence?" Hagstrom reckons it's your ability to predict future earnings etc for a company with a reasonable chance of success - Buffett doubts if he can do so for some types of company, hence they are out of his circle of competence.


----------



## New Stratos

*Re: Roger Montgomery's Crazy intrinsic valuation method*



craft said:


> That's enlightening. Have you borrowed his approach to transparency as well?




Why are you so aggressive? This is an internet forum, the worst we can do to each other is 'upset' one another, so it's not like you can provoke a punch up. If you are seriously trying to convince people of your wisdom, how will insulting them help?


----------



## New Stratos

*Re: Roger Montgomery's Crazy intrinsic valuation method*



craft said:


> If the valuations were right and you could buy at valuation then you would buy at $1.70 and sell three years later at $2.58 whilst collecting 80.9 cents in dividends.  This would actually give you a return of 29% yet you were only factoring in a required return of 12%?????




I know you think of the RR in other terms, but if Buffett and everyone else who thinks of it as the minimum ROE you require the company to return to be happy to invest in it, then everything above that in terms of ROE is a bonus - that's what you've just calculated.


----------



## craft

*Re: Roger Montgomery's Crazy intrinsic valuation method*



ROE said:


> You don't understand NVT enough,  do some more research
> I have NVT for a long time now, I probably know more than the average person..
> 
> Most of your fear is justified if you don't know enough about NVT but if you do it's not a problem at all ....apart maybe valuation but valuation is a subjective unless
> earning doesn't keep up or the business model is weak.
> 
> I can help allay your fears on other area.
> 
> NVT is debt free until they bought sae, the debt is not an issue for NVT they can easily fund it and I wrote to their management sometimes ago, they will pay down this debt from cash flow, not long before it knock it off....
> 
> If you know how NVT model works, you get between year with reduce cash flow because they need to open new school and require capital funding, once it's up and running it takes a very short period of time before it generate incredible earning for NVT.
> 
> Bad economy and High $A is not an issue for Asian and majority of NVT students are Asian, Immigration policy matter more to NVT than High Aussie dollar, if
> the immigration policy is easy to get student into Australia, High $A dollar affect little...
> 
> Asian place very high emphasis on education, to them whatever it takes to educate their kids ..... High dollars mean they just cut back on other things rather than forgo education.... what sort of business get this sort of treatment? not many
> 
> You can even see it here in Australia, lot of Asian migrants, their parents works in
> factories and low paying jobs and their kids go to private school and get top class tutor ...it's in their DNA....
> 
> what else NVT got other business doesn't? pre-paid fees
> Fees are paid up front, from that NVT use to fund their teachers, equipment etc..
> 
> it's like you walk into HVN you give them and say here have $2000 of mine...
> go pay your staff, your rents and give me my TV in 6 months time
> 
> Happy investing, my post is just for information not a buy call, it's your call




Thanks ROE - you saved me a post.

They might have a few current issues for management to work through, but that’s life. The business model however is compelling and that will stand them in good stead to surmount issues as they arise.


----------



## craft

Ves said:


> I also find it curious that RM (as an investor who has criteria that favours companies who make high returns off limited working capital) uses a valuation formula that disadvantages such businesses.




Does he use it?

Maybe he doesn't realise 

OR

Maybe he does realise, but he keeps hush because he is commercializing a valuation service based on the formula.




> Slightly off-topic craft, but you mentioned broker / analyst forecasts. How much value do you put on these when making assumptions to plug into your own valuation formula? Or is it stating the obvious to say that this depends on how this reflects your own structural & competitive analysis of the company?




I'll pm you later.


----------



## Macros

ROE,

Well thought out points - everything you have said seems reasonable.

Personally, my view is that the education business model in Aus has been in a strong growth trend for some years, but this may not be the case moving forward. I'm in a defensive economic mindset.

My thoughts for the future are based on anecdotal information about more (Asian and Indian) students looking at the US and Canada as a viable alternative, which makes sense with currency parity plus our much higher cost of living and property. Once a perception change is made, I would think that it would last for some years.

I haven't had a good look at NVT and have only performed a few cursory overviews - it just doesn't interest me in this market. There is also the potential that the price action has been saying that the earnings won't be as strong moving forward (I realise that this is against value investment philosophy however I think price can sometimes be informed of future earnings). I could be completely wrong, it could just be the price moving back towards fair value. This is the way I perform my top-line filter - superficial financial data overview + my economic viewpoint.

I guess that overall I'm just bearish. I mentioned some time back on Roger's blog (when it was more useful) that I thought retail would struggle significantly and that although JBH for example is a great business, it is in a poor economic environment. When the economic dust settles, and it could be a few years away, I'll be seriously looking at companies like JBH and NVT. The macro trends are just too powerful and structural for a company to do well fighting against these headwinds.

At the moment I'm focused on gold producers. I know that many value investors either see this as silly or that it isn't not true value investment. However, it fits my economic framework and my strategy is working very well. My strategy is to move away from these sorts of companies when I see signs that the economic issues have started to be addressed and that we can have some sustainable economic growth again.


----------



## craft

*Re: Roger Montgomery's Crazy intrinsic valuation method*



New Stratos said:


> Why are you so aggressive? This is an internet forum, the worst we can do to each other is 'upset' one another, so it's not like you can provoke a punch up. If you are seriously trying to convince people of your wisdom, how will insulting them help?




A pretty graph with some dotted lines was put up and the explanation of how they are derived is given as 







> The dotted lines are driven by my interpretation of the formula



How does this add to the discussion? I was making a point aggression was unintended.

Wisdom – Ha, If I was wise I wouldn’t bother. I’m stupid enough to care. I don’t want to convince anybody I’m just putting it out there in case some (not necessarily current posters)  with an open mind might come looking for some opposing points of view that they are not necessarily getting anywhere else. 

I’ve had my say so maybe it is time I did show some wisdom and leave this thread to the pro Montgomery clan I'm sure I could be utilizing my time better for my own benefit.


----------



## Macros

Craft,

I'm not sure where you are coming from because you started a thread including the following words:

"I have read plenty of books but I would be interested to see what else could be learned through a more interactive dialogue.

So who’s out there that’s interested in discussing this or similar approaches."

I have my investment strategy and philosophy figured out - it is unimportant but since this has happened my actual rate of return and expected rate of return is around 100%pa (expecting a decline). The reason why post on these forums isn't to learn, but to question myself and to share my views. I would change my whole strategy on a dime if I came to the conclusion that I was wrong - and I'm prepared to accept that I may be wrong.

If you have it all figured out, why are you questioning and also dismissing any alternative viewpoint simultaneously.


----------



## McLovin

Macros said:


> My thoughts for the future are based on anecdotal information about more (Asian and Indian) students looking at the US and Canada as a viable alternative, which makes sense with currency parity plus our much higher cost of living and property. Once a perception change is made, I would think that it would last for some years.




This is generally along the lines of why I have stayed away from NVT. A lot of hard work has gone into building Australia up as an education destination, but the cost of living/property/AUD are eroding its competitive advantage v places like Europe and NA. 

Once there is a shift away from Australia how hard, and more importantly expensive, will it be to lure students back to Australia?


----------



## Tysonboss1

*Re: Roger Montgomery's crazy intrinsic valuation method*



New Stratos said:


> The question is - "what is the circle of competence?" Hagstrom reckons it's your ability to predict future earnings etc for a company with a reasonable chance of success - Buffett doubts if he can do so for some types of company, hence they are out of his circle of competence.




Everyones circle of competence is different, it comes from a deep understanding of the fundamentals of a business and the industry it operates in. you can't know every thing.

A dairy farmer of 20years would be extremely qualified in valueing another dairy farm. He could look at it and instantly have an idea of the number of cows it can sustain, come to an opinion on the running costs of the operation, he has experiance of past price flucuations of the product etc etc.

But that dairy farmer would be out of his depth trying to value a company that makes womens shoes. 

He is buffett explaining the concept, He starts talking about it at the 2 min mark.


----------



## Muschu

McLovin said:


> This is generally along the lines of why I have stayed away from NVT. A lot of hard work has gone into building Australia up as an education destination, but the cost of living/property/AUD are eroding its competitive advantage v places like Europe and NA.
> 
> Once there is a shift away from Australia how hard, and more importantly expensive, will it be to lure students back to Australia?




If you look at NVT's website and announcements you will see just how many University partnerships they have established in the USA, Canada and the UK.  Some are well established and others in their infancy. They offer many destinations in addition to Australia.


----------



## McLovin

Muschu said:


> If you look at NVT's website and announcements you will see just how many University partnerships they have established in the USA, Canada and the UK.  Some are well established and others in their infancy. They offer many destinations in addition to Australia.




Thanks rick. Would I be wrong in assuming that the overwhelming majority of their revenue is still from Australia though?


----------



## skc

From what I understand the "Quality Score" is a measure of liquidity event?

He cannot seriously claim that ANZ (A3), BHP (B1) and WOW (B2) are ranked behind the likes of TSM, MCE, ONT and IRI.


----------



## Ves

skc said:


> From what I understand the "Quality Score" is a measure of liquidity event?
> 
> He cannot seriously claim that ANZ (A3), BHP (B1) and WOW (B2) are ranked behind the likes of TSM, MCE, ONT and IRI.




He made a blog post about this recently.

Fairly certain that the letter is the "chance of liquidity event" and the number is a rank referring to "investment quality" of some sort. It's ambiguous at best.

Agreed with what you posted.


----------



## skc

Ves said:


> He made a blog post about this recently.
> 
> Fairly certain that the letter is the "chance of liquidity event" and the number is a rank referring to "investment quality" of some sort. It's ambiguous at best.
> 
> Agreed with what you posted.




I think he has a somewhat mechanical definition of these scores tailored for a particular industry.

But what is lacking clearly is a broader view.

If BHP, Woolies and ANZ are in trouble... what chances of all the other A1 companies?!


----------



## McLovin

skc said:


> From what I understand the "Quality Score" is a measure of liquidity event?
> 
> He cannot seriously claim that ANZ (A3), BHP (B1) and WOW (B2) are ranked behind the likes of TSM, MCE, ONT and IRI.




This is why I can't take his rating "system" seriously. As I understand, he has taken 30 or so ratios that he uses to create the rating, ignoring company specific factors like industry. This is how you end up with MCE being classed as A2 and WOW as B2. The uninitiated, and that is who the majority of his followers are, would infer that somehow a mining services contracting business is "safer" than one half of a consumer staple duopoly. In reality, you would expect a lumpy contracting company to have a more robust balance sheet than a grocer, especially a grocer with the market power of WOW.


----------



## New Stratos

SKC, Ves, and McLovin,
   I may be wrong, but I'm fairly sure that the A, B or C is a measure of the 'quality' of the company ie (crudely) ability to produce high ROEs, and the number 1-5 is the likelihood of 'a liquidity event' - that doesn't mean bankruptcy, it may just mean having to borrow money short-term.

If that is the case, then he isn't saying MCE (for example) is 'better' than than ANZ, just that it is less likely to need to borrow money or sell more shares etc (which makes some sense).

As for the following "he has taken 30 or so ratios that he uses to create the rating, ignoring company specific factors like industry"; no, I distinctly remember reading him saying that he uses industry specific models. Again this makes sense - there is no sense in trying to compare debt-equity of say MCE with a bank like ANZ.


----------



## Muschu

McLovin said:


> Thanks rick. Would I be wrong in assuming that the overwhelming majority of their revenue is still from Australia though?




Sorry - only just saw this.  Yes, I think you are right - Sydney in particular.  It will be interesting to see how they go in the USA.  I think it is either 4 or 5 partnerships in place now.


----------



## McLovin

New Stratos said:


> SKC, Ves, and McLovin,
> I may be wrong, but I'm fairly sure that the A, B or C is a measure of the 'quality' of the company ie (crudely) ability to produce high ROEs, and the number 1-5 is the likelihood of 'a liquidity event' - that doesn't mean bankruptcy, it may just mean having to borrow money short-term.
> 
> If that is the case, then he isn't saying MCE (for example) is 'better' than than ANZ, just that it is less likely to need to borrow money or sell more shares etc (which makes some sense).
> 
> As for the following "he has taken 30 or so ratios that he uses to create the rating, ignoring company specific factors like industry"; no, I distinctly remember reading him saying that he uses industry specific models. Again this makes sense - there is no sense in trying to compare debt-equity of say MCE with a bank like ANZ.




Good to know. Still far too opaque to be of any value, pardon the pun.


----------



## Risk Chaser

Hey guys, 

interesting discussion here, I have a question when attempting to value gold companies, ie SLR or MML.

Using Roger's method on the above 2 will result in a very high IV, yet its based on the false assumption that  those mines will continue to produce to infinity with unlimited reserves. 

How does one discount this factor when Companies usually give guidance on expected reserves and mine life.


----------



## Macros

It is a false assumption that any business or earnings go to infinity.

Research their resources and exploration potential. You might say their mine life is limited, however as I see it, it depends on the quality of management which can increase existing resources via exploration or acquisition. It is dynamic.

Much better to think about their production profile over the next 10 years. Anything beyond that is unknown and I'd argue the same for most businesses. For example, Medusa currently produces 100k oz pa but will be increasing production to 400k oz pa over the next few years. They will not do so unless they know that it is reasonably sustainable.

Many in the undustry recognize that most gold producers are very cheap right now (US based commentary). I use IV to gauge the potential, but they are so cheap it doesn't matter what the exact number is.

Factors to consider include free cash flow, production costs and control, good mine life, management quality, expansion potential and direction of gold price.

Also, IVs can gauge companies like BHP and other single sector producers. No reason to think it does not apply to this sector. If they look cheap, it is because they generally are. The major risk lies in cost control and sufficient mine life.


----------



## tinhat

After having been away on holidays, mainly out of mobile/wifi signal, I've been catching up on things since I've been back (for two weeks now). Just now, I'm listening to Roger on Switzer via a embedded utube video at switzer.com. The date of the entry on the switzer website is 23/09/11 but these videos tend to get posted onto the Switzer website one or two days after television broadcast.

Anyway...

What does Roger open with.... oh, well, we were 90% cash in April. Really, is that what he was saying back then?

I don't follow the guy that much in his day to day gabbing. I bought his book and found it very useful - and not from the point of view of finding the magic formula pages, but more for his insight and examples about analysing fundamentals. Whatever I gave him for the book - $20 or $50 or what ever it was - fair enough, but after than... I'll just listen and watch thank you.


----------



## Tysonboss1

Macros said:


> . The major risk lies in cost control and sufficient mine life.




Add to that revenue risk, they like all commodity companies rely on the sale price of the resource their earth moving operation is recovering.

If I were looking to buy a gold producer ( which I am not ), then I would want it to be one of the lowest cost producers with a mine life extendiing past 20 years minimum, almost no debt, and a pipeline of high quality projects, and it must be selling at a price that still has a margin of safty given a historical average price of the commodity.

That is the minimum I need for any single commodity producer.

The only exposure to gold I have is through BHP, which I am much happier with, the portfolio of low cost long life assets, diversified by commodity, Low debt and expansion project pipeline, and managements firm shareholder return focus gives it the edge in my veiw.


----------



## Macros

> Add to that revenue risk, they like all commodity companies rely on the sale price of the resource their earth moving operation is recovering.




Generally all companies rely on the sale price of their products. Neither price nor demand is not set in stone. Therefore it is up to the investor to determine these risk factors for any business over their investment timeframe.



> The only exposure to gold I have is through BHP, which I am much happier with, the portfolio of low cost long life assets, diversified by commodity, Low debt and expansion project pipeline, and managements firm shareholder return focus gives it the edge in my veiw.




It is a matter of perspective. Whilst I think BHP is a good business, majority of profits come from iron ore. Therefore when investing in BHP you are going (approximately) 50% iron ore and 50% diversified minerals. I'm bearish on iron ore and wouldn't personally invest in the 50% iron ore business therefore don't invest in BHP. If I could invest in the 50% diversified minerals business of BHP, I'd be a lot more interested.


----------



## GG999

There are some things that I'm not sure about 
One is that P/E isn't important
Another is that companies with high ROE are automatically given a higher Intrinsic Value if they retain more of their profits.

Although I realize that high ROE and a high Price to Book usually go together, it would seem to me that it's more accurate to say that it is when a company has a high P/B that (at least on paper) it appears better to have earnings reinvested. 

Both in Roger's book and in this pdf there is discussion on how a low ROE company that retains profits actually gives a lower IRR (Investors Rate of Return)

In all the examples, ROE is fixed, and so is P/E (only used to determine the change in share price)
But if these are fixed then so is the P/B, and in the case of the low ROE company the P/B = 0.5

The low ROE company has a P/E of 10 and so if all earnings are paid out as dividends, the IRR is 10%. So in this case the P/E must be very important to an investor because it tells him or her what the earnings yield. They might know nothing about ROE or equity - but they would be interested in the fact that for each dollar they spent on shares they get back 10 cents in dividends due to P/E =10

When the low ROE company with P/B = 0.5 keeps 10 cents of earnings and the P/B is fixed then it only increases share price by 5 cents, leading to IRR = 5%. Another way of looking at it is the investor simply gets the same as the companies ROE.


In the case of the high ROE company the IRR is again 10% because whatever the ROE, the investor earns the earnings yield only. 
But retained, the investor earns the same as the ROE which is much higher. But again I think the critical factor is the P/B which is 2.5 in this case. For every 10 cents retained the price would go up 25 cents.

If P/B = 1 then it wouldn't matter what the ROE is, one wouldn't be able to show (again, at least on paper) that it is better to retain than have dividends. 

I'm not used to talking about these sorts of things and so I suspect this might not make much sense to most people but those people that understand these things better might like to point out what I'm not understanding!


----------



## robusta

The new valuation tool Skaffold is released. As handy as it may be I think I might save my money for two reasons.

1) I enjoy researching stocks myself.

2) Not so sure about the future valuations based on analyst forecasts.

I would be interested to hear any other opinions.


----------



## Tysonboss1

robusta said:


> 1) I enjoy researching stocks myself.
> 
> 2) Not so sure about the future valuations based on analyst forecasts.
> 
> .




Wise move, I try and avoid things that promise to give me fish, and I spend time learning to fish.


----------



## odds-on

robusta said:


> The new valuation tool Skaffold is released. As handy as it may be I think I might save my money for two reasons.
> 
> 1) I enjoy researching stocks myself.
> 
> 2) Not so sure about the future valuations based on analyst forecasts.
> 
> I would be interested to hear any other opinions.




I will not be buying Skaffold. However, i reckon a private investor could earn an annual ROI of between 12 to 20% by buying a dozen or so shares in businesses that have a consistently high MQR. I am sure this is achieveable as long as the private investor is disciplined about purchasing with a safety margin of at least 15%. This will be a purely mechanical investing approach similar to magic formula or graham criteria and i bet it works in the long term.

How long do you think Skaffold will be around for? I reckon a max of 3 years. RM will move onto something else.

Cheers

Oddson


----------



## Vargulf

Hey all,
I finished reading Value.able for the 2nd time a week or two ago. I'm geared up with all the valuation tools to start a 'buffet valuation' of my watchlist to hopefully take advantage of this new share market slump. My problem is I use Commsec and its valuation is useless. I can't find forecast ROE and many other current ratios aren't available. I suspect many of the figures aren't right either. Can anyone recommend a free analysis tool that will give me accurate numbers for valuation?
2nded on Skaffold though. It's to much for the current amount I have invested in stocks. Plus I look forward to doing my own sums. If it was 4 or 5 hundred I would consider it.

In response to GG99,
I think your missing the point. For sure non value investors use P/B and P/E, let them and let them lose money. But both are price related which doesn't equate to what value investors look at for value. We shouldn't give a hoot what a low ROE businesses price related equations tell because we wouldn't be looking at those businesses. For high ROE businesses, sure I 'glance at P/B where Roger doesn't but it true what he says that it is a fairly obsolete ratio. If they had to sell their assets they would be in liquidation and the asset values in their books wouldn't be anywhere close to the sell off prices. And a high ROE business is going to be returning rates far in advance of the book values. The P/B doesn't tell value investors anything they want to know as I see it.


----------



## Julia

odds-on said:


> However, i reckon a private investor could earn an annual ROI of between 12 to 20% by buying a dozen or so shares in businesses that have a consistently high MQR. I am sure this is achieveable as long as the private investor is disciplined about purchasing with a safety margin of at least 15%.



Have you actually achieved the above with real money?


----------



## Ves

That sounds too good to be true to be honest. Even if you out-perform the market by 3% you're still relying on some heavy "bull" years to out-way the down years.

The best value investors (ie Buffet and friends) achieve a long-term 20% average per year. Why would a program achieve around 15%?


----------



## odds-on

Julia said:


> Have you actually achieved the above with real money?




No for the obvious reason that RM has only just released the Skaffold service. I understand that Skaffold allows you to look back at MQR ratings over many years. You would need to research for the companies wih consistently high MQR over many years then apply a disciplined mechanical investing strategy.

Cheers

Oddson


----------



## odds-on

Ves said:


> That sounds too good to be true to be honest. Even if you out-perform the market by 3% you're still relying on some heavy "bull" years to out-way the down years.
> 
> The best value investors (ie Buffet and friends) achieve a long-term 20% average per year. Why would a program achieve around 15%?




I am not suggesting that the progam will achieve around 15%, all i am suggesting is that if a private investor uses the program as a research tool and only buys shares in businesses that have had a consistently high MQR for many years with a reasonable safety margin (15%) they will do nicely and get returns between 12 and 20%. The private investor would need to disciplined with the mechanical investing strategy.

Have you read the Little Book that Beats the Market?
Or googled some of the graham criteria back tests?
Or read about the piotroski screen?

Skaffold can be used to find high quality businesses that you buy at a little bit of a discount. Buying a dozen should cover off all business failure/industry downturn/currency etc risk.

Cheers

Oddson


----------



## RandR

odds-on said:


> Skaffold can be used to find high quality businesses that you buy at a little bit of a discount. Buying a dozen should cover off all business failure/industry downturn/currency etc risk.
> 
> Cheers
> 
> Oddson




Thats great ... but I can do the same thing just using comsec's advanced search function ... for free.



> I am not suggesting that the progam will achieve around 15%, all i am suggesting is that if a private investor uses the program as a research tool and only buys shares in businesses that have had a consistently high MQR for many years with a reasonable safety margin (15%) they will do nicely and get returns between 12 and 20%. The private investor would need to disciplined with the mechanical investing strategy.




You really should substantiate any claims about returns before blindly decreeing it with some cold hard evidence ...

On Roger Montgomery's blog they have an MQR A1 portfolio, What returns has it achieved this year ?

Roger Montgomery talks in his book so much about the importance of an investor understanding the process of value investing, selling a black box valuation program is sort of an anti-thesis to what a fair bit of his book was about imo. 

I might ask, how does it differ from Clime's valuation program ? (roger's previous valuation program) Does anybody know ?


----------



## odds-on

RandR said:


> Thats great ... but I can do the same thing just using comsec's advanced search function ... for free.
> 
> 
> 
> You really should substantiate any claims about returns before blindly decreeing it with some cold hard evidence ...
> 
> On Roger Montgomery's blog they have an MQR A1 portfolio, What returns has it achieved this year ?
> 
> Roger Montgomery talks in his book so much about the importance of an investor understanding the process of value investing, selling a black box valuation program is sort of an anti-thesis to what a fair bit of his book was about imo.
> 
> I might ask, how does it differ from Clime's valuation program ? (roger's previous valuation program) Does anybody know ?




There are a range of free products that can be used to search for shares. It all depends on how much work you want to put in, the accuracy of the data and your ability to analyse the data. I know my limitations.

There is no hard evidence. RM has just released Skaffold. I am not going to buy it. Maybe somebody who does buy it can do some back tests. Sure it will not make 30% ROI every year but i bet if you use Skaffold to create a 'magic formula' portfolio you will get at 12% ROI per annum over the 5 years. It is only an idea. DYOR.

Cheers

Oddson


----------



## robusta

Vargulf said:


> Hey all,
> I finished reading Value.able for the 2nd time a week or two ago. I'm geared up with all the valuation tools to start a 'buffet valuation' of my watchlist to hopefully take advantage of this new share market slump. My problem is I use Commsec and its valuation is useless. I can't find forecast ROE and many other current ratios aren't available.




I am a big fan of Value.able as well but I do have issues with the future valuation sections. From my understanding Buffet does not use analyst forecasts at all, he simply comes up with a current IV and then sits back and thinks about the future prospects of the business.
Part of the selling point of Skaffold is the 'professional' analyst forecast used for every asx listed company, is it Morningstar?



Vargulf said:


> I suspect many of the figures aren't right either. Can anyone recommend a free analysis tool that will give me accurate numbers for valuation?




Annual reports. 




Vargulf said:


> 2nded on Skaffold though. It's to much for the current amount I have invested in stocks. Plus I look forward to doing my own sums. If it was 4 or 5 hundred I would consider it.




Probably good for creating a watchlist IMO, but still a lot of research before I would invest.


----------



## Vargulf

Yeh ok after a whole day on it I can use Commsecs data to find present IV. But future IV is not nearly as easy to find as suggested in Rogies book. (After a day searching I feel like bitch slapping him, if he hadn't been so helpful already;-)

So can someone please suggest a analyst you can subscribe to that will cover the forecast Equity Per Share, Next years ROE and perhaps the forecaste EPS and DPS (I'm not sure about Commsecs)? As long as it doesn't cost to much because currently I have around 20 stocks on watch and I want to narrow them down.

Beginning equity I gather I can get from the companies Annual Statements once I have narrowed down the list abit.

By the way Robusta,
I've been reading other Buffet books and the man plays his cards close to his chest. Realistically I don't think many know if he has a future val formula. There's no question present IV is more important. The future IV can just help get you into the right ball park once  you have chosen a strong competitive adv company with stable and high cashflow and ROE. Nowhere does R.M suggest Buffet uses the same forecast of IV he is selling. Nor do I think he would, Buffets a genius he wouldn't trust analysts unless they were his, he prob does it himself. I'm no Buffet tho lol. I'm happy to outsource.


----------



## GG999

Vargulf said:


> In response to GG99,
> I think your missing the point. For sure non value investors use P/B and P/E, let them and let them lose money. But both are price related which doesn't equate to what value investors look at for value. We shouldn't give a hoot what a low ROE businesses price related equations tell because we wouldn't be looking at those businesses. For high ROE businesses, sure I 'glance at P/B where Roger doesn't but it true what he says that it is a fairly obsolete ratio. If they had to sell their assets they would be in liquidation and the asset values in their books wouldn't be anywhere close to the sell off prices. And a high ROE business is going to be returning rates far in advance of the book values. The P/B doesn't tell value investors anything they want to know as I see it.




Thanks Vargulf
To ask in a different way - since you've read the book and understood the case that was made that a company with a high ROE should retain earnings whereas a company with low ROE should pay it all out as dividends - 

could this be shown if both companies had P/B =1   ?


----------



## Tysonboss1

Even with a price to book of 1,

It basically comes back to how much the company can earn on retained profits. 

Eg, if a company can only earn 5% on the money it retains then it is not worth them retaining it they should return those profits to the owners, 

However if the company has options to invest $$$ and earn 20%, then the company should retain earnings and invest them rather than pay dividends


----------



## craft

Vargulf said:


> In response to GG99,
> I think your missing the point. For sure non value investors use P/B and P/E, let them and let them lose money. But both are price related which doesn't equate to what value investors look at for value. We shouldn't give a hoot what a low ROE businesses price related equations tell because we wouldn't be looking at those businesses. For high ROE businesses, sure I 'glance at P/B where Roger doesn't but it true what he says that it is a fairly obsolete ratio. If they had to sell their assets they would be in liquidation and the asset values in their books wouldn't be anywhere close to the sell off prices. And a high ROE business is going to be returning rates far in advance of the book values. The P/B doesn't tell value investors anything they want to know as I see it.




A Business can have a high ROE because: 
1.	The business has had good luck;
2.	The business has been more operationally efficient than its competitors;
3.	 The business has a temporary competitive advantage; 
4.	The business’s earnings are high because the industry or the economy is at a cyclical peak; 
5.	The business is in a new industry and competitors have only started to enter the industry.
6.	The business has a sustainable competitive advantage

The problem is that most of these reasons are likely to be unsustainable. This is because:
1.	The business’s good luck can easily run out;
2.	Competitors can become more operationally efficient, or the business becomes less efficient;
3.	The business’s temporary competitive advantage disappears;
4.	The business’s earnings falls because the industry, or economic, cycle turns; or,
5.	Competitors enter the new industry.

Only a business with a sustainable competitive advantage can sustain a high ROE long term.

To value all occurrences of high ROE the same is illogical because the high ROE’s will persevere for different time periods depending on what underlies the current high rate.


Changes to ROE is more important to a valuation then just about any other variable. Mistaking a high ROE as sustainable when it is not can  put your valuation out by many multiples.  This is the risk of buying high multiple P/B stocks. 

If you are going to pay any more than the replacement cost of a business assets you had better be pretty sure it has a sustainable competitive advantage.

Once an understanding of the business competitive advantage is made The Price/Book ratio is probably the most useful of the superficial ratios IMO, though it is often distorted by Goodwill so Price/NTA is better.




GG999 said:


> Thanks Vargulf
> To ask in a different way - since you've read the book and understood the case that was made that a company with a high ROE should retain earnings whereas a company with low ROE should pay it all out as dividends -
> 
> could this be shown if both companies had P/B =1   ?




GG999

As you obviously understand - there can be no difference. Some however will continue to tell you black is white.  

Your observation is the logic behind Buffet stating that that each dollar of retained earnings must be translated into at least one dollar of market value. This only happens where the P/B is 1 or greater. Only when a business invests new funds at a rate higher than the discount rate applied by the market will a P/B premium be awarded for those new investments. 

To make the assumption that the market  will automatically apply the historical P/B ratio to future incremental capital deployments is very dangerous. All new investments have to be considered on their own merits.


----------



## Vargulf

Umm... I believe it could. But only because P/B is affected by price. It would be highly unlikely. Without you reading the book I can understand what your saying about the P/B  it CAN recognize a high return business in general. It's just that value investors wouldn't use it because it's unreliable. If the stock market had plummeted - all stocks across the board and a new P/B was calculated the diminished price would churn out a P/B that didn't reflect the true value of the company. Even though it may still be earning the same rate of return. Also P/B really just shows business with high earning power/cashflow. But the key is it shows what the MARKET thinks the company rate of return power is. The market is pretty much always wrong in the short term. They over value, or undervalue and the P?B swings with their whims.
The basic idea is that if a company is earning 6% ROE on your money they should pay you a full dividend. You've already bought the shares unfortunately so the least considerate management can do is pay you a fully franked dividend. You get the franking credits and you get to put the money in Ubank earning the same bloody return. The business does not get to retain earnings at that ROE unless they truly don't care about shareholders or need the money just to survive...


----------



## McLovin

Vargulf said:
			
		

> It's just that value investors wouldn't use it because it's unreliable.




Value investors don't use P/B?


----------



## waimate01

Vargulf said:


> So can someone please suggest a analyst you can subscribe to that will cover the forecast Equity Per Share, Next years ROE and perhaps the forecaste EPS and DPS (I'm not sure about Commsecs)? As long as it doesn't cost to much because currently I have around 20 stocks on watch and I want to narrow them down.




Morningstar. Free account (registration required, but no money). It's the same data you'll see popping up on all sorts of different services. The only thing to be aware of is that you should choose a couple of 'straightforward' stocks and drill down into the details so you full understand how each number is derived. Eg, is DPS the total divs paid so far this financial year, or total divs paid last year, or total divs paid over the last 12 months; does it include or exclude specials, etc, etc. Just important to understand what their labels mean.


----------



## Vargulf

McLovin said:


> Value investors don't use P/B?




None that I have talked to. Price is a dirty word for value investors lol. As is anything with price in it. It can't be trusted: for good reason from my observations.

Craft has explained beautifully. Better than I could.


----------



## craft

Vargulf said:


> None that I have talked to.




Well you have talked to one now!




Vargulf said:


> Craft has explained beautifully. Better than I could.




I can’t have explained it too well because you haven’t got the point I was trying to make.

Market P/B multiple in conjunctions with future investment opportunities tell you an awful lot. (but you have to look past Indefinite Life Intangibles on the books) 

Historical ROE and payout ratios tell you squat.


----------



## McLovin

Vargulf said:


> None that I have talked to. Price is a dirty word for value investors lol. As is anything with price in it. It can't be trusted: for good reason from my observations.




That is completely incorrect. Even Ben Graham was doing net net investing based on book values.

Just because RM doesn't use price doesn't mean price isn't used by value investors.


----------



## Vargulf

waimate01 said:


> The only thing to be aware of is that you should choose a couple of 'straightforward' stocks and drill down into the details so you full understand how each number is derived. Eg, is DPS the total divs paid so far this financial year, or total divs paid last year, or total divs paid over the last 12 months; does it include or exclude specials, etc, etc. Just important to understand what their labels mean.




Good idea I'm fighting my way through the figure of ARB atm whats another good learner stock Woolies?
Cheers. I'm currently using Commsec and the data comes from morningstar. Do Commsec analysts interpret it (many of the figures aren't calculated as a value investor would) or is it exactly the same as the original data? Anyways I'll have a look at the MS and see if it's a better help... 
Would the premium membership give me accurate forecast NPAT and forecast Equity Per Share? 

I came across the following figures:

Forecast NPAT= EPS (forecast) x # of shares (forecast)
&
Forecast Year Equity Per Share = Previous Year Equity per share + Forecast Earnings per share – Forecast dividends per share + new share capital(per share) – buybacks(per share)

Could the Morningstar figures accurately provide me with the data to calculate the above sums? If it could I can finally start forward intrinsic values.


----------



## Vargulf

McLovin said:


> That is completely incorrect. Even Ben Graham was doing net net investing based on book values.
> 
> Just because RM doesn't use price doesn't mean price isn't used by value investors.




Soz I should have specified Buffet style value investors...
I guess it depends who you talk to. Graham was of a different mentality. I don't consider him a value investor in the same way Buffet and now R.M are. Graham liked to buy shares cheap and knew their intrinsic value but he didn't go the extra step of analysing business to find which ones had sustainable competitive advantage. He's branded a 'value investor' but there are different camps in the value investor group. Graham bought anything and everything that was below it's intrinsic value by his margin of safety but he needed to sell when the shares rose and reached their intrinsic. A true value investor shouldn't need to sell because they expect IV to keep rising. That's why Buffet stopped investing Grahams way, it involved owning too many stocks, and having to sell once IV was reached - picking up hefty taxes. He started listening to Charlie M and those two are the first two 'real' value investors in my opinion. Their approach is just common sense in a mad house market.


----------



## McLovin

> =Vargulf;670364Graham was of a different mentality. I don't consider him a value investor in the same way Buffet and now R.M are.




Everytime RM is mentioned in the same sentence as Buffet or Graham baby Jesus cries.



Vargulf said:


> He started listening to Charlie M and those two are the first two 'real' value investors in my opinion.




I'd say your opinion is wrong, but that's just my opinion.


----------



## craft

*Re: Students of Roger Montgomery's Crap intrinsic valuation method*



Vargulf said:


> Soz I should have specified Buffet style value investors...
> I guess it depends who you talk to. Graham was of a different mentality. I don't consider him a value investor in the same way Buffet and now R.M are. Graham liked to buy shares cheap and knew their intrinsic value but he didn't go the extra step of analysing business to find which ones had sustainable competitive advantage. He's branded a 'value investor' but there are different camps in the value investor group. Graham bought anything and everything that was below it's intrinsic value by his margin of safety but he needed to sell when the shares rose and reached their intrinsic. A true value investor shouldn't need to sell because they expect IV to keep rising. That's why Buffet stopped investing Grahams way, it involved owning too many stocks, and having to sell once IV was reached - picking up hefty taxes. He started listening to Charlie M and those two are the first two 'real' value investors in my opinion. Their approach is just common sense in a mad house market.




Are you trying to be funny or are you just that wet behind the ears? 

From the last BH annual Report



> To eliminate subjectivity, we therefore use an understated proxy for intrinsic-value – book value – when measuring our performance. To be sure, some of our businesses are worth far more than their carrying value on our books. (Later in this report, we’ll present a case study.) But since that premium seldom swings wildly from year to year, book value can serve as a reasonable device for tracking how we are doing.


----------



## McLovin

*Re: Students of Roger Montgomery's Crap intrinsic valuation method*



craft said:


> Are you trying to be funny or are you just that wet behind the ears?




I'll go out on a limb and say Value.Able was the first book on value investing Vargulf has read.


----------



## waimate01

Vargulf said:


> None that I have talked to. Price is a dirty word for value investors lol. As is anything with price in it. It can't be trusted: for good reason from my observations.




Value Investor: "_I calculate this stock has an intrinsic value of $23.05 - I'm going to buy it!_"
Online Broker: "_But you can only buy it today at a price of $35.00_"
Value Investor: "_Oh, okay. Then I won't_".

Buy this. Don't but that. It always involves price. You can *only* transact at 'price', so in deciding whether or not to transact, you are using price. Everyone figures price into their decision.


----------



## Tysonboss1

Macros said:


> It is a matter of perspective. Whilst I think BHP is a good business, majority of profits come from iron ore. Therefore when investing in BHP you are going (approximately) *50% iron ore and 50% diversified minerals.* I'm bearish on iron ore and wouldn't personally invest in the 50% iron ore business therefore don't invest in BHP. If I could invest in the 50% diversified minerals business of BHP, I'd be a lot more interested.




Mmmmm,....

So where does their energy business fit into that.

Remember, they are a diversified business, It would take a really big hit to the IRon ore price to materially impact their profitabilty, Most flucutations in Iron will be offset by move ments in other commodities and growth projects coming on line.


----------



## Tysonboss1

Vargulf said:


> I don't consider him a value investor in the same way Buffet and now R.M are.
> 
> Graham liked to buy shares cheap and knew their intrinsic value but he didn't go the extra step of analysing business to find which ones had sustainable competitive advantage.
> 
> He's branded a 'value investor' but there are different camps in the value investor group. Graham bought anything and everything that was below it's intrinsic value by his margin of safety but he needed to sell when the shares rose and reached their intrinsic. A true value investor shouldn't need to sell because they expect IV to keep rising. That's why Buffet stopped investing Grahams way, it involved owning too many stocks, and having to sell once IV was reached - picking up hefty taxes. He started listening to Charlie M and those two are the first two 'real' value investors in my opinion. Their approach is just common sense in a mad house market.




So how much of Grahams work have you studied?


----------



## Tysonboss1

waimate01 said:


> Value Investor: "_I calculate this stock has an intrinsic value of $23.05 - I'm going to buy it!_"
> Online Broker: "_But you can only buy it today at a price of $35.00_"
> Value Investor: "_Oh, okay. Then I won't_".
> 
> Buy this. Don't but that. It always involves price. You can *only* transact at 'price', so in deciding whether or not to transact, you are using price. Everyone figures price into their decision.




What he is trying to say in a round about way is that when valuing a stock, you don't want to use a formula that includes it's price as an imput.


----------



## waimate01

Tysonboss1 said:


> What he is trying to say in a round about way is that when valuing a stock, you don't want to use a formula that includes it's price as an imput.




Yep, I get that. And what I'm trying to say is that whether you put price at the front of the formula, or whether you put it at the end of the formula, it's still in the formula. 

The production of a 'pure' value that doesn't involve price is lovely, but the _very next thing_ you're gonna do with it is compare it to price.

The 'pure' (priceless) value is of no use whatsoever, because you can't but it for that.

Yes, you can produce a 'value' without price, but the value is an* intermediate step* toward the final result, which is buy/sell/hold. And that involves price. 

And not even the all-valuing RM can make a buy/sell/hold decision without price as an input.


----------



## Tysonboss1

waimate01 said:


> Yep, I get that. And what I'm trying to say is that whether you put price at the front of the formula, or whether you put it at the end of the formula, it's still in the formula.
> 
> The production of a 'pure' value that doesn't involve price is lovely, but the _very next thing_ you're gonna do with it is compare it to price.
> 
> The 'pure' (priceless) value is of no use whatsoever, because you can't but it for that.
> 
> Yes, you can produce a 'value' without price, but the value is an* intermediate step* toward the final result, which is buy/sell/hold. And that involves price.
> 
> And not even the all-valuing RM can make a buy/sell/hold decision without price as an input.




Your Valuation technique should provide you with an estimate of the companies value, You then use this estimate of value to give you a guide to the maximum price you are willing to pay,

No one is saying that you never offer a price your willing to pay, or consider the price some one is willing to sell, What they are saying is that when determining Value or you maximum price, you don't use price as an imput.

Eg. A real estate valuation technique is comparible sales, It simple looks at what other properties have sold for and used their sale price as an imput for another properties value, I believe this is a flawed way to value an asset, And I think American and british people who got valuations done in 2007 might now aggree with me.

Even Buffett say he prefers to value companies before being told the offer price


----------



## McLovin

Tysonboss1 said:


> Your Valuation technique should provide you with an estimate of the companies value, You then use this estimate of value to give you a guide to the maximum price you are willing to pay,
> 
> No one is saying that you never offer a price your willing to pay, or consider the price some one is willing to sell, What they are saying is that when determining Value or you maximum price, you don't use price as an imput.
> 
> Eg. A real estate valuation technique is comparible sales, It simple looks at what other properties have sold for and used their sale price as an imput for another properties value, I believe this is a flawed way to value an asset, And I think American and british people who got valuations done in 2007 might now aggree with me.
> 
> Even Buffett say he prefers to value companies before being told the offer price




I agree with this. I use an absolute P/E model (along with DCF) to value companies. The key word is absolute, in that it pays no attention to relative market p/e's.


----------



## odds-on

McLovin said:


> I agree with this. I use an absolute P/E model (along with DCF) to value companies. The key word is absolute, in that it pays no attention to relative market p/e's.




McLovin,

Have you ever used the valuation tools on www.moneychimp.com? They have a tool which converts a 2 stage DCF into an benjamin graham style intrinsic value formula. Using the credit suisse global investment returns yearbook 2011 as a reference the nominal return from equities on the ASX is 12.4%, this is sufficent as a discount rate and assuming that a company will continue to grow after the first 5 years at a rate of 2% you end up with a simple conservative IV formula of P/E ratio = 8.5 + 0.5 x G where G is the growth rate. I like the simplicity of the formula and believe it is sufficent to see if there is any of margin of safety particularly with established companies.

Cheers

Oddson.


----------



## Vargulf

craft said:


> Market P/B multiple in conjunctions with future investment opportunities tell you an awful lot. (but you have to look past Indefinite Life Intangibles on the books)
> 
> Historical ROE and payout ratios tell you squat.




...Wtf. Guess we are going to have to agree to disagree. Historical ROE is useless and P/B is a golden figure. Do you make any money?


----------



## Vargulf

McLovin said:


> Everytime RM is mentioned in the same sentence as Buffet or Graham baby Jesus cries.
> 
> I'd say your opinion is wrong, but that's just my opinion.




Fair enough I came on too hard with B Graham. Sure hes the father of value investing and had a tried true method so kudos etc. etc. I've read security analysis, albeit a few years ago and there are a number of theories of Grahams I don't agree with. Buffet also didn't there are quotes on this. I think Grahams methods are outdated. They just don't ring as true for me as Buffets methods. He focuses entirely on the financials including market price to the exclusion of the fundamentals of the business. 



McLovin said:


> I'll go out on a limb and say Value.Able was the first book on value investing Vargulf has read.




Nice smart ass. Apart from S anal, Intelli Investor, Buffetology, and Buffet. I'll read over the first two again after the criticism (especially the constructive crit from Tysonboss1) but can I politely remind you to read the name of this forum thread... Maybe you and craft are in the wrong place. Why not start up a thread on Graham and talk about the effectiveness of price till your heart is content! Start casting your nets nets boys the end financial figures will tell the victor.



craft said:


> Are you trying to be funny or are you just that wet behind the ears?
> 
> From the last BH annual Report
> 
> "To eliminate subjectivity, we therefore use an understated proxy for intrinsic-value – book value – when measuring our performance. To be sure, some of our businesses are worth far more than their carrying value on our books. (Later in this report, we’ll present a case study.) But since that premium seldom swings wildly from year to year, book value can serve as a reasonable device for tracking how we are doing."




Lol keyword book value not P/B value... wtf. When did this become about me hating P/B anyway? I already said in an earlier post I look at P/B I just don't rely on it. And I am fairly knew at in depth value investing and came here to learn how different people use the valuation method outlined in the book of which the title of this thread is about. If you want to yip about which group are value investors go ahead but do it on another thread. I believe Buffets techniques will be more effective in the long run than Grahams. My opinion... sure but it won't be changed.


----------



## RandR

Vargulf said:


> ...Wtf. Guess we are going to have to agree to disagree. Historical ROE is useless and P/B is a golden figure. Do you make any money?




Id be very careful of disregarding the point Craft is trying to make out of hand because it disagrees with 'your' philosophy. Re-read the posts he has made and spend a bit of time dwelling on it to see if your "WTF" thought changes.

Just IMO Vargulf, but Craft is one of the rare and few posters on this forum I would pay attention to  In fact I make a point of keeping track of the following forumites - ROE, Craft, Tech/A, WayneL. I have learnt A LOT from there postings. 

Relax, and take thought in the fact that it is greatly beneficial for you to hear the opinions of people that differ in there investment approach to you ... because you might just learn something new.


----------



## Vargulf

Thanks RandR I got a little worked up I guess. I must have missed Crafts point. I'll re-read more carefully tomorrow. I haven't learnt enough yet to sure of a position I guess. I'll tone it down lol.


----------



## McLovin

Vargulf said:


> Nice smart ass. Apart from S anal, Intelli Investor, Buffetology, and Buffet. I'll read over the first two again after the criticism (especially the constructive crit from Tysonboss1) but can I politely remind you to read the name of this forum thread... Maybe you and craft are in the wrong place. Why not start up a thread on Graham and talk about the effectiveness of price till your heart is content! Start casting your nets nets boys the end financial figures will tell the victor.




RM is not Buffet or Graham, his performance at CAM is evidence of that. Why some people on this thread have compared him to those investors baffles me.

Is criticism of RM, his performance and his methodology, not a valid point of discussion, considering this thread is about his valuation method?

Maybe take your own advice...



			
				Vargulf said:
			
		

> I haven't learnt enough yet to sure of a position I guess. I'll tone it down lol.


----------



## McLovin

odds-on said:


> McLovin,
> 
> Have you ever used the valuation tools on www.moneychimp.com? They have a tool which converts a 2 stage DCF into an benjamin graham style intrinsic value formula. Using the credit suisse global investment returns yearbook 2011 as a reference the nominal return from equities on the ASX is 12.4%, this is sufficent as a discount rate and assuming that a company will continue to grow after the first 5 years at a rate of 2% you end up with a simple conservative IV formula of P/E ratio = 8.5 + 0.5 x G where G is the growth rate. I like the simplicity of the formula and believe it is sufficent to see if there is any of margin of safety particularly with established companies.





Cheers odds-on.

I haven't used moneychimp, or Graham's formula. I use a variation of the model in Active Value Investing by Katsenelson.


----------



## craft

McLovin said:


> Cheers odds-on.
> 
> I haven't used moneychimp, or Graham's formula. I use a variation of the model in Active Value Investing by Katsenelson.




I haven’t read that one - do you rate it? I had a quick look at his web site and he looks interesting the range bound market strikes an accord. What is the Model he puts forward - anything new?

Cheers


----------



## McLovin

craft said:


> I haven’t read that one - do you rate it? I had a quick look at his web site and he looks interesting the range bound market strikes an accord. What is the Model he puts forward - anything new?
> 
> Cheers




It's definately worth a read. He assigns a base P/E of 8 for a company with zero growth and zero dividend (obviously, the premise of any investing is that the two are mutually exclusive) and then increases the p/e an investor should be willing to pay based on forecast growth and dividend. I have modified the model because his model allows for an increase of 1 in basic p/e for every 1% in dividend yield, clearly an American bias where yields are significantly lower. He then adjusts this p/e based on company specifics (business risk, financial risk and earning predictability). This part can be a bit fuzzy but I find that if nothing else it forces you to think about those three factors. He has a method for estimating required margin of safety but I don't use that.

To be honest, I think he sold himself short by targeting his bookk at "active value investors", although I think we are in a range bound market for the next 3-5 years the model put forward is useful in all market types. His section on risk is borrowed heavily from Nassim Taleb and deals mainly with randomness.

I'm really a pen and paper guy (as I think I've mentioned before) so to me going through the motions of understanding the business is more important than the model (garbage in, garbage out etc). I'm not saying the model isn't important, but I do notice a lot of people spending hours and hours coming up with fancy spreadsheets that spit out a number at the end and spend very little time on the nuts and bolts.


----------



## odds-on

McLovin said:


> It's definately worth a read. He assigns a base P/E of 8 for a company with zero growth and zero dividend (obviously, the premise of any investing is that the two are mutually exclusive) and then increases the p/e an investor should be willing to pay based on forecast growth and dividend. I have modified the model because his model allows for an increase of 1 in basic p/e for every 1% in dividend yield, clearly an American bias where yields are significantly lower. He then adjusts this p/e based on company specifics (business risk, financial risk and earning predictability). This part can be a bit fuzzy but I find that if nothing else it forces you to think about those three factors. He has a method for estimating required margin of safety but I don't use that.
> 
> To be honest, I think he sold himself short by targeting his bookk at "active value investors", although I think we are in a range bound market for the next 3-5 years the model put forward is useful in all market types. His section on risk is borrowed heavily from Nassim Taleb and deals mainly with randomness.
> 
> I'm really a pen and paper guy (as I think I've mentioned before) so to me going through the motions of understanding the business is more important than the model (garbage in, garbage out etc). I'm not saying the model isn't important, but I do notice a lot of people spending hours and hours coming up with fancy spreadsheets that spit out a number at the end and spend very little time on the nuts and bolts.




McLovin,

Have you read either of the following books:

1. You can be a stockmarket genius by Joel Greenblatt
2. The dhandho investor by Mohnish Pabrai

Great reads and both authors reckon if you need to open excel there is no margin of safety. The discount should be obvious. I always remind myself of this every time i try to get to precise in a valuation. Stick to the pen and paper.

Cheers

Oddson


----------



## craft

McLovin said:


> It's definately worth a read.




Thanks - I'll add it to the list.



McLovin said:


> going through the motions of understanding the business is more important than the model (garbage in, garbage out etc).




Amen to that!

Cheers


----------



## McLovin

odds-on said:


> McLovin,
> 
> Have you read either of the following books:
> 
> 1. You can be a stockmarket genius by Joel Greenblatt
> 2. The dhandho investor by Mohnish Pabrai
> 
> Great reads and both authors reckon if you need to open excel there is no margin of safety. The discount should be obvious. I always remind myself of this every time i try to get to precise in a valuation. Stick to the pen and paper.
> 
> Cheers
> 
> Oddson




I haven't read either of those, but I have a month in Europe and North America coming up, with a lot of flying involved so I'll check them out and maybe add them to my list.

I do use Excel, mainly for doing DCF's and I have a ready reckoner that spits out a P/E based on inputs (of course I could do that with a calculator and pen). What I avoid is creating hugely complex models with 100s of variables that produce very pretty graphs and lots of numbers but are not much use beyond that. my theory is, f you need to be that accurate, then your margin of safety isn't big enough.


----------



## Tysonboss1

Yeah agree on the pen and paper approach, 

I also think RM technique can easily give over valuations,

Buffet actually said in an interveiw that he doesn't have a calculator in his office,


----------



## craft

*Re: Students of Roger Montgomery's crap intrinsic valuation method*

The original name of this tread always irks me – So I take the liberty of changing it to something more appropriate. RM just attempts to link himself to Buffet as a marketing ploy so he can sell his crap at exorbitant prices. What is he charging for Skaffold? What does mis-information cost?

Everything written by Buffett in the Berkshire Hathaway Annual reports indicates that he simply uses the Present Value of Future Cash Flows to estimate Intrinsic Value.

Here are some more quotes that indicate the same thing.



> How do you think about value?
> The formula for value was handed down from 600 BC by a guy named Aesop. A bird in the hand is worth two in the bush. Investing is about laying out a bird now to get two or more out of the bush. The keys are to only look at the bushes you like and identify how long it will take to get them out. When interest rates are 20%, you need to get it out right now. When rates are 1%, you have 10 years. Think about what the asset will produce. Look at the asset, not the beta. I don’t really care about volatility. Stock price is not that important to me, it just gives you the opportunity to buy at a great price.



Q&A with 6 Business Schools 2009



> Intrinsic value is terribly important but very fuzzy. We try to work with businesses where we have fairly high probability of knowing what the future will hold. If you own a gas pipeline, not much is going to go wrong. Maybe a competitor enters forcing you to cut prices, but intrinsic value hasn't gone down if you already factored this in





> If you calculate intrinsic value properly, you factor in things like declining prices.



BRK Annual Meeting 2003



> If we could see in looking at any business what its future cash flows would be for the next 100 years, and discount that back at an appropriate interest rate, that would give us a number for intrinsic value. It would be like looking at a bond that had a bunch of coupons on it that was due in a hundred years ... Businesses have coupons too, the only problem is that they're not printed on the instrument and it's up to the investor to try to estimate what those coupons are going to be over time





> If you attempt to assess intrinsic value, it all relates to cash flow. The only reason to put cash into any kind of investment now is that you expect to take cash out--not by selling it to somebody else, that's just a game of who beats who--but by the asset itself ... If you're an investor, you're looking on what the asset is going to do, if you're a speculator, you're commonly focusing on what the price of the object is going to do, and that's not our game. We feel that if we're right about the business, we're going to make a lot of money, and if we're wrong about the business, we don't have any hopes of making money.



BRK Annual Meeting 1997



> To value something, you simply have to take its free cash flows from now until kingdom come and then discount them back to the present using an appropriate discount rate. All cash is equal. You just need to evaluate a business's economic characteristics.



BRK Annual Meeting 2002


----------



## odds-on

*Re: Students of Roger Montgomery's crap intrinsic valuation method*



craft said:


> The original name of this tread always irks me – So I take the liberty of changing it to something more appropriate. RM just attempts to link himself to Buffet as a marketing ploy so he can sell his crap at exorbitant prices. What is he charging for Skaffold? What does mis-information cost?
> 
> Everything written by Buffett in the Berkshire Hathaway Annual reports indicates that he simply uses the Present Value of Future Cash Flows to estimate Intrinsic Value.
> 
> Here are some more quotes that indicate the same thing.
> 
> 
> Q&A with 6 Business Schools 2009
> 
> 
> BRK Annual Meeting 2003
> 
> 
> 
> BRK Annual Meeting 1997
> 
> 
> BRK Annual Meeting 2002




RM is similar to WB, as they are both businessman, it is just that RM is in the business of selling books and investment software. Fair play to RM, let the man make his money. He is not the first and I very much doubt he will be the last to pretend to ‘know’ the methods of WB. What irritates me about the book is the whole extraordinary business guff, WB/CM have spent decades analysing companies and in that time will no doubt have honed their skills at identifying extraordinary businesses. Reading one book does not make you able to identify a extraordinary business, ten years of studying annual reports or owning a couple of business or two, then fair enough maybe as an amateur investor you will have some skill. The other thing that really irritates me about buying extraordinary business concept is how often do you think they come along when they are at a large discount to IV to account for errors made in the valuation by an amateur investor? In Poor Charlie’s Almanack, CM states that the Washington Post purchase was a 1 in 50 year bet, seriously, a 1 in 50 year bet, yet every Buffett type book makes out as if they come along every couple of years. Absolute waste of time for the amateur investor, better off getting an index tracker.

All I know that I would never ever be willing to play a game of poker with WB at the table. I would be more than happy to play if RM was sitting at the table.

Cheers

Oddson


----------



## McLovin

Does anyone know what Monty is charging for Skaffold and if it's up and running yet? He seems to have delayed its launch.

I hadn't been on his blog in a while, but I've noticed a lot of the posters with something intelligent to say have disappeared. A quick look at the number of comments seems to indicate there's not the foot traffic going through that there used to be.


----------



## RandR

McLovin said:


> Does anyone know what Monty is charging for Skaffold and if it's up and running yet? He seems to have delayed its launch.
> 
> I hadn't been on his blog in a while, but I've noticed a lot of the posters with something intelligent to say have disappeared. A quick look at the number of comments seems to indicate there's not the foot traffic going through that there used to be.




I think Skaffold was about $1300 for a year.

He hasnt been blogging much of interest lately, (honestly who wants to read about collins food) so the traffic has died.


----------



## Tightwad

I have a quick look at rogers site regularly, but I'm finding he doesn't post enough for my liking.  When he does its something about skaffold or some obvious or irrelevant info to me.

I'm suspecting the skaffold thing may be held back until the market gets a bit of traction, buying companies at the moment and watching them flail around would put too many people off.


----------



## drlog

Tightwad said:


> I have a quick look at rogers site regularly, but I'm finding he doesn't post enough for my liking.  When he does its something about skaffold or some obvious or irrelevant info to me.
> 
> I'm suspecting the skaffold thing may be held back until the market gets a bit of traction, buying companies at the moment and watching them flail around would put too many people off.




Ah-hem. I'll rephrase that for you: I'm suspecting the skaffold thing may be held back until MCE gets a bit of traction, buying MCE a year ago and watching it flail around would put too many people off. 

Another thing...I had reverse engineered the valuation tables in his book and tried to post them on his blog about a month after the book was released. He edited the post by removing the formula but sent me an email saying to give him a call. I called and he said he was working on a new project and wanted me to work on it as well (I was all excited). I said I would be happy to work with him. There was a break down in communication (kind of my fault - I'm not allowed to have my mobile at work) so I was never given the opportunity to work on what I now know is Skaffold.

Oh well...


----------



## Macros

Tysonboss1 said:


> Mmmmm,....
> 
> So where does their energy business fit into that.
> 
> Remember, they are a diversified business, It would take a really big hit to the IRon ore price to materially impact their profitabilty, Most flucutations in Iron will be offset by move ments in other commodities and growth projects coming on line.




Well with regards to the energy business, as well as growth projects coming on line, my view is that BHP growth will slow. There aren't a lot of big energy assets that have been coming on-steam throughout the world. The acquisition of Petrohawk seems to be one of acquisition for the sake of growth. The profitability of Petrohawk is much lower than BHP and will probably require much higher energy prices to recoup the premium price paid.

Overall there are too many unknowns for me.


----------



## Tysonboss1

Macros said:


> The profitability of Petrohawk is much lower than BHP and will probably require much higher energy prices to recoup the premium price paid.
> 
> Overall there are too many unknowns for me.




The resources the petro hawk has in the ground are enormous, and prices for gas in the states will rise, Petro Hawk was a large capital allocation and they will be able to earn about 25% ROC.


----------



## Macros

Tysonboss1 said:


> The resources the petro hawk has in the ground are enormous, and prices for gas in the states will rise, Petro Hawk was a large capital allocation and they will be able to earn about 25% ROC.




I personally don't see them getting 25%, but that is just me. Its not necessarily the asset base that is the issue, it is the flow rates that are likely a problem.


----------



## Tysonboss1

Macros said:


> I personally don't see them getting 25%, but that is just me. Its not necessarily the asset base that is the issue, it is the flow rates that are likely a problem.




There is a good presentation released by BHP on the 14th,

Part 3 of the presentation has some infomation about the shale businesses, a few key points are.

A shale well normally has first production within months of drilling, and the pay back of investment is less than a year, an individual well can produce economically for upto 50years.

The Petro Hawk drilling program is being expanded 4 fold, by BHP.


----------



## Vargulf

With the shareholder equity figure (m) how do you tell if it is a start of year figure, average or ending equity figure?


----------



## Ves

Vargulf said:


> With the shareholder equity figure (m) how do you tell if it is a start of year figure, average or ending equity figure?



There should be notes for this item in the Annual Report. As far as I am aware listed companies are also required to include a "changes in equity" statement which will show the opening balance as at 1/7/XXXX and the closing balance as at 30/06/XXXX (these dates will obviously change if the company has a different reporting period).


----------



## McLovin

Ves said:


> There should be notes for this item in the Annual Report. As far as I am aware listed companies are also required to include a "changes in equity" statement which will show the opening balance as at 1/7/XXXX and the closing balance as at 30/06/XXXX (these dates will obviously change if the company has a different reporting period).




If it's being taken from the annual report then it will be equity as at balance date. You're correct, there will be a statement of changes in equity which will show open and closing equity (and the various components of it) for the last two years.


----------



## Vargulf

Ves said:


> There should be notes for this item in the Annual Report. As far as I am aware listed companies are also required to include a "changes in equity" statement which will show the opening balance as at 1/7/XXXX and the closing balance as at 30/06/XXXX (these dates will obviously change if the company has a different reporting period).




Cheers for that. I'll have to start downloading bulk annual reports!

 This leads me to my next question I wanted to narrow down my watchlist to ten or so stocks. Is there a way to use commsec or any other broker/analyst site to view all stocks eligible to a value investor? Currently I go through M Roths Top Stocks and find about 20% that warrant further investigation. Plus the ones I have heard Roger suggest? I have enough to be going on with for analysis but if there is a method of finding all potential stocks? Or is it down to manual searching and an aching back?


----------



## Vargulf

waimate01 said:


> Morningstar. Free account (registration required, but no money). It's the same data you'll see popping up on all sorts of different services. The only thing to be aware of is that you should choose a couple of 'straightforward' stocks and drill down into the details so you full understand how each number is derived. Eg, is DPS the total divs paid so far this financial year, or total divs paid last year, or total divs paid over the last 12 months; does it include or exclude specials, etc, etc. Just important to understand what their labels mean.




Is it possible to get more than two years of historical data. Two years isn't enough for me. I'm not great with websites maybe I'm missing something but every company I go to and then go to historical only shows 2010 and 2011?


----------



## New Stratos

Vargulf said:


> This leads me to my next question I wanted to narrow down my watchlist to ten or so stocks. Is there a way to use commsec or any other broker/analyst site to view all stocks eligible to a value investor? Currently I go through M Roths Top Stocks and find about 20% that warrant further investigation. Plus the ones I have heard Roger suggest? I have enough to be going on with for analysis but if there is a method of finding all potential stocks? Or is it down to manual searching and an aching back?




If you use Commsec you can filter the shares for a variety of criteria and even build up multiple criteria.I'd give you step by step isntructions but they've updating the site right now.

Commsec gives you up to the last 10 years of data for each share their (morningstar) data covers. search on the share symbol and look under research or some such tab when it comes up.


----------



## Vargulf

New Stratos said:


> If you use Commsec you can filter the shares for a variety of criteria and even build up multiple criteria.I'd give you step by step isntructions but they've updating the site right now.
> 
> Commsec gives you up to the last 10 years of data for each share their (morningstar) data covers. search on the share symbol and look under research or some such tab when it comes up.




Righto cheers Ill wait till after the update and investigate how to use Commsec to it's fullest. How does everyone find Commses figures are there particular figures that shouldn't be used? If you plan to buy well below the intrinsic value you calculated are they accurate enough?


----------



## McLovin

Vargulf said:


> Righto cheers Ill wait till after the update and investigate how to use Commsec to it's fullest. How does everyone find Commses figures are there particular figures that shouldn't be used? If you plan to buy well below the intrinsic value you calculated are they accurate enough?




The numbers should not be relied upon except for filtering.


----------



## Ves

McLovin said:


> I do use Excel, mainly for doing DCF's and I have a ready reckoner that spits out a P/E based on inputs (of course I could do that with a calculator and pen). What I avoid is creating hugely complex models with 100s of variables that produce very pretty graphs and lots of numbers but are not much use beyond that. my theory is, f you need to be that accurate, then your margin of safety isn't big enough.



Slightly off-topic, but whilst we are talking about P/E ratios.

I often see analysis saying things like "this stock is trading in the top quartile of it's P/E range" or "this stock is trading at it's lowest P/E in history" and everything in between, of course.

Do you know if there is an easy (preferably) free way of working out historical P/E ranges for companies? 

Could be useful for a very basic screen too.


----------



## craft

Ves said:


> Slightly off-topic, but whilst we are talking about P/E ratios.
> 
> I often see analysis saying things like "this stock is trading in the top quartile of it's P/E range" or "this stock is trading at it's lowest P/E in history" and everything in between, of course.
> 
> Do you know if there is an easy (preferably) free way of working out historical P/E ranges for companies?
> 
> Could be useful for a very basic screen too.




P/E charts are available but I don't now of any for free.


----------



## McLovin

Ves said:


> Slightly off-topic, but whilst we are talking about P/E ratios.
> 
> I often see analysis saying things like "this stock is trading in the top quartile of it's P/E range" or "this stock is trading at it's lowest P/E in history" and everything in between, of course.
> 
> Do you know if there is an easy (preferably) free way of working out historical P/E ranges for companies?
> 
> Could be useful for a very basic screen too.




Commsec does have average P/E ratios for each of the last 10 years in the "Financials" section. I imagine they're as reliable as the data that goes into it. I don't know any that will give you charts for free though.


----------



## Ves

Thanks guys - I'll have a hunt around and see if I can find anything else.

I have seen the ave. annual P/E on Commsec. I also noticed that they have a similar thing for dividend yield now as well. 

They're both helpful in a sense, but the graph that craft posted is the main thing that I am after.


----------



## Intrinsic Value

RandR said:


> I think Skaffold was about $1300 for a year.
> 
> He hasnt been blogging much of interest lately, (honestly who wants to read about collins food) so the traffic has died.




Yep 1300 a year...but I dont think he will get too many takers.

He really stuffed up with MCE and no amount of backpedalling on his blog can alter that fact and many would have lost big on this stock in the short run.

I did buy his gold pick SLR and sold half the other day for a nice profit but his rating system with the A1s etc is really flawed as has been discussed here before.

There are some good posters on his blog as well who have mentioned some interesting stocks.

Unfortunately I have no time these days for research as I am working in Singapore and they work me like a dog here...no free time and no time for surfing the net at work!!


----------



## Vargulf

craft said:


> A Business can have a high ROE because:
> 1.	The business has had good luck;
> 2.	The business has been more operationally efficient than its competitors;
> 3.	 The business has a temporary competitive advantage;
> 4.	The business’s earnings are high because the industry or the economy is at a cyclical peak;
> 5.	The business is in a new industry and competitors have only started to enter the industry.
> 6.	The business has a sustainable competitive advantage
> 
> The problem is that most of these reasons are likely to be unsustainable. This is because:
> 1.	The business’s good luck can easily run out;
> 2.	Competitors can become more operationally efficient, or the business becomes less efficient;
> 3.	The business’s temporary competitive advantage disappears;
> 4.	The business’s earnings falls because the industry, or economic, cycle turns; or,
> 5.	Competitors enter the new industry.
> 
> Only a business with a sustainable competitive advantage can sustain a high ROE long term.
> To value all occurrences of high ROE the same is illogical because the high ROE’s will persevere for different time periods depending on what underlies the current high rate.




As to your first point, I'm sure there are some new 'value' investors going out with the valuation method in Value.able and applying it to any and every stock. But can't we assume that if all the books points are taken on board (i.e the first half of the book) that we will only apply it to companies who we have already deemed have a strong and continuing comp adv? One of the main points of the book were that you only begin to value companies who had a very long term stable high ROE continuing strong cashflows and little debt that can skew the results. 
 If we are looking at a low debt business returning high (over 20%) ROE consistently over the past 5-10 years are you seriously saying in this hypothetical case that the ROE results are not informative and P/B is? And that all this can be put down to good luck and the other unsustainable reasons you numbered for 1-2 years high ROE? 



craft said:


> Changes to ROE is more important to a valuation then just about any other variable. Mistaking a high ROE as sustainable when it is not can put your valuation out by many multiples.  *This is the risk of buying high multiple P/B stocks. *
> If you are going to pay any more than the replacement cost of a business assets you had better be pretty sure it has a sustainable competitive advantage.
> 
> To make the assumption that the market  will automatically apply the historical P/B ratio to future incremental capital deployments is very dangerous. All new investments have to be considered on their own merits.




Isn't this the argument that was being made earlier? That company P/B tells you little you didn't already know, IF you are looking at a sustainable high ROE business? P/B is going to be high isn't it? Unless the market has somehow become disillusioned with the stock. Or the whole market has slumped (i.e. now). Both of which scenarios just make it less reliable as a basis for investing in a stock don't they?



craft said:


> Once an understanding of the business competitive advantage is made The Price/Book ratio is probably the most useful of the superficial ratios IMO, though it is often distorted by Goodwill so Price/NTA is better.
> 
> Market P/B multiple in conjunctions with future investment opportunities tell you an awful lot. (but you have to look past Indefinite Life Intangibles on the books)
> 
> Historical ROE and payout ratios tell you squat.




Ok so are you saying once you have done your groundwork, (which I just assume everyone does who is a value investor), a low P/B (or Price/NTA) can represent a discounted stock and that is why it can be useful? 
What struck a cord with me from Buffet books and then Value.able is a scenario such as Vegemite and Marmite having the same book value if all their production equipment is worth the same. And both having a high P/B if Marmite happens to be a popular stock in the short term. This is so inaccurate when it takes in no account of the power of the Vegemite brand?  

I must be missing something with this whole P/B point can someone explain what that is? 

Cheers


----------



## Vargulf

Intrinsic Value said:


> Yep 1300 a year...but I dont think he will get too many takers.
> 
> He really stuffed up with MCE and no amount of backpedalling on his blog can alter that fact and many would have lost big on this stock in the short run.




That's one thing I never got about his MontQualR's or what ever they are. He spends half his book talking about high competitive adv being king then he goes and highly values companies that rely on contracts with other businesses for sucess. Surely this is especially risky in the current financial environment?


----------



## Ves

Vargulf said:


> I must be missing something with this whole P/B point can someone explain what that is?
> 
> Cheers



 A lower P/B (compared to the same stock when it has a high P/B) basically means you can buy more of the same stock with the same amount of capital. When buying at such a time and combining this with high-expected future returns you get more than you paid for with less risk.

This after all, is the aim of value-investing is it not?


----------



## Ves

Vargulf said:


> What struck a cord with me from Buffet books and then Value.able is a scenario such as Vegemite and Marmite having the same book value if all their production equipment is worth the same. And both having a high P/B if Marmite happens to be a popular stock in the short term. This is so inaccurate when it takes in no account of the power of the Vegemite brand?



In this scenario you would have to ask - How did Vegemite get such a strong brand name in the first place? Was it through rigorous advertising? Quality control? Something else?  Does Marmite have the same costs? How much is this brand worth? If you decide that their brand name leads to a competitive advantage (which it quite often does not - ie the differentiation myth) you need to put a value on it. Simply put, in the case of a strong brand name it might be best to go back through the financials and attempt to figure out much they spent (by looking at the P & L) on advertising or anything else that contributes to their brand name. You could annualise this over a five year period and capitalise it in the company's book value. You might find you get a completely different picture after doing this. Accounting records often hide (or dubiously create) hidden assets.


----------



## Vargulf

Ves said:


> A lower P/B (compared to the same stock when it has a high P/B) basically means you can buy more of the same stock with the same amount of capital. When buying at such a time and combining this with high-expected future returns you get more than you paid for with less risk.
> 
> This after all, is the aim of value-investing is it not?




It is... Ok this makes sense. Should I gather then that a low P/B is used (or preferred) rather than an intrinsic value formula for alot of posters on this site? When in conjunction with expected future returns?
Also craft and others have also mentioned 'expected future returns' a lot. Are you just talking forecast earnings growth after the fundamentals have been analysed not ROE? Or is this a step by step theory put forth in a investment book that is being referred to. If so which one.

I was planning to use high ROE's over a 5 year period (with little or no capital raising) as an initial screen for narrowing down stocks. Is this advised against?

Cheers


----------



## Vargulf

Ves said:


> Simply put, in the case of a strong brand name it might be best to go back through the financials and attempt to figure out much they spent (by looking at the P & L) on advertising or anything else that contributes to their brand name. You could annualise this over a five year period and capitalise it in the company's book value.
> You might find you get a completely different picture after doing this. Accounting records often hide (or dubiously create) hidden assets.




Ok but in hoping to hold long term value or growth stocks I would still far prefer investing in Vegemite. They probably do invest more in advertising. So your suggestion of adv related spending into book value is useful, cheers. But doesn't that provide a pretty negative outlook when Vegimites book value may be similar to Marmites (assuming they are the same production size) because Vegimite's BV hasn't taken into account the benefit reaped from the advertising not to mention their intangible assets like brand, loyal customer base e.t.c.  I am right in thinking intangibles aren't included in BV hey?


----------



## MichaelSy

Greetings all,

I have enjoyed reading the discussions thus far, especially those that criticise RM.

I have never invested before, but I do like the sound of RM and the strategies he tries to employ to invest.

So after 39 pages of comments and discussions:

Is it worth buying the book for someone who has never invested before?
Is Roger Montgomery just a PR man, or has he made money from his strategies?

Michael

Edit: Just read pages 28 and 29 of this forum - seems to have answered my questions 

P.S On a more personal note, I can't help but think that this is just another method of speculation.


----------



## skc

MichaelSy said:


> P.S On a more personal note, I can't help but think that this is just *another method of speculation.*




Sums it up perfectly. You've shown a level of understanding beyond many.


----------



## tech/a

skc said:


> Sums it up perfectly. You've shown a level of understanding beyond many.




And it only took 39 pages---err 40


----------



## MichaelSy

So maybe I should save my $50 and stick my money in high interest savings accounts or index funds for the next 60 years rather than trying to beat the market by calculating intrinsic values and trying to work out cashflows of companies? Especially if I want to spend less than 15-20 hours per week doing research on companies and industries?

Edit: ****, problem is I have already spent my $50 - book is somewhere in transit . I should have read this forum first.


----------



## skc

MichaelSy said:


> So maybe I should save my $50 and stick it in high interest savings accounts or index funds for the next 60 years rather than trying to beat the market by calculating intrinsic values?




The book is not useless. It provides a methodology to value companies if a set of input variables and assumptions turned out to be correct. It is a potentially useful starting point, and it will probably help you understand what drives what.

But it is not a bible, it merely offers, like you said, a method of speculation about the future... some people can use it intelligently and beat the market, while others might struggle and be better off putting that $50 in the pokies.


----------



## MichaelSy

skc said:


> The book is not useless. It is a potentially useful starting point, and it will probably help you understand what drives what.




In other words, the book is worth reading, there is something to gain and you'll be a slightly wiser man from reading it?

Good news. Makes me feel much much better already.


----------



## waimate01

MichaelSy said:


> G
> Is it worth buying the book for someone who has never invested before?




Most definitely. Also books by Colin Nicholson, Alan Hull, Daryl Guppy, and (one that you won't hear recommended much but which I think ties it all together nicely), Arun Abey.

Read them all, roll 'em all around in your gut, and then choose your own path.

A very worthwhile investment.


----------



## McCoy Pauley

I found Value.Able a good way of challenging some preconceptions of what I consider to be a worthwhile investment.  I use the valuation formula presented in the book (but substituting proper equations for the tables RM presents - which are available through a Google search or perhaps, even earlier in this thread) as a guide, but no more than that, on when to buy shares in companies I've identified as good prospects.

However, I do not rely wholly on Value.Able to set my investment philosophy.  I think it's worthwhile, if you're not familiar with how a company's set of financial statements work, to spend some time and money learning how a company puts together its financial statements and what they mean.  That investment for me was very beneficial and produced a significant return on investment.


----------



## McLovin

MichaelSy said:


> In other words, the book is worth reading, there is something to gain and you'll be a slightly wiser man from reading it?
> 
> Good news. Makes me feel much much better already.




If you toss out the bit about the valuing of a company then it's an easy intro to investing. RM gives a decent enough introduction to the basics but really it should be seen as a first small step not a user guide.


----------



## McLovin

McCoy Pauley said:


> However, I do not rely wholly on Value.Able to set my investment philosophy.  I think it's worthwhile, if you're not familiar with how a company's set of financial statements work, to spend some time and money learning how a company puts together its financial statements and what they mean.  That investment for me was very beneficial and produced a significant return on investment.




If you want a great book on financial statements try "Financial Statement Analysis: A Practitioners Guide". It frames financial analysis as being adversarial rather than inquisitive where the ultimate aim of the company is to ensure the lowest cost of capital not to ensure full and impartial disclosure. Well worth the read. I probably wouldn't suggest it for someone who doesn't have at least a basic/intermediate understanding of reading financial statements.

http://www.bookdepository.com/Financial-Statement-Analysis-Martin-Fridson/9780470635605

26% off at the moment on Book Depository.


----------



## MichaelSy

Well,

I ordered the books 2 weeks ago (10 business days). I live 10 minutes drive away from the city in Sydney (Point being it takes less than 24 hours from when you put it in the post box to when it arrives at my door).

It still has not arrived.

They have no contact number, and no email address.

So I emailed the general 'contact Roger' column asking for a refund.

Cool.

Michael


----------



## MichaelSy

MichaelSy said:


> Well,
> 
> I ordered the books 2 weeks ago (10 business days).
> It still has not arrived.
> So I emailed the general 'contact Roger' column asking for a refund.




Well. I whinged and moaned last night and guess what showed up in the mailbox this morning.

Michael


----------



## notting

JBH is another of Rogers darlings.  I think he values it at about 17.00.  Woops down to $12.80 at present.  Down about 13% from yesterdays $15.00 whilst the market is up!  
I guess he will be buying bucket loads today??


----------



## Noddy

notting said:


> JBH is another of Rogers darlings.  I think he values it at about 17.00.  Woops down to $12.80 at present.  Down about 13% from yesterdays $15.00 whilst the market is up!
> I guess he will be buying bucket loads today??





JBH announced a sales drop and profit downgrade yesterday, so would expect the price to fall.

Here's a simple rule of thumb to stock valuation which is not often far from the mark -

Book Value x Return on Equity

For JBH  June 2010   $2.71 x 40 = $10.80
            June 2011   $1.55 x 88 = $13.60


----------



## waimate01

Noddy said:


> Here's a simple rule of thumb to stock valuation which is not often far from the mark -
> Book Value x Return on Equity




Err, BV * ROE is just EPS


(ROE = EPS / BV, thus BV * ROE is BV * EPS / BV, or just EPS)

You've moved the decimal point one place, so you're saying VALUE = 10 * EPS, which indeed may not end up far from the mark in some cases, but has nothing to do with BV or ROE.


----------



## craft

*Re: Students of Roger Montgomery's Crap iintrinsic valuation method*



Noddy said:


> JBH announced a sales drop and profit downgrade yesterday, so would expect the price to fall.
> 
> Here's a simple rule of thumb to stock valuation which is not often far from the mark -
> 
> Book Value x Return on Equity
> 
> For JBH  June 2010   $2.71 x 40 = $10.80
> June 2011   $1.55 x 88 = $13.60




You realise you rule of thumb is just P/E = 10! Probably accurate as often as RM's is.


----------



## New Stratos

notting said:


> JBH is another of Rogers darlings.  I think he values it at about 17.00.  Woops down to $12.80 at present.  Down about 13% from yesterdays $15.00 whilst the market is up!
> I guess he will be buying bucket loads today??




Not just Roger values JBH higher than the market does at present:

JBH - JB HI-FI LIMITED
Citi rates JBH as Downgrade to Neutral from Buy (3) - Price Target $15.70 (was $17.50). The broker notes the company has guided for a 5% drop in 1H12 earnings, which is below market expectations. Citi blames softer than expected sales and margins due to competition and price deflation.

FY12-13 EPS forecasts are lowered by 15% and 13%, with the price target also falling. The broker also cuts its recommendation to Neutral from Buy, expecting FY12 will be a bumpy year for JB Hi-Fi and predicting range-bound trading for the stock over the next 12 months.

Target price is $15.70 Current Price is $15.00 Difference: $0.7 If JBH meets the Citi target it will return approximately 5% (excluding dividends, fees and charges).

The company's fiscal year ends in June. Citi forecasts a full year FY12 dividend of 77.00 cents and EPS of 119.60 cents . At the last closing share price the estimated dividend yield is 5.13%.

At the last closing share price the stock's estimated Price to Earnings Ratio (PER) is 12.54.

Market Sentiment: 0.4

How do these forecasts compare to market consensus projections?

Current consensus EPS estimate is 130.5, implying annual growth of 5.3%.Current consensus DPS estimate is 82.7, implying a prospective dividend yield of 5.5%.Current consensus price target is $ 16.93, suggesting upside of 12.5%(ex-dividends).Current consensus EPS estimate suggests the PER is 11.5.

All consensus data are updated until yesterday. FNArena's consensus calculations require a minimum of three sources


----------



## notting

New Stratos said:


> Not just Roger values JBH higher than the market does at present:




Birds of a feather fly down togerther?! 
To beat a falling market consensus is a good way to pick shorts!!



New Stratos said:


> Target price is $15.70 Current Price is $15.00 Difference: $0.7 If JBH meets the Citi target it will return approximately 5% (excluding dividends, fees and charges).



Hmmmm currnt price $12.80 or there abouts. 
More selling to come. May be a good short if some Citi and Roger fans do some weekend reading and see the amazingly cheap price. 
Let them in, then add to the shorts is what I'm thinking.

The thing that really spooked me a while ago when JBH was around 18 was that management were gearing up to revolutionise the way people listen to music.  My God!! They must be going to do a retrospective bid on Apple.  
Yep they've invented a time machine and are clearly waiting on the patent.


----------



## McLovin

notting said:


> The thing that really spooked me a while ago when JBH was around 18 was that management were gearing up to revolutionise the way people listen to music.  My God!! They must be going to do a retrospective bid on Apple.
> Yep they've invented a time machine and are clearly waiting on the patent.




In hindsight, probably a great indicator that growth was slowing.

I mean were they really that far removed from reality that they thought they would take on Apple?

Maybe they've been reading what GCN are upto and thought "yeah, we can do that too".


----------



## quadfin

notting"The thing that really spooked me a while ago when JBH was around 18 was that management were gearing up"

good point good you noticed good i did as well, people are asleep at the wheel, than complain when they crash


----------



## quadfin

gees roger rated JBH  as A3, flashing lights net debt 134% flashing lights , if people want a black box skaffold is not one, who in their right mind would invest in retail now?????????

Actual iv 8.53 forecast 17.86 ,,,, ha ha still laughing ha ha hahahha


----------



## GG999

Vargulf said:


> Hey all,
> 
> 
> In response to GG99,
> I think your missing the point. For sure non value investors use P/B and P/E, let them and let them lose money. But both are price related which doesn't equate to what value investors look at for value. We shouldn't give a hoot what a low ROE businesses price related equations tell because we wouldn't be looking at those businesses. For high ROE businesses, sure I 'glance at P/B where Roger doesn't but it true what he says that it is a fairly obsolete ratio. If they had to sell their assets they would be in liquidation and the asset values in their books wouldn't be anywhere close to the sell off prices. And a high ROE business is going to be returning rates far in advance of the book values. The P/B doesn't tell value investors anything they want to know as I see it.





But ROE equals P/B divided by P/E

Since P is in both the numerator and the denominator, Price is cancelled out and you're not really taking it into account. I guess it's just another way at looking at Return on Equity.


High ROE could result from a high P/B or a low P/E (or obviously a combination of the two)

Do people have ideas on this when looked at this way?
IMHO a low P/E resulting in high ROE is definitely a good thing.t

I can't decide on whether a high P/B is a good thing or not. Because a company has been getting a high profit for the amount of equity it has, people have been willing to pay more for a certain amount of that equity, pushing up the P/B ratio.

So you get less of the equity of the company when you buy a share. That can't be good (?)

On the other hand, if P/B is high and stays high then any equity reinvested in the company will push up the share price by a lot, which is a good thing. This must be behind the equation for Intrinsic Value which gives much more value to reinvested profits compared to profits paid out as dividends. But as far as I can see this only is a result of a company having a P/B more than one, and the P/B staying more than one.


----------



## GG999

Ves said:


> Thanks guys - I'll have a hunt around and see if I can find anything else.
> 
> I have seen the ave. annual P/E on Commsec. I also noticed that they have a similar thing for dividend yield now as well.
> 
> They're both helpful in a sense, but the graph that craft posted is the main thing that I am after.




Not exactly the same thing - but gives you the same story - on Commsec you can look at a bar graph of EPS and forecast EPS with share price overlay (not for the forecast EPS of course!) - I think a very useful way of looking at things.


----------



## ScottyfromAussie

quadfin said:


> gees roger rated JBH  as A3, flashing lights net debt 134% flashing lights , if people want a black box skaffold is not one, who in their right mind would invest in retail now?????????
> 
> Actual iv 8.53 forecast 17.86 ,,,, ha ha still laughing ha ha hahahha




Roger's been warning about JBH for ages, its A3 anyway so its off my radar. But for anyone who still thinks JBH is Rogers darling, sorry that was a while back, he sold out at $15.50.

I can replicate the 17.86 valuation using a 10% discount rate..but that doesn't mean I'd buy JBH at 9 or 10 bucks (They'd have to improve their cashflows, develop brighter prospects and promise to never borrow money to buyback shares again but I digress.)
You have to let the model be your servant, not your master. You take its advice but its your still your decesion and Roger gives you heaps of other things to look at.

I've had a good read of this thread and it seems to rip Roger a lot. To be frank most of the digs are a function of skim reading the book, or repeating out of date information.

I've read the book thoroughly and looked at a lot of Rogers appearances on Sky Biz. If you're looking to invest like Warren Buffet, I think you should look elsewhere. There are some pretty stark differences, not that I claim to know Buffet but the investment profile to me looks quite different.

All Roger says is, lets go out into the 2000+ stocks that make up the share market and find a few really good ones. Lets then learn their business's, evaulate their future prospects to the best of our ability, calculate their value and wait for the market to offer them up at stupid prices.

There's a fair bit you have to do yourself, learning the business isn't easy. I started learning Domino's (DMP) tonight and its going to take me weeks to plough through the business model and learn every facet of the business I can. Only then can I make some educated guess's at its future profitability.

I guess my post really isn't to defend Roger (I don't think people need defending if they can arrive home to their new pool filled with $100 bills and jump around in it). But I wouldn't mind having some actual discussion here about using the principles he's taught.

Any takers?

New topic is "Investors required return" for anyone who's interested :


----------



## Ves

ScottyfromAussie said:


> Roger's been warning about JBH for ages, its A3 anyway so its off my radar. But for anyone who still thinks JBH is Rogers darling, sorry that was a while back, he sold out at $15.50.



 That's amusing because six months prior to that he listed it as one of five stocks that he would confidently buy and hold if the market were to close for five years tomorrow. Another one of those five was MCE.


----------



## New Stratos

Reference for that?


----------



## Ves

Post #81 in the Skaffold thread has a youtube video.

A few of those companies he has mentioned he has spoken negatively of lately.  He seems to get distracted very easily by short-term problem solving  (ie. whatever changes broker estimates) and confuses this with long-term focus.


----------



## New Stratos

Thanks for the link to the video, Ves. You may be right about him being a bit 'twitchier' about results etc than he recommends to his readers; on the other hand he does say in that vid that the 'market being closed for 3 years' amount of confidence applies to his own stocks, whilst as a manager he is paid to look more often. Later he says "twice a year" for good stocks.

As for the particular choices - here's the share price returns, from 9/9/2010 to today (ie I've made no allowances for dividends):
ARB +33%
CAB +28%
ORL +15%
WOW -3%
DWS -10%
CPU -16%
PTM -23%
MCE -47%
JBH -56%
DTL -88%

Average -16.7% against -9.7% for the all ords over the same period, so not too flash, but not a killer to the buy and hold argument, let alone the buy, review periodically and hold if still good one. 

If you eliminate the worst three (as we know he did for MCE and JBH, then it's +3.4% (I am not allowing for whatever price he would have sold at).


----------



## McLovin

New Stratos said:


> DTL -88%




DTL had a stock split; 10:1.


----------



## New Stratos

Yeah, I could see that and used the adjusted price from yahoo; if it's still wrong blame them


----------



## ScottyfromAussie

Ves said:


> That's amusing because six months prior to that he listed it as one of five stocks that he would confidently buy and hold if the market were to close for five years tomorrow. Another one of those five was MCE.




The market isn't static, at the time the news was all good but it changed and he reacted.

Should he have held on because in the past it looked like a good stock?

However we do have

March 2011 http://blog.rogermontgomery.com/will-jb-hi-fi-continue-to-groove-2/

But the problems didn't really surface until JBH released its FY11 accounts. What did we find? Debt + check out how the buyback was financed, with that debt! Thats not really what is expected from a good company.

If you're keeping up to date with JBH, there's also a lot of questions around whether they can continue to grow. You can imagine with the IV calculation JBH taking a lot of its dollars from growth, a reduction in growth has huge implications for the valuation.

Upon seeing this the rational decision is to sell, whether you've made a profit or a loss.

Keeping in mind, checking the financials for 1H12, that debt is paid, the cashflow looks better, but profits have fallen compared to 1H10.

There are a lot of questions floating around...but I'm not smart enough to answer them. I'm just going to focus on stocks thats are easier. If it goes from $9 to $30 thats my loss but at least I won't get caught going from $9 to $1  . Noting though, the retail sector is currently having trouble, it won't always. These things are cyclical so one day retail will return, I dunno when though.

Cheers.

Btw guys any thoughts about investors required return (IRR) ?

I been thinking about it a lot. I have a mathematics/economics background so the immediate temptation is to use historical data to sift out some kind of risk premium.

But in consideration, thats illogical. When coming up with a risk value for the IV calc, an assessment of the risks needs to be _forward looking_. 

The problem here being we're trying to turn qualitative concepts into quantative information. Whatever result I get I know its not going to be precise, luckily it doesn't have to be. But getting it approximately right is still easier said than done.

Try flicking the IRR within the IV calc and you'll see how sensitive the IV is for even a little change, i.e. 0.10 to 0.11 can wipe a huge amount off of the IV.

You of course don't want your IRR to be too high as you may miss out on opportunities but the IRR can't be too low either for risk of getting in too soon or asking too high or a price when selling.

My solution so far is to understand the business model of the stock, I can then understand each risk and assign a rough value to each. The value has to reflect how sensitive the future profits of the business are to each individual risk.

Any thoughts?


----------



## Ves

ScottyfromAussie said:


> The market isn't static, at the time the news was all good but it changed and he reacted.



I would argue that he reacted to the market twice: once in buying and twice in selling. In both cases his valuation formula forecast growth to infinity.  Do you know how his formulae works and the assumptions it makes?



ScottyfromAussie said:


> Should he have held on because in the past it looked like a good stock?



A better question is: was his appraisal and / or assumptions used in that appraisal correct in the first place?  Many here would argue no and the market and Roger have belatedly agreed with them.

Have a look around in both the JBH and MCE threads and read some commentary from other sources before and around the time he made that video.   There were plenty of detractors saying the same things that are only now common knowledge.


----------



## Ves

ScottyfromAussie said:


> Btw guys any thoughts about investors required return (IRR) ?



There is no answer to the question of what IRR to use that will fit all circumstances.   

In most cases, I will use a range of IRR / discount rate values for each valuation I attempt.   Having a range of NPVs is often better than trying to find a perfect solution where none exists.  Always be as conservative as possible.


----------



## ScottyfromAussie

Ves said:


> I would argue that he reacted to the market twice: once in buying and twice in selling. In both cases his valuation formula forecast growth to infinity.  Do you know how his formulae works and the assumptions it makes?
> 
> 
> A better question is: was his appraisal and / or assumptions used in that appraisal correct in the first place?  Many here would argue no and the market and Roger have belatedly agreed with them.
> 
> Have a look around in both the JBH and MCE threads and read some commentary from other sources before and around the time he made that video.   There were plenty of detractors saying the same things that are only now common knowledge.




I dunno why people went to nuts for MCE, even Roger only exposed a small amount of his account to it. I dunno where he got out. If he made a loss thats okay, you don't win all the time. 

I don't like companies like that though, so much hangs on getting each contract. One fails and the share prices crashes. I felt like a lot of people got in just cos Rog was, glad they don't have access to my money!

Say with DMP, if one less pizza is sold its no biggie. Actually I'll buy that pizza so never mind.

Mind you just cos I like Rog's formula, doesn't mean I like all his stocks. I think a few of his A1's are way too risky, but maybe he knows something I don't.

I understand the model and it makes sense to me, its just a tool though. I don't obey its every word and I only use it to estimate the IV a couple of years into the future. I don't expect it to be perfect, its just a tool in my box thats useful.

One of the big things I've learnt from maths/econs is models are the servants of humans not the masters. It doesn't dictate what I do, it just helps out. I guess what I'm trying to get accross is, people are dissing the formula for failing when its being used for something it wasn't designed to, its just meant to be a tool that helps out, its not mean to dictate all trading decisions.


----------



## ScottyfromAussie

Ves said:


> There is no answer to the question of what IRR to use that will fit all circumstances.
> 
> In most cases, I will use a range of IRR / discount rate values for each valuation I attempt.   Having a range of NPVs is often better than trying to find a perfect solution where none exists.  Always be as conservative as possible.




Thats a pretty sweet idea, like if you want 10,000 shares, and

Price 1>Price 2>Price 3

Buy 5000 at Price 1
Buy 3000 at Price 2
Buy 2000 at Price 3.

Any cash that doesn't get used can be left in an 30 day account and wait for other opporunities.

I got something more to think about


----------



## craft

*Re: Students of Roger Montgomery's CRAP intrinsic valuation method*



ScottyfromAussie said:


> Btw guys any thoughts about investors required return (IRR) ?
> 
> I been thinking about it a lot. I have a mathematics/economics background so the immediate temptation is to use historical data to sift out some kind of risk premium.
> 
> But in consideration, thats illogical. When coming up with a risk value for the IV calc, an assessment of the risks needs to be _forward looking_.
> 
> The problem here being we're trying to turn qualitative concepts into quantative information. Whatever result I get I know its not going to be precise, luckily it doesn't have to be. But getting it approximately right is still easier said than done.
> 
> Try flicking the IRR within the IV calc and you'll see how sensitive the IV is for even a little change, i.e. 0.10 to 0.11 can wipe a huge amount off of the IV.
> 
> You of course don't want your IRR to be too high as you may miss out on opportunities but the IRR can't be too low either for risk of getting in too soon or asking too high or a price when selling.
> 
> My solution so far is to understand the business model of the stock, I can then understand each risk and assign a rough value to each. The value has to reflect how sensitive the future profits of the business are to each individual risk.
> 
> Any thoughts?




A required return is an arbitrary number. Only useful as a lowest bound below which you would stay liquid. Beyond that it is far better to calculate the IRR as in ‘Internal Rate of Return’ and simply consider the highest available options.  All investments are a competition for capital – take the best.


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## Ves

ScottyfromAussie said:


> Thats a pretty sweet idea, like if you want 10,000 shares, and
> 
> Price 1>Price 2>Price 3
> 
> Buy 5000 at Price 1
> Buy 3000 at Price 2
> Buy 2000 at Price 3.
> 
> Any cash that doesn't get used can be left in an 30 day account and wait for other opporunities.
> 
> I got something more to think about



 Sorry, I think you misunderstood.  I will calculate a range of valuations to see what possibilities are inherent in my assumptions.  It gives me a feel for different perspectives. It also allows me to compare the impact of the discount rate on the end result.   I wouldn't use these prices as my actual buy targets like you have suggested above.   Although, the idea of averaging into a stock, rather deploying all of your capital at once is a good idea as long as it is done with relation to the valuation that you feel most accurately reflects the reality of the stock's prospects.


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## GG999

Mike23 said:


> There are too many inconsistencies and black holes to RM for my liking.
> 
> - ditto - when RM says with strong conviction that P/E is not appropriate to value a company when in fact his "ROE/RoR x Equity per share" is of course P/E restated - do the math. That he gets away with this beats me.




There were several messages discussing this statement but I just can't work out what the final conclusion was. And when I saw that Craft joined in the discussion (and didn't disagree with the above) I got a bit concerned and looked up the equation.

If I take RoR as being 1/PE (or = earnings yield)
I don't understand how the required rate of return can always equal the Earnings Yield

And when I substitute RoR with Earnings Yield I will always get    IV = Price    which all seems a bit pointless, why bother with the equation.

Presumably it shows that I've completely misunderstood Montgomery's equation for estimating Intrinsic Value. If anyone can suggest the best way for someone like me to understand this stuff better, please say!


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## Muschu

Just curious.

Has Roger gone quiet?  Or adopting a different business approach?

I don't watch Sky Business consistently but itoccurred to me that i have not seen Roger participate for a while.  

Also there seem to be fewer ASF posts about his strategy.

Rick

- just disclosing that I am not a Montgomery client.


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## zac

Muschu said:


> Just curious.
> 
> Has Roger gone quiet?  Or adopting a different business approach?




He is still active. He has his own youtube channel and still goes on the odd show. He has staff that do some of his talking also.

I guess he has been relatively quiet but he has said that with the market rally in recent times its left no stocks that are at a discount to their IV.

His Montgomery Fund from his spruiks seems to be doing well also.


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## Muschu

zac said:


> He is still active. He has his own youtube channel and still goes on the odd show. He has staff that do some of his talking also.
> 
> I guess he has been relatively quiet but he has said that with the market rally in recent times its left no stocks that are at a discount to their IV.
> 
> His Montgomery Fund from his spruiks seems to be doing well also.




Thanks.  Most investments have done well recently.

Roger was, and probably is, very active in promoting his services and most service provider analysts, IMO, don't become quiet in bearish or bullish times.

I am not bothered.  Just noticed the ASF inactivity.


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## tinhat

I get emails from him regarding Skafold, my "free report" etc. I don't read them. He hasn't been on Switzer for a long time yet he use to be a regular. I'm only guessing that Switzer has some viewers who probably let him know that there weren't happy about what some might view as a pump-and-dump approach to MCE. In fact Switzer got the CEO of MCE onto his show back when the MCE share price was on the back of just how much Roger was pumping the stock at the time.

I saw Roger on ABC's 'The Business' last night. He and Ticky get on just fine. I doubt Ticky owns any shares directly.  She probably leaves that to her pony and Marcus Padley.


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## McLovin

tinhat said:


> I saw Roger on ABC's 'The Business' last night. He and Ticky get on just fine. I doubt Ticky owns any shares directly.  She probably leaves that to her pony and Marcus Padley.






Friday funnies!

I'm pretty sure I read something by Padley in 2011 saying everyone should sell all their shares. Good call.


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## tinhat

McLovin said:


> Friday funnies!
> 
> I'm pretty sure I read something by Padley in 2011 saying everyone should sell all their shares. Good call.




I recall last year around the bottom of the market Padley was on 'Business Insiders' (ABC) and said (to paraphrase) "Would you rather be at sea in a small boat during a storm or safely on the shore?". I think not much later in the year Alan Kohler was saying sell everything.


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## McLovin

tinhat said:


> I recall last year around the bottom of the market Padley was on 'Business Insiders' (ABC) and said (to paraphrase) "Would you rather be at sea in a small boat during a storm or safely on the shore?". I think not much later in the year Alan Kohler was saying sell everything.




I wouldn't listen to anything Kohler says. Journos are too interested in stories and hyperbole.


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## InCasinoOut

Greetings all! After reading the book i am checking to see if i have the formulas correct in excel. I've used the 2012 figures and done a quick intrinsic value calculation for WOW and TRS for 2012. Would anyone mind seeing how they compare to your valuations to see if i am on the right track roughly?

Assuming 10% required return for now***

$29.67 WOW Intrinsic Value
$8.60 TRS  Intrinsic Value


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## InCasinoOut

InCasinoOut said:


> Greetings all! After reading the book i am checking to see if i have the formulas correct in excel. I've used the 2012 figures and done a quick intrinsic value calculation for WOW and TRS for 2012. Would anyone mind seeing how they compare to your valuations to see if i am on the right track roughly?
> 
> Assuming 10% required return for now***
> 
> $29.67 WOW Intrinsic Value
> $8.60 TRS  Intrinsic Value




Sorry lets make that my correct valuations of: 

$29.67 WOW Intrinsic Value
$9.78 TRS  Intrinsic Value
$17.34 FGE  Intrinsic Value


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## Tightwad

Not a lot of activity here for a while..

Without crunching any numbers, WOW is probably around the mark but FGE seems to be quite high, the highest i've seen may have been around $13.  Money magazine had a skaffold article recently with a lot of values if you wanted to compare.


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## InCasinoOut

thanks Tightwad!

I found the article and it gave COH at $28.98. Will use that to see if my values are similar.


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## McLovin

InCasinoOut said:


> I found the article *and it gave COH at $28.98*. Will use that to see if my values are similar.




Someone actually published that in a magazine people pay money for? Deary me.


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## InCasinoOut

Well it should be clear to most people that it is half advertising for Skaffold, half advice. Or some similar ratio. the magazine seems to be like a brochure for super funds.


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## McLovin

InCasinoOut said:


> Well it should be clear to most people that it is half advertising for Skaffold, half advice. Or some similar ratio. the magazine seems to be like a brochure for super funds.




Have you had a read through this thread? It's worthwhile for someone contemplating putting money on the table based on Montgomery's formula.


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## InCasinoOut

McLovin said:


> Have you had a read through this thread? It's worthwhile for someone contemplating putting money on the table based on Montgomery's formula.




Hey McLovin, yes i'm afraid i now have. I've only recently decided to invest in the stock market. Started off on the Intellligent Investor, then i read Value.Able, now i read this whole thread and see that a lot of people do not agree with this approach. 

Sucks a bit as i now have to re-evaluate how i am going to invest. At first i was happy i might of founf a sensible way for a newbie to value companies to invest in. I've got a few more months until i have my starting funds together so where to next.....? More reading.

Haven't read annything in the way of Technical Analysis yet, but i wanted to steer clear of gambling, and i have a day job so i was looking for more long term investment strategies.


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## skc

InCasinoOut said:


> Hey McLovin, yes i'm afraid i now have. I've only recently decided to invest in the stock market. Started off on the Intellligent Investor, then i read Value.Able, now i read this whole thread and see that a lot of people do not agree with this approach.
> 
> Sucks a bit as i now have to re-evaluate how i am going to invest. At first i was happy i might of founf a sensible way for a newbie to value companies to invest in. I've got a few more months until i have my starting funds together so where to next.....? More reading.
> 
> Haven't read annything in the way of Technical Analysis yet, but i wanted to steer clear of gambling, and i have a day job so i was looking for more long term investment strategies.




Well it's not a complete waste of time I am sure. You've read a method, you've read about the pitfalls of this method, so you should be in a position to take what is useful and discard what doesn't work...

e.g. Not use the method when company's earnings are inherently cyclical...


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## tinhat

InCasinoOut said:


> Hey McLovin, yes i'm afraid i now have. I've only recently decided to invest in the stock market. Started off on the Intellligent Investor, then i read Value.Able, now i read this whole thread and see that a lot of people do not agree with this approach.
> 
> Sucks a bit as i now have to re-evaluate how i am going to invest. At first i was happy i might of founf a sensible way for a newbie to value companies to invest in. I've got a few more months until i have my starting funds together so where to next.....? More reading.
> 
> Haven't read annything in the way of Technical Analysis yet, but i wanted to steer clear of gambling, and i have a day job so i was looking for more long term investment strategies.




Montgomery's valuation method is mainly based on ROE and the dividend payout ratio (or inversely the ratio of retained earnings). If you follow his approach by merely implementing his formula there are two major assumptions that are implicit in that formula:

1) That the business will be able to maintain its ROE into the foreseeable future, which includes
2) The business being able to generate the same marginal ROE on retained earnings into the future.

So, IMHO, for Roger's formula to be of any use you have to be confident that the company will continue to be able to grow earnings and maintain its ROE. To do this you have to analyse the business in more details. Debt can improve ROE but is the debt good debt, is it generating growing earnings? What are the competitive advantages the company has in its industry or markets and are they sustainable.

The formula in Value.able is inadequate in that it takes the current ROE and payout-ratio and projects them into the long term. Huge assumptions.


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## craft

*Re: Students of Roger Montgomery's CRAP intrinsic valuation method*



skc said:


> e.g. Not use the method when company's earnings are inherently cyclical...





RM secret miracle formula for the reinvested component of earnings is simply a rip-off of the Walter’s Dividend Model.

When Walter devised his model he spelt out the limitations very clearly.

•	It assumes the firms investments are *purely* financed by retained earnings. Not realistic or efficient for most companies 
•	The assumption that the expected rate of return on firm’s investments are *constant*. Not realistic. 
•	The assumption of a *constant* cost of equity capital. Is not realistic and ignores the effect of risk on the value of the firm.

One that I would add.

•It assumes accounting derived returns represent economic reality. Often not the case.


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## brty

I have not bothered to read any of Roger's stuff on this method, yet the answer seems obvious to me. Test it.

If the valuation formula is based on some numbers from the annual reports, or a series of them, then it should simply be a matter of checking some numbers from 6 or 7 years ago for a few companies selected at random. Take the fifth company from each letter of the alphabet and see  how the companies went on a walk forward basis, based on the valuation you came up with.

All the imformation from old Annual reports can be found here...

http://asx.com.au/asx/statistics/announcements.do

Remember that doing this type of study has survivorship bias built in, but it is not a bad place to start.


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## McCoy Pauley

Someone has been regularly calling YMYC whenever one of the Dodger's minions is on air, having a crack at the Dodger's aptitude for spruiking a stock on the way up and going silent on the way down as they sell out. I've read his book and apply his valuation approach to companies of interest to me, but I wouldn't invest with him and it isn't the only way I look at a company.


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## ROE

When it comes to your money NO ONE has its best interest better than you

they all out there dipping into your pocket, whether its fund management, selling subscriptions, software, books, pump and dump article etc.

Most of the principles of good investing are freely available on the net  time is better spent on acquiring these knowledge and make your own decision.

and be very weary of people who run a fund business or selling a service at the same time spruiking free information these free information could end up costing you a fortune. 

Learn the trade yourself, anyone with average intelligent can do it, it is not that hard and make your own decision, be conservative, patient and sensible that is the only way to build wealth.

ignore all the hype and celebrities ... they have only one goal -> dipping their hand into your pocket.


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## Sharpenter

Haven't seen much activity lately but thought I'd throw this question out and get your thoughts.

If a company that does a share buyback below the equity per share increases intrinsic value and a share buyback above equity per share decreases intrinsic value, how can it not be good for the company to do a share buyback below the intrinsic value of its own shares even if it is at a price above equity per share?


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## craft

*Re: Students of Roger Montgomery's CRAP intrinsic valuation method*



Sharpenter said:


> how can it not be good for the company to do a share buyback below the intrinsic value of its own shares even if it is at a price above equity per share?



 If this statement is correct then 







Sharpenter said:


> If a company that does a share buyback below the equity per share increases intrinsic value and a share buyback above equity per share decreases intrinsic value



 can't be correct unless intrinsic value = equity per share.

Do you believe intrinsic value = equity per share? If not you have answered your own question - Something here does not compute. 

If you define IV as the output of a static calculation you will always end up with these circular references that defy common sense. What is your definition of Intrinsic Value?


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## Sharpenter

Hi Craft,

What you point out shows that I need to expand upon the point that I am making. 

You are correct to state there is a contradiction in the reasoning but that is precisely what I am finding hard to reconcile.  In Value.Able, Roger states a summary of points that help to increase or decrease intrinsic value (as calculated and defined by his income and growth multipliers formula) and amongst them are those two points which are that intrinsic value will increase if a share buyback is done when the share price is below the equity per share figure and conversely, intrinsic value will decrease when a share buyback is done with the share price above equity per share.  That much is stated in his book and I assume it to be correct.

However, the point of confusion I then have is that as a retail investor Roger advises that it makes sense to purchase shares when their price is below the company's intrinsic value per share.  If this makes sense as good investment advice for me as an individual, why would the same logic not apply to a share buyback scheme such that as long as the share buyback is conducted when the share price is below intrinsic value (not simply the equity per share value) it would also increase the company's intrinsic value?

An example will help explain much better than lengthy explanations.

ABC Company has total firm intrinsic value = $1000.
100 ordinary shares outstanding 
equity invested in the company = $500
equity per share = $5
intrinsic value per share = $10

According to the reasoning in the book, a share buyback scheme when the share price < $5 will increase total firm intrinsic value and > $5 will decrease total firm intrinsic value.

My logic would suggest that any buyback scheme when the share price < $10 would increase the total firm intrinsic value because each share is being bought back at less than the intrinsic value per share.  

Does this reasoning make sense to you?


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## McLovin

Sharpenter said:


> Does this reasoning make sense to you?




Yes. Using your example again...

ABC Company has total firm intrinsic value = $1000.
100 ordinary shares outstanding 
equity invested in the company = $500
equity per share = $5
intrinsic value per share = $10

And assuming the company buys back and cancels 50% of its shares at $6 (ie above equity value but below IV).

What will the company look like after?

ABC Company has total firm intrinsic value = $700.
50 ordinary shares outstanding 
equity invested in the company = $250
equity per share = $5
intrinsic value per share = $14

The participating shareholders' shares had an IV of $10. They only received $6, so the remaining $4 flowed to shareholders who did not participate in the buyback.

Of course no one will ever actually agree on what IV is, and therein lies the mystery!


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## Sharpenter

Thanks that's really useful!

I just wasn't sure if share buybacks were validated only if they were below equity per share value or intrinsic value per share and it seems that any buyback below IV will increase the overall IV per share of remaining shareholders by your reasoning.  That helps put my mind at rest.


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## craft

*Re: Students of Roger Montgomery's CRAP intrinsic valuation method*

The problem you are having reconciling the two statements is because they can only reconcile when IV equals equity per share.  If IV isn’t always equal to equity value then the only reconciliation possible to make is: At least one thing Montgomery is feeding you is wrong.  





Sharpenter said:


> That much is stated in his book and I assume it to be correct.



Assumptions can be costly.

I think a lot of RM’s stuff is dangerously wrong but spelling it out in detail is no longer on my to-do list.  Maybe somebody else will jump in and explain better than I have but if not just keep exploring the contradictions like this that your common-sense can’t reconcile and you might avoid some costly lessons.

Don't be surprised if the reconciliations turns out to be RM is full of ......


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## craft

*Re: Students of Roger Montgomery's CRAP intrinsic valuation method*



Sharpenter said:


> Thanks that's really useful!
> 
> I just wasn't sure if share buybacks were validated only if they were below equity per share value or intrinsic value per share and it seems that any buyback below IV will increase the overall IV per share of remaining shareholders by your reasoning.  That helps put my mind at rest.




Sharpenter

Are you relying on RM's IV calculation as your measure of IV?


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## Sharpenter

Yes Craft as a general indicative measure, though I appreciate it only gives a rough idea.

McLovin above appears to have answered the specific concern that I had though, do you disagree with his point?


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## McLovin

Sharpenter said:


> Yes Craft as a general indicative measure, though I appreciate it only gives a rough idea.




I don't even think it does that. It's been discussed at length in this thread, and is worth reading.


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## craft

Sharpenter said:


> Yes Craft as a general indicative measure, though I appreciate it only gives a rough idea.
> 
> McLovin above appears to have answered the specific concern that I had though, do you disagree with his point?




I agree with McLovin. (except for the math $250 closing equity

Buybacks don’t create any value* but they can however re-distribute benefit depending on how they are priced compared to IV (whatever that may be).  If priced below IV then continuing holders benefit at the expense of exiting investors and the reverse is true for buybacks over IV, exiting investors gain at the expense of continuing holders.

Also agree that RM’s formula is not useful as even an indicative indication of IV. In fact I suspect that exact thought has cost plenty of people a lot of money. Only if you understand all the implied assumptions of the formula could it be a suitable shortcut for some situations.

RM has done his best to cloud the formula in secrecy for his own ends rather than highlighting the underlying assumptions and their limitations. – I think you would be better off with a really simple valuation model as a rough guide that you understand the assumptions of.


*except maybe to the extent that they can differentiate tax benefits to varying holders


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## Sharpenter

Well it is interesting that you say consider using another valuation method because I remember watching a Bruce Greenwald lecture and he destroys the discounted cash flow model and its variants by saying that bad information added to good information ends in bad information.  i.e. the inaccurate inputs mean the outputs become gibberish

Do you think that a simplistic p/e ratio approach has become valid now simply on the basis that many investors consider it to be useful?


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## craft

Sharpenter said:


> Well it is interesting that you say consider using another valuation method because I remember watching a Bruce Greenwald lecture and he destroys the discounted cash flow model and its variants by saying that bad information added to good information ends in bad information.  i.e. the inaccurate inputs mean the outputs become gibberish
> 
> Do you think that a simplistic p/e ratio approach has become valid now simply on the basis that many investors consider it to be useful?




Bruce Greenwald is a very smart man and I agree completely - Its not what valuation that a DCF spits out that counts its the thinking about value driving assumptions that matters and then the ongoing monitoring of how reality unfolds in relation to the assumptions that you made.

A P/E valuation model will do just fine initially to control 'valuation risk' ie the risk of you overpaying given current earnings, as a far bigger risk you face on most stocks is 'earnings risk' and you would be far better of trying to understand what drives earnings and in fact you have to have your head completely around this before a DCF valuation becomes even remotely accurate.


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## Rainman

Sharpenter said:


> Do you think that a simplistic p/e ratio approach has become valid now simply on the basis that many investors consider it to be useful?




Any valuation approach that includes the price in the equation is flawed, in my view.  I agree with Bruce Greenwald that the most accurate valuation approach is the asset-based approach because it involves the least amount of speculation about the future.  The only problem with this approach is that it does not lend itself very well outside of deep value situations, i.e. to companies trading at or below net current asset value.


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## luutzu

Rainman said:


> Any valuation approach that includes the price in the equation is flawed, in my view.  I agree with Bruce Greenwald that the most accurate valuation approach is the asset-based approach because it involves the least amount of speculation about the future.  The only problem with this approach is that it does not lend itself very well outside of deep value situations, i.e. to companies trading at or below net current asset value.




Another approach to valuation that does not speculate, not as much, is to invest in well established and dominant companies that are well managed.

These are companies whose business and industry is not likely to be affected by rapid technological and other changes, and whose assets and capital invested is so large that it's unlikely to be challenged by new arrivals etc.

These tend to be the top 3 in their industry... and once you studied them, happy with their current and previous performance and position, happy that the next 5 to ten years will be as they are (and most likely better)... price it and if the market price is reasonable or not, act accordingly.

----

Asset-based valuation could also be misleading - say an asset that's $1 on the books may very well fetched 10 cents in a liquidation sale. I've picked up a few office suite for $10, $20 at auctions - sometime they just want to pay you to take it away to save them from having to dump it.


In my not so humble opinion, if you know enough about the business, valuation doesn't take very much effort. If you find that you're spending way too much time trying to value a business, it's either because you don't know enough about the business or be because you're trying to justify yours or the market's price - either way it's not a good way to invest.


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## Vargulf

I've spent the past few days trawling my way through Commsec financials and attempting to build a spreadsheet to calculate IV's for my shortlist (I assure you this is the very last step in my value analysis). 

In this current climate I'm curious to compare IV's to current SP as one final point of reference. 

I'm admittedly not great at maths and whatever I'm doing wrong may be glaringly obvious to some but I have spent hours and hours trying to figure out IV's on different stocks and I'm getting widely varying nonsensical results. I'm very thankful if anyone has any tips on what I'm doing wrong?

*As an example IV on Pro Medicus:*
Shares on Issue 103.6 (m)
Shareholder Equity 49.3 (m)
*EQPS (book value) 0.48 ($)*
ROE 38.8 (%) EOFY 2019 (rounded to 40% line in RM's table)
EPS 2020 0.237 ($)
DPS 2020 0.120 ($)
*Payout Ratio 51%*
RRR 10%
(0.48 x _4.00_) *0.51 + (0.48 x _12.126_) *0.49 

 IV= *$3.84    *Current SP: $15.50 (down from $38)

*Note no need for caveat emptor comments I realise this IV is not a silver bullet and I need to average RoE's etc. but for now I'm just trying out RM's method and can't get anything close to common sense answers.


----------

