Investing style is a religion

[Value Collector]

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

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

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

 

[Value Collector]

I will ask you this question and please answer me,

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

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

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

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

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

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

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

 

[luutzu]

I will ask you this question and please answer me,

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

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

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

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

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

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

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

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

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

 

[Value Hunter]

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

 

[luutzu]

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

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

 

[gaius]

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

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

 

[luutzu]

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

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

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

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

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

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

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

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

 

[gaius]

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

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

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

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

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

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

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

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

 

[luutzu]

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

Serious?

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

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

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

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

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

 

[Value Collector]

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

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

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

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

 

[Skate]

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

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

Skate

 

[Value Collector]

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

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

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

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

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

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

 

[Value Collector]

luutzu if you want to stop this argument

Skate

The argument is over, the facts speak for themselves.

 

[luutzu]

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

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

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

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

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

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

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

 

[Value Collector]

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

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

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

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

 

[luutzu]

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

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

Here dude...

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



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

Closer look....



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

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

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

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

So dividends received would actually be $8.31B.

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

Now if we sold it last FY at average market price of $24.50 ps, we'd make a capital loss of $173M.

If we sold it this year at its higher price of $30.... a capital gain of $7.19B.

Total gain on that $32.87B investment in WOW would be: $8.31 + $7.19B... or $15.5/$32.87 = 47% return over 8 years.... that's 5%pa compounded.



Monty was looking for 10% rate of annual return right?

He also wasn't looking to add another $1.76B either. Well... maybe he likes to as it'd mean his initial investment is now worth more

So WOW failed him big time.

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

The only way an investor in WOW could make profit beyond what is estimated above there is they'd trade in and out. Getting their timing more right than not.

Doing that mean they let other shareholders bear the additional equity raised; suffer the capital loss etc.

But if an investor could do that, there are other more votatile stocks they can play and gain a whole lot more than from WOW.

 

[luutzu]

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

Skate

Just to be sure, you were referring to me giving in right?

 

[Skate]

Yes..
Someone will have to give in - it dosn't mean Value Collector is right if you give in - it means the revolving door will stop turning.

Your conversation with Value Collector is like watching Tennis - you hit the ball to him (your point of view) & Value Collector hits the ball staight back to you (with his point of view) & the game as I see it has no end in sight because - both of you steadfastly hold your own position.

luutzu I could be mistaken but the position you hold is the consensus of most. (IMHO)

NOW: If you agree with Value Collector it will stop the argument..

I'M JUST SAYING: If you agree with Value Collector it will mean both of you will be wrong..

Another way of looking at this: If Value Collector agrees with you then both of you will be right. (IMHO)

IMPORTANT: Value Collector will not agree with you and he will hold his position till his last breath (thats why I'm suggesting you agree with him - I know agreeing with him will make you both wrong but its the price you may have to pay)

FROM EXPERIENCE: Agreeing with the other breaks a stalemate - but - I always conclude my arument with:

"you know by me agreeing with you will make us both wrong but its a price I willing to accept to move on"

luutzu - I was trying to help you move on - thats all !

ANOTHER IMPORTANT POINT: I read enough of your post luutzu to realise you don't need any help from me.

AS WELL AS: Value Collector always reinforces his point of view with conviction - so I don't see an end - UNLESS - you both agree to disagree.

JUST SAYING: There would be no trading or traders if we all held the same opinion.

Skate

 

[luutzu]

Yes..
Someone will have to give in - it dosn't mean Value Collector is right if you give in - it means the revolving door will stop turning.

Your conversation with Value Collector is like watching Tennis - you hit the ball to him (your point of view) & Value Collector hits the ball staight back to you (with his point of view) & the game as I see it has no end in sight because - both of you steadfastly hold your own position.

luutzu I could be mistaken but the position you hold is the consensus of most. (IMHO)

NOW: If you agree with Value Collector it will stop the argument..

I'M JUST SAYING: If you agree with Value Collector it will mean both of you will be wrong..

Another way of looking at this: If Value Collector agrees with you then both of you will be right. (IMHO)

IMPORTANT: Value Collector will not agree with you and he will hold his position till his last breath (thats why I'm suggesting you agree with him - I know agreeing with him will make you both wrong but its the price you may have to pay)

FROM EXPERIENCE: Agreeing with the other breaks a stalemate - but - I always conclude my arument with:

"you know by me agreeing with you will make us both wrong but its a price I willing to accept to move on"

luutzu - I was trying to help you move on - thats all !

ANOTHER IMPORTANT POINT: I read enough of your post luutzu to realise you don't need any help from me.

AS WELL AS: Value Collector always reinforces his point of view with conviction - so I don't see an end - UNLESS - you both agree to disagree.

JUST SAYING: There would be no trading or traders if we all held the same opinion.

Skate

Now that's wisdom. Serious, wow.

 

[Value Collector]

Yes..
Someone will have to give in - it dosn't mean Value Collector is right if you give in - it means the revolving door will stop turning.

Dude, I ended this debate on the 25th of June, I only wrote what I wrote today to show the actual fact of 1 single point to clear it up for the readers at home, I have given up trying yo convince luutts.

He seems to look at everything backwards, and misses key points, so I have no more time for it, I am working on frying a bigger fish at the moment.