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

[zac]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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..