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

[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]

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]

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]

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]

I know there is a fair bit of information, but did anyone check put the FOFOA links?

No. Not really interested.

 

[Macros]

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]

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]

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]

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]

=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

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

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]

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]

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.