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

Vargulf · 14 November 2011

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 · 14 November 2011

Vargulf said:
It's just that value investors wouldn't use it because it's unreliable.

Value investors don't use P/B?

waimate01 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

=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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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 · 14 November 2011

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?

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

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