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

Vargulf · 14 November 2011

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 I think Grahams methods are outdated.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 · 14 November 2011

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 · 14 November 2011

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 · 15 November 2011

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 · 15 November 2011

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 · 15 November 2011

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 · 15 November 2011

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 · 15 November 2011

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 · 15 November 2011

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 · 15 November 2011

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 · 15 November 2011

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 · 16 November 2011

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 · 16 November 2011

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 · 16 November 2011

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 · 16 November 2011

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 · 16 November 2011

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 · 17 November 2011

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 · 17 November 2011

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 · 17 November 2011

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 · 17 November 2011

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.

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

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