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

[quadfin]

gees roger rated JBH as A3, flashing lights net debt 134% flashing lights , if people want a black box skaffold is not one, who in their right mind would invest in retail now?????????

Actual iv 8.53 forecast 17.86 ,,,, ha ha still laughing ha ha hahahha

 

[GG999]

Hey all,


In response to GG99,
I think your missing the point. For sure non value investors use P/B and P/E, let them and let them lose money. But both are price related which doesn't equate to what value investors look at for value. We shouldn't give a hoot what a low ROE businesses price related equations tell because we wouldn't be looking at those businesses. For high ROE businesses, sure I 'glance at P/B where Roger doesn't but it true what he says that it is a fairly obsolete ratio. If they had to sell their assets they would be in liquidation and the asset values in their books wouldn't be anywhere close to the sell off prices. And a high ROE business is going to be returning rates far in advance of the book values. The P/B doesn't tell value investors anything they want to know as I see it.

But ROE equals P/B divided by P/E

Since P is in both the numerator and the denominator, Price is cancelled out and you're not really taking it into account. I guess it's just another way at looking at Return on Equity.


High ROE could result from a high P/B or a low P/E (or obviously a combination of the two)

Do people have ideas on this when looked at this way?
IMHO a low P/E resulting in high ROE is definitely a good thing.t

I can't decide on whether a high P/B is a good thing or not. Because a company has been getting a high profit for the amount of equity it has, people have been willing to pay more for a certain amount of that equity, pushing up the P/B ratio.

So you get less of the equity of the company when you buy a share. That can't be good (?)

On the other hand, if P/B is high and stays high then any equity reinvested in the company will push up the share price by a lot, which is a good thing. This must be behind the equation for Intrinsic Value which gives much more value to reinvested profits compared to profits paid out as dividends. But as far as I can see this only is a result of a company having a P/B more than one, and the P/B staying more than one.

 

[GG999]

Thanks guys - I'll have a hunt around and see if I can find anything else.

I have seen the ave. annual P/E on Commsec. I also noticed that they have a similar thing for dividend yield now as well.

They're both helpful in a sense, but the graph that craft posted is the main thing that I am after.

Not exactly the same thing - but gives you the same story - on Commsec you can look at a bar graph of EPS and forecast EPS with share price overlay (not for the forecast EPS of course!) - I think a very useful way of looking at things.

 

[ScottyfromAussie]

gees roger rated JBH as A3, flashing lights net debt 134% flashing lights , if people want a black box skaffold is not one, who in their right mind would invest in retail now?????????

Actual iv 8.53 forecast 17.86 ,,,, ha ha still laughing ha ha hahahha

Roger's been warning about JBH for ages, its A3 anyway so its off my radar. But for anyone who still thinks JBH is Rogers darling, sorry that was a while back, he sold out at $15.50.

I can replicate the 17.86 valuation using a 10% discount rate..but that doesn't mean I'd buy JBH at 9 or 10 bucks (They'd have to improve their cashflows, develop brighter prospects and promise to never borrow money to buyback shares again but I digress.)
You have to let the model be your servant, not your master. You take its advice but its your still your decesion and Roger gives you heaps of other things to look at.

I've had a good read of this thread and it seems to rip Roger a lot. To be frank most of the digs are a function of skim reading the book, or repeating out of date information.

I've read the book thoroughly and looked at a lot of Rogers appearances on Sky Biz. If you're looking to invest like Warren Buffet, I think you should look elsewhere. There are some pretty stark differences, not that I claim to know Buffet but the investment profile to me looks quite different.

All Roger says is, lets go out into the 2000+ stocks that make up the share market and find a few really good ones. Lets then learn their business's, evaulate their future prospects to the best of our ability, calculate their value and wait for the market to offer them up at stupid prices.

There's a fair bit you have to do yourself, learning the business isn't easy. I started learning Domino's (DMP) tonight and its going to take me weeks to plough through the business model and learn every facet of the business I can. Only then can I make some educated guess's at its future profitability.

I guess my post really isn't to defend Roger (I don't think people need defending if they can arrive home to their new pool filled with $100 bills and jump around in it). But I wouldn't mind having some actual discussion here about using the principles he's taught.

Any takers?

New topic is "Investors required return" for anyone who's interested :

 

[Ves]

Roger's been warning about JBH for ages, its A3 anyway so its off my radar. But for anyone who still thinks JBH is Rogers darling, sorry that was a while back, he sold out at $15.50.

That's amusing because six months prior to that he listed it as one of five stocks that he would confidently buy and hold if the market were to close for five years tomorrow. Another one of those five was MCE.

 

[New Stratos]

Reference for that?

 

[Ves]

Post #81 in the Skaffold thread has a youtube video.

A few of those companies he has mentioned he has spoken negatively of lately. He seems to get distracted very easily by short-term problem solving (ie. whatever changes broker estimates) and confuses this with long-term focus.

 

[New Stratos]

Thanks for the link to the video, Ves. You may be right about him being a bit 'twitchier' about results etc than he recommends to his readers; on the other hand he does say in that vid that the 'market being closed for 3 years' amount of confidence applies to his own stocks, whilst as a manager he is paid to look more often. Later he says "twice a year" for good stocks.

As for the particular choices - here's the share price returns, from 9/9/2010 to today (ie I've made no allowances for dividends):
ARB +33%
CAB +28%
ORL +15%
WOW -3%
DWS -10%
CPU -16%
PTM -23%
MCE -47%
JBH -56%
DTL -88%

Average -16.7% against -9.7% for the all ords over the same period, so not too flash, but not a killer to the buy and hold argument, let alone the buy, review periodically and hold if still good one.

If you eliminate the worst three (as we know he did for MCE and JBH, then it's +3.4% (I am not allowing for whatever price he would have sold at).

 

[McLovin]

DTL -88%

DTL had a stock split; 10:1.

 

[New Stratos]

Yeah, I could see that and used the adjusted price from yahoo; if it's still wrong blame them

 

[ScottyfromAussie]

That's amusing because six months prior to that he listed it as one of five stocks that he would confidently buy and hold if the market were to close for five years tomorrow. Another one of those five was MCE.

The market isn't static, at the time the news was all good but it changed and he reacted.

Should he have held on because in the past it looked like a good stock?

However we do have

March 2011 http://blog.rogermontgomery.com/will-jb-hi-fi-continue-to-groove-2/

But the problems didn't really surface until JBH released its FY11 accounts. What did we find? Debt + check out how the buyback was financed, with that debt! Thats not really what is expected from a good company.

If you're keeping up to date with JBH, there's also a lot of questions around whether they can continue to grow. You can imagine with the IV calculation JBH taking a lot of its dollars from growth, a reduction in growth has huge implications for the valuation.

Upon seeing this the rational decision is to sell, whether you've made a profit or a loss.

Keeping in mind, checking the financials for 1H12, that debt is paid, the cashflow looks better, but profits have fallen compared to 1H10.

There are a lot of questions floating around...but I'm not smart enough to answer them. I'm just going to focus on stocks thats are easier. If it goes from $9 to $30 thats my loss but at least I won't get caught going from $9 to $1 . Noting though, the retail sector is currently having trouble, it won't always. These things are cyclical so one day retail will return, I dunno when though.

Cheers.

Btw guys any thoughts about investors required return (IRR) ?

I been thinking about it a lot. I have a mathematics/economics background so the immediate temptation is to use historical data to sift out some kind of risk premium.

But in consideration, thats illogical. When coming up with a risk value for the IV calc, an assessment of the risks needs to be forward looking.

The problem here being we're trying to turn qualitative concepts into quantative information. Whatever result I get I know its not going to be precise, luckily it doesn't have to be. But getting it approximately right is still easier said than done.

Try flicking the IRR within the IV calc and you'll see how sensitive the IV is for even a little change, i.e. 0.10 to 0.11 can wipe a huge amount off of the IV.

You of course don't want your IRR to be too high as you may miss out on opportunities but the IRR can't be too low either for risk of getting in too soon or asking too high or a price when selling.

My solution so far is to understand the business model of the stock, I can then understand each risk and assign a rough value to each. The value has to reflect how sensitive the future profits of the business are to each individual risk.

Any thoughts?

 

[Ves]

The market isn't static, at the time the news was all good but it changed and he reacted.

I would argue that he reacted to the market twice: once in buying and twice in selling. In both cases his valuation formula forecast growth to infinity. Do you know how his formulae works and the assumptions it makes?

Should he have held on because in the past it looked like a good stock?

A better question is: was his appraisal and / or assumptions used in that appraisal correct in the first place? Many here would argue no and the market and Roger have belatedly agreed with them.

Have a look around in both the JBH and MCE threads and read some commentary from other sources before and around the time he made that video. There were plenty of detractors saying the same things that are only now common knowledge.

 

[Ves]

Btw guys any thoughts about investors required return (IRR) ?

There is no answer to the question of what IRR to use that will fit all circumstances.

In most cases, I will use a range of IRR / discount rate values for each valuation I attempt. Having a range of NPVs is often better than trying to find a perfect solution where none exists. Always be as conservative as possible.

 

[ScottyfromAussie]

I would argue that he reacted to the market twice: once in buying and twice in selling. In both cases his valuation formula forecast growth to infinity. Do you know how his formulae works and the assumptions it makes?


A better question is: was his appraisal and / or assumptions used in that appraisal correct in the first place? Many here would argue no and the market and Roger have belatedly agreed with them.

Have a look around in both the JBH and MCE threads and read some commentary from other sources before and around the time he made that video. There were plenty of detractors saying the same things that are only now common knowledge.

I dunno why people went to nuts for MCE, even Roger only exposed a small amount of his account to it. I dunno where he got out. If he made a loss thats okay, you don't win all the time.

I don't like companies like that though, so much hangs on getting each contract. One fails and the share prices crashes. I felt like a lot of people got in just cos Rog was, glad they don't have access to my money!

Say with DMP, if one less pizza is sold its no biggie. Actually I'll buy that pizza so never mind.

Mind you just cos I like Rog's formula, doesn't mean I like all his stocks. I think a few of his A1's are way too risky, but maybe he knows something I don't.

I understand the model and it makes sense to me, its just a tool though. I don't obey its every word and I only use it to estimate the IV a couple of years into the future. I don't expect it to be perfect, its just a tool in my box thats useful.

One of the big things I've learnt from maths/econs is models are the servants of humans not the masters. It doesn't dictate what I do, it just helps out. I guess what I'm trying to get accross is, people are dissing the formula for failing when its being used for something it wasn't designed to, its just meant to be a tool that helps out, its not mean to dictate all trading decisions.

 

[ScottyfromAussie]

There is no answer to the question of what IRR to use that will fit all circumstances.

In most cases, I will use a range of IRR / discount rate values for each valuation I attempt. Having a range of NPVs is often better than trying to find a perfect solution where none exists. Always be as conservative as possible.

Thats a pretty sweet idea, like if you want 10,000 shares, and

Price 1>Price 2>Price 3

Buy 5000 at Price 1
Buy 3000 at Price 2
Buy 2000 at Price 3.

Any cash that doesn't get used can be left in an 30 day account and wait for other opporunities.

I got something more to think about

 

[craft]

Re: Students of Roger Montgomery's CRAP intrinsic valuation method

Btw guys any thoughts about investors required return (IRR) ?

I been thinking about it a lot. I have a mathematics/economics background so the immediate temptation is to use historical data to sift out some kind of risk premium.

But in consideration, thats illogical. When coming up with a risk value for the IV calc, an assessment of the risks needs to be forward looking.

The problem here being we're trying to turn qualitative concepts into quantative information. Whatever result I get I know its not going to be precise, luckily it doesn't have to be. But getting it approximately right is still easier said than done.

Try flicking the IRR within the IV calc and you'll see how sensitive the IV is for even a little change, i.e. 0.10 to 0.11 can wipe a huge amount off of the IV.

You of course don't want your IRR to be too high as you may miss out on opportunities but the IRR can't be too low either for risk of getting in too soon or asking too high or a price when selling.

My solution so far is to understand the business model of the stock, I can then understand each risk and assign a rough value to each. The value has to reflect how sensitive the future profits of the business are to each individual risk.

Any thoughts?

A required return is an arbitrary number. Only useful as a lowest bound below which you would stay liquid. Beyond that it is far better to calculate the IRR as in ‘Internal Rate of Return’ and simply consider the highest available options. All investments are a competition for capital – take the best.

 

[Ves]

Thats a pretty sweet idea, like if you want 10,000 shares, and

Price 1>Price 2>Price 3

Buy 5000 at Price 1
Buy 3000 at Price 2
Buy 2000 at Price 3.

Any cash that doesn't get used can be left in an 30 day account and wait for other opporunities.

I got something more to think about

Sorry, I think you misunderstood. I will calculate a range of valuations to see what possibilities are inherent in my assumptions. It gives me a feel for different perspectives. It also allows me to compare the impact of the discount rate on the end result. I wouldn't use these prices as my actual buy targets like you have suggested above. Although, the idea of averaging into a stock, rather deploying all of your capital at once is a good idea as long as it is done with relation to the valuation that you feel most accurately reflects the reality of the stock's prospects.

 

[GG999]

There are too many inconsistencies and black holes to RM for my liking.

- ditto - when RM says with strong conviction that P/E is not appropriate to value a company when in fact his "ROE/RoR x Equity per share" is of course P/E restated - do the math. That he gets away with this beats me.

There were several messages discussing this statement but I just can't work out what the final conclusion was. And when I saw that Craft joined in the discussion (and didn't disagree with the above) I got a bit concerned and looked up the equation.

If I take RoR as being 1/PE (or = earnings yield)
I don't understand how the required rate of return can always equal the Earnings Yield

And when I substitute RoR with Earnings Yield I will always get IV = Price which all seems a bit pointless, why bother with the equation.

Presumably it shows that I've completely misunderstood Montgomery's equation for estimating Intrinsic Value. If anyone can suggest the best way for someone like me to understand this stuff better, please say!

 

[Muschu]

Just curious.

Has Roger gone quiet? Or adopting a different business approach?

I don't watch Sky Business consistently but itoccurred to me that i have not seen Roger participate for a while.

Also there seem to be fewer ASF posts about his strategy.

Rick

- just disclosing that I am not a Montgomery client.

 

[zac]

Just curious.

Has Roger gone quiet? Or adopting a different business approach?

He is still active. He has his own youtube channel and still goes on the odd show. He has staff that do some of his talking also.

I guess he has been relatively quiet but he has said that with the market rally in recent times its left no stocks that are at a discount to their IV.

His Montgomery Fund from his spruiks seems to be doing well also.