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

[ubtheboss]

Highly recommended. The portfolio of companies I analyzed using the intrinsic valuation method- which includes doing some quantitative and qualitative research- is up by an average of 57% right now. The market has been in a general uptrend for weeks but because of the quality of the companies I have bought I'm not concerned if there is a pullback. To me that represents and opportunity to buy more at a cheaper price (if I have the cash). Averaging down on a spec stock is NOT recommended but with a value company it can be (assuming it is just general market sentiment that is making it retrace and not bad news of course).

 

[ubtheboss]

I heard Roger on Sky Business the other day mention he is a believer in the coal and iron ore stories right now. Does anyone know which companies in those areas he favours? He did mention ATLAS which is iron ore. What about coal?

I'd like to buy Atlas (nearly did when it was $3) but a caller on that show said iron ore prices tend to dip during northern hemisphere summers. Atlas did dip in sp between May and Aug last year. Anybody else agree with that view?

 

[tinhat]

I heard Roger on Sky Business the other day mention he is a believer in the coal and iron ore stories right now. Does anyone know which companies in those areas he favours? He did mention ATLAS which is iron ore. What about coal?

I'd like to buy Atlas (nearly did when it was $3) but a caller on that show said iron ore prices tend to dip during northern hemisphere summers. Atlas did dip in sp between May and Aug last year. Anybody else agree with that view?

Did Roger give his IV opinion on the stock? It's certainly had a hard run up as of late.

 

[Tightwad]

I cant remember seeing anything by Roger, but there are a couple of valuations and comments by posters on the blog, should find it if you search for it.

At the moment Im looking at ARB (code ARP) and MIN and thinking i should have gone for more MCE when i topped up the other day at just over 8.35. Was thinking the Libya crisis may be unsettling for oil, rather than perhaps making offshore oil drilling more viable.

 

[RogueTrader273]

Just got RM's book a few days ago and was wondering a couple of things:

1. Why should your RR affect the IV of a company?

2. Nice worksheet Keegan88! Does a 2011 IV for ARP of $8.57 sound right? (11.72 2012)

I entered RR 10, EqPS 1.54, EPS 2011 0.49, EPS 2012 0.553, DPS 2011 0.21, DPS 2012 0.23, Shares 72.5 mill. (data from Etrade.)

 

[Billyb]

Just got RM's book a few days ago and was wondering a couple of things:

1. Why should your RR affect the IV of a company?

Forget about shares and think about intrinsic values of bank accounts

What is the intrinsic value of a bank account today at 10% interest with $1000 in it (and the money will be payed out to you at the end of the year)

Assume the next best account in the market offers 5%. So basically, we would be happy with something in between, say 7% (this is now or RR)

To get a 7% return on the bank account, we would be happy to pay 10/7 x 1000 = $1428.

so RR is very important to determine how much is sensible to pay for something

I personally think RM's method is too reliant on RR, in reality there is no 'correct' RR so we use it primarily as a risk input in the equation, high risk companies get lower IVs meaning less likely to buy it unless it is substantially discounted.

Finding good companies with good prospects in my view is a lot more important than calculating IVs, after all the market doesn't give a damn about IVs, quite simply they will price a business high when they feel good about the business, and this is what will happen for companies with good prospects.

 

[tothemax6]

Forget about shares and think about intrinsic values of bank accounts

What is the intrinsic value of a bank account today at 10% interest with $1000 in it (and the money will be payed out to you at the end of the year)

Assume the next best account in the market offers 5%. So basically, we would be happy with something in between, say 7% (this is now or RR)

To get a 7% return on the bank account, we would be happy to pay 10/7 x 1000 = $1428.

so RR is very important to determine how much is sensible to pay for something

I personally think RM's method is too reliant on RR, in reality there is no 'correct' RR so we use it primarily as a risk input in the equation, high risk companies get lower IVs meaning less likely to buy it unless it is substantially discounted.

Finding good companies with good prospects in my view is a lot more important than calculating IVs, after all the market doesn't give a damn about IVs, quite simply they will price a business high when they feel good about the business, and this is what will happen for companies with good prospects.

Morningstar has a useful value model (available in my CRC markets brokerage account), in which they use a 'discount rate', that looks very much like an RR (around 10%), but which claims to be weighted according to a companies beta, risk etc. Might be worth a look.
Also regarding Rogers method, he does use a second filter - his so called 'ratings' from 'A1 to C5', with A1 being 'top company, good management, low change of liquidity event, likelihood of increasing IV' etc, and with C5 being 'big pile of debt-ridden poop'.

 

[RogueTrader273]

Thanks for that guys! Was having trouble figuring out why my own return requirements should affect the valuation of a company.

Btw has anyone worked out the IV of Mastermyne (MYE)? Good chart, good looking figures, and in the mining services sector (picks and shovels.)

 

[moreld]

1. Why should your RR affect the IV of a company?
)

RT, Bilyb gave you a great answer, a 1% move in the RR has a massive effect on valuation. Here is some more reading from a value investing guru, James Montier.
http://www.simoleonsense.com/wp-content/uploads/2008/11/dangers-of-dcf.pdf

While Montier is dissing DCF it is not much of a mental stretch to apply many of his concepts to Roger's valuation work. I'm not saying that thinking about IV is not a worthwhile step, but as Billyb said, it should only be one tool in your toolbox.

Any methods that rely on beta are moving even further aways from reality and should be trusted even less.

 

[RogueTrader273]

Yes you're right, very helpful answers, looks like it might be as much art as science.

Just fiddling around with putting this on a spreadsheet, any feedback welcome.

 

[Bunter221]

Yes you're right, very helpful answers, looks like it might be as much art as science.

Just fiddling around with putting this on a spreadsheet, any feedback welcome.

Thanks for sharing RogueTrader all assistance appreciated. Run some stocks through before Monday and leave feedback for you.

 

[RogueTrader273]

No probs- currently working on a version that will save all data to a seperate sheet, should be done in a day or two.

 

[Bunter221]

No probs- currently working on a version that will save all data to a seperate sheet, should be done in a day or two.

I normal have the master and then save as say BHP as an example, works fine for me.

 

[RogueTrader273]

I'm saving it so that each record is in a single row, similar to Mr Bojangles web page.
Is the worksheet giving you the correct answers?

 

[Bunter221]

I'm saving it so that each record is in a single row, similar to Mr Bojangles web page.
Is the worksheet giving you the correct answers?

Oh YES the one row and all stocks on the one page would be fantastic. I still haven't had a chance to check how your sheet performs. Been working very hard on other issues. Will definately do some stocks today and check against the Intrinsic Value web page provided by Mr Bo which is all I have used up to date.

 

[RogueTrader273]

Ok this version's much better (see attached). I haven't finished the record saving module yet, as I haven't decided yet which data I want to save. Not being a finance wiz, I'd appreciate any feedback on that. Also I've improved the tables so they use units of one instead of 2.5, so no need to select an ROE value manually.

 

[Bunter221]

Ok this version's much better (see attached). I haven't finished the record saving module yet, as I haven't decided yet which data I want to save. Not being a finance wiz, I'd appreciate any feedback on that. Also I've improved the tables so they use units of one instead of 2.5, so no need to select an ROE value manually.

Thanks RT I like to refer to Stock Code and of course Excel lets the individual sort alphabetically - but you could put a button, the entered price - lets you how out of date the data is if you are aware of current price, also the date data entered would also clarify this, ROE and the amount of debt, safety margin and intrinsic value.
Basically if you want to enter more individuals can hide columns or colour the ones they want to monitor.
Hope that helps!
The explanations could go as "comments" under the applicable headings if you wanted to tidy up the front end. Thanks for your efforts!

 

[RogueTrader273]

Actually I'm thinking now I should save everything including formulas so that 'what if?' calcs can be done such as changing the RR and putting in the latest SP etc. Lots more can be added too - how about cash flow, and Roger's A1-C5 rankings?

 

[Bunter221]

Actually I'm thinking now I should save everything including formulas so that 'what if?' calcs can be done such as changing the RR and putting in the latest SP etc. Lots more can be added too - how about cash flow, and Roger's A1-C5 rankings?

RT I guess the more you show the better the chance of differentiating between several buying opportunities, everything helps. Lets face it, once developed columns can be hidden or taken out based on the feedback later. Roger's A1 -A5 etc may be somewhat subjective but he obviously relies on the management factors (not really measureable apart from figures revealling a well managed company and reading reports) the stocks could be sorted off the data that way you may achieve a ratings column similar to Roger's. Obviously, with this process in place all my life I wouldn't have made as many bad choices on stock purchases based on tips and wrong fundamentals.

 

[Bunter221]

Actually I'm thinking now I should save everything including formulas so that 'what if?' calcs can be done such as changing the RR and putting in the latest SP etc. Lots more can be added too - how about cash flow, and Roger's A1-C5 rankings?

Hi RT just looking at your good work ARP V3 you have 72(000000) its actually 72.5 and this makes a large variation to the IV. I use Suncorp data so there may be a variation. It would be nice if others calculating more manually could share their thoughts!
On the RR matter of riskier stocks you use a higher RR in the calc which will reduce their IV, less riskier investments say banks have a lower RR say 8 instead of 12 which will raise their IV relatively speaking making them good buys because of the lower risk in the calcs.