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What are attractive prices?

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Jesse Livermore

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Hi,

One of Warren Buffet's 'value tenets' is to buy companies at attractive prices, but what is an attractive price?

Is AMP a good buy at $7.78? What about TLS at $3.99? ORG at $7.52? QAN at $4.06? BSL at $6.94? TEN at $3.09? FGL at $5.50?

I am ready to to take an active interest in investment and remove my $100,000.00 from Colonial First State and start investing small into direct equity securities. I am currently studing for ASIC PS 146 compliance through the Diploma of Financial Services at the SIA and feel it's about bloody time I invest directly.

Using a fundamental approach based on buffett's investment guidelines, especially his 'know what you own' and 'buy at attractive prices' concepts, I will I will do a bit more F/A on the S&P/ASX 200 companies and decide upon my best value stocks in each sector. I am thinking of holding 3-5 stocks originally at a cost from $2500.00 upto no more than $10,000.00 and building on that.

I am quite raw and books can only give you so much, I need to EXPERIENCE in the market, and it's starts mid next week when my Colonial First State funds are cleared into my CMA.

Have you guys got anything you'd like to tell me before I 'take the plunge'?

Jesse Livermore
 
Jesse Livermore said:
Hi,

One of Warren Buffet's 'value tenets' is to buy companies at attractive prices, but what is an attractive price?

Is AMP a good buy at $7.78? What about TLS at $3.99? ORG at $7.52? QAN at $4.06? BSL at $6.94? TEN at $3.09? FGL at $5.50?

I am ready to to take an active interest in investment and remove my $100,000.00 from Colonial First State and start investing small into direct equity securities. I am currently studing for ASIC PS 146 compliance through the Diploma of Financial Services at the SIA and feel it's about bloody time I invest directly.

Using a fundamental approach based on buffett's investment guidelines, especially his 'know what you own' and 'buy at attractive prices' concepts, I will I will do a bit more F/A on the S&P/ASX 200 companies and decide upon my best value stocks in each sector. I am thinking of holding 3-5 stocks originally at a cost from $2500.00 upto no more than $10,000.00 and building on that.

I am quite raw and books can only give you so much, I need to EXPERIENCE in the market, and it's starts mid next week when my Colonial First State funds are cleared into my CMA.

Have you guys got anything you'd like to tell me before I 'take the plunge'?

Jesse Livermore
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Since you've been on ASF for awhile Jesse, the best I can suggest is going through some of those old threads on money and risk management and psychology, also read Nick Radge's book (see the Adaptive Analysis thread), mainly the first part since you don't follow TA.
If I were you I'd start paper trading and then invest tiny amounts to test the water rather than going in with the parcel size you suggest- eventually you'll have to put in real money. But this is not advice just what I'd do, it may not suit you and you may make a lot of money by going right in (so if you follow my view you may lose money).

So basically, be patient and read up. If you want views on specific stocks I suggest the individual threads for those stocks- we have threads for all those stocks here on ASF.

Good luck!!
 
RichKid said:
If I were you I'd start paper trading and then invest tiny amounts to test the water rather than going in with the parcel size you suggest
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I've been keeping track of things for a while on tradingroom.com.au. MIG, MAP and TCL have been the best of the stocks in my watchlist. I'll buy 3-5 stocks over the course of about 4-6 weeks. The first transaction I make will probably a small one, say $250.00 > $1000.00 and I'll add to my positions as the weeks and months progress.

Jesse Livermore.
 
Hi Jesse,

Are you taking your "attractive prices" tenet from the source, or are you going by what other people say Buffet says? I ask because a LOT of people who use Buffet's name act as if they're not interested in what he's written and couldn't care less about the details of how he invests.

My understanding is that Buffet's idea of an attractive price is one that is substantially below the intrinsic value of the purchase. This is based on Benjamin Graham's "margin of safety" principle; aim to buy so low that even if the share price falls you'll still have an acceptable return. The trick is figuring out the intrinsic value and your necessary margin of safety for each company you look at - simple really :D

I'm sure you'll do your own reading and research and figure out your own strategy. Buffet's is not the only way; I'll be interested to read what plan you eventually decide to follow.

All the best,

Ghoti
 
Hi Jesse

For what it's worth, here is my :2twocents worth on how I determine whether a company is fundamentally good value or not.

Basically I go through a series of 4 tests and a company has to gain a score of 70%+ in these tests for me to rate it as ok to buy fundamentally. I've set up an Excel spreadsheet to model these 4 tests. Then I look at the company's price chart to help time buying points.

1. I use the Altman-Z Factor to gauge whether a company is financially sound or not. For info on how the Altman-Z Factor model works, maybe have a look at http://www.nysscpa.org/cpajournal/old/16641866.htm

2. I look at various financial ratios including, working capital ratio, Debt/Equity, Gearing, ROA, ROE, interest cover, EBIT margin etc

3. I then look at the PER and PEG ratios to make sure they are within reasonable limits.

4. I then look at what returns I can expect in the next 2 years based on increased share price according to PER and EPS,DPS forcasts. I then discount that total return back to NPV.

example:

Company XYZ

Current Share Price: $1.00
Forcast EPS in 2 yrs: 7.5 cps
Forcast Div in Yr 1: 3.0 cps
Forcast Div in Yr 2: 3.2 cps
'Fair' PER: 16.0
Long term 'Risk Free' Return: 5.5%

Therefore, potential price target = 0.075 x 16.0 = $1.20

Potential TOTAL 2 yr return = $1.20 + 0.03 + 0.032 = $1.262

Now I 'discount' this $1.262 total return back to NPV using a transposed compound interest formula:

NPV = TR/((1+I)^n)

Where

NPV = Net Present value of the $1.262 total return
TR = Total Return
I = Discount Rate
n = number of years
^ = to the power of

NPV = 1.262/((1+0.055)^2) = $1.13

Since the current share price at $1.00 is well below the $1.13 NPV of my total potential return then I would consider XYZ to be good value atm. But to pass my NPV test, the share price has to be more than 10% below the NPV.

So although all this above doesn't actually value the company as you originally asked, it does value your expected returns in terms of what those returns are worth today (NPV).

So after I have the results of the above 4 tests, the individually weighted test results need to add up to a score of 70%+ for the company to pass my fundamentals/valuation test overall. If the company passes then I look at the price chart to help time buying points.

Good luck and hope this helps :)

bullmarket
 
It takes research.
Think three years ahead, study the company and understand the business.
Study other companies in the same business.
Qantas was a buy when it was around $3.30 and the dividends were rising. I own it but have offloaded some at $4.00.

If a company is growing, is it growing at a rate that means that it is undervalued? Is the merger of two companies mean the third will do well?
Basic stuff.
 
Hi Jesse,

Try this for a valuation methodology, was on the ASX website recently: http://www.boardroomradio.com/templates/event.jsp?c=279&e=780&m=wmp

"Boardroom Radio Broadcast of Investor Hour:
Roger Montgomery is Chairman of Clime Capital Limited which invests predominately in ASX listed securities. A recording of Roger's recent presentation on How to value any listed company is now available (link above)."

If you haven't read it already read Benjamin Graham's Intelligent Investor.
 
Why TLS?

I can't believe the number of smart people who think its a bargain.

I wouldn't give them 1c if I could help it, only thing saving them at the moment is line rentals and as more people keep ditching the landline for other forms of telephony services (VOIP through broadband) I can't see any value in TLS other than the copper wire they have and maybe the Senesis and Mobile coverage.

If people wised up and shopped around they could save a bucket load on what TLS charges for calls.
There may be a recovery when T3 gets of the ground but at what price will it be?

Just my :2twocents
 
RichKid said:
If you haven't read it already read Benjamin Graham's Intelligent Investor.
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I own every book you coud possibly imagine in trading and investment, however many of them are still unread!

Fundamentally speaking I have books that if studied properly would put me way ahead of the average person, these include:

Beating the Street, Lynch
One up on Wall Street: How to use what you already know to make money in the market, Lynch
The Intelligent Investor: The Definitive Book On Value Investing, Graham
Security Analysis: The Classic 1940 Edition, Graham and Dodd

But thanks for reminding me.

Jesse Livermore

P.S. I'm not blind to technical analysis. It's just easier to make decisions based on fundamentals at the beginning.
 
Jesse
$100k - buy a unit mate, does not matter how many books you have you cant beat experience and a plan. No plan - your $100k can be $90 to 80k b4 you know it even in a bull market. Buying $1k or $2.5 will kill you on brokerage, whoops thats the trader in me out. Go back and spend a few weeks and put a plan together. Will your $2.5k or $10k have a stop loss, sorry mate but what will you do if your $10k shot/investment is 10% down. I hope you do well with your attractive/value prices in the companies/(bluechips?) that you mentioned, Its not that easy having $100k and turning it into $200k especially with the dogs (imo) that you mentioned. Making money relys on choosing good companies for the longterm (seems your way) or trading using TA alone or combining some TA with research but things always go wrong and then what DO YOU DO? Chit if you have to ask people on this forum what to do b4 taking the plunge with $100k your in trouble b4 you start. Sorry to be so blunt.
 
buy a unit
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I'm a 19 year old student. How would I make the repayments?

Go back and spend a few weeks and put a plan together
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I have a lot more research to do but here is basically what I am looking for.

1. A simple and understandable business
2. Consistency
3. Favorable long-term prospects

4. Rational management
5. Management that is candid with it's shareholders
6. Management that resists the instutional imperative

7. High Return on Equity
8. Owner Earnings
9. Profit Margins
10. Businesses that have created at least one dollar of market value for ever dollar retained.

11. Intrinsic Value (ROE/pretax RR* EQPS)
12. Business that can be purchased at a significant discount to its value

I'll buy 3-5 businesses over the course of about 4-6 weeks. The first transaction I make will probably a small one, say $250.00 > $1000.00 and I'll add to my positions as the weeks and months progress. I am looking at an initial 3-12 month monitoring period of my businesses. I feel I have a fair idea of how I should size my positions, however definately not quite there in regards to risk management.

Its not that easy having $100k and turning it into $200k especially with the dogs that you mentioned.
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The businesses I mentioned earlier where just of companies that I knew of that were cheap in comparison to others in its sector, I am not planning on buying into these businesses.

Jesse Livermore
 
Jesse,
I hope your idea works out for you. Personally, I started trading in small amounts, the smallest you can purchase on the ASX if you don't already own a parcel of shares in that company is $500 + brokerage. Keep that in mind.

You need to work out if you intend to be a Trader or an investor and regarded as such by the ATO. It's an important point, in terms of Capital Gains v Tax on your business profits. If you are subject to Capital Gains and you sell the shares within the year then you will pay a higher percentage in CGT than if you sold after you've held them for a year. The difference can be significant. The flip side to that of course is that you can start out as an investor but may reach the point where the ATO regards you as a business anyway. You may well need to get advice on that, financial and probably legal, I did. Whichever way you go, you'll need to keep records, especially financial records but records of your research as well. You should develop a Trading Plan, modify it and refine it as you need to but generally stick to it.

Rely on your own research. Don't always believe what you read in the Newspapers, magazines or broker reports. I made that mistake with my first purchase which was in Sunland Ltd. Ultimately I had to implement the stop loss part of my plan and sell at a loss. Best thing I ever did for my portfolio though.

Jesse, I look at the charts first, then if things look good on that front, I look at the fundamentals. If the charts aren't helpful, I'll still look at the fundamentals. If the fundamentals look good, I'll search the internet and libraries (eg the online libraries via the Australian Institute of Management of which I'm an Associate Fellow) for information on the company (not just the company's website). If that checks out, I'm in.

One way, though not the only way to find such companies is on the finance pages of ninemsn. Use their investment finder. It provides the Aspect Huntley's ratings in the areas of Income, Growth, Value, Risk. They're measured on a scale of 1 to 5, where 1 or 2 for Income, Growth and Value are excellent or good and 4 or 5 for risk means low risk. You can download it to a spreadsheet and if you got keen could add the ranks together. Your worst will have a total of 20. Exclude N/R which means no rank. Ideally your looking at companies that total between 7 and 11 out of 20. That may then throw up a certain sector for you. I found BBG this way, so it can work. The key is research. Rely on your own research.

The link for the Investment Finder is below.
http://investor.ninemsn.com.au/investor/shares/finder/default.asp

I currently hold 7 companies. Currently the following are doing ok.

ANZ bought 30 March 2005 @ $20.58 Currently @ $24.22
BBG bought 25 May 2005 @ $11.67 Currently @ $14.14
QGC bought 21 March 2005 @ $0.48 Currently @ $0.635
MBL bought 17 October 2005 @ $65.50 Currently @ $67.68

Timing and research is how I found these. I think value is at times in the eye of the investor and very much depends on your goals. I aim to sell my positions in 12 - 18 months, therefore I buy with that view in mind.

I hope this helps. Be patient and the rewards will come.

Good luck!
 
I would have brought $90.000 worth of sbm shares last friday
$10,000 I would have kept for funeral expenses if things do not go well.
 
Jesse Livermore said:
I'm a 19 year old student. How would I make the repayments?
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I'd seek out someone like Nick Radge and put into place a comprehensive investment plan (not just a stock investing/trading plan), you are fortunate to have such an amount at this age so don't be in a rush to lose it, you probably don't know how hard it is to earn that amount again if you lose it (or even a portion of it).

Most importantly, be patient and take your time to get the planning and understanding right. Fund managers may be good at losing your money but you might do an even better job of losing more if you're not careful.
 
RichKid said:
I'd seek out someone like Nick Radge and put into place a comprehensive investment plan.
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I have financial plan.

It takes into account my needs and objectives, personal and financial situation, risk profile and financial knowledge.

It discusses income and expenditure, assets and liabilities. It covers cash, fixed interest, shares, and property. Managed investments, superannuation, retirement and Insurance etc. have yet to be considered.

Jesse Livermore
 
Jesse Livermore said:
I have financial plan.

It takes into account my needs and objectives, personal and financial situation, risk profile and financial knowledge.

It discusses income and expenditure, assets and liabilities. It covers cash, fixed interest, shares, and property. Managed investments, superannuation, retirement and Insurance etc. have yet to be considered.

Jesse Livermore
Click to expand...

"I dont have a degree but I employ many that have and they have made me a lot of $$s"

Even though you have your own plan I'd seriously get the opinion of an expert, you may have it 100% right but then again I'll bet they will have a few ideas you never thought of.

Finding an expert is the problem. If Nick didnt wish to do it I'm sure he'd know someone who could.
It would set you back $1200 + I'd say so maybe you need to be in more of a position for diversification and tax planning before seeking out this expert.
 
Hey jesse,

Buying a unit would actually not be a bad idea, i saw a studio in the city (melb) rented out to ibis apartments until 2009 with a further 5yr option going for $115Gs, they pay all outgoings (body corps, council rates, etc) and you get $845pcm nett, apparently u get ~4.5%pa growth on those apartments. Put down 20-25Gs and loan the rest, they pay it off 4 u and sell it in the longer term, it works out sweet....

As for TCL and MIG, these guys have so much debt, so they are very prone to rising interest rates, which is why prices have been dropping in recent months. They also need to borrow to pay their dividends... MIG been making heaps of acquisitions but the last one was 89% debt-funded... But yeh i dunno, u probably know heaps more than me on this...

Investing really depends on your one risk profile.. The best way is just to do your own research i guess...

Bullmarket, ur technique seems awesome, but one question: by Fair P/E do u mean Current P/E ?
 
Hi nizar

nizar said:
Bullmarket, ur technique seems awesome, but one question: by Fair P/E do u mean Current P/E ?
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For my purposes, 'fair PER' = what I think is a fair and justifiable PER based on a company's forcast EPS growth for the next few years. As a guide I look at the company's historical PER (from commsec research) and the company's sector avge PER and peer companys' PER to come up with what I believe should be a fair PER going forward.

In reality, a 'fair PER' is subjective and different people could easily have differing views. I try to err on the side of caution and tend to drop my fair PER by a half to one point if I'm unsure, so as not to artificially inflate my expected return (as described in earlier post) and its NPV by too much.

Hope this helps

bullmarket :)
 
Bullmarket,

what success have u had by using this formula?
What are your current holdings?

I applied the formula in your example to some companies i was thinking of investing in:
WPL worked out to be some 40% undervalued (NPV = 58.35)
HSP some 45% undervalued (NPV = 8.45)
BIL 20% undervalued (NPV = 12.78)

and even ZFX after 196% rise in 2005, the NPV = 12.99.

Wat do u (or anybody else) think of these companies?
Ill do my own research dont worry, i just wanna hear opinions ;)

Also, i think (especially with miners), we must consider the risks the company must overcome to reach forecast earnings...
 
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