Hi, how do you determine a fair value of a stock? what is the formula to use? can list an example?

When you think it is fair then it is fair...

For me, I don't need and don't want to think too much, no need to talk about the different models as in DDM, DCF, the very old Munsen methodology, etc. Just use the Book Value.

how to check the book value?

I use a coin. I flip until I get the answer that I want.

Can use many methods to get the fair value.

For me, I try the KISS, keep it as simple method i.e P/E. Sort of lazy to learn more complicated methods. In the end, it is not the sole factor to sell you shares.

If I think BN could not win a 2/3 majority in GE, I might sell off the shares too.

Just one of the methods, certainly not the best you can get.

This post has been edited by SKY 1809: Nov 5 2010, 01:55 PM

then better go up hill & play "Big or Small" better

I expect the BN to win. I think the stock market will only crash if BN loses because this will be a shock. I don't think a less than 2/3 majority win will cause the stock market to fall. I don't think this result will shock the public a 2nd time. On the other hand, if BN wins 2/3 majority possibility the stock will climb higher.

dividend discount model? discounted cash flo model?

been long time since meh last used those methods

Sounds good too.

---

Added on November 5, 2010, 2:05 pmYa, some of these methods , we just learned once and forget one unless you are sort of fund managers.

Even Analysts do not like to use these methods often.





This post has been edited by SKY 1809: Nov 5 2010, 02:05 PM

what is the book value for bjcorp?

Book Values do not work very well for Plantation and property stocks in the past.

The book value for agriculture lands and commercial lands differ a lot. And seldom people want to sell lands at plantation price though the book says it is only worth that much.

Bjcorp , Realized Net Asset Value is above rm 2, ( forgot the exact number )

This post has been edited by SKY 1809: Nov 5 2010, 02:14 PM

There are lots of methods to calculate the fair value. The simplest one is to use average PE.

However, merely using average PE is not enough. Need to look at the fundamentals of the company as well for profitable investment

Though, many glove stocks are fundamentally strong ones, they cannot run away from the problems of QE 2, where raw material prices are jumping up, and US $ is falling fast.

This post has been edited by SKY 1809: Nov 6 2010, 12:18 PM

any web to have chart for PE and book value?

Bjcorp still undervalue...
It should at RM2.. or above....
Believe...
VT will take 1-2week will bring BJcorp RM1.50++

bjcorp got high PE

PE is neither perfect too.

Most beginners would just use the historical PE ( published somewhere or info appeared in the trading system ) ) as the numbers to buy a certain stock. That is one school of thought. expecting constant future economic performances as if today.

The other school of thought would like to use the forward PE , meaning some kind of future earnings are used. Like to take into account of future good CPO prices at above rm 3,000/tonnes.

The price you pay for the stock actually counts the number of years the company would earn back that amount of money in the future.

Let say for PE of 5x, you do expect the company would earn back this money in 5 years , kinda shorter is better.

That is why another school thinks you should use the forward PE.

Logically it makes sense since we all hope the company we buy would make good profits in the future, not the other way round.

If there is a likely recession in the near future, stock price would start to sink first, Forward PE recognises that.

If you are still using the historical PE as a yardstick, you need to know where you stand in the future.

This post has been edited by SKY 1809: Nov 6 2010, 12:21 PM

I tried calculating using DCF model, and it's quite useless if you cannot make a good cashflow forecast for 5 years (garbage in = garbage out)

Also rite, most DCF look good now because of relatively low interest rates.

if u buy for long term..who cares?

as long as the price is in ur tolerance level, just grab it, if u play short term...i go genting play big and small...50%-50%, faster results..and high return lagi best~

Even if you buy long term, you need to care. Valuation is very important. Go google finance and look at the 10-year chart of Microsoft, Wal Mart, Pfizer and Johnson and Johnson. All this are super blue chips in US. During the early 2000-2002, there is a big cap bubble in US. Those folks that buy big caps during that period and hold it long term, practically have zero capital gain. The earnings do grow as forecast, but, the multiple contracts, leaving shareholders with almost zero capital gain. Their dividend yield aren't that great either.

If those who buy AIG 10 or 20 year also. Will tear like no tomorrow.

if ur intention is invest aka hold lama-lama (15/30/45yrs), my experience told me data (peg, nta, fcf & etc) is a very first defense, dy is second as ur cash flow for spending or derivatives, company prospects would be the key for my decision.

for speculative play; peg, mkt theme & vol would be my priority

thats depends on how is ur tolerance level and ur Stop Lost/Profit Level lo...

holding a stock forever without convert it into real money, at the end, its still just a paper...

---

Added on November 5, 2010, 11:12 pmvolume is very important, no volume, when you want to sell..hard to sell also...

This post has been edited by cypher: Nov 5 2010, 11:12 PM

tat is 4 my speculative play, 4 long term investment, i never bother on the vol

Most worst player's mistake. If you don't know the value, your capital will stuck there... you want to buy something intrinsic value increasing sufficiently... not something increasing like turtle or go no where in these 10 years

In a nutshell buy low sell high is more useful than buy high sell higher.

If BN lose that's good as the SE will crash and I can buy even lower.

Yes, I believed different counters carry different ways to judge and decide on the Fair Value.

Then again, I recalled reading somewhere : even this Fair Value itself has volatility too, ie at different times, the Fair Value is different, being influenced by fundamental factors, eg political climate and present Gov't.

THis makes it even more complicated.

I believed longterm holdings can succeed for stocks that do not move their Fair Values.

For others, it's not worth to hold long term.

Judging the Fair Value is hard enough, now this fair Value itself is a moving target.

DCF might not be the same as the actual cashflow of the company. Anyway, any assumptions or projections made are not actual. Kinda simulations to me.

For me, actual cashflow of the company is important, and most analysts are not of accounting/financial background , many tend to overlook this important issue.

For example, not too long ago, LCL was top graded by most analysts, but some of financial/accounting trained investors tend to shy away from this company. LCL ( at the time of top rating ) took too long ( more than one year ) to collect the payments from their customers. Signs of some troubles were written on the wall.

However, none of the stock analysts pointed that out at that time.

For me, I focus on the undervalued small capital stocks, so good cashflow management of those companies is my top pick if for long term.

Not saying DCF is no good, just saying that priority has to be given ( for lazy investor like me )

Just my view.

This post has been edited by SKY 1809: Nov 6 2010, 12:46 PM

Fair value is just a way out to guide only.

It is just like beauty contest, who is more beautiful than others.
How to judge? I also don't know.

Put the same model/listed company, different people can come out with different figure and result.

Economy, businesses can be changing rapidly.
Today the company can report making 1 billion profit, cashflow + 1 billion, analysts said fair value Rm10
Next quarter, business down, company making 1 million, cashflow +0, analysts may say fair value Rm5.

Worst one,
Company report receivables being classified defaulted after, resulted loss a billlion, then analysts may downgrade the fair value to Rm1.

So how?
Hey last time the analysts said Rm10 is fair value one, how come now Rm1.

The world is never fair.

For me, the "fair value" is the value/price you paid to buy the stocks is worth to generate satisfactory profit for you.

Actually it is about individual perception or individual figure instead of a universal figure to start with.

To invest in stock, one should never look what is fair value, or TP set by anyone.
The first criteria is to judge yourself,
How much I should pay for such amount of profit can be generated.
How will the company grow, company prospect, future will be in term of generating growth in profit.
How well the company management is taking good care on shareholders and sincere and honest in running the businesses.

Just my 2 cents.

This post has been edited by cherroy: Nov 6 2010, 11:02 AM

u r absolutely right...

I like to look at fair value this ways:
. The current fair value in stock is performance as per next Q announcement or and next Q forecast using the last Q result as the guideline..
Say that we r looking at CIMB and MAYBANK
Both announced their last Q result with almost the same EPS for the last Q (12.59/12.89)
For the next Q result to be announced this month might not change much and their share price are almost the same so both of them are at the fair value.
. Now look at MBSB
I think this stock will have a better fair value in the future,

like i mention lo...its up to ur own tolerance level

how you will know the fair value of the stock? if those researcher or analyst is so damn accurate...why they not 1st to get that?

somemore, how u know whether this price is in so called fair value? like cherroy mention, when this is the fair value, but then suddenly other factor affect and it drop below the so called fair value. how u say about that?

for eg, i brought AIRASIA at RM 2.2, most of the ppl tell me it is very high already, not worth to buy, but for me RM 2.2 is fair for me, even got ppl tell me, aviation stock is not safe, once the aircraft crash one time, then gone...it is true, but for me is what a stupid reason....

for me, my own consideration is = profit stop / lost stop % + duration to hold + news/announcement

either one of the reason which make me think i need to sell, then i will sell...which ever reason comes in first that get my attention...

unless i buy just want to gain the dividend from time to time....

This post has been edited by cypher: Nov 6 2010, 01:53 PM

learning learning....input input....thank you thank you all teachers here...

The fair value of a particular share on any particular day is the price it is transacted on that day on the stock market. Period.

Yes, I am talking from the point of Technical Analysis where price is everything and incorporate all factors known and unknown.

True also, IF Kenmark or LCL turned PN 17 on that day, then you could find the true fair value on the day from TA point of view.

But for FA, signs ( like LCL/Kenmark ) signs could be written on the walls. Even for Kenmark, too big of debtors may require more in depth study before you invest.

Those ekor numbers come out as First prizes, are in fact first prize numbers reflecting the true fair value, no argument on that. TA is right in that sense.

This post has been edited by SKY 1809: Nov 6 2010, 02:12 PM

For glove stocks, even though their business model still remain the same..i would say that the oversupply of their rubber gloves, as well as increasing raw material cost & rapid falling of US$ have changed the fundamental of the affected rubber glove companies.. So looking at the fundamental of the companies is still important for profitable investment

Let me share some of my investment experience of analysing a company's fair value.

1st I'll check the company's management, if the quality of the management is good I'll further check out their intrinsic value. If they are not integrity enough such as the "Berjaya" gang of the companies are out of my radar screen.

2nd step is then to evaluate a company's fair value. But what methods I should use? It depends on whether we are insider? Are we the substantial shareholder and be able to impose decision making onto the company's management and subsequently affect the distribution of the company cashflow?
1) If you are minority shareholders, maybe Discounted Dividend Model (DDM) is suitable.
2) If you are controlling shareholders, then Discounted Free Cashflow Model (DCF) is good tool.

However, these discounted models are too complicated to me because a lot of the people don't know how to use financial modeling to project future dividends/cashflows and subsequently to use the correct discount rate and constant growth rate to get the accurate PV. A small fault input or assumption could have lead to a disastrous outcome by using these models.

Then people would tend to make life easy by using P/E, P/B or P/S. But these relative valuations have their own weaknesses due to irregualr year of financial results and thus P/E, P/B or P/S could be invalid for certain years. In addition, certain ratios only applicable to certain sectors. For example P/B could be good for banking or property stocks because they rely on their asset to generate value, but it is not a good indicator for knowledge intensive sector such as IT companies since they make business base on human resource, not physical assets.

In order to justify the application of relative valuations, analyst would tend to get a normalised or average ratios for P/E, P/B or P/S by removing some of the outliers. Subsequently they further supplement these ratios by comparing with the Adjusted Net Asset (book value). IMHO, it's stupid to value a company base on NAV, because doing business is forward looking, so we should not evaluate a company based on its historical figures. If a company is making losses but sitting with huge base asset, what's the point we buy a company's at a discount to its NAV knowing a negative retain profit is gradually shrinking the company's NAV?

With all these absolute and relative valuation models, oh hell!, they still cannot get us the exact valuation. So there are another value investing strategy comes to play that we should buy a company with a margin of safety to it's intrinsic value. At the end of the day, all we can see that we don't have some rocket science tools to get us the actual value but a vague range of valuation.

In order to understand a company's valuation, it all depends on how good is our business sense or instinct, how well we can understand the business model and how far we can look beyond the business prospect. It's not necessary to become well equipped in academic theory and historical numbers in order to be a good investor or else there would be a lot mathematicians, statisticians and historians become success in investment.

I like the quote from John Maynard Keynes as he had once said "It is better to be roughly right than precisely wrong”. The same quote does apply to value an investment because it's an art, not a science or mathematics.

This post has been edited by kinwing: Nov 6 2010, 04:58 PM

Theories & talk, talk, talk is fine. Now, pls recommend at least 5 counter in klse & we'll see its performance & judge with our own eyes. Thank You!

Why we should spoon feed you?

hantam these 5 for fun

QSR
Drbhcom
Ci holdings
bkawan
axiata

QL for one more , but must give a good timeframe for it lah.


But for value investors , the biggest setback/mistake is to set a short timeframe or having too high an expectation.

This post has been edited by SKY 1809: Nov 6 2010, 09:06 PM

thanx for sharing sharesa

First & foremost, even though I talk theory of buy high, sell higher. I do give recommendations for US stocks
Now, this forum is for sharing & I DO NOT need ur spoon feeding!
But if you are going to talk theory. Do have BALLS, be a MAN & DON'T sidestep the issue by giving EXCUSES
Its for the other forumers to judge theory talk & compare it against actual peformance
Nothing to hide unless you have

In Malaysia, you still can get some haha corporate information every now and then ( some pieces and not completely ) , but it does not mean you should share it openly with everyone you know of .

This post has been edited by SKY 1809: Nov 6 2010, 07:57 PM

When this thread is open, apparently it is talking about how to value a company and theories are involved along the discussions. It is not a tips giving thread.

I don't see you contribute any in the discussion instead you straight away asking for 5 counters. It then gave me an impression that you either don't know/don't bother to know and only care about the outcome. To be successful in investment, it's not always outcome but the ultimate goal is to go through the process, and discussion of how to find the fair value is the "process" we are talking about. So what's the point we tell which 5 counters we choose base on our on assumption that you don't know? Again, I said no spoon feeding, unless you know the "process" we are talking about and apply your own understanding of the process to get the 5 counters to show us what you have been working before asking us to show you the 5 counters. If you talk something with input and contribute something interactively in the discussion rather than arrogantly blame the "process" is bullshit, it would be quite a pleasure for me to talk more over here.

When you are criticising someone by finger pointing, please remember there would be 4 fingers pointing back to yourself. Your words just reflect who you are who only like to talk cock sing song since you might not have BALL to show the "process".

How do u guys judge management of company ??

sky1809, well we can keep a list of 30 or so list of counter in watchlist, giving 5 is no big deal, anyway this discussion goes nowhere
reminds me of mlm thread, going around & expanding into irrelevant topics

talk so much theory & giv excuses! writing 5 counters is only 1 line
no point furthering this as u go jus go round in circle & giving excuse after excuse

You are also keep whining around and around of begging others to spoon feed you

Well,

I find the discussions are rather fruitful, only you are the one who spoils the soup.



P/s . I thought the 5 are requested by you, and our forumers obliged by our Malaysian friendly Culture.

This post has been edited by SKY 1809: Nov 6 2010, 09:11 PM

Ya, we are talking about the "process" but someone still doesn't get it. That's why I'm saying when one is more on the "outcome" who tells others no shit how these outcomes derive. We are just from the different world.

Maybe I can claim I make millions of $ from 5 counters based on fair valuation method. But anyone of you can verify how I make millions on that? Or you are too stupid to look through how I can make million with the 5 counters but you cant? If you can't understand then why I bother to tell you which 5 counters? You might claim I'm BS but it's the bad side of telling the outcome without knowing how prove it works. It is an internet world man, I can even BS I'm top 5 most sucesssful FM here who claim to make big bucks from the 5 counters in bursa as stated below:-
SATANG
OILCORP
KENMARK
LCL
AMVEST

Can you verify/prove how I make millions or you think it is a a wasting time to read the 5 counters since you know no shit out of these?

This post has been edited by kinwing: Nov 6 2010, 09:30 PM

I wont even bother to buy airasia, I don't see the fair value goes anywhere where in future 10 years. The price can go like crazy times 3++ but eventually will follow it true value in future.I dunno about short term..zero knowledge about it.
It is simple,it is because those analyst don't focus on business in perspective of owner . their estimate are useful, but if they apply in rubbish business, so rubbish outcome too
heard of margin of safety??

As a long tern value investor:
1)buy GOOD business ( AA is a superb company, world class CEO ...but in wrong industry.. capital intensive industry..)
2)buy business that intrinsic value at increasing sufficient rate
3)Buy at great discount
I have been investing for 5 years ++ in oversea market..not so long for some of you, I only watch my portfolio once for few weeks.
all along these years, my portfolio generate compound return around 20%++(after affected by GFC)...

For the bold statement,Good strategy for those who dunno the intrinsic value at least better than those who buy and hold the wrong business...

---

Added on November 6, 2010, 11:34 pmPBB, NESTLE, JOBST ..
The first two every one knows it is a great company and business
PBB - trading at 15% premium to my value
NESTLE - trading at 25% premium to my value
JOBST -(edited..just realised JOBST is RM2.8 now..my fair value last month see is RM2.3 in JOBST thread)..too bad ..i just thought i want to buy it when coming back Malaysia.

will disclose more company in future.

cheers

This post has been edited by foofoosasa: Nov 6 2010, 11:58 PM

similar with what i have read in the book - Business Cycles (History, Theory and Investment Reality) by Lars Tvede

Great stuff there kinwing as well as other forumers who contributed. Yes, process is extremely important. Most people thought when the price of the share they long go up, then, their process is correct, this is a wrong way to view investments. Sometimes, a good process may still lead to bad result. But, if your process is sound, you should do well over the long run.

Some of us here may not be comfortable in revealing our position because whenever you make your position public, you feel a certain obligation to stick to that position and you can't think independently.

For those who like to read message board for tips, read this piece of research paper : Confirmation Bias and Investment Performance : Evidence from Stock Message Board

As for criticism on DCF model, actually, all the PE ratios and stuff can link back to DCF model. DCF is good because it can allow you to look at what drives the company as well as stimulate various conditions. As long as your cash flow forecast is consistent and your inputs are logical and consistent, then, the valuation derived should be a good guide. Do a sensitivity analysis on your inputs. With excel, it is rather easy to do all this stuff. Stress test the company and try to kill it, if the company still survive, then, most likely you got a bargain in your hands. As for some common errors on DCF, I have share this piece in the Value Investing thread before but I am going to share it again on this thread. Download the attachment below.

On air asia, please take a look at SIA performance since its stock listing. SIA is the most profitable airline in the world. If Air Asia turn out well, it would probably be like SIA and that's a big IF. But, if you look at SIA financials, you will know why Air Asia is not a good idea especially at such a price. It may go up, but, it doesn't means it is a good company.


Attached File(s)
 CommonErrors.pdf ( 106.4k ) Number of downloads: 23

I do not know who invented the theory of " Discounted Cash Flow".

For me , at best it should be called " Assumed Income Flow"

In today world, incomes could not as easily classified as CASH. The Dubai crisis and even bank mini bonds went bust. Perhaps , QE 2 may bring back Incomes closer to CASH, but still not very right to assume Incomes = Cash.

IF you are the traditional Chinese businessmen, DCF is nonsense because it has nothing to do with CASH, at best a promise to receive CASH sometimes in future dates.

To the laymen, the word DCF is grossly misleading . Otherwise incomes in IOU could be termed as CASH.

In Malaysia, you can easily find construction contracts to do, but the chances of not receiving payments or so called HARD CASH is very high or a long delay is highly possible. You may have a good DCF model here, but ..........looks good on papers only. No HARD CASH is coming in.

BTW, Cashflow is neither profit as well. " Discounted" sounds confusing to Accountants too.

Using DCF, Malaysia could build another 10 100th floor Towers perhaps, but where is the real cash to come from ?

And there would not be any Dubai Crisis at all.


Just my view.

---------------------------

Discounted cash flow models are powerful, but they do have shortcomings. DCF is merely a mechanical valuation tool, which makes it subject to the axiom "garbage in, garbage out". Small changes in inputs can result in large changes in the value of a company. Instead of trying to project the cash flows to infinity, terminal value techniques are often used. A simple annuity is used to estimate the terminal value past 10 years, for example. This is done because it is harder to come to a realistic estimate of the cash flows as time goes on.

http://www.investopedia.com/terms/d/dcf.asp

This post has been edited by SKY 1809: Nov 7 2010, 09:20 AM

I trust my hunch to determine fair value then i flip the coin

All these DCF, PE and all sorts of methods are Greek to me so I will take the easy way out.

1. Call up dealer which company are worth investing. They have so many in-house reports so it will be a piece of cake to them. You want how many counter, they can give you how many.

2. See how much money I am willing to tie up long term.

3. Use Technical Analysis to determine my entry point and exit point.

Life so much easier this way for my ignorant brain.

Just keep an opened minded that there are such things around, and meanwhile you can still stick to your own methods that you are comfortable with.

IF you think it is good , you may adopt some of the ideas ( added on ) to your own practices.

This is just a round table type of discussion.

Do not take it too seriously.

This post has been edited by SKY 1809: Nov 7 2010, 08:52 AM

Folks,

Let me throw in my 2 cents...

"Fair Value"??

1) Looking at the industry that GUARANTEED to make money. -> Bank, Unit Trust, and Insurance

2) Look for the Best Managed company in that industry. --> PBBank

3) How do they LOSE MONEY?? --> Political Loan

4) What price to buy?? When the Dividend Yield is high enough as compare to FD. 2 x to 3 X FD. 6% to 8% will be a good number..

5) When to sell??

A) Dividend stop growing.

C) Condition (1) to (3) changes...

This is probably dividend based investing...

Dreamer

I think you may have misunderstood the difference between Discounted Cash Flow and Discounted Residual Income. I think the DCF model you talk about is actually a discounted residual income model. Yes, I agree with you on the discounted residual income model. Discounted residual income model is a bunch of BS created by accountants who thought that accounting numbers is good representation of actual economic condition.

Discouted Cash Flow model is basically a model which discount the expected CASH FLOW, that's hard solid cash. It takes into account of capital expenditure and working capital requirement. Underlying the model is a simple assumption that a business is worth only as much as the cash that it can generate, which is very sensible.

As we are buying equities without control, as Kinwing have mentioned previously, we can adjust that using a discounted dividend model (a subset of discounted cash flow) instead. But, that would probably undervalue the company. But, you can compensate that by doing a discounted cash flow to equity model. The fair value, should be within the range of two values.

There are complications involve when using DCF to value young and high growth firms because cash flow projection is difficult. But, even if you use multiples such as PE and you whack an industry PE into the high growth firm, you are implicitly assuming that the company, will become like the mature players in the industry in the long run and earn that sort of cash flow that a mature player earns. So, you are basically doing some forward looking assumption without realising it. If you use historical PE, you may be assuming that the past performance can repeat itself. It is just that when you use multiples, these assumption are implicit. In DCF, the assumption is explicit.

There are various shortcomings in DCF model assumption. The problem is not the model itself but the problem lies in the inconsistencies in applying the assumption. For example, the capital expenditure assumption must tie back with the growth assumption. You can't assume that the growth is 30% a year with minimal CAPEX. Another possible error is the terminal value growth rate, some analyst whack a very high growth rate into their terminal value. What's their justification? Cause the industry grow at 5% for 30 years, so, I think a 4% growth rate is possible for terminal value. But, terminal value is a valuation to an infinite years. What is 30 years when compared to infinite amount of years. By whacking a 4% growth, the company theoritically at one point of time will be bigger than the entire output of the world because the world do not grow so fast.

There are flaws in every valuation model, be it multiples or dcf, I think the best way is to use a combination of both. Check with various technique.

Plus, for those who like to read analyst report for TP, always find out how they come up with it. Even some big foreign banks TP have some real inconsistency problem which result in an above average target price.

Just my two cents.

This post has been edited by the snowball: Nov 7 2010, 12:07 PM

able to apply theory into practice & sharing with us

1duit is a lot of construction activities, I looking at this



got a spike in its volume, but its not available in the above graph. look at its accelerating eps
http://biz.thestar.com.my/marketwatch/fin_...?searchstr=5703

Fiscal Year 12/31/2006 12/31/2007 12/31/2008
Net Turnover/Net Sales 1,086,414 1,411,533 2,033,535
Net Profit 33,800 70,180 21,800

sky1809, thanks for the compliment. for every pov, there r the supporters & those anti I am fine with arguments as it allows a neutral viewing. do keep up the flame war

Thanks for your sharings esp on Muhibbah.

I think we are on the same track/ tune now.


I also love this stock from FA point of view , contracts of 2.5 billions in hand for a small size company, and many more to come. Good PE and so on.

But a word of cautious is that they have rm 200 m stuck in a project called Asia Petroleum Hub apparently abandoned now. I do not know the latest outcome , and thus unable to update you.

IF they were to write off this amount, of rm 200m, the impact is huge. It could take a couple of years to earn back the losses. IF they could recover back the amount owing to them, Muhibbah does have good prospect.

For the purpose of sharing only.

Do not mean Muhibbah is no good.

Happy Investing.

A broker analysis is attached here

This post has been edited by SKY 1809: Nov 7 2010, 08:29 PM


Attached File(s)
 Muhibbah_100903_RN2Q10.pdf ( 50.22k ) Number of downloads: 20

Doesn't seem convincing to me for no.4
Biggest mistake made by some of the long term value investor.
For the bold statement,Probably it is the best strategy who don't know the intrinsic value.
I prefer to buy the business doesn't pay any dividend if they are excellent management team and meet the conditions stated by you from (1) to (3). Unless they don't know how to utilise extra equity and have to return it to shareholder.

My way of investing is like buying a stock that no different from buying a private business.For me, As long as it is a good business that can sustainable for some period of years, a great management think the business like an owner...keeping the retained earning would be much much more favourable rather than pay it out to shareholder.

Just my 2 cents

This post has been edited by foofoosasa: Nov 7 2010, 07:12 PM

haha good point, but ive used up 95% of my smf already , so cant participate in the Megasale if it ever to happen.

and because of that. i hope it will not be that way haha...

I don't look at the graph, so I don't how the price behave.
I just roughly look at the ROE, operating margin, debt ratio...not an extraordinary business.It is not my game..
But If you trust the estimate of EPS from the analyst (which most often are too bias)..probably you can trade for it or go for short-medium term investment (less than 1-2 year).

-edited-
This is the Intrinsic value I compute based on the broker research analyst provided by SKY1809
2009 2010 2011
0.72 0.85 0.93


This post has been edited by foofoosasa: Nov 7 2010, 08:25 PM

I think Dreamer's strategy is actually the same as your strategy of buying below intrinsic value, cause by definition, if we use the dividend yield as the measures of market return, a 2X-3X spread over FD means the market risk premium is high. This tend to happen during a crisis and prices tend to fall below intrinsic value. It is just a layman and easily understandable ways to say the same thing.

I use to think like you too. But, now, I prefer a certain amount of dividends. It is hard to find management that can deploy capital into something that have incremental return on capital. Even you take the most fantastic company the world have ever seen- Microsoft, they have some fantastic return on equity. Although they pay dividends and buy back a lot of shares, the cash flow generated from its Office, Windows and Server division is still amazingly large. So, the dividends is less than its cash flow. Thus, Microsoft keep some of the cash flow it generated. Since Microsoft have above average ROE, you may think that it is good for Microsoft to retain the earnings to do R&D. But, most of Microsoft R&D is on things that they lose a lot of money, like Bing and they are throwing a lot of money into Windows Phone 7. So, even though MSFT itself have fantastic return on equity, the retain portion is wasted on those that do not generate that high of return of equity. You may say that this is a good deployment of capital in tech industry, but, if XBOX is anything to go by, Microsoft need to throw 8-10 years of cashflow into something before it can generate some decent result. So, not sure whether this is good deployment of capital. The point is, even companies with high Return on Equity, the portion retain may not be reinvested into division that have that high ROE, so, the cash, in a sense is better return to shareholders.

As you mention that you manage to do 20+% compounded growth for 5 years now, the benchmark should be a company that can return 20+% ROE in its reinvested earnings just to match your performance. Very few companies manage to pull that off, yes, even Microsoft can't do that because the money is thrown into division with lousy returns. The historical ROE of US is about 12%, I guess, for Malaysia, it should be around there or lesser as our leverage should be a bit lower due to some Chinese businesses tend to have a more conservative capital structure. So, in your case, since your return is 20+%, I think, most if not all of the time, you should hope companies to pay you dividend because you can actually do better with the money.

So, if you have some good stock picking skill like foofoosasa, one should hope for dividend.

I can give plenty of companies that retain 50%-80% of their earning and generate ROE range between 30% to 80% in oversea.
However..as the company mature..they will start to give out dividend..and this will surely reduce the rate of increasing of the intrinsic value . I accept the fact that someday company will give out return and impossible to retain their earning it as much for business growing business.. except one company ...Berkshire Hathaway..doesn't give any dividend after operating so many years which are operated the best legendary investor the world.
Don't get me wrong.. I like a stock like PBBank which is a great business but not because of they giving out prudent dividend.. and It is just simply wrong to conclude that a company doesn't pay dividend doesn't mean they are not suitable for long term.
It is simple..every business will undergone
1)initial phase - no dividend
2)growth phase - start giving some
3)maturity phase - mostly giving out most
I will hunt every great business with discount value no matter they are in which phase.
But I like business like JOBST type.. or first hand and second hand car website...because they have competitive advantage due to their size... unless the management screw up their competitive advantage by doing something stupid.

The retention ratio is not that important in this discussion as I am comparing between your own incremental ROE vs the companies incremental ROE. In addition, it is not the average ROE that matters, it is the incremental ROE that matters, that is what ROE the incremental retained earnings manage to generate.

I believe the company you talk about that churn out 30-80% ROE are tech, pharma and recently IPO-ed companies. I am not sure how you define ROE, but, if you define it as accounting ROE i.e. Net Income/ Accounting Net Book Value rather than finance ROE i.e. Net Income/ Market Cap then, the company are most likely in the industry I mention above. This is due to the fact that there are certain accounting rules that require them to expense R and D rather than keep it at the books, so, the ROE is actually not a good reflection of true economics of the business because a lot of asset are actually off the balance sheet.

Another possible explaination for such a high ROE is that it is a human resource based business. For example, it is a pure play investment bank (i.e. no trading) or consultancy firm. Again, such companies have a lot of off balance sheet assets that is not reflected in the balance sheet.

In any way, businesses above should not be judged on ROE because their profitability and growth is not a function of their capital allocation decision. It is more of a function of how they increase their brand awareness, customer loyalty and retaining their best talent. All this are off balance sheet assets. So, accounting ROE become unimportant in such businesses because their key success factors is not capital allocation. For example, take coca cola, a management should be judged on how much its retain its brand awareness and image or even increase it as such action would result in an increase in bottom line. He should not be judged on how good he is spending money to build the factory. The damage done on the coca cola brand image on its bottom line should be much more severe than a wrong capital allocation decision.

Another type of companies with such an impressive ROE is those with a recent IPO, but, those advantage tend to fade within 3 years.

I ran a stock screen using Capital IQ with a very basic requirement of non-tech and non-pharma, sustainable >30% ROE of 10 years, debt to equity less than 1.25, out of the universe of 500k companies worldwide, only 200 fits the bill.

In any case, I would like to hear the list of companies you have mention. If it is cheap, I may even buy it. Not necessary need to be in Malaysia. I have access to most markets as long as it is not companies that is listed in Timbaktu.

This post has been edited by the snowball: Nov 7 2010, 09:55 PM

I owned this 3 years ago...
http://www.reuters.com/finance/stocks/chart?symbol=ORL.AX
retail legend in Australia in my opinion..
It is traded at fair value now..but no discount...
There are some other US company which I own but not interested to disclose.
Yes I aware of off balance sheet item such as lease financing...
Anyway I would like our discussion stick to KLSE stock without OT.

It is ok to not disclose. Unless you finish buying the stock already, it is actually better to keep your stock pick secret.

The company is impressive in terms of financials. Just browse through, if add back off balance sheet liabilities, the leverage will be more significant but it is how retails works, which explain the ROE. But, be careful of the licensing deal they have. Keep a close eye on that. I know of a HK company got wiped because of that. Thanks for the sharing.

foofoosasa,

1) I am NOT long term value investor.

2) I am long term DIVIDEND investor.

The value investor need to sell their stock in order to make money. I don't. In fact, with every passing years, my exposure aka cost basis went down.

I bought PBBank when it was $7 and the dividend yield was about 8%. After a few years and collecting about $2 worth of dividend, my cost basis is around $5. My EFFECTIVE DIVIDEND YIELD is around 10% or more now.

3) As per KLSE, I do not TRUST the accounting data reported. Dividend paid is MORE REAL than any accounting report...

Dreamer

Muhibbah up today . Good Pick

aiya, wat u all discuss in the klse thread. then i just cross check TA & FA only. should thank everyone there for sharing their selections
no matter wat is being recommend here. most forumers won't jus accept it & buy for fun they would definitely do their own r&d

furthermore, unless we r billionaire. wat ever counter we intend to buy. it is nothing & the action won't move the counter, compared to the BUYING POWER of the mutual funds, insurance inv link funds, sovereign funds. & do they hav the time to spent in lowyat forum or y would they even wan to come to bolehland 100%? 1% of their firepower maybe can lah unless we got billionaire investor in lyn

Muhibbah is good pick, i got it at RM 1

the reason the price drop due to their previous revenue in their annual report year 2008 onwards, you can trace back their finance report previously

the company is quite strong with what they do, moreover, only RM 1 ...

i only dont like is, they install a water pump and pump out all the water from their factory and make the road flood when there is heavy rain...

Would you mind to share the software you used to screen through all the stocks given your criteria? How trustworthy are those figures? Are those number audited? Is there any authority in-charge of that?

Newbie in stock market.

while we await the answer, it did mention capital iq

http://tradingroom.bentley.edu/infrastruct...tware-datafeeds

I personally prefer William O'Neil (2nd last from above link) but that would mean another war argument with 99% of forumers who are FA

I use Capital IQ. But, mere mortals like us would not be able to afford it unless you have USD13k/year to throw around. It is actually for hedge funds and asset management guys. I got it because it is in my university database. Even in my school, I can't access it as it is for MBA student not undergrad. I somehow manage to convince the librarian to allow me to use it.

Capital IQ is fantastic. It is the best software out there. The figure is accurate and you can check back to the annual report because it provides an instant link. If you know who is Li Lu, the man in running to replace Buffett before he voluntarily pull out, he actually have some stake in Capital IQ. It is way way way better than Bloomberg because it is designed for FA rather than TA. If you like trading, perhaps Bloomberg is a better platform.

William O'Neil Direct Access won't entertain enquiries from individuals unless you are an institutional client. If anyone want to extract TA lessons from it, its going to be a really steep learning curve. Better stick to FA

http://www.williamoneil.com/PDFs/WONDACollateral.pdf

The closest search on its pricing is in a year 2001 book review 'What the book does accomplish is to portray how generally useless fund managers are since 80% of the time they can't beat the market indexes. The book thus makes a great case to invent index funds, such as those offered by Vanguard, which simply buy the whole index and don't bother churning stocks"

http://books.google.com.my/books?id=SfQFy8...epage&q&f=false

Cool, perhaps I should check with my uni and see if they have it.

I find the learning curve of doing stock analysis is steep. Could you provide any insight on how you overcame it? The Wits and Wisdom of Charles T. Munger covers a lot of the factors and method Munger uses whenever he evaluates or searches for opportunities.