Oct 9 2008, 09:59 PM
QUOTE(cherroy @ Oct 9 2008, 05:23 PM)
Too generalised, it is good giving out an idea to acquire undervalued stock, but practically wise, it is very hard to implement across in general.
You need specific company, industry issue, situation to assess, not as simple or straight forward as that. The article mainly giving out an idea how to assess a particular situation, it doesn't right in all extent.
The formula
NCAV = Total Current Assets — Total Current Liabilities — Long-term liabilities
So if a dividend stock that constantly giving out most of its profit to the shareholders then it will result in low current asset as well (with minimal liability), then those consistently giving out 8-9% dividend yield, then in this kind of formula, it won't work well.
If you applied on current financial stocks, this formula even worst to give an idea to buy or sell. Let say virtual eg. a financial giant Lxx, or Axx, that current asset is 500 billions, - 100 current liabilities - 100 long term liabilities, ended up NCAV 300 billions, if outstranding share is 1 billion, it worth 300, so applied 2/3 rule, can buy at 200 level.
But due to massive writedown, loss, then resulted in 300 billions losses, then value eventually being wiped out altogether, so undervalued become overvalued.
The formula gives a extremely conservative value to any company. Graham is known to be very conservative and wouldn't part with his money unless its a sure win. You need specific company, industry issue, situation to assess, not as simple or straight forward as that. The article mainly giving out an idea how to assess a particular situation, it doesn't right in all extent.
The formula
NCAV = Total Current Assets — Total Current Liabilities — Long-term liabilities
So if a dividend stock that constantly giving out most of its profit to the shareholders then it will result in low current asset as well (with minimal liability), then those consistently giving out 8-9% dividend yield, then in this kind of formula, it won't work well.
If you applied on current financial stocks, this formula even worst to give an idea to buy or sell. Let say virtual eg. a financial giant Lxx, or Axx, that current asset is 500 billions, - 100 current liabilities - 100 long term liabilities, ended up NCAV 300 billions, if outstranding share is 1 billion, it worth 300, so applied 2/3 rule, can buy at 200 level.
But due to massive writedown, loss, then resulted in 300 billions losses, then value eventually being wiped out altogether, so undervalued become overvalued.
By buying companies which has Net Current Assets much more than their Current and long term liabilities combine, the margin of safety is sound in the case of any credit default which will not bankrupt that company.
For banks case, which suffered the meltdown. Their current liabilities is actually way beyond what their current assets are (Cash assets not receivables). Because if their current liabilities + long term liabilities is smaller, even if they completely write-off their bad debts an the creditors comes calling, they still will have a positive net current assets.
Graham not only use that positive net current assets, but on top of that, he advises to buy at 2/3 of that value so it is even cheaper, which increases your margin of safety even more.
The problem with the formula is, it is too simple and will be mis-interpreted to suit some analysts to conform with the formula. Cheeroy is right to say you can't apply it to everything unless you can quantify everything accurately.
And as far as I know, all company dividend policies do not extent a 100% giveback unless it is a Cooperative Organization. Most is 50% and the rest of the profits remains as cash assets which will be growing if not used or re-invested into the business.
Another thing, I believe during Graham's time most people are not fully educated in the stock market system or the general movement of it. So his method is almost impossible to apply nowadays unless the crash is so massive that conventional thinking is completely disregarded and there is absolutely no support at all at the very bottom.
This post has been edited by skiddtrader: Oct 9 2008, 10:06 PM
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