When should you initiate a position in a company?

Quote:6. What sort of books have guides on non-tedious valuations?

Which investment books have you read?

And remember this motherhood statement of quotation. It will help to guide you along.
"In theory, there is no difference between theory and practice. In practise, there is."

Another words, you can read as much as you want, but you can't learn how to swim by just reading and not get wet. Of course the more you read the more you know there is more than one way to float and paddle yourself in the water. The most important thing is you first learn how not to get drown.

(05-07-2013, 12:43 PM)MrMsus Wrote: Hi Valuebuddies,

I have some questions regarding a stock's valuation and fair price. This might have been covered elsewhere but I hope to re-initiate a thread on this topic because I think it's just as important as knowing how to find a fundamentally strong company. I'm not sure about you guys, but I have always run into situations where I really really love a company, but am not sure if I should buy in then or wait a while longer and hope that the price would go down further.

The valuation ratios that we all know- the famous P/E, P/B, NAV etc, are more often than not a blur to me, because they can never be used universally across all companies. They are also not accurate measures... so I get really confused sometimes whenever someone uses P/E to value a stock, but elsewhere someone else would say that using P/E isn't a good way. Hopefully someone can shed some light on this.

Besides the above, here are some other questions I hope you can help clarify:

1. What's the difference between P/E and PEG?

2. What other ratios/ valuation methods do you use?

3. How do you determine which ratios (i.e. pe, pb) to use for companies from the different sectors, particularly within the retail sector (which has many different industries on its own- luxury, consumer staples, restaurants) and service sectors (like Kingsmen Creatives for e.g., or Boustead)?

4. How do you know what the “ideal” P/E should be? For e.g., its always common for people to say that if a company has >10x PE, then it should be fairly priced, and also not uncommon for people to say I think the company shouldn't go beyond a PE of 10x, but on what basis do they say that? How do you determine?

1. What's the difference between P/E and PEG?

PEG is P/E divided by the growth rate of the company. The lower PEG is, the more undervalued the company is. For e.g., a P/E of 20 seems high, but if the growth rate is 20%, PEG is 1 which is pretty good. The caveat is that you need to establish the growth rate of the company yourself which is not easy.

Here's an article about Seth Klarman's business valuation. http://www.gurufocus.com/news/221448/set...-valuation

I started off by reading about all the great investors in the world. Joel Greenblatt's "You can be a stock market genius" is a great read. My favourite is "Poor Charlie's Almanack" which is a compilation of all the speeches by Charlie Munger. Then there are the books by George Soros and Martin Whitman. So who is your investment hero?

(05-07-2013, 12:43 PM)MrMsus Wrote: 1. What's the difference between P/E and PEG?

2. What other ratios/ valuation methods do you use?

3. How do you determine which ratios (i.e. pe, pb) to use for companies from the different sectors,
...

4. How do you know what the “ideal” P/E should be?
...

1. PE = price earning ratio

PEG = Price Earning Ratio / EPS Growth Rate

2. Discounted cash flow. SWOT. Qualitative analysis.

3. For me, PE is the better ratio, as it implies the earning yield (1/PE), which is essentially the returns you can expect the company to give you over the long term.

P/B alone doesn't tell you anything about the returns of the company. Some industries like the software industry, may not be capital asset intensive, but can generate consistent cash flow. P/B is a bonus, but profitable companies with low P/B (ie <1) are true bargains IMO that are hard to come by.

However, one should never rely on either one on face value, because earnings and book value can be easily manipulated by accounting gimmick. Earnings can be inflated by one-off earnings (like disposing an asset or subsidiary) for example. Book value can be inflated by "goodwill".

Those 2 ratio should never be used alone also. Factors like debt level, return on equity/assets/invested capital as well as qualitative factors such as the long term prospect of the company and industry, SWOT analysis etc is arguably more important.

4. Ideally PE should be as low as possible. But PE alone never paints the whole picture. Ideally, one should give a conservative estimate of the companies future earnings, including growth potential, then buy on the basis of >20% discount to DCF implied fair value.

Very very generally, and in the absence of earnings abnormalities, safety margin imposed:
Slow growth, stable, predictable companies, at cheap valuation (Casa Holdings, Low Keng Huat): PE<5
Company with good long term growth potential, strong balance sheet (The Hour Glass, Boustead, Neratel): PE<10
Companies with strong moat, strong growth potential (Sarin, FHCO): PE<20

Sometime, the best way to learn is to plunge straight into the pool.
Then you will make sense of what you learn.

A smarter way is to plunge into a safe pool which is to do a paper trading with a time horizon of 1 year.
That will be sufficient to grasp the basics of investment. For the rest, consult the gurus here and form your own judgement.

PS: I start out reading Peter Lynch's books which is very good for beginners.

People here somehow forget to mention about investing what you know. Take a look at d.o.g post, I believe every search-worthy word in e company website would have been evaluated and studied. Take p/e magnitude with pinch of salt except dividend yield because that e most likely return u get every year. If u want to use P/E, compare with peer comparison to let u evaluate it is cheap or not and most of time companies are cheap for a reason. It is not so easy to find deep undervalued stocks except when in crisis period e.g. 2008. Most stocks now are fairly valued and unless u have a upper hand of knowing "guaranteed" non public information then u will be certain u can make tidy profits.

Read analyst reports and look out for the common ratios compared for different industries. After a while, u get e idea.

(08-07-2013, 10:01 PM)intellect Wrote: Sometime, the best way to learn is to plunge straight into the pool.
Then you will make sense of what you learn.

A smarter way is to plunge into a safe pool which is to do a paper trading with a time horizon of 1 year.
That will be sufficient to grasp the basics of investment. For the rest, consult the gurus here and form your own judgement.

PS: I start out reading Peter Lynch's books which is very good for beginners.

Buying with real money is so different from paper trading in terms of psychology. Initiating a position with small amount of real money is a better option in my view.

(09-07-2013, 09:50 AM)Trader88 Wrote: Buying with real money is so different from paper trading in terms of psychology. Initiating a position with small amount of real money is a better option in my view.

Totally agree.

In fact using paper trading may make you think it's quite easy after all. This is when you use real money then you will find the difference. i repeat: ""In theory, there is no difference between theory and practice. In practise, there is."
This motherhood statement should apply to all things in life. Even now sometimes i am stumb.
My quote: "You may think it's like this; Actually it was like that. Then you know!"