A Newbie Guide to Investing

[cif5000]

Hi Guys, I have a question on how to evaluate a company after divestment of some of its businesses.

Say Coy A has:
EPS = 4 cents
NAV = 40 cents
and prices normally trade @ PE of 8 so about 32cents and price-to-book is then 0.8

It divested one of its biz which contributes EPS of 2 cents @ 20 cents so:
new EPS = 2 cents
new NAV = 60 cents

Say it is normally valuated using PE so based on PE of 8, its price becomes 16cents after divestment and ROE also dropped from 10% to 3%.

However PE is looking at further potential but with this divestment, it realized that potential now rather than over 8 years. So how do one value the Coy after the divestment given that its future EPS and ROE becomes lower but it has already got the other half fully realized EPS (earning) in its pocket?

I hope this doesn't sounded like a stupid question.

The NAV after transaction is wrong. It should be 40ct because you are selling NAV 20ct for 20ct.

Ok if it is a case of turning 20cts of assets into cold hard cash without earning ability, then it may be worse off.

However , say if the disposal resulted in a net gain of 20cts (say they divest 30 cents worth of NAV at 50 cents ie the part of the biz that has a lower ROE), how then do we value the Coy?

Here's the theory which I believe should work. However, do note that the market is a living organism and it will behave on its own.

Divestment Scenario 1: Selling NAV of 20ct / EPS of 2ct for 20ct
After the sale, assuming the PE of the remaining business remains at 8, the value of the remaining business will simply be 16ct. We will have to add the cash to the calculation. However, the cash will have to be discounted based on the market's experience with the company treats cash. If the 20ct cash will be distributed to shareholders, I will give minimal discount only on *when* it will be distributed. If the company has track records of squandering the cash away, a heavier discount is needed. In formula, it is:
New share price = PE (existing business) + cash x discount factor

Divestment Scenario 2: Selling NAV of 30ct / EPS of 2ct for 50ct
This is obviously a better deal than Scenario 1 because you are selling the business at a PE of 25 and a PB of 1.67 compared to 10 and 1.0 previously. It also means that the remaining business is one with a higher ROE / requiring less capital (EPS of 2cts with NAV of 10ct).

If we assign a cash discount factor of 0.9, then the new share prices will be
Scenario 1: 16ct + (20ct x 0.9) = 34ct
Scenario 2: 16ct + (50ct x 0.9) = 61ct

Remember, it's theory.

[cif5000]

Hi one question on EV. Investopedia explains 'Enterprise Value - EV'

Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company's debt, but would pocket its cash.

Now this seems strange to me. You pay more for a company with net debt and less with a company with net cash. So say if I have coy in net cash and someone is eyeing it and I want more I should quickly get huge loan to jack up the acquisition price?

I simply thought if a biz is good, the acquisition will be NAV + premium and if the biz is bad, the acquisition will be NAV with a discount. Biz world really made no sense to me!

Don't worry, I was once confused too.

We are talking about 2 different things here.
1. How much you value the company
2. How much you pay

Assuming you are willing to pay $1m for a company. If the balance sheet has no cash and no debt, you will pay the seller exactly $1m.
[EV = $1m]

If it has $200k of debt and you will have to assume the debt after taking over, how much will you pay the seller? $800k (a)
[EV = $1m]

OTOH, if it has $500k of cash, you will pay the seller $1.5m (b).
[EV = $1m]

BUT if we ignore the debt and cash and pay $1m to the seller for whatever capital structure the company has (e.g. in a and b), you will end up paying "more for a company with net debt and less with a company with net cash."
[EV of a = $1.2m]
[EV of b = $0.5m]

It is different from "you value a company with net debt more than a company with net cash".

Hope I didn't confuse you further.

[specuvestor]

Great points in this discussion on EV

What I've learnt is that unless you can takeover a company, do be careful when valuing based on EV, which was developed primarily as a back of envelope gauge in the days of M&A craze of the 80s. EV is just an additional indicator to the OPMI what is worth to another takeover party (if there is one).

Cif5000 is right that there will always be a discount factor on cash because unless u control the company, you have no access to it. That's why shell companies are required to submit a business proposal else be delisted as the owners could simply pay themselves big remunerations and bleed shareholders to death (hint to deep value investors). After a sale, it is a matter of capital structure to determine the value it will add but in general usually in the short term 1+1>2. In the long run however the strategic consideration of why the 1+1 came together in the first place is more important. That separates investors from business owners

[Temperament]

This reminds me of what a Thai Tycoon did to F&N recently. It's mind boggling to me. If not of course i have profited too.

[Behappyalways]

Anthony Bolton: What I learnt in three decades of investing
http://www.telegraph.co.uk/finance/perso...sting.html

http://investideas.net/forum/viewtopic.p...7&start=10

[Ferns]

Hi all,

Yet another newbie question.

How do you keep calculate your returns when you buy shares and sell shares over different time period?

Scenario 1 (easy, no answer needed)
I buy 2 different stocks on 1 Jan 2010 (assuming markets are open) and sell on 31 Dec 2011. I use the initial outlay and the final value and calculate the CAGR.

Scenario 2 (this one confuses me)
I buy 1 stock on 1 Jan 2010 and 1 Stock on 1 Feb 2010 and sell both on 31 Dec 2011. To make it easier to explain, let's attach some values to this.
1 Jan 2010, buy 1 lot at 2.00, sell on 31 Dec 2011 for 2.50
1 Feb 2010, buy 1 lot at 10.00, sell on 31 Dec 2011 for 10.50

Scenario 3 (confuses me even more)
1 Jan 2010, buy 1 lot at 2.00, sell on 31 Dec 2011 for 2.50
1 Feb 2010, buy 1 lot at 10.00, sell on 31 Oct 2010 for 10.50

How do I calculate the returns on this portfolio as at 31 Dec 2011? Do I need to include the stock that was sold in 2010?

I think the main idea is, I would like to find out what are my returns over my next decades of investing, how do I go about calculating that? One way I thought of is to keep an investing bank account and just take note of the amount of money I've put in there and take note of the amount I have at the end of the say 20-30 time period? However, if I'm depositing money into that account annually, wouldn't that affect the calculation of my returns?

Hope my question isn't too confusing.

Thanks!

[Temperament]

For me, i have no choice. i use Microsoft Money software to capture every B/S since day one. i think you can check on this topic in past postings in VBs.
Please check first. You may be very satisfied with what you find.

[CityFarmer]

Hi all,

Yet another newbie question.

How do you keep calculate your returns when you buy shares and sell shares over different time period?

Scenario 1 (easy, no answer needed)
I buy 2 different stocks on 1 Jan 2010 (assuming markets are open) and sell on 31 Dec 2011. I use the initial outlay and the final value and calculate the CAGR.

Scenario 2 (this one confuses me)
I buy 1 stock on 1 Jan 2010 and 1 Stock on 1 Feb 2010 and sell both on 31 Dec 2011. To make it easier to explain, let's attach some values to this.
1 Jan 2010, buy 1 lot at 2.00, sell on 31 Dec 2011 for 2.50
1 Feb 2010, buy 1 lot at 10.00, sell on 31 Dec 2011 for 10.50

Scenario 3 (confuses me even more)
1 Jan 2010, buy 1 lot at 2.00, sell on 31 Dec 2011 for 2.50
1 Feb 2010, buy 1 lot at 10.00, sell on 31 Oct 2010 for 10.50

How do I calculate the returns on this portfolio as at 31 Dec 2011? Do I need to include the stock that was sold in 2010?

I think the main idea is, I would like to find out what are my returns over my next decades of investing, how do I go about calculating that? One way I thought of is to keep an investing bank account and just take note of the amount of money I've put in there and take note of the amount I have at the end of the say 20-30 time period? However, if I'm depositing money into that account annually, wouldn't that affect the calculation of my returns?

Hope my question isn't too confusing.

Thanks!

IIRC, there are two methods, NAV (net asset value) and XIRR (internal rate of return).

NAV is a professional method used by fund managers, while XIRR can be easily measured with MS Excel.

There were detail discussion on the two methods in this forum, but I lose track on them. You might want to do a search.

[Ferns]

Hi all,

Yet another newbie question.

How do you keep calculate your returns when you buy shares and sell shares over different time period?

Scenario 1 (easy, no answer needed)
I buy 2 different stocks on 1 Jan 2010 (assuming markets are open) and sell on 31 Dec 2011. I use the initial outlay and the final value and calculate the CAGR.

Scenario 2 (this one confuses me)
I buy 1 stock on 1 Jan 2010 and 1 Stock on 1 Feb 2010 and sell both on 31 Dec 2011. To make it easier to explain, let's attach some values to this.
1 Jan 2010, buy 1 lot at 2.00, sell on 31 Dec 2011 for 2.50
1 Feb 2010, buy 1 lot at 10.00, sell on 31 Dec 2011 for 10.50

Scenario 3 (confuses me even more)
1 Jan 2010, buy 1 lot at 2.00, sell on 31 Dec 2011 for 2.50
1 Feb 2010, buy 1 lot at 10.00, sell on 31 Oct 2010 for 10.50

How do I calculate the returns on this portfolio as at 31 Dec 2011? Do I need to include the stock that was sold in 2010?

I think the main idea is, I would like to find out what are my returns over my next decades of investing, how do I go about calculating that? One way I thought of is to keep an investing bank account and just take note of the amount of money I've put in there and take note of the amount I have at the end of the say 20-30 time period? However, if I'm depositing money into that account annually, wouldn't that affect the calculation of my returns?

Hope my question isn't too confusing.

Thanks!

IIRC, there are two methods, NAV (net asset value) and XIRR (internal rate of return).

NAV is a professional method used by fund managers, while XIRR can be easily measured with MS Excel.

There were detail discussion on the two methods in this forum, but I lose track on them. You might want to do a search.

Thanks!

I found that discussion in the forums, I think it was started by Temperament. I think it was the thread regarding performance in 2012.

XIRR I kinda understand the excel function, but don't quite understand what goes behind the calculation...

NAV method still don't quite understand

[Ferns]

Did a quick read up on XIRR already. I understand how the formula and calculation works.

Question: Would it better to track all the different stocks under 1 XIRR function or 1 function for each stock or both?

I supposed if I did a separate function for each stock then I won't be able to get a sense of how I've performed over the years as an investor right?

And if I did a single function for all the stocks then I won't get a sense of how a certain stock has performed for me right?

So conclusion, best to keep track of both? Think I answered my own question? Just try to clarify