Buy and Hold Valuation Question/Discussion

[smallcaps]

i) There is no need to come up with precise intrinsic value figures... think valuation instead in more probabilistic terms of whether it is possible to achieve desired IRR in light of current available facts .

Hi hmwes,

IMO, in general, metrics used by value investors do not result in either a precise value, nor do any of the individual metric result in an intrinsic value for the company. Thus, the same would apply to DCF, which is that it is merely one of the many metrics which are prone to large amount of errors, hence requiring even larger amount of allowances. Thus, I would agree with your point above, that intrinsic value estimation is probabilistic in nature. However, I believe what matters in value investing is that we buy far below the intrinsic value, and not whether we know the intrinsic value, and thus the emphasis should be on the margin of safety. This means that it would be usually be good enough to determine that a certain stock is 'at least worth $10', versus 'worth around 20 dollars'.

[mysterion]

Actually Earnings Power Value is much more complicated that DCF and RNAV because it forces the analyst to take into account numerous business factors such as non-recurring charges, the cyclic nature of businesses, cash level, debt level, stability of current earnings and so on. And if you include the calculation of the asset reproduction cost, it allows you to see to compare the two values and decide if the difference is sustainable via any competitive advantages. I'm actually still not very sure about this so correct me if I'm wrong.

On the other hand, DCF can be simplified into a basic formula where you just input your expected growth rate, discount factor, viola you get some magic number which you can say is the intrinsic value of the company. This could potentially result in garbage in, garbage out and result in over-optimistic values. It's really hard to find a company where you can conservatively project FCF growth rates into the future.

I haven't really tried analysing businesses by RNAV but it seems to be the easiest since all you need to do is revise historical book values to current values (e.g. real estate, precious metals, commodities, inventory etc.)

[csl123]

Example:-
Who can know SMRT used to be a small "CASH COW" for so many years that seems nothing can go wrong, now looks like a "bottomless pit".
Don't know when or even whether SMRT can be a "CASH COW" again. Maybe it will never be again.
i have benefited from "SMRT"
i never imagine this "National Asset" of ours can deteriorate due to "overlooked-mismanagement".
SAD.

At some point of time, corporations will be run by poor management. Can you imagine that with poor management, SMRT is still about to generate cashflow of abt S$300 mil per yr? With the recent saga, this presents a great opportunity to increase long position in stable and profitable stock.

[Temperament]

Example:-
Who can know SMRT used to be a small "CASH COW" for so many years that seems nothing can go wrong, now looks like a "bottomless pit".
Don't know when or even whether SMRT can be a "CASH COW" again. Maybe it will never be again.
i have benefited from "SMRT"
i never imagine this "National Asset" of ours can deteriorate due to "overlooked-mismanagement".
SAD.

At some point of time, corporations will be run by poor management. Can you imagine that with poor management, SMRT is still about to generate cashflow of abt S$300 mil per yr? With the recent saga, this presents a great opportunity to increase long position in stable and profitable stock.

Is it cash-flow (FCF) or net profit?
Do you think the new SMRT's Mangement will be able make SMRT become a little "CASH COW" again?

What about SPH?
Do you think SPH will ever be run by poor management one day too?
Scary!
But then very few companies existed for more than 100 years or so.

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i) There is no need to come up with precise intrinsic value figures... think valuation instead in more probabilistic terms of whether it is possible to achieve desired IRR in light of current available facts .

Hi hmwes,

IMO, in general, metrics used by value investors do not result in either a precise value, nor do any of the individual metric result in an intrinsic value for the company. Thus, the same would apply to DCF, which is that it is merely one of the many metrics which are prone to large amount of errors, hence requiring even larger amount of allowances. Thus, I would agree with your point above, that intrinsic value estimation is probabilistic in nature. However, I believe what matters in value investing is that we buy far below the intrinsic value, and not whether we know the intrinsic value, and thus the emphasis should be on the margin of safety. This means that it would be usually be good enough to determine that a certain stock is 'at least worth $10', versus 'worth around 20 dollars'.

"emphasis should be on the margin of safety."

Unquote:-
Ya lol! That's why layman like me try to buy only after the market crashed.
Even then may buy too early and not the best counters available then.
At other times, if i buy, it's usually for "Hit & Run".
It's very rare i can spot a value buy that the market has not spotted.
Usually maybe there is a Rights Issue, then maybe there is a chance to buy the NIL PAID RIGHTs due to many unforseened reasons of/in the market.
Yet it is still a "speculative" buy.
Nobody can be sure how the Market going to rate this counter after Rights Issue.
In fact, i am very afraid to buy any counter now for long-term.
Even though some 'speculative counters" are at 2009 prices.
My 2 cents
ROJAK INVESTOR.

[smallcaps]

In fact, i am very afraid to buy any counter now for long-term.
Even though some 'speculative counters" are at 2009 prices.

Hi Temperament,

IMO, there is no requirement for value investors to buy and hold stocks and thus nothing wrong with your approach. I am not sure how it happened, but nowadays value investing seems to have become strongly associated with 'buy and hold' and often results in the following situation:


Layman : What type of approach u use for stock investment?

Buddy : Value approach.

Layman : Oh yes, heard of that before: Buy and hold.

Buddy: ... ... (awkwardness, not sure if want to explain Margin of Safety is not Buy and Hold)


Not so what you mean by speculative though... by earnings or by financial condition?

[csl123]

Operating Cash Flowing.

IMO, it is still a cashcow.
SMRT claims that it is spending S$900 mil to upgrade the railway line from 2012 to 2019. I think SMRT has a great investor relations to "appease" the general public.

Drill deeper into SMRT Annual Report, you will realise it is on average, spending $100+ mil per year on capex. This means that SMRT is going to spend ~$900 mil REGARDLESS of the train disruption incidents. Just to add, SMRT wants to get LTA to co-share the cost of upgrade.

Sorry, I didnt research into SPH. Can't comment much.

[Temperament]

In fact, i am very afraid to buy any counter now for long-term.
Even though some 'speculative counters" are at 2009 prices.

Hi Temperament,

IMO, there is no requirement for value investors to buy and hold stocks and thus nothing wrong with your approach. I am not sure how it happened, but nowadays value investing seems to have become strongly associated with 'buy and hold' and often results in the following situation:


Layman : What type of approach u use for stock investment?

Buddy : Value approach.

Layman : Oh yes, heard of that before: Buy and hold.

Buddy: ... ... (awkwardness, not sure if want to explain Margin of Safety is not Buy and Hold)


Not so what you mean by speculative though... by earnings or by financial condition?

Speculative counters to me means all the companies in commodity sector including oil & gold etc...