When should you initiate a position in a company?

[MrMsus]

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?

[arthur]

There's really alot of deep questions you are asking.

But I have to reckon you aren't reading enough.
If you can manage to find all the answers to your own questions above, the value of the discovery and knowledge along the way will be tremendous.

No point letting people tell you why in a quick answer.
Some things are meant to be discovered and learnt by oneself.

Cheers

[Clement]

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?

Hi,

I agree with Arthur above that some of these questions have no simple answer. The financial statements themselves and ratios are there to tell a story about the companies past performance. In my view, ratios are mainly used for filtering (so many stocks, not enough time to research them all). Putting effort into researching a stock is also an investment, so ratios can be used to "shortlist" stocks for further investigation. If they pass further scrutiny, then we can back our effort investment with monetary investment.

When starting out, it is normal to be abit naive and make poor investments, therefore our monetary investments don't always yield retuns. However, our effort investment will always yield returns as the knowledge can aid to make better investments in the future.

[paullow]

feel free to visit my blog.
without reference to any single company, i covered the basic n fundamentals of it.
no stock recommendation per se are made.
those are what works for me. from being working n rich to semi retired n much richer.
cheers!
paulcokefreedom.blogspot.sg

[MrMsus]

There's really alot of deep questions you are asking.

But I have to reckon you aren't reading enough.
If you can manage to find all the answers to your own questions above, the value of the discovery and knowledge along the way will be tremendous.

No point letting people tell you why in a quick answer.
Some things are meant to be discovered and learnt by oneself.

Cheers

Thanks, Arthur. I see your point and appreciate the goodwill in your response. I won't take answers as they are- never have and never will. But at some point I think everyone needs a guiding light. I've been lost from all the reading I've done so far, so I remain hopeful on getting some empathetic responses from the VB community to some of my queries, if not all.

Anyway, I should add to my list of questions:
5. What resources do you commonly use to do your learning?
6. What sort of books have guides on non-tedious valuations?

---

Hi,

I agree with Arthur above that some of these questions have no simple answer. The financial statements themselves and ratios are there to tell a story about the companies past performance. In my view, ratios are mainly used for filtering (so many stocks, not enough time to research them all). Putting effort into researching a stock is also an investment, so ratios can be used to "shortlist" stocks for further investigation. If they pass further scrutiny, then we can back our effort investment with monetary investment.

When starting out, it is normal to be abit naive and make poor investments, therefore our monetary investments don't always yield retuns. However, our effort investment will always yield returns as the knowledge can aid to make better investments in the future.

Hi Clement, thanks too. But what if you've gone past the screening stage, and you're stuck with a company which you liked (because you've scrutinised its statements and decided that you love its business and management) but unable to decide whether to buy at its current price or later? What would a seasoned investor do?

[KopiKat]

If you have not read it yet, try some of Joel Greenblatt's books, which are very easy to read and understand. Altho' I only read them in recent times, I wished I'd read them when I was just embarking on my investment journey... so blur about the whole thing, don't know where and how to start...

For valuations, 'The Big Secret for the Small Investor' may be useful as a start..

I also find investopedia site useful as I did most of my self studies from their articles and explanations of key financial terms...

Enjoy your learning journey!

---

But what if you've gone past the screening stage, and you're stuck with a company which you liked (because you've scrutinised its statements and decided that you love its business and management) but unable to decide whether to buy at its current price or later? What would a seasoned investor do?

Perhaps what you need is a classification system? I roughly follow Peter Lynch in his book 'One Up on Wall Street' which classifies stocks into Growth, Stalwart, Cyclical, Turnaround,... For each, you'd have to adopt different valuations and strategies. A simple example in my case when I started out using his ideas was to focus on Stalwarts - Little or No Growth, pays out most of earnings as dividends. In such cases, after screening and deciding I like the company, biz, management,... I used Yield, Payout Ratio and sometimes PE to help me decide on when to buy or sell. Of course not 100% sure thing, but I like to think I make more than I lost...

[Clement]

There's really alot of deep questions you are asking.

But I have to reckon you aren't reading enough.
If you can manage to find all the answers to your own questions above, the value of the discovery and knowledge along the way will be tremendous.

No point letting people tell you why in a quick answer.
Some things are meant to be discovered and learnt by oneself.

Cheers

Thanks, Arthur. I see your point and appreciate the goodwill in your response. I won't take answers as they are- never have and never will. But at some point I think everyone needs a guiding light. I've been lost from all the reading I've done so far, so I remain hopeful on getting some empathetic responses from the VB community to some of my queries, if not all.

Anyway, I should add to my list of questions:
5. What resources do you commonly use to do your learning?
6. What sort of books have guides on non-tedious valuations?

---

Hi,

I agree with Arthur above that some of these questions have no simple answer. The financial statements themselves and ratios are there to tell a story about the companies past performance. In my view, ratios are mainly used for filtering (so many stocks, not enough time to research them all). Putting effort into researching a stock is also an investment, so ratios can be used to "shortlist" stocks for further investigation. If they pass further scrutiny, then we can back our effort investment with monetary investment.

When starting out, it is normal to be abit naive and make poor investments, therefore our monetary investments don't always yield retuns. However, our effort investment will always yield returns as the knowledge can aid to make better investments in the future.

Hi Clement, thanks too. But what if you've gone past the screening stage, and you're stuck with a company which you liked (because you've scrutinised its statements and decided that you love its business and management) but unable to decide whether to buy at its current price or later? What would a seasoned investor do?

Hi,

In general, value investing has very little to do with market timing. In practice however, i understand that it is really frustrating buying too early and waiting for the market to realise the hidden value. So i would say it depends on your research and the liquidity of the stock itself. For example, your research might have provided clues as to future "events" that might alert everyone else to the value of the company like earnings announcements etc.

[Greenrookie]

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?

I am new, but let me try, and hopefully generate more discussion

for 2) and 3)
Static valuation have no meaning, you need to know the trend, the whatever matrix you use for a company must be over a period of time, at least through 1 bull and bear cycle. You can then see the average valuation, what is the bull average, bear average.

historical and av. valuation in a company is also only of so much use until you compare it with a peer, the bigger brothers and the industry average. The more blue the company, the prenium the valuation, so dun compare a small start-up with a leader and see valuation is lower and hence under-valued.

the final and perhaps most important will be the future earnings and the impact on the valuation. but point 2 and point 3 is science, its based on past data, future earnings need a lot more study and is subject to more risk, although order book, inventory level, margins, industry news, customers' capex can all provide some clues.

One should use a range of metrix,
some are risk management related:
-gearing level
-impairment level
-receivables, inventories

some are operationally effecient related
- FCF
- ROE, ROA
- Margins

No single metric is a do-all, kill-all, but for property counters,
PB and RNAV does matter a lot,

Yield plays
-FCF

Reits, trusts
-Gearing and OCF

LAstly, the qualitative aspect of it, is as important as the quantitative.

Hypotically,

you want a yield play with growth,

you compare 2 similar companies, and the bigger brothers,

you realised a particular one, has consistent stable earnings, growth and FCF, EPS, and a number of other mertics are better than the other, it go thro bull and bear comparably well even when compared to market leaders. You see valuation to be better going forward due to your best research ability, U have a sound company under your radar liao.

Then you apply the most important concept, margin of safety. Discount the some of the questionable growth, look at the mertics again, assume you think a fair value for this company is $1 because you decide looking at the average matrics of earnings and comparing with other companies, $1 is good. Then depending on your risk reward peferences, you only buy at price below $1

=)

[CityFarmer]

Hi,

I agree with Arthur above that some of these questions have no simple answer. The financial statements themselves and ratios are there to tell a story about the companies past performance. In my view, ratios are mainly used for filtering (so many stocks, not enough time to research them all). Putting effort into researching a stock is also an investment, so ratios can be used to "shortlist" stocks for further investigation. If they pass further scrutiny, then we can back our effort investment with monetary investment.

When starting out, it is normal to be abit naive and make poor investments, therefore our monetary investments don't always yield retuns. However, our effort investment will always yield returns as the knowledge can aid to make better investments in the future.

Hi Clement, thanks too. But what if you've gone past the screening stage, and you're stuck with a company which you liked (because you've scrutinised its statements and decided that you love its business and management) but unable to decide whether to buy at its current price or later? What would a seasoned investor do?

A common answer to the question is buy when the price is below intrinsic value, and with sufficient margin of safety. How much margin is comfortable, is up to individual, 10-20% is reasonable IMO.

It is alright not able to buy at lowest, since even WB can't do it

[Trader88]

A common answer to the question is buy when the price is below intrinsic value, and with sufficient margin of safety. How much margin is comfortable, is up to individual, 10-20% is reasonable IMO.

It is alright not able to buy at lowest, since even WB can't do it

What is intrinsic value? Intrinsic value can be quite subjective.