Thank you for your encouraging comments about Value.able and all of your generous feedback. You have indeed given me enough suggestions for Value.able#2, or at least a workshop/lecture. While I consider these and in the meantime, I have received a number of questions (some of which go beyond the mandate for the book) that I think, if answered, could benefit everyone. Besides, I suspect if there is one person that has written me a question, there will be others who have the same query but didn’t write. In the interest of efficiency and to avoid repetition, here are what I believe represent the most likely questions you could have and the corresponding answers.
Question 1: Historical Information
In terms of valuations, is all the requisite historical information on individual companies freely available? You mentioned you look ahead 2 or 3 years when estimating intrinsic value. How do you go about getting the information for this? Can you recommend a source of financial data.
Answer 1: I have discovered that all the data you need to estimate intrinsic value and apply the steps in Value.able is available on Commsec, Westpac and E*trade (Thanks Ashley for the latter!). Here is the link to a demonstration of where EXACTLY to find the data. Or click on the Source Data button just to the right.
Financial data is also available for free on Google Finance and Yahoo Finance and you can also purchase publications that have up to ten years of historical information (I am currently trying to negotiate a special price for owners of Value.able).
Question 2: Analyst Forecasts
Where can I get analyst forecasts?
Answer 2: Consensus analyst information is available on Commsec and E*trade. Yahoo finance also provides consensus analyst estimates for 6000 companies updated weekly and the 2 year forecast EPS and DPS growth can be found under the Key Statistics tab. Not wanting to be left behind, Google Finance also has consensus estimates for Sales Profit and Dividends. Click here, then click on “More Ratios” under Key Stats and Ratios over on the lower right hand side of the page. Of course, if you use a full service broker you should be able to ask your adviser for access to the firm’s online research repository. Given analyst forecasts come from the analysts, they will have estimates as well.
Question 3: What tools can I use?
Perhaps you may know what I can use to filter the “good businesses” from the “not so good businesses”?
Question 4: The retention rate
Calculating the value of an infinite life asset that has a 100% retention rate and a lower ROE than the required return is a mathematical impossibility.
Answer 4: I wouldn’t ever buy such an abomination! The most technically adept of you have suggested that where Retained earnings =100% and ROE<RR, my estimates are not conservative enough. I can see why – in theory – some of you would like to treat it more harshly with the valuation formula. However I prefer to treat it even more harshly than you – simply throw it in the bin! Why would you want to own a business where, through your inputs, you have assumed wealth destruction? The question about whether to invest or not is made in the head instantly. You don’t need a calculator for that.
Considering a margin of safety, I look for companies likely to sustain an ROE that far exceeds my required return and avoid businesses whose management retain profits at unproductive rates.
Question 5: Is value investing becoming too popular?
My concern is if there is a possibility that the rising popularity of value investing, by purchasing at a discount to intrinsic value, could spoil this method of investing?
Answer 5: There are a lot of people who worry that finding gold will immediately mean everyone else will find it at the same time and render it valueless. Don’t worry, there are vastly more investors speculating than there are investing. Even Buffett observed that after 40 years of teaching it, he has seen no migration towards value investing.
Question 6: Forecast Equity per share
How do I calculate forecast equity per share, I cannot find it anywhere?
Answer 6: Forecast equity per share is:
Forecast Year Equity Per Share = Previous Year Equity per share + Forecast Earnings per share – Forecast dividends per share + new share capital(per share) – buybacks(per share)
The last two elements can be deduced from any announcements the company makes about capital raisings or buybacks.
Question 7: Referencing others
You refer a lot to the work of these investing giants but as a successful former fund manager, you should have had more “Roger” in it.
Answer 7: As I say in my introduction, what I have been able to accomplish has been thanks to the writings and teachings of others. In my own investing I have adopted and adapted the frameworks suggested by many investors and academics and combined them in a way that is unique, suits me and works of course! I have for example not found my final approach to valuation anywhere else – it is an amalgam of the work of those mentioned in the book. I have not read about the extension of the margin of safety concept anywhere else either and the list goes on. There is a now a rather fruitful garden but the seeds were borrowed from the great and celebrated mathematicians and investors. Indeed I think even Buffett picked up a few pointers from others, especially Walter. To that end here’s a well known Buffett quote that I should have included in the book: “I don’t think I have any original ideas… I’ve gotten a lot of ideas myself from reading. You can learn a lot from other people. In fact, I think if you learn basically from other people, you don’t have to get too many new ideas on your own. You can just apply the best of what you see.”
It is my hope that now that you have the answers to these questions, you won’t have to wait for me to try and reply to emails with the same requests.
Roger… please check my valuations!
Finally, many of you asked me to check your work! I really am humbled by how many of you are launching straight into the application of value investing. Well done! Instead of going through everyone’s examples, I thought it would be much better to give you some worked examples for you to try yourself. Take these inputs and run them through the process in my book. By the end of next week I will release the answers for you to check your work against along with the substeps. The inputs are in the table. Print it and fill in the blank columns to arrive at your answers (click on the table to enlarge the image).
Ten Value.able valuations
Posted by Roger Montgomery, 10 August 2010
Click here for the answers… no cheating.