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How do I value a business?

How do I value a business?

I find investing intellectually and financially stimulating, and being able to share the process equally rewarding.

A large number of investors, financial planners, stockbrokers, and a very observant plumber have emailed me requesting the various insights that I mentioned on Market Moves with Richard Gonclaves and Nina May’s Your Money Your Call on the Sky Business Channel.

Many of you have also asked for individual stock recommendations or how I might be able to advise you. Here is the official response…

As you can imagine, I have received innumerable requests to manage funds, provide share market advice, review and establish share portfolios and the like. Having recently resigned (June 30) from the financial services and funds management businesses I founded, listed on the ASX and sold, I am not currently able to assist with these requests, however, with your permission, I will keep your details and let you know when I am in a position to assist.

In the meantime you can follow my thoughts by tuning in to Ross Greenwood’s Money News program on 2GB (NSW), ABC Statewide Drive (NSW) with John Morrison, watching the Sky Business Channel, reading my weekly Value Line column in Alan Kohler’s Eureka Report and visiting my blog, Roger Montgomery Insights.

If you have registered your details at my website, www.Rogermontgomery.com, I will contact you when my guide book to showing you how to identify great businesses and value them is available for purchase in late February or early March.

Until then, I have written an eight-page note on how to construct a share portfolio using my approach to identifying great businesses and valuing them.

I have also uploaded an article I recently wrote for Alan Kohler’s Eureka Report about airlines and why their accounting will make you sit up and take notice.

Enjoy your reading and investing and keep in touch.

Roger

Posted by Roger Montgomery, 30 November 2009

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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10 Comments

  1. Hello Roger, Looking forward to your new book. I attempted an intrinsic valuation for NAB using figures from Commsec. S’holder (book value) $37,815m ($18.02 equity per share) ROE 6.57% RR 12% Pay out ratio 119% (pay out exceeded earnings?) = $9.68 that cannot be correct, please help?

    • rogermontgomeryinsights
      :

      Hi Chris,

      There’s nothing wrong with the arithmetic. If a company has $18 of equity earning a 6% return and you are using a 12% required return (which is double the profitability of the equity) then you should be paying about half the equity. I think your issue is the adopted return on equity. My ROE for NAB is not that low. After the announced AXA bid, I ran my numbers on NAB and discovered a $4 drop in intrinsic value from roughly $25.50 to $21.30.

      Roger

  2. Hi Roger

    I found your 8 page doc very helpful thanks.

    One question however. In a market where you yourself say there are only a handful of stocks at fair value, I would find it hard to allocate the advised 7% only in any given stock. In my case I have only 4 stocks in my portfolio so my average is obviously much higher.

    What do you think is the compromise? Having more money on the sidelines waiting for more stocks to become fair value or to own greater % stocks in fewer companies?

    Cheers

    Matt

    • rogermontgomeryinsights
      :

      Hi Matt,

      I don’t compromise. I allocate money to investments when I can find superior ones. If I cannot find enough investments, I sit in the safety of a bank account. I should say that if you are investing less than $10 million, you should find ample things to invest in and outperform the market if you are not in too much of a hurry.

  3. Hi Roger,

    Really enjoying this blog of yours as well as your YouTube postings and looking forward to the book next year – will there be a chapter addressing ‘when to sell’?

    Thanx,

    Tim

  4. Hi Roger,

    I was wondering if you could help me. I tried to download the 8 pg note mentioned in your post, but I could not download this. There seems to be an error. Could you please check this?

    Regards,
    Kathy

  5. Hi Roger, having a bit of trouble with the links in this post, both the airlines and portfolio construction links lead to dead ends

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