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How we assess value

 

How we assess value

In this week’s video insight Andreas shares our valuation framework for assessing a company. Our framework is based on the concept of intrinsic value, where we form a view of what a business is worth and then compare that valuation to what the market is prepared to pay. How does our approach differ to other investors?

You can read our quality criteria in this article.

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Andreas is the joint Portfolio Manager of The Montgomery Fund. Andreas joined from Navigo Partners, a M&A advisory firm in Stockholm, Sweden where he was a Director responsible for origination and execution of Scandinavian projects. Before this, he worked for three years in corporate strategy at Alinta Energy in Sydney.

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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9 Comments

  1. Hi Andreas

    I understand the concept of determining Intrinsic Value based on DCF modelling , but it has it’s limitations. I recently heard a well known Finance person state that Analysts in general get their forecasts right only 60% of the time. The longer the forecast period is, the harder it becomes to get the estimate of Intrinsic Value correct. The reality is Share Market Returns are made up of Dividends received plus or minus the change in Market Price of the Shares at a given point in time compared to the Market Price paid at time of purchase. Australian companies in general have a high Dividend payout ratio, so the Dividend part of the gain from Australian Share Investing plays a big part in arriving at Intrinsic Value, whereas the Capital Gain or Loss is at the mercy of market sentiment at the time of sale. Dividends received are real, but “paper” Gains or Losses don’t mean much because they are not locked in until an Investment is sold and then Mr Market has the final say. It’s only when Share gains and dividends are in the Bank that you can be confident that you have achieved them.

  2. Also, you talk about the 15 year forecast and the pressure testing that goes on (2min mark).

    It would be interesting to have a look at this process in action, a 15 year forecast requires people who are not standard financial types but who are almost like sci-fi creative writers types. This creates a problem where you need a balance between the more sober individuals (the usual suspects) and the creative types (as opposed to the fools) who are able to imagine what is about to come.

    In my view this also has a generational dimension older generations tend to be looking in the rear vision mirror (which is not necessarily all bad) while the younger types (even if this is not biological but more psychological) are able to see emerging trends and more willing to take risks.

    • Hi John,
      You correctly point out that doing a 15 year forecast is much more art than science!
      I should also point out that the way we generally use the 15 year forecast is much more to answer the question of “what assumptions do we need to believe to justify the current share price?” than to come up with a point estimate of value.

      We tend to find it much easier to assess the assumptions in that way than if we try to come up with the exact assumptions that we think are most likely.

      • Hi Andreas, how are your discount rates determined? Company WACC; or your required return plus risk premia for some sectors/countries? I note Munger’s comments on not factoring risk into the discount rate, seem fair. I was also surprised to see MIM refer to CAPM/beta recently, I assumed that may have been too technical/rear-looking?

      • Hi Dave,
        We tend to link the discount rate used to our perception of company quality and our assessment of the volatility and predictability of a company’s future. We do generally not adjust the rate with changes in the risk free rate as that is basically what leads to asset price bubbles and we also want to be consistent over time. We do not use CAPM to determining discount rates.

  3. david klumpp
    :

    Thank you for sharing that Andreas. Do you plan any follow-up on this theme of valuation? It’s a theme that I’m sure many readers are very interested in. I’d like to suggest that it would be valuable to show an example calculation of intrinsic value, comparing with price for one of the portfolio’s stocks.

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