Saturday, 5 December 2020
Quote for the day
"In the business world, everyone is paid in two coins: cash and experience. Take the experience first; the cash will come later." - Harold Geneen
Friday, 4 December 2020
The Basics Of Valuing Companies
Valuation is at the heart of all investment decisions.
Every time you choose to buy or sell a share you take a view on what the share is worth, and whether the market's valuation is high, low, or about right.
We are going to take a look at valuing shares as an explicit, practical discipline. We will first run through the basic methods, and then have a look at how they can be applied in practice on companies in various sectors.
Valuation methods tend to focus on numbers, but they need to be considered in the context of the company's prospects, and the risks in its business.
Two Main Approaches
There are two main approaches:
Relative valuation – how does the company's share price compare with other companies in the same sector, or the market as a whole?
Future income - by forecasting the future profits, cash flow, dividends or other economic factors of the company.
How Much Time Have You Got?
If investing is your day job, then you have the time to build comprehensive financial models and make sensible forecasts from which discounted cash flow valuations can be derived. That is what a stockbroker's analyst, covering a handful of companies all in the same sector, will do.
But the amount of time and effort required to use DCF and other forecasting methods means that they are not very often practical tools for the individual investor.
The Relative Valuation Approach
So I am a fan of the relative valuation approach -- and not just for basic share valuation metrics such as P/E ratio and dividend yield. It is very instructive, when researching a company, to look at one or more other companies in the same sector. Apart from the numbers, the most useful things to compare include:
* Business mix and geographical coverage;
* The business model and strategy; and
* What the management says about trading conditions and prospects.
If you only look at one comparative company, choose a large, well-researched one which makes some effort, in its accounts and/or on its website, to explain its strategy and the important trends and developments in its industry.
Consensus Forecasts
There is one important area in which private investors can benefit from the analysts' financial models. Consensus forecasts of revenues, earnings and dividends are widely available for most stocks. These are averages of the forecasts of all the analysts covering a stock, and as companies give "guidance" about their prospects, forecasts for the next year end are based on more than just idle speculation.
So where possible I would usually use the prospective P/E ratio and dividend yield (based on the forecast for earnings and dividend for the next year end) in comparing companies.
Approach
Putting all this together, my approach is:
1. Choose one or more comparator companies.
2. Learn about the sector, and how the business and strategy of the company compares with others in the sector. From this you can form a view as to the prospects and downside risks for the company.
3. Compare the basic valuation measures: prospective (or historic) PE, dividend yield, PEG ratio etc. This is a good time to look at analysts' recommendations.
4. If the basic valuation measures do not make sense, then look at other valuation measures such as price/sales or price/book value.
5. Look at how the share price has performed over the past twelve months (or longer).
6. Examine and compare the operating performance: revenues, margins, return on capital etc.
7. Examine and compare the financial strength: gearing, dividend cover, cash flow, tangible assets etc.
8. Look for any hidden liabilities or value, e.g. pension fund deficits, over- or under-valued properties.
A Comparison Table
Drawing up a table such as the one below is a quick and easy process which helps focus attention on what may be driving the market's valuation of a share:
All of the numbers can be taken from the CSE Company Financial Info, with just a little bit of arithmetic required for the revenue growth and cash flow ratios.
Every time you choose to buy or sell a share you take a view on what the share is worth, and whether the market's valuation is high, low, or about right.
We are going to take a look at valuing shares as an explicit, practical discipline. We will first run through the basic methods, and then have a look at how they can be applied in practice on companies in various sectors.
Valuation methods tend to focus on numbers, but they need to be considered in the context of the company's prospects, and the risks in its business.
Two Main Approaches
There are two main approaches:
Relative valuation – how does the company's share price compare with other companies in the same sector, or the market as a whole?
Future income - by forecasting the future profits, cash flow, dividends or other economic factors of the company.
How Much Time Have You Got?
If investing is your day job, then you have the time to build comprehensive financial models and make sensible forecasts from which discounted cash flow valuations can be derived. That is what a stockbroker's analyst, covering a handful of companies all in the same sector, will do.
But the amount of time and effort required to use DCF and other forecasting methods means that they are not very often practical tools for the individual investor.
The Relative Valuation Approach
So I am a fan of the relative valuation approach -- and not just for basic share valuation metrics such as P/E ratio and dividend yield. It is very instructive, when researching a company, to look at one or more other companies in the same sector. Apart from the numbers, the most useful things to compare include:
* Business mix and geographical coverage;
* The business model and strategy; and
* What the management says about trading conditions and prospects.
If you only look at one comparative company, choose a large, well-researched one which makes some effort, in its accounts and/or on its website, to explain its strategy and the important trends and developments in its industry.
Consensus Forecasts
There is one important area in which private investors can benefit from the analysts' financial models. Consensus forecasts of revenues, earnings and dividends are widely available for most stocks. These are averages of the forecasts of all the analysts covering a stock, and as companies give "guidance" about their prospects, forecasts for the next year end are based on more than just idle speculation.
So where possible I would usually use the prospective P/E ratio and dividend yield (based on the forecast for earnings and dividend for the next year end) in comparing companies.
Approach
Putting all this together, my approach is:
1. Choose one or more comparator companies.
2. Learn about the sector, and how the business and strategy of the company compares with others in the sector. From this you can form a view as to the prospects and downside risks for the company.
3. Compare the basic valuation measures: prospective (or historic) PE, dividend yield, PEG ratio etc. This is a good time to look at analysts' recommendations.
4. If the basic valuation measures do not make sense, then look at other valuation measures such as price/sales or price/book value.
5. Look at how the share price has performed over the past twelve months (or longer).
6. Examine and compare the operating performance: revenues, margins, return on capital etc.
7. Examine and compare the financial strength: gearing, dividend cover, cash flow, tangible assets etc.
8. Look for any hidden liabilities or value, e.g. pension fund deficits, over- or under-valued properties.
A Comparison Table
Drawing up a table such as the one below is a quick and easy process which helps focus attention on what may be driving the market's valuation of a share:
All of the numbers can be taken from the CSE Company Financial Info, with just a little bit of arithmetic required for the revenue growth and cash flow ratios.
Edited article of Tony Reading from www.fool.co.uk
Quote for the day
"In the end, it's not the years in your life that count. It's the life in your years." - Abraham Lincoln
Thursday, 3 December 2020
Warren Buffett's 23 Most Brilliant Insights About Investing
Warren Buffett, the billionaire "Oracle of Omaha" continues to be involved in some of the biggest investment plays in the world.
Buffett is undoubtedly the most successful investor in history. His investment philosophy is no secret, and he has repeatedly shared bits and pieces of it through a lifetime of quips and memorable quotes.
His brilliance is timeless, and we find ourselves referring back to them over and over again.
We compiled a few of Buffett's best quotes from his TV appearances, newspaper op-eds, magazine interviews, and of course his annual letters.
Buffett is undoubtedly the most successful investor in history. His investment philosophy is no secret, and he has repeatedly shared bits and pieces of it through a lifetime of quips and memorable quotes.
His brilliance is timeless, and we find ourselves referring back to them over and over again.
We compiled a few of Buffett's best quotes from his TV appearances, newspaper op-eds, magazine interviews, and of course his annual letters.
Quote for the day
"If you take responsibility for yourself you will develop a hunger to accomplish your dreams." - Les Brown
Wednesday, 2 December 2020
Here Are The Ground Rules For Successful Investing
Not
long ago investing was easy. There were few places you could invest and
if you had money you wanted to invest, you left it to the professional
stock brokers. However, deregulation of the financial markets has
changed all this. In the past 20 years new investment products have been
launched, changes have been made to the tax systems and retirement
plans which have altered the attractiveness of many investment products.
Up to about 20 years ago, share investing was purely in the domain of the wealthy. For most people it was difficult to trade in overseas stock exchanges, there were no such thing as cash management trusts, installment warrants, exchange traded options, dividend imputation, reset preference shares and endowment warrants - to name a few. Now about 50% of investors are "mums and dads" investors who either own shares directly or in managed funds. Unfortunately, in recent years many investors have been "burnt" because they did not understand the risks of investing in financial markets.
Governments around the world have made it clear that it is important for people to take control of their own financial futures. The sustainability of government funded pensions is under pressure. If you do not save and invest, you will suffer a significant decline in your retirement living standard. The average life expectancy is about 80 years, so if you retire at 60 years of age, the savings you have accumulated in the 40 years of your working life will need to fund your retirement of 20 years or more.
Deregulation of financial markets, interest rates and currencies means that the market determines the value of investments and not government decree. This provides opportunities for educated investors to build wealth and for unwary investors to lose wealth. You must understand the opportunities and risks.
The ground rule is that if you want to be a successful investor in financial markets, you must educate yourself about investing. Even if you put your faith in a licensed investment advisor, not all are competent. It is essential that you understand how the financial markets work so that you do not put your hard earned money in the hands of an incompetent advisor who is only interested in the commissions available. How can you tell whether a particular investment is right for you? The only sure way is to become familiar with the language used in the financial industry and to have a sound investment strategy. Does this mean that you should keep you money safe by putting it under the bed or keeping it in the bank? No - but you do need to understand the risks involved and set ground rules for successful investing.
There are a number of ground rules in investing that haves stood the test of time. With time, patience and effort you can become a successful investor in all the areas that are open to you. This will not come overnight and you will have to be prepared for that fact there will be times you lose money. However,perseverance is a virtue above all others. The road is not always easy, but nothing worthwhile is.
Here are the ground rules for successful investing:
1. Be your own investment manager. No advisor or stockbroker should do it for you. Only you know what your real needs are, what your temperament is - and only you are motivated by your own best interests, not sales commissions. It is also more fun to do it yourself.
2. Confront risk and then reduce it through spreading your investments.
3. Take a contrarians view to investment markets. That is, look for opportunities and do the opposite of what everyone else is doing.
If your investing facts are out-of-date, how will that affect your actions and decisions? Make certain you don't let important investing information slip by you.
4. Do not be put off by investment jargon. Master it instead.
5. NOW is the best time to start investing. Do not wait for the markets to improve. If the share market is filled with gloom, that is the time to buy.
6. Make good quality shares the core of your investment strategy. Then you can rest easy when you invest in more speculative areas.
7. Always consider tax implications of making investments but never let tax minimization be the main objective. The fundamental rule is to think in terms of after-tax returns.
8. Keep up to date through reading the financial papers and searching independent investment research websites.
9. Discussing investments is stimulating. Condition your mind to talk to others about investing, especially people who are more experienced and knowledgeable than you are.
10. Do not be greedy. Discipline yourself to cut your losses with bad investments and cash in when you have made a reasonable profit.
11. Be patient. Rome was not built in a day. Similarly, you may not become wealthy overnight, but you will over time.
12. Never invest in anything you do not understand. If a particular investment sounds too good to be true, it usually is.
13. Pay yourself first. Most people invest money they have left over after paying the bills. Allocate yourself the first 10% of your monthly income to build up your investment capital. By doing this you will force yourself to become an investor and the long term benefits will be enormous.
If you master these 13 ground rules, you will be a successful investor. You will rival so-called professionals and will sleep easily at night knowing that money is the least of your worries.
Have a good trade.
Source: www.fool.co.uk
Up to about 20 years ago, share investing was purely in the domain of the wealthy. For most people it was difficult to trade in overseas stock exchanges, there were no such thing as cash management trusts, installment warrants, exchange traded options, dividend imputation, reset preference shares and endowment warrants - to name a few. Now about 50% of investors are "mums and dads" investors who either own shares directly or in managed funds. Unfortunately, in recent years many investors have been "burnt" because they did not understand the risks of investing in financial markets.
Governments around the world have made it clear that it is important for people to take control of their own financial futures. The sustainability of government funded pensions is under pressure. If you do not save and invest, you will suffer a significant decline in your retirement living standard. The average life expectancy is about 80 years, so if you retire at 60 years of age, the savings you have accumulated in the 40 years of your working life will need to fund your retirement of 20 years or more.
Deregulation of financial markets, interest rates and currencies means that the market determines the value of investments and not government decree. This provides opportunities for educated investors to build wealth and for unwary investors to lose wealth. You must understand the opportunities and risks.
The ground rule is that if you want to be a successful investor in financial markets, you must educate yourself about investing. Even if you put your faith in a licensed investment advisor, not all are competent. It is essential that you understand how the financial markets work so that you do not put your hard earned money in the hands of an incompetent advisor who is only interested in the commissions available. How can you tell whether a particular investment is right for you? The only sure way is to become familiar with the language used in the financial industry and to have a sound investment strategy. Does this mean that you should keep you money safe by putting it under the bed or keeping it in the bank? No - but you do need to understand the risks involved and set ground rules for successful investing.
There are a number of ground rules in investing that haves stood the test of time. With time, patience and effort you can become a successful investor in all the areas that are open to you. This will not come overnight and you will have to be prepared for that fact there will be times you lose money. However,perseverance is a virtue above all others. The road is not always easy, but nothing worthwhile is.
Here are the ground rules for successful investing:
1. Be your own investment manager. No advisor or stockbroker should do it for you. Only you know what your real needs are, what your temperament is - and only you are motivated by your own best interests, not sales commissions. It is also more fun to do it yourself.
2. Confront risk and then reduce it through spreading your investments.
3. Take a contrarians view to investment markets. That is, look for opportunities and do the opposite of what everyone else is doing.
If your investing facts are out-of-date, how will that affect your actions and decisions? Make certain you don't let important investing information slip by you.
4. Do not be put off by investment jargon. Master it instead.
5. NOW is the best time to start investing. Do not wait for the markets to improve. If the share market is filled with gloom, that is the time to buy.
6. Make good quality shares the core of your investment strategy. Then you can rest easy when you invest in more speculative areas.
7. Always consider tax implications of making investments but never let tax minimization be the main objective. The fundamental rule is to think in terms of after-tax returns.
8. Keep up to date through reading the financial papers and searching independent investment research websites.
9. Discussing investments is stimulating. Condition your mind to talk to others about investing, especially people who are more experienced and knowledgeable than you are.
10. Do not be greedy. Discipline yourself to cut your losses with bad investments and cash in when you have made a reasonable profit.
11. Be patient. Rome was not built in a day. Similarly, you may not become wealthy overnight, but you will over time.
12. Never invest in anything you do not understand. If a particular investment sounds too good to be true, it usually is.
13. Pay yourself first. Most people invest money they have left over after paying the bills. Allocate yourself the first 10% of your monthly income to build up your investment capital. By doing this you will force yourself to become an investor and the long term benefits will be enormous.
If you master these 13 ground rules, you will be a successful investor. You will rival so-called professionals and will sleep easily at night knowing that money is the least of your worries.
Have a good trade.
Source: www.fool.co.uk
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