|
|
I am busy, reading annual reports from different companies that are listed in SGX, AMEX, NYSE, and NASDAQ and 'The Aggressive Conservative Investor' book. As a result, I do not have enough time and motivation to write blog every month. Therefore, I will post blog entry once I have something interesting to discuss with the interested readers. Right now I write about investment valuation. The next blog entry will be about behavioural finance. I will post it after I have read James Montier book.
Present Value
Notice:
Someone in the chat box has pointed out the errors on DCF (discounted cash flow) valuations. After looking at this comment, at the first quick glance, I have not detected. So, I did a few minutes check until I have realised the mistakes. I apologise for such errors. I will like to seek opinion from other readers whether doing this kind of mistakes make me a foolish and stupid person. As for me, I do not think so since every human on the earth has made different kind of mistakes before. I feel that it is tough to re-read the blog entry and check for any errors with my intention to do other things after this blog entry. At that time, doing the graphics of each equation is the last thing I have done in haste after taking one hour to write the blog entry. In the future, please kindly point out the mistake as soon as possible. Thank you for your time to read.
The present value method is first illustrated by John Burr Williams, who has written present value of dividend in his book, The Theory of Investment Value in 1938. In fact, I am waiting my chance to buy this book after I have gained enough experience in real-time practical investment. Williams' mathematical method of present valuation of dividend is known as dividend discount model. Within the period between 1930s and 2000s, many academic professors also have developed present valuation methods of different types of cash flows such as earnings, abnornal earnings, and so on. We shall look at the following present valuation method in the form of algebra.
In the above equation, V represents price per share, value of project, value of firm, and so on; CFN represents cash flow, where N is the number of period; r represents the discount rate, which is interest rate as the form of opportunity cost. If we consider dividend per share as the form of cash flow, we will obtain the price per share; likewise, if we consider income earned from the project as well as cost of the project, we will obtain the value of the project. If we want to obtain the value of the firm, we will use free cash flow or abnormal operating income.
The problem of the above equation is that we have to forecast cash flow from present year to infinite number of year. The greater the number of years we forecast the cash flow, the greater the uncertainty the future is, the less accurate the valuation method is. To solve this problem, we have to truncate the equation as follows. This is done by adding the terminal value(TV) on the year that you want to forecast until.
It is almost equivalent to the present valuation method for valuing coupon bond. That is how many professional analysts in many banks and investment firms do. It is not end of the story yet. We customise the above present valuation method in order to have the best fit on the basis of the characteristics of the firm as well as its fundamental. There are three different types of scenarios that different firm behaves.
If the firm is able to generate the same cash flow forever, the present valuation method will be as follows:
(Edited Part 1:The second variable on the right hand side of the below equation should be like this, representing the same amount of cash flow that will given in every year starting from 2nd period or 2nd year. The error is to add '+' in between two things on the second variable of the right hand side of the equation. It is mathematically incorrect. The correction is done by replacing '+' by 'x'. 'x' is invisible as long as you know it is multiplied because the same amount of cash flow that is generated every year starting from year 2, reprsented by (CF2/r) must be discounted by the present value of (1/(1+r^2)).
.jpg)
If the firm is able to grow cash flow constantly forever, then the present valuation method will be as follows:
This formula is also known as Gordon Growth Method. G stands for growth in the percentage term. This growth rate must be at least equal or less than the growth of the economy. It will be seemed unrealistic if the firm is growing faster than the economy.
If the firm is growing cash flow after the terminal year, then the present valuation method will be as follows:
Edited Part 2: the denominator of the third variable, where its numerator is terminal value, should be (r-g) instead of (1+r) because of the assumption of the growing cash flow. If the cash flow is not growing, the denominator should be (1+r).
.jpg)
In school, you do all these exercises involving the use of present valuation methods as if you are in the perfect information world. The information in the questions provide you the discount rate and growth rate. In practice, you have to find what the right discount rate and growth rate will be in order to value the price of a stock, a firm, or a project. It is one problem because many people have different views on the value of the discount rate and growth rate. Therefore, people's intrinsic values are different from each other, which is normal situation. Another problem is that you have to forecast the cash flow. In order to do that, you need to predict the trend of the business cycle for the next few years. Which year is bearish one and which year is booming one? It does not make sense to assume all years to be booming one, which means that cash flow will grow over time. Even professionals as well as professors cannot forecast perfectly. Let see the data provided by James Montier, whom I like his analysis work, from Societe Generale's 'The Dangers of DCF'.
This above three pictures show that analysts do long-term forecast, which fails miserably. These are the reasons why I do not use present valuation method since I do not like to forecast given large margins of errors. It is the accurate and logical model to address the value of the stock but it will work very well if it is used in the world of perfect information. In the world of imperfect or asymmetric information, it will fare badly.
Valuation Method that involve the use of earnings multplier or earnings
This kind of valuation method is something I do not like to use because earnings do not reflect the true business' operation and there is no correct earnings multiplier. First of all, in a booming economy, earnings will increase greatly and, in a bearish economy, the earnings will fall greatly. It is all due to the consumers' disposable income in the different nature of the economy. It is very important to look at normalised earnings. Only owners of the businesses know how to normalise since they have insider view of which part of earnings will be the result of the consumers who buy their products or use their services regardless of the state of the nature. Without inside view of the business, it is difficult to derive perfect normalised earnings. Lastly, there is no fixed rule on which earnings multiplier is the one to apply. A wrong use of the value of earnings multiplier can either inflate or deflate the value of the stock. Some will prefer historical earnings multipler,;others prefer average earnings multiplier.
Balance Sheet Analysis
I love doing balance sheet analysis since it directly deal the value of the net assets as well as net net. Net assets is about rough proxy to the rough value of the firm in the private investor's point of view. I do agree that it can be quite crude method of valuation due to the distortion caused by accounting standards and the managers' discretion on the value of each accounting items.
Ratio Analysis
I somewhat like to use these to determine whether the company is profitable one. To use ratio analysis, you must compare the result of the ratio analysis with a discount rate. There is no perfect thumb of rule about what discount rate you should use to compare with. Recalling the empirical evidence that shows that mean reversion exists in the real world, reflecting the microeconomics theory, the profitable firms that has result of ratio analysis exceeding the discount rate may decline over time. We do not know when it will occurs.
Multiples
We all know that low price multiples compared to average or normal standard identify the firms as undervalued firms and high price multiples identify firms as overvalued or glamour ones. The problem is that we do not know what value of price multiple is the normal standard to compare with the firm's price multiple. That is why I rarely compare price multiples.
Which valuation method should you use?
There are two quotes which one of them you will be inclined towards. First quote came from Aswath Damodaran's 'Investment Valuation' book as follows:
“Those who disdain valuation models for their potential errors end up using far cruder approaches (such as comparing P/E ratios or applying EBIT multiples)… they choose to sweep the uncertainties (of valuation) under the rug and act as if they did not exist."Second quote came from John Maynard Keynes as follows:
"It is better to be roughly right than precisely wrong"If you are inclined towards first quote, you will be using present valuation method with conservative mind. If you are inclined towards second quote like me, you will be using crude and other methods that involve doing rough estimation that leads to logical valuation with less error of margin.
Contents of Annual Reports
I find that annual reports from companies that are listed in NYSE, AMEX, and NASDAQ are wordy but detailed. I like the section of risk factors and comparisons of key variables such as gross profit between present year and past year with explanation of why they increase or decrease. These areas are not covered in any SGX-listed companies' annual reports. However, so far, Mermaid is the only SGX-listed company that offer risk factors section. I feel that corporate governance which all SGX-listed companies include in the annual report, should not be in annual report but in their websites' investor relatio
The following parts of contents of the annual reports which i like to see are:
1)risk factor
2)reasons to explain the increase or decrease of the key variables between present year and past year
3)chairman's and/or CEO's statements to sum up the company performance and his/her expectation of the company performance for next year
4)Show that other asset or other liability andconstitute of what accounting items in the footnotes of the financial statement.
5)profile of the directors
6)table of how many stocks will be received by directors who exercise their options hypothetically.
Book
Title: The Aggressive Conservative Investor
Author: Martin J Whitman and Martin Shubik
Rating:8/10 (in the point of newbie investor) or 9.5/10 (in the point of experienced investor)
Comment:
It is so incredible book that I want to buy and re-read it again over again to refresh my thoughts towards the investment process. This book offers an interesting idea to wear different thinkcaps to analyse the company in different point of view. Best takeaway from this book is chapter 2 and case study Chapter 2 gives us financial integrity framework to follow as a proper guide to invest in. The first three case studies are quite different to comprehend but, nevertheless, they are interesting to learn. I believe that once we gain enough experience and understanding of how these situations that are similar to these case studies, we will understand what this book is trying to explain. The last case study is superb!
Dramas and Movies
Shiawase ni Naritai!(Japanese Drama 2005)
Synopsis:
A high school girl has to quit school as her father commit suicide by drowning. At that point, her father has left $10 million yen debt under her mother's name as a guarantee. She also has two young brothers. Upon quitting school, she find a job to pay the debt. One day, she is given a chance to work in tv station, UBS. Her interest and potential shines in this workplace. Will she last long given her education status? Can she pay up the debt?
Rating:7/10
Remark: It is interesting drama that brings you smile each time that high school girl get past all kind of trials
20th Century Boys The Last Chapter Our Flag (Japanese Movie 2010)
Synopsis:
It is the finale movie to close the mystery about who is the leader of the 'Friend'. Kenji came back from so-called dead, wanting to resolve the problem. The rest of Kenji's friends and Kanna were seperated at the start of this third installation. Kanna formed certain group to rise against 'Friends' while hiding in unknown underground place. The leader of the 'Friend' decides to do massacre in Tokyo followed by the world. What will Kenji do? Who is the leader of 'Friend'? What will the end of this story be like?
Rating:6/10
Remark: It is slow motion story explanation. The main factor in this third installation is to find out the identity of the leader of 'Friend'. There is a twist regarding that identification. Overall, it is ok movie.
Law-Abiding Citizen (Hollywood Movie 2009)
Synopsis:
It was fate that two robbers ransacked a house that contain one husband, one wife, and one daughter. One of two robbers feel high to kill that wife and daughter. Fast forward, there was a lawsuit for this robbery and murder. But, That robber cum murderer made a deal with opposing lawyer that he will be jailed for 5 years for the third-degree murder while the other robber, who did not murdered, was sentenced to be killed for murder in 10 years time. That husband felt unfair. In 10 years later, that husband rolled out his plan to kill any person who was associated with this case intelligently. Nobody know when, how, and where he do it. When is the end of his plan?
Rating:10/10
Remark: Brilliant story with unpredictable plot. I couldn't tell how that husband did all this kind of murder even if he was locked in the prison at the first glance. It is a must-watch movie!
The Informat (Hollywood Movie 2009)
Synopsis:
This movie reflects the real-life story that happens in US in 1990s. It is about a guy, Mark Whitacre, revealing a price-fixing of lysine between his corporation, ADM and other international corporations. At that time, he has held high-ranking management in ADM. Under the pressure, he makes up a lie about a sabotage on ADM's lysine production so as not to lose the managerial job. In the end, he decides to reveal to FBI officer about price-fixing. More secrets about him are about to be revealed. What will happen to him? What will ADM do? What is the penalty?
Rating:7/10
Remark: Matt Damon does not look like that actor of Mark Whitacre in the movie. Very convincing disguise. This movie should blow asian people's mind about corporate conspiracy. Nice story.
Big Money (Japanese Drama 2001)
Synopsis:
A unemployed young man, Shirato, is looking for a job until he stumbled upon the job that is offered to him by legendary speculator, Kozuka. His job is to learn stock trading from Kozuka. Kozuka sets each trial for him to meet within his expectation. At the same time, Kozuka is waiting for the right time to unveil his plan. His plan is to make the third biggest Japanese bank, Matsuba Bank. Can this plan succeed?
Rating:8/10
Remark: It is quite exciting and fast-paced drama for anyone. Great for weekend relaxing to burn your free time on this nice drama.
Sherlock Holmes (Hollywood Movie 2009)
Synopsis:
Sherlock Holmes is trying any means to prevent Watson from getting married. Getting married means that Watson is not going to stay in the same home with Sherlock Holmes. Meanwhile, there is mystery case brewing on Holmes' radar. That mystery is supposed to be ended at the moment the criminal, who Sherlock Holmes and Watson caught him on spot, is to be hanged for the murder of 5 women and attempted murder of one woman. This murder is Lord Blackwood. Lord Blackwood did not die. How does he survive during the death sentence that is viewed by Lords as well as Sherlock. On top of that, Watson, as a certified and professional doctor, confirmed that he is dead upon checking his pulse. Lord Blackwood goes on killing more people. Why does Lord Blackwood want to kill? How shall Sherlock Holmes solve this case?
Rating:7/10
Remark: The story is interesting but slow paced. The good package in this movie is beautiful written dialogue script. Good enough to have popcorn entertainment.
Gokusen The Movie (Japanese Movie 2009)
Synopsis:
This movie is designed to be middle of the season 3. New class 3D does not care about its homeroom teacher, Yankumi. Meanwhile some of previous class 3D are doing their best for their own jobs. As usual, new class 3D learn the true friendship through one incident, where Yankumi saved a popular new clas 3D guy's ass. At the same time, one classmate from old class 3D got into trouble while the other one came from 2nd season Gokusen drama is trying any inspiration for his own path. The former guy unknowingly become criminal for drug case on the evidence -his wallet dropped in the scene- found by the cops while he runs away out of his embarrassment (he does not want to trouble Yankumi again). How shall Yankumi prove this guy innocent to the police? Can Yankumi find the true culprit for the drug involvement?
Rating:7/10
Remark: It is usual stuff. Yankumi's and her students' feelings in this movie -especially final third of this movie - are so sincere enough that we are touched!Good enough for japanese drama lovers.
Up In The Air (Hollywood Movie 2009)
Synopsis:
Ryan Bingham is doing the job of firing people in the behalf of his clients, who are the companies who have these people as their employees. His current philosophy is not to have his own family, children and anything else. One day, a new female employee, Natalie who just start working in the firm, where Ryan works at. She suggests to have teleconference thing to cut the travelling expenses so that most people who took charge of firing-people tasks can go their home. Ryan demonstrates why it is bad idea. Therefore, the boss decide to have Ryan to mentor Natalie. Over time, Ryan began to have the feeling to start a family. Has he done that?
Rating:7/10
Remark: It is fine movie for anyone who is in crossroad in his or her life.
Astroboy (Hollywood Animation 2009)
Synopsis:
Toby's father, Dr Tenma, is going to put some kind of core energy into a peacekeeper, a robot. That core energy is developed by another brilliant scientist, Dr. Elefun. This is to be done privately. Toby, who overheard from his father's discussion with President Stone over this peacekeeper task, is excited to see the peacekeeper in action. There are two different types of core energy, red and blue. Blue one is positive one while red one is negative one. President Stone likes red coloured one and, therefore, commands that red one is to be installed in the peacekeeper instead of blue. Everything went wrong. That Toby turns into Astroboy.
What happened to Toby?How shall Toby live a new life?
Rating:8/10
Remark: It is a wonderful sound effects that colour this movie beautifully.
Surogates (Hollywood Movie 2009)
Synopsis:
Dr Canter developed robots that can be controlled by humans. His purpose was to aid disabled people to use the fully able robot to function as if they were normal people. VSI, the company Dr Canter built, thought otherwise. In attempt to maximise its profit, VSI marketed their products, robots, as a way that people need not to be killed in accident, war, and so on because robots will be dead while humans who control robots are not dead. There was a plot that someone wanted to kill Dr Canter's son. FBI was trying to find out the motive of this murder. Who is the mastermind? What will Dr Canter deal with his son's death?
Rating:8/10
Remark: It is so unique to see how humans control robots. Old people use robots that look young people in age of 20-30. Men also use female robots. It is neat way not going to surgery to change the sex or use plastic surgery to enhance boobs, facial features and so on. What a future! Good enough to eat pop corn at home while watching this movie.
Amelia (Hollywood Movie 2009)
Synopsis:
This movie is trying to portray the real life of Amelia Earhart, who wants to be pilot. As a pilot, she achieves her dream to be the first woman to cross Altantic Ocean. Unfortunately, the tragedy follows in the end according to the real life.
Rating:7/10
Remark: It is almost like educational movie to me, learning about the real-life popular lady in America in 1930s.
White Night (Korean Movie 2009)
Synopsis:
There is a murder case, where the pawnbroker is murdered in the enclosed ship. Detective Han Dong-soo can not find the evidence that point the murder. In 14 years later, there is another murder in different district. Detective Cha Seung-jo suspect that this murder case is something to do with that murder case of 14 years ago. Truth began to be known....
Rating:7/10
Remark: The story is quite good but slow-paced.
Avater (Hollywood Movie 2009)
Synopsis:
In the sci-fi genre movie, Jake sets out on the mission with the company in the moon, Pandora. His mission is to assist the company so as to extract important natural resource that stores in Pandora. Jake's mind somehow enters into the strange blue-coloured creature that has the function of humans but stronger, taller and powerful in terms of physical. He strikes lucky to make friends with those blue coloured creatures. He get confused whether to side with humans or blue-coloured creatures. Eventually, he has choosen one side to protect. Which side does he choose to be with?
Rating:9/10
Remark: The graphics looks cool together with wonderful storyline. Somehow, it is a message to protect the nature where a group of people, blue-coloured creatures cannot live without. It is truly excellent movie.
Auction House (Korean Drama 2008)
Synopsis:
Cha Yun Soo gets the chance to obtain the job that enables her to work in the auction house. Her firm, Will Auction, deals with all kinds of paintings, antiques, and rare items. She gains experience in each time she gets every new task given by her manager, Min Soo Rin. What can she learn by working in the auction house?
Rating:7/10
Remark: It is good drama but awfully short episodes. Nevertheless, there are not much interesting stories left to make up more than 20 episodes. Good enough to spend one whole day to complete 12 interesting episodes during weekend.
Cruel Temptation (Korean Drama 2008)
Synopsis:
Gu Eun-jae is currently married with Kyo-bin. One day, Eun-jae's blood unrelated sister, Shin Ae-ri returns back from France with the aim to form her family with Kyo-bin. Ae-ri develops her own evil plot to get Kyo-bin to divorce Eun-jae and introduces her already-born son, Nino, who has the blood of Ae-ri and Kyo-bin. The family war has gone loose, getting Gu family to be at loggerheads with Jung family. Along the way, Gu Eun-jae and her family suffers a lot. What kind of revenge will Eun-jae get in order to satisfy her pain and hatred?
Rating:8/10
Remark: The main factor for this attractive drama is the plots Ae-ri and Eun-jae are doing against each other. Although it is really long story, 129 episodes, it is enough to attract people who love to watch and/or read love stories like that.
When It's At Night (Korean Drama 2008)
Synopsis:
Heo Cho-hee, as a young teenger, saw her father being arrested by Noh Jung Pil, who is the chief, taking care of national treasures in Korea. Her father was tomb robber, stealing many national treasures in Korean Museum. Fast forward, Cho-hee and her brother, Heo Gyun, are taken care by Mr Noh. Subsequently, Mr Noh hired Cho-hee to work in the same department, catching tomb robbers. There is a mission for Cho-hee to obtain stolen national treasure that is now located in Japan. At the same time, Kim Bum Sang, who is currently working in University, giving lecturers in the University, and educating Korean public about the antiques and national treasures in the public tv, is asked by rich Korean tyccon to bring that same treasure back to him in Korea. As time progresses, there is interesting romance between Kim Bum Sang and Heo Cho-hee.
Rating:7/10
Remark: There is so many amusing stuffs in the early episodes. In later episodes, the laugh factor dried up. Overall, it is interesting drama.
Beyond A Reasonable Doubt (Hollywood Movie 2009)
Synopsis:
C.J Nicholas is trying better luck to get interesting story in the TV. He thinks there is one story, which a district attorney, Mark Hunter tried to create a fake DNA as a decisive evidence. That fake DNAs are enough to persude 17 different juries in different cases to make criminals gulity. Nicholas is trying to prove this in the hard way. What is the proof that confirms that Mark Hunter is creating fake DNA?
Rating:9/10
Remark: The story is remarkable good. The ending is also excellent. Unbelievable ending!
Armored (Hollywood Movie 2009)
Synopsis:
Ty Hacknett was discharged from his military mission at Iraq, netting Silver metal. At the same time, he has his father and mother passed away. All he has now is his younger brother. There are two mortgages that are against his parent's home. He is struggling to pay to the banks. Meanwhile, he is working in a security firm, being part of a team that fetch a box, containing money, from banks to his security firm. One day, his colleagues asked him to join the plan that involves stealing money. Did Ty Hacknett agree or not? Can this plan be successful?
Rating:7/10
Remark: It is standard film. Enough pop corn to eat while your eye glued to this movie, anticipating the degree of the success of this plan.
Gambling Apocalypse Kaiji (Japanese Movie 2009)
Synopsis:
Kaiji was trapped by the loansharks because he was the guarantor to the loan contract that his friend made. The boss of these loansharks suggested him to take part some kind of competition that might wipe that debt clean. Little wonder, at the moment Kaiji entered, he saw a battlefield, where many people who had similar problem as Kaiji (they borrowed from loansharks) gamble against each other. He was too kind to win the competition. Due to his kindness, he joined the loser club that condemned him to work as a slave for the corporation, digging in the underground. Knowing that this life sucked, he vowed to get out of this horrible place. Can he do it?
Rating:7/10
Remark: Manga-adopted movie is rarely fantastic. The ending is quite desirable to our liking.
14 Blades (Hong Kong Movie 2010)
Synopsis:
This movie showcases a well-known assassin working for the chinese government. He was assigned to take a imperial seal back from someone to the imperial court. Over this mission, he was trapped and betrayed by his 'brother' and evil offical. Escaping from this plot, that assassin was finding the right time to complete his mission. Did he complete the mission?
Rating:6/10
Remark: A lot of standard fighting movie. Overall, good enough to watch with pop corn.
Descendants Of Hong Gil Dong (Korean Movie 2009)
Synopsis:
In the modern time, the descendants Of Hong Gil Dong (famous thief who steal foods and gold from riches and gave them to the poor aka Robin Hood) are following the same path as his ancestor. Hong Mu-hyeok, who works as a teacher, is trying his best to conceal his family secret. Sooner or later, his family secret will be revealed to his girlfriend.
Rating:8/10
Remark: Nice plots, where Hong Mu-hyeok steal money from a evil rich young man.
Secret (Korean Movie 2009)
Synopsis:
Sung-ryeol, a detective for homicide divison, discovered that his wife was the main suspect for the murder. He tried his best to conceal the evidences that pointed to his wife in the crime scene. There was the twist, where somebody else murdered the victim, who is the brother of head of the gang. There was dark secret behind to that victim. The head of the gang did not want anyone to find out and did all the measures to obtain something, which is the dark secret. What is the dark secret? Who is the real murderer?Sung-ryeol was in his wits' end as cops and gangsters were fast zooming towards his wife as the picture evidence became clearer to see.
Rating:9/10
Remark: Neat twist. Film bluffers can never guess what the ending is.
Dirty Harry (Hollywood Movie 1971)
Synopsis:
Harry Guardino, a inspector for the homicide division was on the fast track to nail the murderer who is on the loose. This murderer was blackmailing the mayor to pay the ransom money. Otherwise, he would kill the specific member of the public that is stated in the notice. What did Harry do?
Rating:8/10
Remark: This old movie is much more entertaining than any modern action flicks nowadays. Watch out Harry's 0.44 Magnum gun!
Tony Del Piero wrote and posted at at 11:51 pm
