Is it realistic for a new investor to estimate the value of a company?

Electric Boobs

What's the best way for a beginner to make his/her own estimation on the value of a company before looking at the actual value? I'm assuming most people don't try this method anyway?

My plan at the moment is to follow certain companies in order to become familiar with them and make imaginary investments for next while until I get more cash.

HobbyMan

Electric Boobs wrote: »

What's the best way for a beginner to make his/her own estimation on the value of a company before looking at the actual value? I'm assuming most people don't try this method anyway?

My plan at the moment is to follow certain companies in order to become familiar with them and make imaginary investments for next while until I get more cash.

Start with net working capital situations, then add in intangibles, then factor in earnings power.

I am a full time value investor (for a decade next year) and the valuation method is the only method I use.

Obviously different sectors are valued differently ie banks/insurance, equity funds, manufacturers etc etc.

Electric Boobs

HobbyMan wrote: »

Start with net working capital situations, then add in intangibles, then factor in earnings power.

I am a full time value investor (for a decade next year) and the valuation method is the only method I use.

So what would be an example of an intangible if I'm to get an idea of what that means in this context?

HobbyMan

An intangible is something which is not a physical asset. An example would be a brand name. The quality of tangible assets is much easier to evaluate than those of intangibles.

Again try to figure out how much you think the intangibles are worth before you look at the balance sheet.

Try to practise this regularly. For example how much do you think the brand name 'Unilever' is worth? You can ask 10 different people and you'll probably get 10 different answers but once you are comfortable with your own judgements then that's all you need.

A little tip here; try to undervalue rather than overvalue. If you can buy a company at a large discount to a very conservative value assesment then you could be onto a winner.

When valuing companies you should also look at free cash flow as those companies without positive free cash flow would need to raise money once in a while diluting your holding.

Hope that helps a little.

better call saul

"The Intelligent Investor" by Benjamin Graham is your starting point

Electric Boobs

HobbyMan wrote: »

Start with net working capital situations, then add in intangibles, then factor in earnings power.

I am a full time value investor (for a decade next year) and the valuation method is the only method I use.

Obviously different sectors are valued differently ie banks/insurance, equity funds, manufacturers etc etc.

So what would be the best way to access a company's balance sheets?

HobbyMan

Electric Boobs wrote: »

So what would be the best way to access a company's balance sheets?

Through the companies website. Look under 'Investor Relations'.

padser

Electric Boobs wrote: »

What's the best way for a beginner to make his/her own estimation on the value of a company before looking at the actual value? I'm assuming most people don't try this method anyway?

My plan at the moment is to follow certain companies in order to become familiar with them and make imaginary investments for next while until I get more cash.

I think the assumption that's not what most investors do is probably a poor one.

I think you are going to struggle to make accurate valuations and I think you are going to struggle to know whether or not you are making accurate valuations even with the benefit of hindsight.

(I'm assuming you are looking at reasonable scale companies, is the type that will have "investor relations" sections on their sites).

I work in a company and as with most companies in our industry we monitor our competitors performance closely. That means we listen to every earnings call, we save all their annual reports, we extract all the data from them and put them into models we build. We do this with a full time team of about 6 people. We overlay these model with inside information we have about our industry (how much suppliers charge for things, what customers are worth, what regulatory changes are in the offing) to make these models more accurately. If we think a company is undervalued or would be a good fit we hire teams of investment bankers and consultants to do all this again, but in more detail.

So, if you start trying to follow companies in my industry as a private individual with limited time and the lack of inside knowledge we have....I know who I'm backing to do a better valuation. ;-)

I believe (not personal experience obviously) that most industries work like this.

Finally, even if you do start this and discover you picked companies that rose in value, I'll still question whether it was luck or skill. Did your the broader indexes grow? Did that sector grow? (If so were you just caught up in a rising tide?) did your "picks" outperform the industry? (If so remember roughly half of companies outperform the industry, so if you make 3 picks and all three outperform, there is a one in eight chance that would happen by chance). So figuring our afterwards if this you see lucky or good is pretty tough.

Finally, even if you are actually better than everyone else, and consistently so to indicate it's not luck...is your edge enough to pay the transaction costs???


So, to sum up. I'd suggest just investing in something cheap that tracks an index over time rather than be too clever. Or accept that you are really just taking a punt ;-)


Just my 2c

Value Hunter

Electric Boobs wrote: »

What's the best way for a beginner to make his/her own estimation on the value of a company before looking at the actual value?

This is a simplified version of my initial screening process,

1. Go to the income statement link for a company on yahoo finance

- Research the last years earnings and revenue in comparison to previous years figures.

- Determine if an one off effects/costs either benefited or damaged earnings (impairment charges, using tax credits etc)

- Decide on a yearly profit figure you believe is an accurate indication for the future

- Discount this annual profit amount you decided on by anything from 0% - 20% depending on how reliable/stable you believe earnings are or how confident you are in your forecasting


2. Research the balance sheet link on yahoo finance

- Add up all assets

- completely subtract intangible assets such as goodwill, deferred long term asset charges etc

- Discount accounts receivable to a level your comfortable with (0% - 10% would be the standard)

- Add up all liabilities

- Subtract the liabilities from the tangible assets value you decided on to get your value of tangible shareholder equity

3. Valuation

Add the shareholder equity value with a multiple of the annual profit you decided on (3x earnings,5x earnings, 7x earnings etc etc). Decide on which multiple to use based on your prospective growth for the company, strength of the company/industry and reliability of historical earnings.

You now have a value for the comapny

4. Find the number of outstanding shares and divide this into the company value you found to get the value per share.

5.. Margin of Safety

Discount the value you decided upon by anything from 5% to 25% depending upon how confident you are in our valuing ability.


All of this can be done in less than 20mins, but you'd be surprised by how many 'investors' completely ignore it.

If a stock passes this initial screening I then put it through more accurate and detailed research, using the companies figures (not yahoo's).

Once I settle on a final per share value, I try and buy it at an additional 10% + discount to the value I came up with.


You can see I have huge protection through discounting and margin of safety's, so when I do find a stock that passes the test it usually has an excellent risk/reward payoff.


You don't have to ever buy a stock

Don't follow the crowd, stick your gut and research and you'll be fine.

Best of Luck