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Tagged: Intrinsic value

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Hi Stig,

Firstly, thank you for a great podcast, i have enjoyed all the episodes thoroughly and am re-listening to the past episodes again.

I had one question for you. With regards to the intrinsic value of the companies that you have done on the show, how do you calculate/determine the probabilities of the different growth scenarios?

Keep up the great work.

Cheers,

BenHi Ben,

With regards to estimating the probabilities of the different outcomes, it tends to come down to common sense most of the time.

Say, you have a company which has grown FCF at 20% for the past ten years, can it do it at 20% for the next ten years?. Highly unlikely since excess profits attract competitors, reversion to the mean comes into play where outpeformance reverts back toward the average, and the law of large numbers means it is hard for the company to keep growing at such a clip as markets become saturated or costs rise as the business scales. There may be instances where a company with a wide moat can keep up this superior performance but we want to err on the side of caution when estimating future growth.

We would therefore assign a higher probability to earnings which grow closer to revenues which are more stable, as a company matures earnings growth has a habit of reverting back to this kind of rate. Essentially we are assigning a greater probability to the conservative assumption of future growth rather than hoping for a stellar performance to continue. Likewise, we may may assign a small probability to a worst case scenario or raise it if there is a lot of uncertainty, i.e high debt, poor liquidity position, narrowing moat, threat of regulatory intervention etc.

As Buffett has said, “It is better to be approximately right than precisely wrong.”

Hope this helps and sorry I can’t be more concrete here but valuation is part science, part art. This is why we consider IV to be a range of value rather than a precise figure.

Regards,

David

Hi Stig,

I followed the intrinsic value course. But I’m unclear on how to value a company involved in Finance operations like banking & Finance sectors where I see lot of negative cash flow and Debt-to-equity ratio seems to be too high. Kindly help on valuing a financial company.

Thanks

SanthoshSanthosh,

I feel your pain with financial companies. Honestly, I can’t give you a good answer. I think the conventional DCF analyses are of little use and standard metrics like debt are harder to use since they by definition had debt as their business model.

Sorry I couldn’t give you a better answer. I invested in two banks in my early days and made a decent profit until to find later that it was pure luck. The metrics I used were not useful.

-Stig

Price is what you pay. Value is what you get. - Warren Buffett

Hi Stig

I have copies of your Warren Buffet Accounting and Three favourite books and I recently completed your ETF course – excellent ! One burning question though

How can I determine the intrinsic value of an ETF ?

Thanks

Q

Hi Guys,

Just went through the intrinsic value course, thanks for creating that for us! I will adopt the IRR approach but I have the following two questions for you:

1-) What is the different between the IRR method and the method used in your free Course 2, Unit 3 Lesson 5 “Determining the intrinsic value of a stock”. I know that for one we use the FCF and the other the BV + dividend payouts, but why use one over the other and should we test with both methods? I am a little confused cause I was convince by the first method you thought us…

2-) In that Course 2 Unit 3 Lesson 5, Preston uses Walt Disney as an example and concludes that the stock is overvalued at the price trading at that time. But this is assuming a Price/BV = 1 right? Isn’t that an overly conservative assumption? Couldn’t we “safely” assume that the stock will be trading at a future Price/BV of 2 or at an average of past Price/BVs?

Best,

AntoineHi Stig,

I went through the intrinsic value course a couple of times already and loved it. I still have trouble with one thing: putting an actual number (general or specific) to the intrinsic value of a stock so that I can properly calculate the necessary margin of safety. How does the discount rate, net present value, and IRR relate to the actual number that one can get for the value of a stock? In other words, is the IRR that you get from the downloadable sheet in the course the same as the discount rate? Also, if you solve for the discount rate in the NPV formula, well, how do you solve for the discount rate and is that method more accurate than estimating based on inflation, uncertainties, and opportunity costs? Which method do you use more often? I know it’s a loaded question, so thanks in advance!

Onward,

MarkQ,

So sorry about my late response.

But to answer your question. You really can’t. You can go in and estimate the intrinsic value of the holdings of the ETF, but there is no good number for the ETF because it would be the Net asset value which is where the market price is at in aggregate.

Thanks for your support!

-Stig

Price is what you pay. Value is what you get. - Warren Buffett

Mark,

Thanks for the support!

Yes IRR is the discount rate if you discount all of the future cash flows back to the price you’re paying for the stock today.

This is also your risk assessment (and opportunity cost) too. If it says 10%, then you need to compare that to your alternatives and choose the best option.

Thanks for the kind words about the course. We spent endless hours on it, so we really appreciate the encouragements!

Price is what you pay. Value is what you get. - Warren Buffett

Hi Stig/Preston,

Thanks for this great intrinsic value course, I have couple of general questions about this course.

1) Can we use this intrisnic-value-calculator sheet for stocks in India,Australia,British.

2) The intrisnic-value-calculator sheet project free Cash flow 2016 to 2026, it possible to change to 2018 to 2028. As you know, we already have FCF data till 2017.Thanks,

PanduPandu,

Thank you for the awesome support! That really helps us giving us time to provide more free content to the TIP Community.

To answer your question:

1) Yes, you can apply that for all markets. You might want to look for a higher IRR in emerging markets though.

2) You can change that in the sheet and the numbers will adjust automatically. Please let me know if you can’t locate where ðŸ™‚Thanks again, Pandu!

Price is what you pay. Value is what you get. - Warren Buffett

Stig,

Thanks for your reply. I was able to change the sheet now!.

Thanks,

PanduHello,

the intrinsic value course is really good. I really like the programmed excel sheet, that by itself has the value of the money I bought the course with.

I have 2 questions.

1] I am from the Czech Republic and the most commonly used online broker is Patria Online where the buying and selling fees are roughly for a normal investor: 15 USD for the US market, 17 EUR for the EU and 80 CZK for the Czech market. In my opinion, the fees are quite high. I found online brokers that are based in other countries which have their fees much lower but there are not that well known.

–> My question is: If the online broker was to go out of business what happens with the stocks that I bought through the broker? Do I own it or does the broker own it? Is it better to pay extra for online brokers that have been around for many years and are well known? What online brokers would you recommend for the Czech Republic and the UK?2] I used to use MSC money and then I switched to MorsningStar. Unfortunately, with the new update, Morningstar does not show all the data I want (10 year serie for some financials) Do you pay for the MorningStar monthly subscription or is there a better free service out there?

Thank you in advance for answers.

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Hi Stig, Im little bit overwhelmed here.

So what is the relationship between intrinsic value calculator, the DFC calculator, and the excel spreadsheet (IRR) from the intrinsic value course

Is it related to one another?

Or is it just 3 different method of valuing a stock?Thanks!

Hi Guys,

My earlier question also relates to Yohane’s question, would really like to understand the difference between the methods. In the free video tutorials the method was focused on book value and dividend payouts figures whereas in the intrinsic value coure we looked at IRR based on FCF. What is more robust? To focus on the BV figures of a company or the FCF figures?

Many thanks,

Antoine- AuthorPosts

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