Young fullah on board

Hey team,

I'm a young student doing engineering up in Auckland (20 years old, two years down and 2 more to go!) and I've recently become interested in investing. I have a mere couple thousand I've been saving over the course of the summer doing my engineering internship so rather than being ready to invest I'm more looking to build knowledge of how the market works, reacts and changes so I can start to make some decisions on where to put my money for a more comfortable future.

I've been looking around the site daily to follow some stocks and keep updated with how they're moving until I finally made an account in the hopes to start asking questions and further build some know how. I haven't formally learnt anything to do with business, economics or accounting (didn't even take a year of any at school) but I like to think I'm relatively clued up and find maths simple enough (I've done enough in school and engineering to become relatively comfortable with it). I started reading Ben Graham's intelligent investor which seems to be a highly recommended book around here in terms of the emotional side behind investing and I'm quickly getting knees deep into that.

So with that info out of the way I have a couple of questions that may have some elaborate answers

- If the share price is fundamentally controlled by the bidding of investors, why (theoretically) should the share price change to converge with the theoretical value of the share? Especially if dividends don't come into that equation

- How would one start to get a good idea of valuing a company?

- is a couple grand too small to start in the market? I understand that brokerage will kill my earnings unless the stock really jumps up but is there anything I may be missing in the venture to build up on my small capital?

With those questions I hope I haven't sounded to mislead on the market situation but aside from that, happy to be here and hope I learn a bunch :)

Cheers
Sam

Quote:

---

- If the share price is fundamentally controlled by the bidding of investors, why (theoretically) should the share price change to converge with the theoretical value of the share? Especially if dividends don't come into that equation

---

If you read further into the Intelligent Investor you will answer you own question. Over the short term, the share price can swing wildly away from the "true" value of the business. Over the long term the share price will roughly follow the growing or declining value of the business.

This happens because short term the price is controlled by everyday people like you and me buying the shares. Perhaps I have to sell my shares to buy a new car and need to sell $5000 of the stock. I need the money today and not tomorrow or in a few weeks time when the price might be better. Therefore, if someone is only willing to buy the stock today for 2-3% less than the current price, I have to sell to them if I want to sell them today. Hence these wild swings for no apparent reason. Or perhaps there is a recession and the whole stock market is declining. I get nervous because I don't want to lose any more money, so I sell regardless of the price because I just want out today. Or on the other hand, if investing in a hot popular growth company is a sure thing and it is going to make me rich quick, I'll buy today for what ever price, because I got a hot tip from the NZ Herald that the stock price is going to go up 50% this year.

Over the longer term the price follows the value of the company because say something that was making $10 million profit in 2004, I may pay $100-150 million for the whole company. If in 2014 the company makes $100 million, I would pay $1-1.5 billion for the whole company. So over the long term it seems to follow it.

Quote:

---

- How would one start to get a good idea of valuing a company?

---

There are several business like ways to value a business that someone could look into. There are other ways that I cannot understand how to value a business (such as how to value a company like Xero which doesn't make a profit, I stay clear of these companies because I cannot understand how to value them).

The business like methods are:

- Liquidation value/book value
This is where you add up all the assets and minus the liabilities and get a figure. Take for example a house. The house costs $500,000. I have a mortgage of $400,000. The liquidation/book value (net worth) of the company/house is $100,000

- Discounted cash flow
This is where you estimate how much "cashflow" the business will provide over its useful life and discount it back to the present value. This sounds a bit complicated, but once you read up on it (a Google search or look through Investopedia will explain) then you can value this back. This uses the simple fact that people would be better off taking $100 today rather than $100 next year as inflation makes $100 next year less worthwhile.

- Discount dividend model/gordon growth
I personally use this method to value companies. It is similar to discounted cashflow but uses the dividends that the company pays out. A search on this in Google will provide more info also.

I suggest getting a book on pure company valuation (which will be very accounting based) to understand these better.

Quote:

---

- is a couple grand too small to start in the market? I understand that brokerage will kill my earnings unless the stock really jumps up but is there anything I may be missing in the venture to build up on my small capital?

---

If you have $2000, the brokerage to buy is $30 which is 1.5% of the purchase price. You won't get rich investing $2000 but the skills you will learn from being in the market will be invaluable. I pretend traded a virtual portfolio for 6-12 months before I bought my first share but it wasn't until I had money on the line that I learnt valuable skills that have allowed me to make good returns over the past few years. I'm 25 and I bought my first share around 4 years ago and the lessons I learnt from that first share purchase was the best lesson I ever learned. I found I could only learn so much from reading a book, it wasn't until I put things into action, made mistakes and learnt from them that I begun to get better.

I wouldn't rush in and buy anything but I would look to buy not only to make money but to learn also.

Quote:

---

With those questions I hope I haven't sounded to mislead on the market situation but aside from that, happy to be here and hope I learn a bunch

---

Hope the answers help too.

cheers for the reply born, heading away for the weekend the minute I leave work so I'll try get more into the intelligent investor in the down time and research some of those models you mentioned :)

I also had that mindset with the money I've earnt that it is money that I won't need over the year at uni and it will probably be a great learning curve through the process of researching companies and making an informed decision rather than just chucking 2 grand on a stock and hoping it goes through the roof from hype.

Quote:

---

Originally Posted by samdaman

cheers for the reply born, heading away for the weekend the minute I leave work so I'll try get more into the intelligent investor in the down time and research some of those models you mentioned :)

I also had that mindset with the money I've earnt that it is money that I won't need over the year at uni and it will probably be a great learning curve through the process of researching companies and making an informed decision rather than just chucking 2 grand on a stock and hoping it goes through the roof from hype.

---

A good place to start looking for a good business to invest into would be ones you are familiar with. By that I mean that you shop there or use their services, the head office is just down the road, you have worked there, know someone who works there, you understand it with your engineering background, etc.

An example is that I work in logistics and supply chain. I therefore think I can understand those businesses better than the average person that isn't involved in the industry as I can see trends with companies before the results show up in their annual report. E.g. I can see Mainfreight (MFT on the NZX) and Toll (TOL on the ASX) trucks come in and out everyday and speak with their employees on a daily basis.

ok so I'm back from the weekend away and a few questions have arisen.

First one is about the value of a company, I still don't see the reason why a share price would NEED to converge around a companies value? Is it just something I'll have to accept which is caused by investors or is it due to the idea that the company could try to buy back shares at the value of a company which in turn would cause that convergence towards the real value? That or other ideas along that line or am I just making things up?

With the models listed above how would one go about finding and calculating these figures. I had a read over each of them and get the vague idea, however without some numbers and values I feel like I can't understand these models fully.

cheers again for the help, I appreciate all I can get :)

Quote:

---

Originally Posted by samdaman

First one is about the value of a company, I still don't see the reason why a share price would NEED to converge around a companies value? Is it just something I'll have to accept which is caused by investors or is it due to the idea that the company could try to buy back shares at the value of a company which in turn would cause that convergence towards the real value? That or other ideas along that line or am I just making things up?

---

Lets assume there is only one true value for a company (everyone has their own opinion so this isn't the case). If it is selling below this, everyone will buy up to the true value. If it is selling above this, then current holders will sell down their holding till it reaches this value.

At a particular point in time, it is hard to say what the true value is, but over time, the market concensus should get it about right.

Think of an easy example that has a true value - how much would you pay for NZ$1? What would you do if you could buy for 90c or if you could sell your current holding for 110cents?

Quote:

---

First one is about the value of a company, I still don't see the reason why a share price would NEED to converge around a companies value? Is it just something I'll have to accept which is caused by investors or is it due to the idea that the company could try to buy back shares at the value of a company which in turn would cause that convergence towards the real value? That or other ideas along that line or am I just making things up?

---

It doesn't need to stick to it's "true value" at all. Lots of companies remain expensive or cheap for decades. Because "tru value" is just one persons opinion, you and me could use the same valuation method, but because we input different figures for growth in EPS, dividend payout ratios, return on equity, risk free rates, etc we could come up with different figures. There is really not "true value" for any investment, it is only that one persons opinion of how much the investment is worth to them as an individual.

But generally, they hover around and over the long term tend to follow the price of the business. If it didn't and remained very cheap, people would see this and buy the company, forcing the share price upwards towards.. it's "true value". Also if it was too expensive, people would recognise this and the price would decline to meet... it's "true value". Do you understand this?

Quote:

---

With the models listed above how would one go about finding and calculating these figures. I had a read over each of them and get the vague idea, however without some numbers and values I feel like I can't understand these models fully.

---

Google discounted dividend excel. This is the Microsoft Excel spreadsheet that it will refer to. Look up any company, say Port of Tauranga. From it's annual reports over the past few years you can get the EPS each year and the growth year on year. How much dividends it pays out, it's return on equity, etc. From there, you can put a spreadsheet together to value this.

It is hard to explain through a few short sentances. I highly recommend you go to the university library or the public library in town and type in the search engine "business valuation" and there will be whole books dedicated to these valuation methods.

I use a pretty basic excel spreadsheet to put together my valuations for discount dividend models. I've copied across my valuation for Port of Tauranga below. I've assumed a 7 year timeframe (Google Juglar cycle on why I use 7 years), I've assumed 6% growth in EPS over those 7 years. I've asumed 55% dividend payout ratio will remain and I've assumed at the end of 7 years, a P/E ratio of 17 is reasonable. I want to achieve a 15% return after tax on my share investments, otherwise I keep my money in an online savings account and be patient. My calculations are below. As you can see, the price I want to buy at or below is $9.74. The current stock price is $13.73 so obviously I'm not buying any shares at the moment.

						17
	1.15
	1.06
year	eps	div	price+div	price	sum div	compounding
0	83.60	45.98	1467.18	1421.20	45.98	974.00	1	11.65
1	88.62	48.74	1601.19	1506.47	94.72	1120.10	1
2	93.93	51.66	1743.24	1596.86	146.38	1288.12	1
3	99.57	54.76	1893.82	1692.67	201.14	1481.33	1
4	105.54	58.05	2053.43	1794.23	259.19	1703.53	1
5	111.88	61.53	2222.61	1901.89	320.73	1959.06	1
6	118.59	65.22	2401.95	2016.00	385.95	2252.92	1
7	125.70	69.14	2592.04	2136.96	455.09	2590.86	1
8	133.25	73.29	2793.55	2265.18	528.37	2979.49	FALSE
9	141.24	77.68	3007.14	2401.09	606.05	3426.41	FALSE
10	149.71	82.34	3233.55	2545.15	688.40	3940.37	FALSE
	Buy below
	$9.74 11.65 PE

Quote:

---

Originally Posted by Harvey Specter

Think of an easy example that has a true value - how much would you pay for NZ$1? What would you do if you could buy for 90c or if you could sell your current holding for 110cents?

---

Excellent example.

thanks harvey and born, both posts very helpful.

What you've both cleared up for me is that by no real reason should a share price actually converge to a theoretical value. It was just boggling my brain that the only reason it would move is because of investors expectations that a share would move up. I'm used to buying things that have a use whereas I find it hard to believe that a company that doesn't pay dividends could be appealing beyond "it may move up one day", really shows I've got lots to learn.

I'm checking out some spreadsheets at the moment, but it might take me some time to figure these things out, wowzas it was confusing.

thanks again though this has given me a solid base to continue further learning

Quote:

---

Originally Posted by samdaman

thanks harvey and born, both posts very helpful.

What you've both cleared up for me is that by no real reason should a share price actually converge to a theoretical value. It was just boggling my brain that the only reason it would move is because of investors expectations that a share would move up. I'm used to buying things that have a use whereas I find it hard to believe that a company that doesn't pay dividends could be appealing beyond "it may move up one day", really shows I've got lots to learn.

I'm checking out some spreadsheets at the moment, but it might take me some time to figure these things out, wowzas it was confusing.

thanks again though this has given me a solid base to continue further learning

---

Companies choose not to pay dividends for all sorts of reasons. Generally they boil down to two main reasons though.

- First is the company is growing or thinks the shareholders will benefit more from keeping the money and investing it for the shareholder. If the company is making 20% return on its capital, I would much prefer them to keep the money and invest it for me at 20% than them to pay it out to me so I can keep it in a savings account earning 3% interest.

- Second is the company isn't doing too well and can't afford to pay dividends because they are losing money every year and need the money so they don't go bankrupt

hadn't thought about it in the first listed respect and that makes a lot of sense. I checked out some spreadsheets born and I've gotta say I'm struggling to piece together all the terms and values. I'm currently signed up to ASB and I'm using the morning star research PDFs provided by them. Whether it's my spreadsheets being too complicated or that I'm too new to investing however it's looking pretty tough at the moment. Things like beta that aren't listed on the report I have no idea how to calculate or what to put. I understand more time looking at these things will make me more comfortable with them, but at the moment it looks very overwhelming.

Another good book to read is "Bulls, Bears and a Croupier" which was mentioned to me by a user in the ASX forum.

Its a good read and suited to newer investors. Focused on the ASX but if you plan to invest seriously you will find yourself buying Aussie stocks at some stage.

Good analysis Born. Would you say you value these differently from the bigger brokers in town?

If not is picking stock trends more useful than running valuation models? The reason why I ask is that the valuation models are very well known but the top brokers use company interviews and future trend analysis combined with valuation metrics.

There are some good videos on the ASX with interviews of the top fund managers and they talk about their valuations, worth a look: http://www.asx.com.au/education/inve...ideos-2014.htm

Quote:

---

Originally Posted by samdaman

hadn't thought about it in the first listed respect and that makes a lot of sense. I checked out some spreadsheets born and I've gotta say I'm struggling to piece together all the terms and values. I'm currently signed up to ASB and I'm using the morning star research PDFs provided by them. Whether it's my spreadsheets being too complicated or that I'm too new to investing however it's looking pretty tough at the moment. Things like beta that aren't listed on the report I have no idea how to calculate or what to put. I understand more time looking at these things will make me more comfortable with them, but at the moment it looks very overwhelming.

---

I should hope it's overwhelming! It's a completely new subject to you. I've been reading books on investment since I was 17 and I still learn new things all the time.

I use ASB also and the PDF's are a great resource, I use them for any new company that I'm looking at for a quick reference if the company is any good. I think these are a great way to start seeing the difference between good companies and average companies.

I'd say your spreadsheets are too complicated. Investing should be as simple as possible. I don't think you need to get into the nitty gritty of discounted cashflow/dividend models just yet. Just learn the absolute basics.

A great resource I use is a website Investopedia. It's like a dictionary for investing. They have these cool 1-2min movies which shows complicated financial terms and makes them very easy to understand. They have "how to" guides on there for all sorts of things, including trying to value investments. Another good reasource is a book "Warren Buffett and the Interpretation of Financial Statements" this is really handy.

Right now I'd say your best bet to learn more things is just devour every book you can find at Auckland Libraries. You can reserve books and get them sent to your local library from all over Auckland so there are literally thousands of books on investing. Type anything into the search engine such as "investing" "stock market" "dividends" "business valuation" "Warren Buffett" "Philip Fisher" "Benjamin Graham" "Peter Lynch" etc and read read read.

Give me a list of businesses that interest you and we can talk through the pros and cons of the companies if you like.

Quote:

---

Originally Posted by Schrodinger

Good analysis Born. Would you say you value these differently from the bigger brokers in town?

If not is picking stock trends more useful than running valuation models? The reason why I ask is that the valuation models are very well known but the top brokers use company interviews and future trend analysis combined with valuation metrics.

There are some good videos on the ASX with interviews of the top fund managers and they talk about their valuations, worth a look.

---

The only broker forecasts/valuations I see are Morningstar, only because they show them on the page when you type in the stock you are looking at. My valuations that I want to buy at are always much lower. Fund managers have to buy something where as I'm happy to sit on the sideline for years at a time until something decent comes up so it isn't exactly comparing apples to apples.

Quote:

---

Originally Posted by born2invest

I should hope it's overwhelming! It's a completely new subject to you. I've been reading books on investment since I was 17 and I still learn new things all the time.

I use ASB also and the PDF's are a great resource, I use them for any new company that I'm looking at for a quick reference if the company is any good. I think these are a great way to start seeing the difference between good companies and average companies.

I'd say your spreadsheets are too complicated. Investing should be as simple as possible. I don't think you need to get into the nitty gritty of discounted cashflow/dividend models just yet. Just learn the absolute basics.

A great resource I use is a website Investopedia. It's like a dictionary for investing. They have these cool 1-2min movies which shows complicated financial terms and makes them very easy to understand. They have "how to" guides on there for all sorts of things, including trying to value investments. Another good reasource is a book "Warren Buffett and the Interpretation of Financial Statements" this is really handy.

Right now I'd say your best bet to learn more things is just devour every book you can find at Auckland Libraries. You can reserve books and get them sent to your local library from all over Auckland so there are literally thousands of books on investing. Type anything into the search engine such as "investing" "stock market" "dividends" "business valuation" "Warren Buffett" "Philip Fisher" "Benjamin Graham" "Peter Lynch" etc and read read read.

Give me a list of businesses that interest you and we can talk through the pros and cons of the companies if you like.

---

Yea i've become quite familiar with investopedia over the last couple of months, really handy for explaining terms and such. Any simple spreadsheets you could recommend then? Looking at the ones I sifted through did look a little complicated as you've said.

The only companies I've become really interested in so far are DIL, SUM and PEB (might just be overly influenced by their activity here on ST) But from what I've been reading these three companies have a bright future ahead of them

Quote:

---

Originally Posted by samdaman

The only companies I've become really interested in so far are DIL, SUM and PEB

---

YOu have picked three really hard shares to value.

DIL - high growth Tech company but at least it is profitable unlike XRO etc
SUM - retirement village. you need to understand how their operation licenses work, preoprty revaluations (effectively free financing), etc
PEB - a company with little to no revenue but huge potential. Plus a pipeline of product improvements which are still in development but if successful, will be easy to cross sell.

Traditional valuations are easist with the big, slow company's like TEL, FBU etc

Quote:

---

Originally Posted by Harvey Specter

YOu have picked three really hard shares to value.

DIL - high growth Tech company but at least it is profitable unlike XRO etc
SUM - retirement village. you need to understand how their operation licenses work, preoprty revaluations (effectively free financing), etc
PEB - a company with little to no revenue but huge potential. Plus a pipeline of product improvements which are still in development but if successful, will be easy to cross sell.

Traditional valuations are easist with the big, slow company's like TEL, FBU etc

---

Makes sense. Starting out with a small amount of capital would I not be better looking to try research into one of these companies at a hope for a better return rather than a longer confident return? I feel as I'm still a student a lower risk yield on my investment isn't the right plan of action. I'm not working full time past mid February so I decided to look more towards companies which had a higher risk of return.

furthermore what would be my best plan of action towards feeling comfortable putting money into a company like the 3 listed above, I can understand it would be hard to value companies with strange cashflows and fundamentals.

let me know what you think as I am very keen to take all advice on board

Quote:

---

Originally Posted by samdaman

Makes sense. Starting out with a small amount of capital would I not be better looking to try research into one of these companies at a hope for a better return rather than a longer confident return? I feel as I'm still a student a lower risk yield on my investment isn't the right plan of action. I'm not working full time past mid February so I decided to look more towards companies which had a higher risk of return.

furthermore what would be my best plan of action towards feeling comfortable putting money into a company like the 3 listed above, I can understand it would be hard to value companies with strange cashflows and fundamentals.

let me know what you think as I am very keen to take all advice on board

---

DIL- Ok not an easy one to value at all. In order to be able to value something using traditional business valuation methods, we need to be able to estimate well what the growth in revenue, profits, dividends and free cashflow are over the next 5-10+ years. Even if we do come up with a figure using the last two years it has made profit and positive free cashflow, it won't be very accurate as it will be a wild guess.
SUM- Only two years financial statements to go off which makes putting a value on it quite difficult.
PEB- Doesn't make profit and is in a negative cashflow each year so if you used the discount cashflow or discount dividend model, the value of this company would be $0. If you used the liquiadation value it would be worth $11 million.

Let's try the easier of the 3 to value, Summerset Group. Also lets use the discount dividend model (because it is the one I use and I feel most comfortable with it).


Over the last two years, earnings were 2.39c in 2011 and 7.34c in 2012. This is a growth of 307%

- Let's say that over 7 years, SUM is likely to grow its EPS on average 12%
- In 7 years time a reasonable P/E for SUM to sell at is 19
- Lets assume SUM keeps its dividend payout ratio of 34%
- I want 15% p/a return after tax

As seen in the table below, I have run this through my basic excel spreadsheet. All I have to input is the current EPS, the growth of those EPS, the current dividend payout ratio, the sale P/E after 7 years time and the required 15% return. If I discount my 15% return back to todays price I need to buy SUM at or under $1.27. The current price of SUM is $3.61 so according to this spreadsheet the current price of SUM is overvalued.

						19
	1.15
	1.12
year	eps	div	price+div	price	sum div	compounding
0	7.34	2.50	141.96	139.46	2.50	127.00	1	17.30
1	8.22	2.80	161.49	156.20	5.29	146.05	1
2	9.21	3.13	183.36	174.94	8.42	167.96	1
3	10.31	3.51	207.86	195.93	11.93	193.15	1
4	11.55	3.93	235.30	219.44	15.85	222.12	1
5	12.94	4.40	266.03	245.78	20.25	255.44	1
6	14.49	4.93	300.45	275.27	25.18	293.76	1
7	16.23	5.52	339.00	308.30	30.70	337.82	1
8	18.17	6.18	382.17	345.30	36.87	388.50	FALSE
9	20.35	6.92	430.53	386.73	43.79	446.77	FALSE
10	22.80	7.75	484.69	433.14	51.55	513.79	FALSE
	Buy below
	$1.27
	17.30 PE

Let's say I'm a bit more aggressive on my figures. After 7 years the P/E is 25 and the EPS grow at 15% I can then afford to spend $1.96 on the stock.

						25
	1.15
	1.15
year	eps	div	price+div	price	sum div	compounding
0	7.34	2.50	186.00	183.50	2.50	196.00	FALSE	26.70
1	8.44	2.87	216.39	211.03	5.37	225.40	FALSE
2	9.71	3.30	251.34	242.68	8.67	259.21	FALSE
3	11.16	3.80	291.54	279.08	12.46	298.09	FALSE
4	12.84	4.36	337.77	320.94	16.83	342.81	FALSE
5	14.76	5.02	390.93	369.08	21.85	394.23	FALSE
6	16.98	5.77	452.06	424.45	27.62	453.36	FALSE
7	19.52	6.64	522.37	488.11	34.26	521.36	1
8	22.45	7.63	603.22	561.33	41.89	599.57	1
9	25.82	8.78	696.20	645.53	50.67	689.50	1
10	29.69	10.10	803.13	742.36	60.77	792.93	1
	Buy below
	$1.96
	26.70 PE

Say I buy at todays price of $3.61. I can therefore expect a return of 5.4% p/a if the EPS grows at 15% and I sell it for a P/E of 25 after 7 years.

						25
	1.054
	1.15
year	eps	div	price+div	price	sum div	compounding
0	7.34	2.50	186.00	183.50	2.50	361.00	FALSE	49.18
1	8.44	2.87	216.39	211.03	5.37	380.49	FALSE
2	9.71	3.30	251.34	242.68	8.67	401.04	FALSE
3	11.16	3.80	291.54	279.08	12.46	422.70	FALSE
4	12.84	4.36	337.77	320.94	16.83	445.52	FALSE
5	14.76	5.02	390.93	369.08	21.85	469.58	FALSE
6	16.98	5.77	452.06	424.45	27.62	494.94	FALSE
7	19.52	6.64	522.37	488.11	34.26	521.66	1
8	22.45	7.63	603.22	561.33	41.89	549.83	1
9	25.82	8.78	696.20	645.53	50.67	579.53	1
10	29.69	10.10	803.13	742.36	60.77	610.82	1
	Buy below
	$0.00
	00.00 PE

hmmmm really interesting born, that spreadsheet seems really handy. would you ever pick stocks like PEB? based on their products and customer base with an expectation of growth? If so do you have research methods to delve into their company and feel more comfortable about putting money on them? Also would you have any comments on post #18 of mine? In my current situation I feel as if a more risky investment would be my best plan of action, would you agree with this or continue to hold onto my cash?

Quote:

---

Originally Posted by samdaman

Makes sense. Starting out with a small amount of capital would I not be better looking to try research into one of these companies at a hope for a better return rather than a longer confident return?

---

You misinterpreted. They are all great shares, I hold all three with DIL and PEB being overweight. They are just difficult to value using 'traditional' methods.

I do less research than I should. I look at the company story, what their financials are like, and what their growth potential is. I dont calculate a 'target price' as such. The downfall with my method is I dont have an exit strategy so have read up a bit on this these holidays.

Quote:

---

Originally Posted by samdaman

hmmmm really interesting born, that spreadsheet seems really handy. would you ever pick stocks like PEB? based on their products and customer base with an expectation of growth? If so do you have research methods to delve into their company and feel more comfortable about putting money on them? Also would you have any comments on post #18 of mine? In my current situation I feel as if a more risky investment would be my best plan of action, would you agree with this or continue to hold onto my cash?

---

No I wouldn't pick a stock like PEB. Firstly it doesn't make and profit. Secondly I have no idea what the future for cancer research will look like in 10 years time. I can't pick with even a little bit of certainty if the company will even be around in 10 years time. It might be broke. Compare this to a company like MFT, POT or ANZ. Trucks or ships will still need to transport goods across the world in 10 years time. More people want to live in NZ and our exports should grow to meet international demand so more goods transported. ANZ will be around because people are always going to borrow money for houses, businesses and use bank accounts for the next 10 years time.

I would read all their annual reports from cover to cover. Talk to anyone who works there or customers who have seen or used their products and services. Anyone in the research industry that has an opinion on the company, etc.

You say "hope for a better return" in your post. Is that what you want to base your investments on? I might as well buy lotto tickets because I hope I can win. Come on buddy, you have read The Intelligent Investor, it explains the difference between and investor and a speculator. I suggest you read that chapter again.

I would hold onto your cash and do more research on what makes a good investment. Investing in stocks is not a 100m sprint it is a marathon. So pace yourself and get your head sorted out so you can make rational decisions rather than getting too excited because you see the squiggly line of DIL, PEB, SUM go up so it must be a good investment. Read all you can on investments, get a clear head, put together a good plan and stick to it.

When I first started I got extremely excited with stocks. I watched the prices every day and got all these big ideas in my head about how I was going to make my millions. Now that I have a plan, I stick to it. I don't let emotions rule my thinking and stick closely to my strategy to the point that investing has become emotionless and I'm following a process.

Your posts look very familiar because I used to say exactly the same things on a different forum Aussie Stock Forums under a different username with all these exciting plans. I soon learned the ones that harped on about the likes of DIL, PEB made lots of money on those stocks, but because they were the speculative type, they also lost lots of money on other stocks, but they never talked about them. The people I take advice from on this forum are the likes of level headed people such as Sparkytheclown, Snoopy, KW, etc who follow a process and don't let emotions rule their thinking.

Quote:

---

Originally Posted by Harvey Specter

You misinterpreted. They are all great shares, I hold all three with DIL and PEB being overweight. They are just difficult to value using 'traditional' methods.

I do less research than I should. I look at the company story, what their financials are like, and what their growth potential is. I dont calculate a 'target price' as such. The downfall with my method is I dont have an exit strategy so have read up a bit on this these holidays.

---

I may have misconveyed rather than misinterpreted, I understand they are difficult and inaccurate to value, my question lies more around what one may look at to get a better idea about a company in the pursuit to get a better idea of how a starting up company will grow

Quote:

---

Originally Posted by born2invest

No I wouldn't pick a stock like PEB. Firstly it doesn't make and profit. Secondly I have no idea what the future for cancer research will look like in 10 years time. I can't pick with even a little bit of certainty if the company will even be around in 10 years time. It might be broke. Compare this to a company like MFT, POT or ANZ. Trucks or ships will still need to transport goods across the world in 10 years time. More people want to live in NZ and our exports should grow to meet international demand so more goods transported. ANZ will be around because people are always going to borrow money for houses, businesses and use bank accounts for the next 10 years time.

I would read all their annual reports from cover to cover. Talk to anyone who works there or customers who have seen or used their products and services. Anyone in the research industry that has an opinion on the company, etc.

You say "hope for a better return" in your post. Is that what you want to base your investments on? I might as well buy lotto tickets because I hope I can win. Come on buddy, you have read The Intelligent Investor, it explains the difference between and investor and a speculator. I suggest you read that chapter again.

I would hold onto your cash and do more research on what makes a good investment. Investing in stocks is not a 100m sprint it is a marathon. So pace yourself and get your head sorted out so you can make rational decisions rather than getting too excited because you see the squiggly line of DIL, PEB, SUM go up so it must be a good investment. Read all you can on investments, get a clear head, put together a good plan and stick to it.

When I first started I got extremely excited with stocks. I watched the prices every day and got all these big ideas in my head about how I was going to make my millions. Now that I have a plan, I stick to it. I don't let emotions rule my thinking and stick closely to my strategy to the point that investing has become emotionless and I'm following a process.

Your posts look very familiar because I used to say exactly the same things on a different forum Aussie Stock Forums under a different username with all these exciting plans. I soon learned the ones that harped on about the likes of DIL, PEB made lots of money on those stocks, but because they were the speculative type, they also lost lots of money on other stocks, but they never talked about them. The people I take advice from on this forum are the likes of level headed people such as Sparkytheclown, Snoopy, KW, etc who follow a process and don't let emotions rule their thinking.

---

I haven't finished the intelligent investor yet, it's going along pleasantly though. I do understand the difference between being speculative and making informed decisions. I also agree a decision made on the stocks mentioned above right now would be speculative however this is why I asked how one would go about making that informed decision. I don't see my self as an excited youngster trying to base my decisions off vigour and adrenaline, I'm simply weighing up my options on companies which are growing against more established companies which could give more reliable returns. Even on 15% p.a on $2000 I'm only looking at a couple 100 absolute max profit which is nearly not worth keeping my free cash locked up in and 15% would be a great pick for a stock no?

I want the skills to be able to make that informed decisions on these risky growing companies just as much as the established ones. So in response I wanna say I'm staying level headed, not trying to rush into anything. DIL, SUM and PEB are just companies of interest, so no I don't want to base my investments off squiggly lines, new or rumours. But I do wanna take risks while I'm young and the amount of money I'm investing is relatively low

If you are investing for the long haul build a portfolio then add to it. I started with banks then moved into Tech. If you are looking for excitement go to the casino. The less excitement at the start while you build teaches you good lessons and you can properly balance with more risky stocks as you gain experience. I dont recommend starting with risky tech stocks. Remove your emotions and trade on facts not hype.

Quote:

---

Originally Posted by samdaman

I may have misconveyed rather than misinterpreted, I understand they are difficult and inaccurate to value, my question lies more around what one may look at to get a better idea about a company in the pursuit to get a better idea of how a starting up company will grow

---

They are all growth stocks so you need to understand what growth the market is factoring in and determine whether that is reasonable.

One reason why I dont prepare my own spreadsheets is that it is highly unlikely that mine will be more accurate than the guys/girls who do it for a job who have access to more info and better spreadsheets.

Quote:

---

Originally Posted by Schrodinger

If you are investing for the long haul build a portfolio then add to it. I started with banks then moved into Tech. If you are looking for excitement go to the casino. The less excitement at the start while you build teaches you good lessons and you can properly balance with more risky stocks as you gain experience. I dont recommend starting with risky tech stocks. Remove your emotions and trade on facts not hype.

---

My current situation is I'm starting small, very small. I've got 2k from my summer job and probably won't be able to add to that through the year. I'm well aware against trading the hype but do you even think it's worth it then to try starting a portfolio with 2 grand?

Yep I did.

Quote:

---

Originally Posted by Schrodinger

Yep I did.

---

brokerage will kill it a bit, but if I've only got a little I can only expect to bring in a little. looks like its time to start building up a nice list of companies to watch :)

Just checking back in, I've started looking at some companies and sifted through some numbers and I'm seeing some strange results (could be normal but hey I'm new) I looked at WHS and AIA. I used two different spreadsheets to get a vague idea of their values and both came back with roughly around 9.5ish for AIA and the low 2's for WHS. Now I'm starting to think I'm not calculating things like growth accurately. Do these numbers sound correct? I ask because the Morningstar have them both priced at around their current stock values. More complex formulas possibly? Any interpretation of these results will be greatly appreciated :)

Cheers

Quote:

---

Originally Posted by samdaman

Just checking back in, I've started looking at some companies and sifted through some numbers and I'm seeing some strange results (could be normal but hey I'm new) I looked at WHS and AIA. I used two different spreadsheets to get a vague idea of their values and both came back with roughly around 9.5ish for AIA and the low 2's for WHS. Now I'm starting to think I'm not calculating things like growth accurately. Do these numbers sound correct? I ask because the Morningstar have them both priced at around their current stock values. More complex formulas possibly? Any interpretation of these results will be greatly appreciated :)

Cheers

---

What data and assumptions did you input?

Growth, terminal value, etc.

Quote:

---

Originally Posted by born2invest

What data and assumptions did you input?

Growth, terminal value, etc.

---

earnings per share growth, payout ratio, COE

Yes what figures did you use?

Quote:

---

Originally Posted by samdaman

Any interpretation of these results will be greatly appreciated :)

Cheers

---

Its hard to review a model without actually seeing the model - not that I am volunteering.

It could be anything - inputs, assumptions, calculations or just a simple formula error.

Quote:

---

Originally Posted by born2invest

Yes what figures did you use?

---

Ill use AIA as an example,

EPS: 0.12
Growth: 4% (redid with 3% and it still came out with a value of 5.2)
COE: 5.37 (using dividend growth of 2%)

with a 2% growth it comes out closer to morningstars valuation however unless I've calculated that too low wouldn't 2% be on the light side for AIA?

Quote:

---

Originally Posted by samdaman

Ill use AIA as an example,

EPS: 0.12
Growth: 4% (redid with 3% and it still came out with a value of 5.2)
COE: 5.37 (using dividend growth of 2%)

with a 2% growth it comes out closer to morningstars valuation however unless I've calculated that too low wouldn't 2% be on the light side for AIA?

---

EPS is 0.1134 so not sure where you got your 0.12 from (rounding perhaps?)
Growth of 4% seems reasonable
I would suggest you find a model that doesn't use cost of equity (COE), weighted average cost of capital (WACC), risk free rates, beta co-efficient, etc this just complicated the crap out of things.

I just created my own spreadsheet in excel that I go off, would you like me to email it through to you?

Quote:

---

Originally Posted by born2invest

EPS is 0.1134 so not sure where you got your 0.12 from (rounding perhaps?)
Growth of 4% seems reasonable
I would suggest you find a model that doesn't use cost of equity (COE), weighted average cost of capital (WACC), risk free rates, beta co-efficient, etc this just complicated the crap out of things.

I just created my own spreadsheet in excel that I go off, would you like me to email it through to you?

---

yea the .12 must have been rounded i got it from the bottom of the morningstar report rather than the last reported value as I was unsure which was more current or applicable. If you don't mind doing that I'd be happy to check out your spreadsheet, as you say a few of the spreadsheets I have looked at require some very complicated and seemingly tough to pick inputs