Stock investing basics, Interview with Elliott Morss

Stock Investing Basics

Last January 25, 2014, I was invited as a resource speaker about stock investing basics in University of Negros Occidental- Recoletos, Bacolod City. My audience were college senior students, and MBA and PhD students.

To those who are interested:

Stock Investing Basics V.2

If you have any suggestion regarding the presentation, please leave it in the comments below.

 

Interview with Elliott Morss

To those who are interested, you may view an interview with Elliott Morss regarding my opinion in the Philippine economy and Philippine stock market:

http://www.morssglobalfinance.com/investing-in-2014-how-about-the-philippines/

http://seekingalpha.com/article/1955941-investing-in-2014-how-about-the-philippines

 

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Making Sense on Discounted Cash Flow Method of Valuation

Before reading this post, please be aware that you must first recall your knowledge in your first year college class about time value of money or you can check this resource.

I already discussed PE ratio as a simple valuation method in here.

The ultimate determinant of value is the cash that comes in to the owners of the business. Suppose that you own a business, what would matter to you most? The earnings figure in the income statement or the cash that goes into your bank account (figures in the cash flow statement)?

With cash in mind, we can say that in order to value a business we should measure how much cash it will generate in its lifetime. And since we are dealing with years, it is appropriate to use discounted cash flow (DCF) method to value a business.

Let’s say you own a laundry shop that you expect to generate cash to your bank account of P1,000 for 10 years and you expect it to generate P500 to infinity with no growth and is expected to maintain no debt. Let’s assume that our cost of capital is 5%.

The formula of DCF method is:

Intrinsic value = sum of discounted present value + present value of terminal value – net debt

We will have the following calculation for the intrinsic value of the laundry shop:

DCF1

More on DCF method of valuation here.

Assuming that someone will offer to buy your business, you should not sell it at lower than P13,860.

Comments:

You may have noticed that I do not add terminal value in my DCF valuations. The reason being is that I do not believe that companies will go on in perpetuity or exist forever. Also, it provides ample margin of safety for my calculation.

Everything in the book sometimes does not make sense in the real world. 🙂

 

 

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

Disclosure: See Portfolio page for my holdings.

Speculation VS Investing

The line between a speculative and investment enterprise is very clear. Speculative enterprise has a chance that the speculator will substantially diminish his/her capital while an investment enterprise has a margin of safety for your capital.

Example:

Speculative enterprise

You bought company A with a book value of P1 for P20 with the hope that the company will hit 300 million barrels of oil.

What if they hit 300 million barrels of oil? You will win. Big time. Probably more than 10 fold of your investment.

What if they do not? You will lose. Big time. Probably it would render your investments near to useless.

 

Investment enterprise

If you bought company A with a book value of P10 for P2 and they have a chance that the company will hit 300 million barrels of oil.

What if they hit 300 million barrels of oil? You will win. Big time. Probably more than 10 fold of your investment.

What if they do not? It’s alright. You have substantial asset protection. The stock price may fluctuate but value is still intact.

Above are simplified example and this concept will continually be validated as we go on.

Blog, US Jobs

Blog

A good blog for new investors (can also be for the experienced):

http://www.oldschoolvalue.com/blog/articles/

LOTS of useful information.

He recommends the following books for new investors that have no accounting background:

http://www.oldschoolvalue.com/blog/best-investment-books-for-value-investing/

 

US Jobs

Actual jobs missed forecast:

http://www.forbes.com/sites/steveschaefer/2013/04/05/u-s-adds-paltry-88000-jobs-in-march-unemployment-rate-at-7-6/

It would likely mean that the Fed will keep on stimulating the market.

The Global Filipino Investor, Stock Thoughts: ATN/ATNB

The Global Filipino Investor (TGFI)

If you are a new in the stock market, you might want to explore this site:

http://tgfiph.com/

They were featured in On the Money:

http://www.youtube.com/watch?v=rs6X8vumW4c

 

ATN/ATNB

To those who are interested in ATN/ATNB:

https://fundamentalenthusiast.wordpress.com/2013/04/05/atn-holdings-inc-atnatnb/

Love 24/7, Stock update: GREEN, LPZ

I watched Love 24/7 this weekend. Love 24/7 is an interview of different people about what they will do if the world ends. The movie then concluded that all that matters is love. That if the world ends, it would always be the time spent for your loved ones that will matter.

Agree?

I STRONGLY AGREE! If the world ends, we should forget our stocks and just be with our closest and wait for the world to explode. If the world ends, all the assets in the world that has the capacity to generate future cash inflows will not matter because there will be NO FUTURE for all of us.

BUT the world will not end. The world will keep on changing and we need to work to put food on our table tomorrow and in the years to come. Love is important but it is not the only thing that matters. Balance is important.

In investing, most investors see book value (BV) as the company’s intrinsic value. Seeing a company’s value through its BV is viewing the company DEAD. A company that is dead has NO FUTURE. There is no need of using the Price to Earnings Ratio (PER) in valuation since the company will be dead anyway.

A company that is alive grows its book value.

Example:

JFC’s BV in 2008 @ 14, in 2011 @ 19

JGS’BV in 2008 @ 11, in 2011 @ 21

To illustrate, if company A has a book value of P1 today and currently selling at P2, is it undervalued or overvalued?

If you view it dead, it is overvalued.

What if I say that Company A is projected to grow its book value to P5 in 5 years? is it over or undervalued at P2?

Probably you’ll think twice whether it is under- or overvalued. You’ll have to consider PER and all other financial tools.

BV is important but it is not the only metric that matters. Balance in considering other financial tools is important.

LPZ

Courtesy of Zepol, check this out:

http://manilastandardtoday.com/2012/12/10/globe-bayantel-tender-offer-98-complete/

In the last paragraph:

“In the event that the debt offers are completed, Globe intends to apply with the rehabilitation court to amend the terms of the rehabilitation plan in the interest of assuring Bayan’s long-term sustainability. Globe expects that the debt will remain subject to the jurisdiction of the rehabilitation court after the completion of the debt offers,” Globe assistant corporate secretary Marisalve Ciocson-Co said earlier.

What could the amendments be?

Below is my thought flow chart for LPZ:

ST01

GREEN

I will be waiting for a PSE disclosure regarding the result of special stockholders meeting on December 11 or December 12. Trading halt probably? ahahaha wishful thinking.

The Basics a Newbie Should Know

What are STOCKS?

Stocks are shares of ownership in a company. When you buy stocks of a publicly listed company, you become a stockholder or shareholder of a company. In other words, you become a part-owner of that company.

As a part-owner, you participate in the company’s growth and future profits. Conversely, you may also lose if the company suffers a loss or performs below market expectations.

The number of stocks you acquire will determine how big or small your ownership is. As you acquire more stocks, your ownership stake in the company becomes greater.

How Do You Make Your Money Grow in Stocks?

There are two ways to make your money grow in the stock market:

1. Through an increase in stock price or capital appreciation

Capital appreciation is an increase in the market price of your stock.  It is the difference between the amount you paid when buying shares and the current market price of the stock. However, if the company does not perform as expected, the stock price may go down below your purchase price.

You cannot really earn from stock price appreciation unless you sell your shares. Otherwise it is only a book value gain, which means it is not yet converted to cash, and current price may change depending on market forces.

For example, if you buy a share of stock at Php100.00, and it rises to Php110.00, your capital appreciation or gain is Php10.00.  Keep in mind that you only realize your gain of Php10.00 minus applicable charges, if you sell at Php110.00.  If you choose to hold it and it further increases to Php150.00, your capital gain would be Php50.00. However, if your stock decreases to Php100.00, and you decide to sell it at that price, then your capital gain is zero.

2. Through dividends declared by the company

Dividends are paid out to shareholders, representing earnings of the company that are not going to be reinvested in their business.  There are two types of dividends: cash and stock dividends.

A cash dividend represents earnings declared by the company for every share of stock. So, if the company declares a dividend of 25 centavos per share, a stockholder with 10,000 shares will receive a cash dividend of (Php2,500.00 minus tax of 10% for individual Filipino investors)(Php0.25 x 10,000) in cash.

Stock dividends are additional shares given to shareholders at no cost. If the company declares a 25 percent stock dividend, a stockholder with 10,000 shares will be entitled to an additional 2,500 shares of stock.  These shares can be sold anytime after the shares have been issued.

The Trading Schedule

In the Philippines, the only operating stock exchange is the PSE.

The PSE has two (2) trading floors in Ayala Center, Makati City and Ortigas Center, Pasig City—where trading participants trade daily from 9:30 a.m. to 1:00 p.m. except Saturdays, Sundays, legal holidays and days when the Central Bank Clearing Office is closed.

Effective January 02, 2012, trading hours are from 9:30 a.m. to 3:30 p.m., the morning session is from 9:30 a.m. to noon, while the afternoon session starts at 1:30 p.m. until 3:30 p.m. Note that you can start placing your orders 30 minutes before the market opens or at 9:00 a.m.

The PSE has extended the trading hours beginning this October, in a bid to attract more investors and prepare for cross-border trading with neighboring Southeast Asian nations.

Investors may post a buy or sell order even after the trading period. However, this order will only be entered and matched through the PSE’s new trading system known as the PSEtrade, the next trading day.

More on: http://www.pseacademy.com.ph/LM/p0/investors~reading/l-beg/k-all/Beginner.html