The Intelligent Investor - Benjamin Graham (Part 3)

The Intelligent Investor - Benjamin Graham (Part 3)

The Intelligent Investor - Part 3

In the final section, I will present some common mistakes in everyone's thoughts on the market price and value of the stock.

The funny think about the value of shares in Vietnam

Every day, while reading the newspaper, monitor internet forums, listen to those around talking about the stock, I can not help but laugh about some of the misconceptions regarding market price and value of the stock. Here I would like to set out some of the funniest cases.

Assumption 1: values ​​have no meaning at all before I said preliminary part of this misperception, now please get the funniest example I've ever known.

When shopping for a certain item, the Vietnamese rushed to purchase if you would like it market price suddenly drops (such as through promotion), in addition to not need to learn anything more.

But for stocks (and the dollar, gold) are slightly different. First, people rushed to buy when the market will price it up (not your colleagues by urging you to hurry to buy shares because the stock price is up there?). When most stocks have high prices and difficult to buy, people will buy the labor to find new stock (usually on the OTC market) are priced lower. Also do not need to learn anything more. Just buy one quick before they are called elders luyen.Ngo investors received 1 value has no meaning at all before I said preliminary part of this misperception, now would get examples funniest I have ever known.

The most typical example for the case of a (high) as PVD, for the two cases (low price) is BBT.

 To understand the humor in this 2 stocks, you should first know about the PE. PE of an index is the ratio of shares between market prices and profits of the company to issue shares in the first year. For example, last year the company made a profit X is 1 thousand per share, the current market, the market price of stock X is 12 thousand dollars, then we say that X PE of 12 ( = 12 thousand / one thousand).

 In other words, you spend 12 to get the $ 1 profit each year while equity X. If company X still maintaining speed as current profit, then after 12 years as you recall the original amount.

PVD had the time of PE = 328. I can not understand why people have to spend money to buy stocks with PE = 328. Even shares of Google, even though a lot of people and many people sought evaluation that was too high expectations, PE is only about 60. If you buy PVD with PE = 328, and if profits remain constant current year, business PVD need about 328 more years for you to recoup capital considered. Three hundred and twenty-eight years! If you can not imagine how long it is, then just think this: 328 years ago, the Saigon even less well formed!

And BBT (Bach Tuyet Cotton only)? Nearly a year ago, the market price of BBT only about ten thousand dollars. You find cheaper too, right? But if you take your BBT meager profit that provides market share for that price, the PE of BBT above 100. Well, need to drive more than 100 years to recoup your capital.

 Only a single explanation for the PE> 100 is a reasonable long-term profit growth should drive stronger current. At that time only 100 years can be reduced to 10-20 years (at that time the market price of certain higher BBT). How strong drive to increase profits? By selling more than tampons? To explore that possibility, rather than out of time to read the financial reports, you should spend precious little time to run to the supermarkets, grocery stores in Saigon. Try counting how many points you find the products sold by BBT. As I understand it, the BBT tampons increasingly drifted away from Saigon, to find the right stores in the province to the other. Every year, they drift farther back, and less than the point of sale. I guess that BBT buyers (buying stocks, not buying tampons) when PE> 100 are ignorant men. Most women in Saigon are not buying the shares of BBT and tampons.

Assumption 2: Par value is the value of the stock

Many newspapers often report on the following securities:

 "X shares (par value of 10 thousand dollars / share) currently has a market price of 200,000 VND / share, ie 20 times the face value. He Z, securities experts of company Y. that the market price of X has exceeded the actual value. Investors should be careful ... "

 Yes, I've read all that you need to be careful. But be careful not to stock X, that is careful with his Z something. According to the words of Mr. Z is the par value of the stock value, is not it?

I will take a simple example. Suppose I set up earlier this year corporation HAVILO (hot vit lon) with a capital of 100 million. To get that money, my bank loan 40 million, and acquaintances are mobilized from the remaining 60 million by the issue of 6,000 shares with a par value of 10,000 VND (60 million = 6,000 x 10,000). Assuming that the shareholders agreed to contribute capital for the par value.

Thus, at the time of establishment of the balance sheet HAVILO as follows:

    Assets
 
    100
 
    + Cash
 
    100

    Liabilities
 
    40

    + Bank Loans
 
    40

    Equity
 
    60

    + Share Capital
60

Table 1 (Unit: 1 million)

It's easy to understand right: Assets = Liabilities + Equity.

Because nature is lazy, I decided not to use 100 million cash business at all, but give all go buy it at SJS market price is 100,000 VND / share. Fortunately, only a few months after the market price of SJS up to 1,600,000 VND / share (adjusted after split), and I sold all of his shares SJS. So my initial 100 million has turned into 1.6 billion, ie I added 1.5 billion profit. Suppose HAVILO favored companies do not pay corporate income tax this year.

When the balance of HAVILO would be this:
    Assets
 
    1600

    + Cash
 
    1600
 
    Liabilities
 
    40

    + Bank Loans
 
    40

    Equity
 
    1560

    + Share Capital
 
    60
 
    + Retained Earnings
 
    1500

 Table 2 (Unit: 1 million)

Now I puzzle you: Par value of HAVILO now is how much?

Answer: still 10 thousand dollars / share (because capital investment is 60 million).

Next question: I want to sell your shares for $ 50 HAVILO thousand dollars / share (5 times face value), you can buy it?

 Of course you will buy now for the bargain price of 50 thousand is too. With 1.6 billion cash, whether HAVILO have to stop trading immediately, to pay 40 million in debt, it is still more than 1.5 billion to return to shareholders. This means that each share will be 1:56 HAVILO billion / 6,000 = 260 thousand shares.

Spent 50 thousand dollars to own 260 thousand dollars in cash, for ordinary people, it is the bargain investment, but for what he Z which is not necessarily so!

 The par value of the shares is simply a number that is set at contribution or issuance of shares to the outside. Over time, the face value will be different from the actual situation of the property and profits of the company. Market price is 20 times the face value does not mean expensive, but prices fell by 1/10 face value does not mean cheap.

 If you want to understand the value of a company, you have to look at the balance sheet. Only a denomination can not say anything at all.

Assumption 3: Book value is the value of the stock

In accounting, it is the price of the book (Book value - BV) by:

BV = equity / number of shares issued

Apply for Table 2:

BV ratio = 1,560 / 6,000 = 260,000 shares at

After the presentation in misunderstanding 2, you can also come up with the thought: if the market price is lower than the BV have no stocks are cheaper? Many analysts also value that mistake. In fact, BV and denominations, can not say anything about the actual value of the shares.

In the example in Table 2, the right is a bargain investment, but quite the opposite case. Take a look at the following example.

Once you have 1.6 billion of cash, I decided to make one crazy investment: Nhat Tao Market running out to buy a multitude of super old computer (XT computer, black screen 2-blue, not drive ... for example). Yes, I like it so extravagant. After the purchase, I just left 10 million in cash.

Balance Sheet of HAVILO this time will be as follows:

    Assets
 
    1,600

    + Cash
 
    10

    + Machinery
 
    1,590

    Liabilities
 
    40

    + Bank Loans
 
    40

    Equity
 
    1,560

    + Share Capital
 
    60

    + Retained Earnings
 
    1500

 Table 3 (Unit: 1 million)
Now, debt and equity have not changed, only the structure of the property there is a difference. Assets are divided into 2 parts: 10 million in cash and the "machinery" is 1,590 million.

 PV is 260 thousand dollars. But in every 260 thousand dollars, much of which went into the terms "machinery" is over. You see, if blindly rely on the hospital, you will be mistaken that a computer machine XT life is worth! In fact, everyone knows, there are few machine XT is also nobody to go home to get tight spot.

 That's why we call BV is "book value". In the book, the XT machines or the latest Core2duo can be all the same.

And with only 10 million in cash, HAVILO will certainly be in big trouble when 40 million in debt due. The risk of bankruptcy is hardly inevitable. But even then, the book value of HAVILO it is still 260 thousand VND / share! Workers will still have to buy because HAVILO that the book value of 260 thousand is too tempting. Of course it does not have me in it! In fact, the value of the numbers 0 HAVILO plump, no I do not have to bother.

 If you rely on the hospital to business valuation, you have to take the hospital to find out what actually is. It is Core2duo or XT, it is a land in the heart of the city or a worthless alluvial sea, it is the machines can help generate a lot of profit or as a money mill mercilessly . For this, you have to learn to live in the company, which invited employees to drink beer; interview partners, customers and competitors of the company, you can even hack into the internal network the company's information to moi (I am joking, but do not be foolish to do so!).

Misunderstanding 4: The PE said to share the value of

You know that PE is what? Ok. We further.

Many experts also made the comment or shares beyond true value because PE is too high, or lower than the PE value is too low. This is really very funny.

Price is P in PE (market price), but the word is Earning E (profit). In accounting, profit does not mean there is no money, there are the other vice versa. We continue our example from Table 3 offline.

 The trick mung nature, I try to turn things around for HAVILO. With a pile XT machine then I certainly can not operate them to generate profits. I got into the Internet to find an open source software that corrected a bit and turn it into their own software (of course I have to hide the origin of its open source). Then I went to call students in the University of the software I purchased with special terms: spend every comfort, after 1 years to pay well (known as credits in accounting for new customers 1 year fees). I understand what students are doing with the money that pays for their students even kids know it, but that's OK, just stop spending, then default on their appointments to always have stars.

So HAVILO additional 60 million profit, student software to spend, and I'm excited to look prepares HAVILO stock price increases. Everyone will all go home happy.

 HAVILO additional 60 million profit, but would like to get the corresponding amount shall have to wait 1 more year. No matter, the eager investor does not need to wait so long, they start to calculate:

Total profit was 60 million. HAVILO release 6 thousand shares.

So profit per share of 60 million / 6 = 10 thousand thousand VND / share.

Prices of HAVILO today is 50 thousand dollars / share.

Inferred: PE = 50 ngan/10 thousand = 5

RELATIVES HOLY! BUY SUPER CHEAP STOCKS DYKE!!!

HAVILO PE of only 5, while the market average is 40. Book value of HAVILO to 260 thousand, while the market price is only 50 thousand. As foolish as not to buy?

If you buy HAVILO, you and the other shareholders will have 40 million when the debt burden HAVILO bankruptcy. Well, hope that next year you will find the other students to claim back money paid to use the software offline! Good Luck! And I hold the money by selling shares HAVILO for you to hang out here Tuan Chau Island.

 Of course there are examples for director of scams. But even honest director, based only on single PE does not tell the real value of the business:

 - Profits this year could be as high as mutations. For example, the company produced T noodles with meager profits over the years, so the market price is also very low T. Suddenly major disasters this year, the leadership of the basic T turbidity fat noodles to people in distress at exorbitant prices. Profit this year will be exceptionally high, but the next year they will definitely have big problems, even to maintain profits as before and also difficult. So you have to consider PE over the years.

One must look to growth factors. A company with PE = 50 versus company B PE = 10, then how? You think that B more attractive? Let's look to the future. If A growth of 50% / year, while B -5% growth / year (ie, profits in the future will increasingly poor) A new company is worth the investment. For the future situation of a company is not actually too difficult. It focuses on companies that you understand. For example, if you are IT people, the only company producing a floppy with PE = 5 is not attractive? Of course not, because just a few years from now it will be closed.

Misunderstanding 5: Only experts can analyze the value

Experts here are? It is those who make the investment funds, finance companies, securities firms, banks, university professor, ...

You think that only those who can finance analysis, company analysis, ... And what could be his advantage by them.

What do you think about the examples mentioned misunderstanding 2, 3, 4? Is that due to accounting errors, inaccuracies good test, cheat? Information is not transparent?

There is no blame here. Most of the examples to the validity of accounting and auditing. Call PC XT are the property was entirely right. There is no transparent mechanism though any size can help you find the "loopholes" that. You, the investor, have to do that.

So the "experts" when it has the advantage of finding "loopholes" that? There is no advantage at all. On the contrary, they are the main disadvantages. Peter Lynch, who is considered the best fund managers in the United States, wrote in his book "One Up on Wall Street" that any normal person, if you know what I take to understand, there are can beat the professionals on Wall Street. When I had the time I would summarize the contents of this book.

 The easiest way to defeat most experts is based on the Index Fund (mentioned in previous post). This has been proven by the study's theoretical and practical results from the financial sector.

The second is to take advantage of what you have said available. Imagine if an expert to sit reading the financial report, whether he is able to assess the exact business there? The upper part of the article was to answer.

Financial analysis is only part of the analysis of enterprise value, but not enough. The rest, you have to understand the reality of the business, products, customers, markets, prospects of the business.

Take me as an example. My expertise is to write software. A professional that he is financially. So who has the advantage over the analysis of value?

Answer: I was. Because first I will focus on analyzing only the companies that I understood. Can I use my expertise to analyze the software production company, when I can experience analyzing companies powerful software applications to serve the manufacturing business.

Specialized software is one of our most valuable assets. A You can not have it in overnight. But without an understanding of the software industry, how to analyze the company? For those who are not professional, they are very easy to think that the XT and Core2duo machine have the same value.

There are specialized software and then, to learn the basics of how to finance investment is much easier than doing the opposite. For example, I see many people stayed to IT, just a few months, or even possible to work within the financial sector, banks (as analyst, motivational counseling), although there has never been anything expertise and experience in a new field. Conversely, I have never seen anyone from the financial sector, off work, and in just a few short months to learn to express the software can be.

Of course I do not mean to compare and lower branches at all. What I mean is simple: use your existing strengths to win. If something is missing, please find the best way to supplement or fill. Do not lose its strength to work blindly into areas that you can not afford to take victory, just because I heard a rumor that someone is very good and more dominant.

Recently I have heard many notes in the Mekong Delta Rice hit two deep thanks fish, brought his money to buy a new car. Hold the remaining amount, the pay determination to hunt Saigon shares of companies in the field of drilling rigs, technology, banking, pharmaceuticals ...

In the opposite direction, many employees in the technology companies, banks ... Delta are flocking to hunt for stocks of companies exporting seafood new because the price is very low (for a seafood company has high price floor).

Two Rice would pay my house and, if you really want to invest yourself, you should take the time to analyze the business situation of the company around its seafood.

Knowledge exchange to take pho

I'm craving pho (literally, not figuratively). It was a long day Vietnam but they did not eat soup in the show somehow malfunctioning.

I also very much interesting things to say about the stock, the investor, to make money ... Or when I would open the Vietnam securities class style Le Nam (simple, straightforward, frank, and funny)? I will prioritize large numbers class students.

Tuition will be the first bowl of pho / 1 student / 1 class. Note: do not accept cash, only pho no formaldehyde.

Is there anyone that does not want to participate? Bring me a bowl of soup to go.

 OUT
Table of Contents:
The Intelligent Investor - Part 1
The Intelligent Investor - Part 2
The Intelligent Investor - Part 3
Source: http://tobecomeabillionaireonline.blogspot.com