Beauty ( Value ) Is In The Eye Of The Beholder – Part 2
Stocks Valuation: Art or Science?
This is an “old age “ question that pondered all of us as an
investor and question we hear from time to time. For me, I think stocks
valuation is both a science and an art. We often hear that analysts are trying
to find the so-called ”intrinsic value”
of a stock or business and different model or methods of analysis would give a
different result of valuations, sometimes the variance could be huge.
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| <Image Credit: Mishfitlife.com> |
Beauty (Value) Is In The Eye of The Beholder: Part 1
When comes to “valuation”, I think most of us will have his
name in our mind. Yes ! he is the so-called “ Dean of Valuation”,
Professor Aswath Damodaran, currently a Professor of Finance at
NYU’s Stern School of Business. He is one of the best-known experts on
valuation and is often the “go-to” source when analyst or reporters are trying
to understand the valuation of a hot new company.
<Introduction To Valuation by Prof Aswath Damodaran>
## This is part of a series of lecturer (25 sessions in
total ) by NYU Stern School Of Business. You may find the full series on
YouTube by this link.
https://www.youtube.com/watch?v=znmQ7oMiQrM&list=PLUkh9m2BorqnKWu0g5ZUps_CbQ-JGtbI9
Our friend, Kyith from Investmentmoats.com also
has written a great article about valuation in detail in his blog recently. You
may find the link as below :
What
I Learn About the Art of Valuation. <Source:InvestmentMoats.com>
When comes to valuation, everyone will have their own
“judgment “ or biases, and try to put a “figure” on their stocks target price.
For me, I think this is not “right or wrong”, as mentioned, the so-called
“target price” lies with our “ forecast or estimation” about the company’s future
revenue, cash flow, or growth. How
optimistic or pessimistic of our thinking about the sectors or industries will
affect the “intrinsic value” we derived from our estimation. We should always
just take the “target price “ from an analyst with “a pinch of salt “.
Is The Trend Your Friend?
“The trend is your friend” is one of the best-known
sayings, although this message is incomplete. The full version should be, “The trend is
your friend, until the end when it bends.” The trick with buying stock is to
to be patient through the small changes in price until you can identify the
point when the trend makes a change in direction or “bends.”
As I always mentioned in my blog, market moves in a cycle
and will “revert to mean “ in
the long run when there is overshoot from time to time, be it over-optimistic
or too pessimistic.
But how about at companies level? We have seen so many
companies trading at below -2SD level at this moment. Will these companies be
able to recover and their stock price reverting to mean eventually?
Of course, not all will recover or reverting to mean. Some
companies are facing real “structure or
fundamental change”, the challenge could be due to “ technology
disruption” (SPH), price war because of new competition (StarHub/Sing
Tel), economic cycles and cost factors (HPH, Keppel Corp,
SembCorp, Genting), internal restructuring ( HSBC, Sing Post)
etc. Some of these company may succeed to transform and recover eventually and
some may not, we will need to be extra careful in evaluating or doing a “recovery
play” kind of trading in such companies, of course, if you are betting it
right, the returns could be good.
Other than “fundamental change”, many companies are trading
below -2SD because
of a crisis or an economic downturn. If the fundamental of these companies still
solid and the current low stock price was mainly because of Covid-19 pandemic , the stock price may recover or rebound strongly once the pandemic is over.
Sectors like banking, hospitality, consumer staples will recover eventually and
of some may take much longer e.g Aviation
/ Cruise Lines etc. The probability of reverting to mean for such companies are
much higher than those with “fundamental challenges “. Most important is to
find a fundamentally solid company to invest and hold it for the long term,
patiently.
Final Thoughts
As I mentioned earlier, “Value is in the eye of the beholder”…every investor may have their own “thinking” or value about each
company they have invested. No right or wrong, some try to pick up the dividend
play and some trying to invest more on “growth stocks”, depending on your risk
appetite and investing time horizon. Even the “recovery play“ may turn out to
be a good one in your portfolio if you are lucky enough to “play “ it right.
Our friend, B ( from A Path to Forever
Financial Freedom) has written a very good summary of different “play” or categories of stocks
in our portfolio. You may find this interesting and see if you can breakdown
your portfolio into these 4 categories of stocks. :D
Allocating My Stock
Positions Based On These 4 Categories
Cheers !!
STE
Quote Of The Day :
“Numbers people believe that valuation should be about
numbers and that narratives/stories are distractions that bring in irrationalities
into investing. Narratives people believe that valuation
and investing are really about great stories and that it is the height of
hubris to try to estimate numbers when you face uncertainty.”
“Research in psychology point to an undeniable fact. Human beings respond
better to stories than to abstractions of numbers. This is true in business as
well, where storytelling often is much more effective at selling people on any
investment than the numbers that may be presented.”
By
Prof. Aswath Damodaran
Appendix: Regression Chart for selected companies.
Disclaimer:
The information contained within this blog is
provided for informational purposes only and is not intended to substitute for
obtaining professional financial advice as the writer is not a certified
financial adviser. You are responsible for your personal finances and should
not rely on this site or anyone else to make the final decision for you and
please do your own due diligent in using information from this blog.
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