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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Beauty (Value) Is In The Eye of The Beholder: Part 1


 Valuation is a science because there are “scientific element” involved in methods of valuation e.g using DCF (Discounted Cash Flow ), SOTP ( Sum-of the parts  ), Asset-Based Model (Relative Valuation ),  Financial Ratio analysis (PB/PE/Div Yield etc ). Valuation is an art because it involved “judgement “ about the prospect or future of any company. It is always as subjective as art when it comes to “ estimating” or forecasting future growth or a company or any other variable ( uncertainty ) that would affect the future e.g Interest rate movement, credit cycles, market conditions, inventory and demands etc… Hence, our valuation is full of “biases “ with all these “ guesstimation “ where we punch into any modelling or valuation methods.


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.


Our friend, Kyith from 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. <>


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 !!





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.



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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