Monday, October 18, 2010

Just Give Me The Final Answer!

I have been getting more and more requests for my specific valuations and "buy" prices for particular stocks. Because I have declined to divulge such information, I have received many questions as to why I'm not willing to share such info. As such, I thought it best to share my thoughts on the subject with a post.

First of all, I don't want to get into debates with readers about the calculation of various components that form part of a valuation. Everyone will have their own opinion when it comes to valuation, and that's okay, as the purpose of this blog is not to converge on a single opinion but rather to discuss the relevant issues that can have an impact on a valuation. If I had to spend time discussing/debating/describing each of the various inputs that form part of my valuation, I wouldn't have enough time devote to more productive endeavours.

Furthermore, by sharing my valuation numbers, I am also opening the fund up to competition. Many of the stocks discussed on this site are not liquid, but even for the ones that are, I open the fund up to front-running: if readers are buying/selling ahead of me because they know my valuation, I'm doing a disservice to the fund's shareholders, which is not acceptable.

Also, while it would be nice to be right all the time, I am far from it. As such, I have no interest in opening myself up to future scrutiny for the stocks which just don't work out. The fund is intended to be used to judge performance, not individual securities whose returns can be taken out of context and for which someone may hold me liable.

Finally, one of the major themes of this site is that individual investors should learn how to make their own investment decisions, and not just count on the musings of analysts. If I was displaying my own valuations, I would be subtly encouraging readers to take it and run with it. This doesn't make me much different than the analysts we criticize, or the google ads that appear in the top banner of this page, where advertisers offer "hot penny stocks" and other items designed to acquire your e-mail address. While I'm happy to profit off of them by way of reader clicks (and I thank the reader for those, as they form a significant portion of the site's modest income), I don't aspire to become them.

Happy investing!


Ankit Gupta said...

I actually have a question about valuations in general.

I like participating (buying the equity) in liquidations, because I'm simply looking for lots of cash. I'm not being asked to see into the future 8-10 years out and tell you how the company will be doing.

Cash and assets as close to cash as possible are easy to value. The hard part is earnings, because that requires a future outlook on the business.

How do you determine a good multiple to use with earnings or even cash flow? Is it largely just an approximation based on what you think will happen to the industry/sector?

Anonymous said...

Hey Barel,

Love the blog. I had a question for you. Not sure if its reasonable or not. But its a simple question -- where do you start? Do you run a filter on google finance or elsewhere to get a list of candidtate stocks? Don't know where one would begin.


Chris of Stumptown said...

So much of prices is personal. How much money do you allocate per position? How diversified are you? How much can you lose and not impact your goals? How much before you lose your nerve? Are you investing in illiquid situations? On and on...

I don't answer these questions. Instead I just tell people what I am doing (if they ask) and suggest how I think about valuation. Sometimes I think it's better to go backwards, and say at current prices markets are implying certain multiples. This way people can decide what they think without me having to give them "the answer"... such as it is.

Saj Karsan said...

Hi Ankit,

Yeah I don't really have that multiple down to a science, but I think it is fair to say it varies by industry. Also, it's important to subtract out debt, and not treat every multiple the same regardless of capital structure.

Hi Anon,

I do use screens, but I also hear and read ideas from other value investors.

Taylor said...


The multiple used to discount normalized earnings also should reflect the perceived risk of the individual company, IMO. For example, Walmart would command a much lower multiple than a start-up tech company. You could also use a range of discount factors, say, from 7 to 15. That way, you would have a better idea of how large your margin of safety is.

So far, one of the best valuation books that I have read is "Value Investing: Graham, Buffet, and Beyond". If you haven't read it, I highly suggest it.

Ankit Gupta said...

Thanks Taylor and Saj! I'll grab that book and read it.