Author: The Soaring Eagle

Entrepreneur, Investor, Solution Architect, Award-winning poet, Published author
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Value-based Investment: Mr. Market


Mr. Market

We’ve been using this term rather casually. Ben had used it in his book: “The Intelligent Investor” at several occasions.

I like to use metaphors. I find them easier to understand and to relate to, by so many people.

Imagine you are in the middle of the ocean, the Pacific for example. Your are the captain of a well-built ship. You’ve mastered the skill and the art of sailing such a vessel. You have a good deal of control over the ins and outs of that ship. However, do you control the weather? No one claims that, even the best of captains!

What you do, as an “Intelligent Captain”, is that you make sure that you understand the physics of the weather, and know the up-to-date weather forecast. Now you sail your ship, so that Mr. Weather is on your side; blowing your sails in the right direction, even during the harshest storms.

Got the idea? No one can control Mr. Market. It’s so moody, no one can even predict its next move for sure, ever. So, what can we do? We select our investments carefully, so that the ups and downs of Mr. Market’s moods do not affect us dramatically. We sometimes use those rather extreme variations to our benefit. We will see how, down the road.

For now, think of Mr. Market as the weather. Be prepared as much as you can. But don’t waste too much time trying to precisely predict its next move. Even worse, trying to time it.

When your investment strategy is based on solid principles, patience and discipline, Mr. Market’s current mood has little effect on the future of your portfolio.

Happy investing..

To be continued…

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Value-based Investment- The Intrinsic Value of a Stock


Last time we concluded by defining the IV of a stock. An Intrinsic Value is not always the same as the sticker price (but sometimes it could be). Rather, It’s the inherent value that this business deserves in today’s market.

Simply put, it’s very similar to the net-worth of an individual. You add up the sources of income and subtract the expenses. What you’re left with is that person’s net-worth. Same thing with businesses. What is the expected income from operation? What would be the value of all assets if they got liquidated? Patents, royalties, etc. Anything that the company owns and can convert into cash, minus whatever loans or liabilities it has in the market.

Next, divide that by the number of shares the business has (or intends to make) available in the market. For example, say the calculation we just made above resulted in ten million dollars. That is the net-worth of the business. The number of shares is one million. This gives rise to an IV of $10. This is what a single share of that business is intrinsically worth!

Armed with this knowledge, your decision-making process becomes a whole lot easier. You now have a baseline to come back to. Now, and only now, you go ahead and check the current sticker price of the business; what Mr. Market “feels” the price of one share of that business should be today! If Mr. Market was in a good mood and wanted to raise the price above $10 per share, then as an “Intelligent Investor”[1], you would hold back and keep the stock symbol on your wishlist. If the sticker price was less than ten, then the next step of investigation would kick in: Is it a business you would own for a 100 years, proudly? In other words, Is it a “wonderful”, growth, and money-making business?

That will be the subject of the next episode of this series. Stay tuned and be well…

To be continued…

 

The Wealth Maker

 

[1] Ben Graham has a book holding the same title. I’m not sure if he was the first to use this term though. The book is one of the best references on value-based investing.

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Value-based Investment: A Symbol or a Business?


Ben Graham had come with a paradigm shift, using today’s strategic terminology. Stocks had been seen through their ticker symbols: paper vehicles to make money in the future, relying on some emotional expectations of the price going up, luck, hype, and above all, Mr. Market’s moods.

The paradigm shift was significant. It simply devised that a stock symbol represents a company; a business in other words. For the stock price of that business (its ticker value at Bay Street, Wall Street, or any other “street” for that matter) to go up or down, keeping Mr. Market’s modes aside, something has to happen in that business.

The analysis goes even deeper. Before allocating capital to a “symbol”, an investor must know if the business behind that symbol deserves what it is being sold for. Very simple, just like grocery shopping. One wouldn’t buy a pound of tomato for $100, or a gallon of milk for $50. Yet investors do that, till today, in stock exchanges around the globe.

The reader would wonder: Why? Because they rely on second-hand information, which blows the actual value of a stock out of proportion, and then fuel that with hype that the price would go even higher. We all know too well what happens next.

Ben suggested that before you allow yourself to buy a stock, find out what its “Intrinsic Value” (IV) is. Does that gallon of milk deserve $50? Of course not. Then how much? The IV of a gallon of milk is around $3. That is common knowledge. Finding out the IV of a stock is not common knowledge. It requires deliberate research. However, that work is essential to making informed investing decisions.

To be continued…

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Value-based Investment: Introduction


Before Benjamin Graham (1894-1976), investing had been restricted to a special few. People didn’t know that what those ‘special few’ had been doing was merely guess-work!

In order for an individual to invest in the stock market, she or he had to submit to an ‘expert’, who was supposed to know the game of investing: A stock broker, a money manager or a fund manager.

The ‘experts’ had formed an elite circle of influence. What happened within that circle was at best ambiguous to the public. It was not a fair game! Not based on logic and common sense.

What Graham did to stock investing was very similar to what Newton did to physics and astronomy. He’d transformed the practise from one of hype to an activity of research, analysis, logic, decision-making, and of course, risk taking

To be continued..