The Wealth Algorithm (4)


 

Please read the last four articles, if you haven’t already.

We now have the start and end points of our journey defined. That is a clear, believable intention, and the current networth.

What’s left is the process to go from the start line, to the end point.

Why is it important to define these two points? The answer is very simple: Imagine going online to book a plane ticket. What are the first two questions you have to answer? Leaving from? And going to? Right? You can’t make a reservation without knowing your source and destination points.

Same here. Actually, this is the first lesson in Success 101!

They say: To make money you’ve got to have money. Is that always true? Can you start your financial wealth building journey with zero-out-of-pocket investment?

Well, you could, but it would take much longer, which means you must start off at a much younger age, say at 10 years old!

Are you 10 years old now? I guess not. Then let’s focus on the other route, which is financing.

How can you finance your dream? A big question, eh..?

Unfortunately, it’s not enough, most of the time, to have only the start and end points well-defined, in order to obtain the financing you need. A third critical component is required, and that is your plan. In professional terms: Your business plan.

So let’s talk about that in the next post.

Between now and then, write your intention statement on one side of an empty page, and your networth on the opposite side. Read them to yourself, then start exploring ways to move from the left to the right of the page…

All the best,

The Wealth Maker

 

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.