Valuation

Does anybody have any thoughts on valuation? If you look at stocks, how do you personally choose to determine value? If you look at property investments, how do you determine value? What is value? How do you value more unusual things like contracts and deals?

I have some thoughts on valuation, a subject I've given a fair bit of thought to, but would like to hear what others think.

Thanks!

- Thomas.

> Does anybody have any thoughts on valuation?
the definition: judgement of worth
implies subjectivity...what is valuable to
you may not have the same meaning to me...
perception certainly plays a role

> If you look at stocks, how do you personally
> choose to determine value?
Usually I look to future predictions,trends
and read expert analysis

If you look at
> property investments, how do you determine
> value?
I usually succumb to old maxims such as
location,location , location...however I
also try to read about trends ...many places
which may be undesirable today will be very
desirable and valuable in the future.

What is value?
My judgement of the worth of something

How do you value more
> unusual things like contracts and deals?

I look at the bottom line: "what's in this
contract or deal for me?" Is it a win/win
situation? will it benefit me later? does
it have the potential to become more or
less valuable? Often I will do a cost/benefit
analysis...

these are my "powerfully practical" answers.
hope this helps...;-)

> Does anybody have any thoughts on valuation?
> If you look at stocks, how do you personally
> choose to determine value? If you look at
> property investments, how do you determine
> value? What is value? How do you value more
> unusual things like contracts and deals?

Hi Thomas,

Here's the view I use....
The value of a business is determined by the estimated cash flows expected to occur over the life time of a business, discounted at an appropriate interest rate.

- The Warren Buffett Way, by Robert Hagstrom, Jr., p. 264.

Here's what it means in English, at least in a very simple example....

Let's say that I own a business which makes me $1000 a year in profit, like clockwork. Let's say, for the sake of our calculation, that the "life-time" of that business is 10 years.

And to make it super-simple, let's say that there's no inflation and also no growth.

Then, according to the above quote, the "worth" of the business is 10 x $1000 = $10,000.

(10 years is the "life-time" of the business, multiplied by the "estimated cash flows" which here I've taken as the yearly profit. There's no discount since I've assumed no inflation, and I've also assumed no growth)

Of course, in reality there are other investments you can put your money it, and there is inflation to take into account too. These would actually reduce the value of the business.

Thomas, I know you have thought about this deeply.... It would be great if you'd share your insights. :)

Cheers,

Dien

Actually, I missed out some things... I'm a bit rusty on this (I do this kind of thing all by a spreadsheet I created, so I haven't thought about it in a while)....

I forgot to include the discount factor at the end....

That is, if in year 11 the business also makes $1000 per year (and will continue to do so in the foreseeable future), then if someone expects an 8% yearly return on their investment, this could in itself be worth $12,500 to them (since 8% of $12,500 is $1000).

So the total value in this case would be $10,000 (from the calculation in my previous post) + $12,500 (from the calculation above), making it $22,500.

This is very simplified because I've assumed no growth and no inflation, mainly to show the principles involved.... A more realistic evaluation would take growth and inflation into account.

- Dien

> Thomas, I know you have thought about this
> deeply.... It would be great if you'd share
> your insights. :)

Actually I'm currently in the process of writing up a brief overview of my thoughts on valuation. Although so far this brief overview has come to 1832 words and I'm not finished yet! I'm considering writing a detailed book (e-book perhaps) on the topic, as I think it would be of value to a number of people... To explain value, what it is, how you derive it etc, to your normal non-finance person. :)

- Thomas.

Thank you for clarifying this ..."normal
people"....
a few more posts re the financial valuation
process and I'll loose all my friends I
invited to this board to talk about the 5
stages...
Can't wait until the ebook on valuation comes
out and talks about it from a "layperson"
perspective.
(smile)
Got a go and bring my friends back to the
board...that math stuff is going to blow them
right out the water....

Hi Sandy! :)

> a few more posts re the financial valuation
> process and I'll loose all my friends I
> invited to this board to talk about the 5
> stages...

Heheh...

I think this is the only mathematical thing we've ever discussed.... so I hope your friends can rest assured.... :)

Yesterday, I was waiting for someone to pick me up from the airport (I flew back to Sydney), and I got to talking with a lady who was waiting there as well....

After having an interesting discussion with her for a while, I mentioned my background in physics.... and she said I must be good at mathematics....

She said, "Mathematics is something you either love or hate. There's no in-between.... You love it, or hate it!"

Maybe she's right.... :)

That certainly made me think....

I'll have to lump mathematics in there along with MLM and Rush Limbaugh... ;)

> Can't wait until the ebook on valuation comes
> out and talks about it from a "layperson" perspective.
> (smile)
> Got a go and bring my friends back to the
> board...that math stuff is going to blow
> them right out the water....

Heheh....

I hope your friends enjoy the process of becoming experts in the ancient language Paeonian!

Oh yes, and the other more practical stuff too! :)

Thanks Sandy..... :)

Dien