It is important to know exactly what we mean by the word “value” before getting started with Value Investing in Singapore. When the father of Value Investing Ben Graham documented this approach, he perceived the value of a business to be simply the total value of a company’s assets. It was actually possible to find stocks that were selling far below their actual value back in the 30s and 40s.
In order to find out if a stock is worth buying, Ben Graham would first calculate the intrinsic value per share where:
(Valuation) / (Number of Shares)
For instance, you have determined company A to be valued at $100 million. The current share price on the stock exchange is $60 and there are 1 million shares. Where the value per share is $100 ($100 million / 1 million).
Margin of Safety
In this case, the margin of safety is $40 i.e. ($100 – $60). What this margin suggests is that if the determined value of $100 million is accurate, you would expect the market to recognise this value and correct. A larger margin of safety helps to mitigate the risks because it would be fair to assume that earnings in future will not fall below that and investors will feel appropriately protected. However, if the value is more abstract compared to just looking up the book value of a company, then how can an average investor look at a complicated company like IBM to determine how much it is worth?
Here is how to start:
You should start with the book value followed by adding in the forecasted cash flows. Take note of any acquisitions or mergers going on in the company. It is very important to look at the earnings and growth of earnings. Lastly, try your best to quantify the value of the intellectual property, brand, and all other intangibles that make a business unique.
You are highly advised to do such analysis a few times for many companies in order to get a feel for the numbers involved as well as where to locate the numbers. With more practice, the ‘feel’ of what is a good deal should become apparent.
It is not an easy task to decide which stocks to invest in and which ones to avoid investing.