Show me the value - the intrinsic value!

[KinAlberta]

For years now, decades in fact, I've read corporate analyses stating what a company's intrinsic value is at some point in time - often specific prices with no mention what so ever that it is at a point in time.  That omission alone makes me wonder.  Then there's Whitney Tilson's Berkshire Hathaway intrinsic value graph. I think Whitman's graph is the only graph I've ever seen trying to show a company's intrinsic value over time - but of course it's an inexact science because BRK is a going concern.

 

See chart on pg 16

http://www.tilsonfunds.com/BRK.pdf

 

So what I'd like to see is a graph of the intrinsic value of a company throughout its life (maximum potential shareholder holding period). Say for example or one of the 70s' NiftyFity stocks that no longer exists.  There we'd have a full history of cash dividends, discount rates, market prices, everything. 

 

Has anyone ever seen such a thing?  If not, anyone care to take a stab at it?  ;-)

 

 

 

Some quick almost random links off the internet via Googling for intrinsic value graphs...

http://advisoranalyst.com/glablog/2014/03/05/david-merkel-on-intrinsic-value.html

http://www.technologyreview.com/view/519226/technology-is-wiping-out-companies-faster-than-ever/

http://www.economicmargin.com/afg-investment-grade-0

[rb]

Shouldn't be that hard to do it once the movie end. Pick a company, get its dividends for the period you want and stick a big fat zero at the end for no longer with us. Then get your discount rates, for simplicity, use US 10-year yield+5%, pop everything in Excel and do present values.

 

rb

[100 Shares]

I have Merrill Edge for a broker and with it comes access to Morningstar's premium service. In their reports for stocks they give fair value using DCF. in the report is a chart of their estimate of fair value (at the time) and stock price over the past 2-3 years. Of course you'd have to agree with their fair value assessment for you to care.

[rb]

I have Merrill Edge for a broker and with it comes access to Morningstar's premium service. In their reports for stocks they give fair value using DCF. in the report is a chart of their estimate of fair value (at the time) and stock price over the past 2-3 years. Of course you'd have to agree with their fair value assessment for you to care.

 

I guess you gave to ask yourself how much do you agree with their assessment of fair value. If you truly believe that they are doing it right than you can give your money to them to manage and you would do great.

 

I think the OP was looking to compare the value of a company that is no longer with us, thus we can really appreciate its true fair value, against the fair value that the market estimated and compare over time.

[KinAlberta]

I have Merrill Edge for a broker and with it comes access to Morningstar's premium service. In their reports for stocks they give fair value using DCF. in the report is a chart of their estimate of fair value (at the time) and stock price over the past 2-3 years. Of course you'd have to agree with their fair value assessment for you to care.

 

I guess you gave to ask yourself how much do you agree with their assessment of fair value. If you truly believe that they are doing it right than you can give your money to them to manage and you would do great.

 

I think the OP was looking to compare the value of a company that is no longer with us, thus we can really appreciate its true fair value, against the fair value that the market estimated and compare over time.

 

 

Exactly.  Forums are full of people discussing tech companies saying "my estimate of intrinsic value is..." yet their projections only go out 5 or so years on a company selling products that might be obsolete in three years.  (Think Apple of the 80-90s, Blackberry of 2005, etc.)  Imagine valuing a long bond not knowing if you will get any of your principal back in 7, 8, 9 or more years. I think tech investing is fine but you have to shorten the expected lifespan up to next to nothing whereas the companies Buffett picks have higher probability of at least a 20+ year additional lifespan.  There must be a lot of unspoken thinking on Buffett's part in looking at companies earnings with a high propensity to regress to the mean if not beyond and protect invested capital for decades.  He's essentially trying to find the barrels of fish to shoot.  (IBM's transition is a neat case in point.)

 

Anyway, looking at defunct companies to understand how the market really performed at sensing "true" intrinsic value would be very enlightening. Where and why did it get it right and where did it get it wrong. Theory vs practice.  (Buffett's "How inflation swindles the equity investor" article touched on this issue in his discussion of the investment climate in the 1950s in a low BV environment.)

[Guest Schwab711]

I have Merrill Edge for a broker and with it comes access to Morningstar's premium service. In their reports for stocks they give fair value using DCF. in the report is a chart of their estimate of fair value (at the time) and stock price over the past 2-3 years. Of course you'd have to agree with their fair value assessment for you to care.

 

I guess you gave to ask yourself how much do you agree with their assessment of fair value. If you truly believe that they are doing it right than you can give your money to them to manage and you would do great.

 

I think the OP was looking to compare the value of a company that is no longer with us, thus we can really appreciate its true fair value, against the fair value that the market estimated and compare over time.

 

 

Exactly.  Forums are full of people discussing tech companies saying "my estimate of intrinsic value is..." yet their projections only go out 5 or so years on a company selling products that might be obsolete in three years.  (Think Apple of the 80-90s, Blackberry of 2005, etc.)  Imagine valuing a long bond not knowing if you will get any of your principal back in 7, 8, 9 or more years. I think tech investing is fine but you have to shorten the expected lifespan up to next to nothing whereas the companies Buffett picks have higher probability of at least a 20+ year additional lifespan.  There must be a lot of unspoken thinking on Buffett's part in looking at companies earnings with a high propensity to regress to the mean if not beyond and protect invested capital for decades.  He's essentially trying to find the barrels of fish to shoot.  (IBM's transition is a neat case in point.)

 

Anyway, looking at defunct companies to understand how the market really performed at sensing "true" intrinsic value would be very enlightening. Where and why did it get it right and where did it get it wrong. Theory vs practice.  (Buffett's "How inflation swindles the equity investor" article touched on this issue in his discussion of the investment climate in the 1950s in a low BV environment.)

 

Cool discussion, I passed on Apple for the reasons you mention when it was really cheap ($450 or ~$65 split-adjusted). I'm not sure exactly how to get a better handle on fast product cycle companies (maybe just avoid them is the answer) but I've always thought that your thoughts are exactly what Buffett meant when he says he avoids tech companies. His IBM investment pretty much solidified this idea in my head that it's not technology companies themselves he avoids, it's fast product cycles where he can't figure out what they will even sell in 5 years. 10 years ago, Apple didn't even sell phones and now folks are trying to figure out how much they are going to invest in manufacturing cars. No matter what the gains in owning AAPL are, it's somewhat speculation in my mind since no one can explain where revenue will come from in 5 years (although iPhones are starting to represent are highly stable revenue/profit source for the foreseeable future).

[PatientCheetah]

you kind of said the answer yourself. with tech/consumer or anything with short product cycles, you cannot value with any degree of accuracy. IMO the best approach to tech/consumer investing is following operating momentum and staying with the trend until the momentum begins to slow

[rb]

Cool discussion, I passed on Apple for the reasons you mention when it was really cheap ($450 or ~$65 split-adjusted). I'm not sure exactly how to get a better handle on fast product cycle companies (maybe just avoid them is the answer) but I've always thought that your thoughts are exactly what Buffett meant when he says he avoids tech companies. His IBM investment pretty much solidified this idea in my head that it's not technology companies themselves he avoids, it's fast product cycles where he can't figure out what they will even sell in 5 years. 10 years ago, Apple didn't even sell phones and now folks are trying to figure out how much they are going to invest in manufacturing cars. No matter what the gains in owning AAPL are, it's somewhat speculation in my mind since no one can explain where revenue will come from in 5 years (although iPhones are starting to represent are highly stable revenue/profit source for the foreseeable future).

I think you are absolutely spot on in your discussion - especially about tech. Maybe a lot of tech investing is doable for people with certain skillsets that can speculate properly, but doesn't lend itself to the long term investor.

 

To take your Apple example, yes it was cheap at 450 compared to now, but all of the current valuation is based on the crazy IPhone margins they get. That's it. Now one of the things that history taught us is that margins for consumer electronics collapse and a lot of times very violently. I won't get into debates of why this happens. But that's what they do. Maybe AAPL is different. But it's more likely than not that the Iphone margins will go down at some point and when they do AAPL will loose the valuation. So with AAPL, you really need to take a leap of faith.

 

Warren Buffett took the other way, basically saying that he's more than willing to take lower growth and returns but more steady. KO also has great margins and nice decent growth (nothing like AAPL though) and that's OK for him. But KO looks like a bond compared to AAPL. If there will be any deterioration in the business (margins and growth) it will be very very gradual if at all.

 

Basically it boils down to this: When you do a DCF, a company with some pricing power that can live for a long time is  better than a company that's great for a decade or two and then fades away. But in the latter company you can make a lot of money quickly.

[oddballstocks]

I have Merrill Edge for a broker and with it comes access to Morningstar's premium service. In their reports for stocks they give fair value using DCF. in the report is a chart of their estimate of fair value (at the time) and stock price over the past 2-3 years. Of course you'd have to agree with their fair value assessment for you to care.

 

I guess you gave to ask yourself how much do you agree with their assessment of fair value. If you truly believe that they are doing it right than you can give your money to them to manage and you would do great.

 

I think the OP was looking to compare the value of a company that is no longer with us, thus we can really appreciate its true fair value, against the fair value that the market estimated and compare over time.

 

 

Exactly.  Forums are full of people discussing tech companies saying "my estimate of intrinsic value is..." yet their projections only go out 5 or so years on a company selling products that might be obsolete in three years.  (Think Apple of the 80-90s, Blackberry of 2005, etc.)  Imagine valuing a long bond not knowing if you will get any of your principal back in 7, 8, 9 or more years. I think tech investing is fine but you have to shorten the expected lifespan up to next to nothing whereas the companies Buffett picks have higher probability of at least a 20+ year additional lifespan.  There must be a lot of unspoken thinking on Buffett's part in looking at companies earnings with a high propensity to regress to the mean if not beyond and protect invested capital for decades.  He's essentially trying to find the barrels of fish to shoot.  (IBM's transition is a neat case in point.)

 

Anyway, looking at defunct companies to understand how the market really performed at sensing "true" intrinsic value would be very enlightening. Where and why did it get it right and where did it get it wrong. Theory vs practice.  (Buffett's "How inflation swindles the equity investor" article touched on this issue in his discussion of the investment climate in the 1950s in a low BV environment.)

 

Cool discussion, I passed on Apple for the reasons you mention when it was really cheap ($450 or ~$65 split-adjusted). I'm not sure exactly how to get a better handle on fast product cycle companies (maybe just avoid them is the answer) but I've always thought that your thoughts are exactly what Buffett meant when he says he avoids tech companies. His IBM investment pretty much solidified this idea in my head that it's not technology companies themselves he avoids, it's fast product cycles where he can't figure out what they will even sell in 5 years. 10 years ago, Apple didn't even sell phones and now folks are trying to figure out how much they are going to invest in manufacturing cars. No matter what the gains in owning AAPL are, it's somewhat speculation in my mind since no one can explain where revenue will come from in 5 years (although iPhones are starting to represent are highly stable revenue/profit source for the foreseeable future).

 

I remember passing on Apple when it was in the $80s (~$8 split adjusted) back in 2006 and thinking it was overpriced. Yet I was buying Apple hardware like it was going out of style, should have looked at myself and friends rather than used those old dusty value metrics...would have been much richer.

[LC]

The problem trying to value things 5+ years out is that the discussion quickly turns qualitative, not quantitative.

 

Quantitative problems are easy to frame, discuss, and "solve". Not so with qualitative ones. It requires good judgement, an open mind, and of course humility/margin of safety.

 

To relate this to Apple...my reasoning was, "here we have the best electronic design company in the world selling for 10x earnings ex-cash. will consumer electronics grow? yes. will design be a huge factor? yes."

 

No matter what the product happens to be, Apple will make a well-designed version, work it into their brand and ecosystem, charge a premium price, and it will gain a following. The company has tremendous option value in that regard. In the meantime, they mint money with their iphones etc.

[tombgrt]

I have Merrill Edge for a broker and with it comes access to Morningstar's premium service. In their reports for stocks they give fair value using DCF. in the report is a chart of their estimate of fair value (at the time) and stock price over the past 2-3 years. Of course you'd have to agree with their fair value assessment for you to care.

 

I guess you gave to ask yourself how much do you agree with their assessment of fair value. If you truly believe that they are doing it right than you can give your money to them to manage and you would do great.

 

I think the OP was looking to compare the value of a company that is no longer with us, thus we can really appreciate its true fair value, against the fair value that the market estimated and compare over time.

 

 

Exactly.  Forums are full of people discussing tech companies saying "my estimate of intrinsic value is..." yet their projections only go out 5 or so years on a company selling products that might be obsolete in three years.  (Think Apple of the 80-90s, Blackberry of 2005, etc.)  Imagine valuing a long bond not knowing if you will get any of your principal back in 7, 8, 9 or more years. I think tech investing is fine but you have to shorten the expected lifespan up to next to nothing whereas the companies Buffett picks have higher probability of at least a 20+ year additional lifespan.  There must be a lot of unspoken thinking on Buffett's part in looking at companies earnings with a high propensity to regress to the mean if not beyond and protect invested capital for decades.  He's essentially trying to find the barrels of fish to shoot.  (IBM's transition is a neat case in point.)

 

Anyway, looking at defunct companies to understand how the market really performed at sensing "true" intrinsic value would be very enlightening. Where and why did it get it right and where did it get it wrong. Theory vs practice.  (Buffett's "How inflation swindles the equity investor" article touched on this issue in his discussion of the investment climate in the 1950s in a low BV environment.)

 

Cool discussion, I passed on Apple for the reasons you mention when it was really cheap ($450 or ~$65 split-adjusted). I'm not sure exactly how to get a better handle on fast product cycle companies (maybe just avoid them is the answer) but I've always thought that your thoughts are exactly what Buffett meant when he says he avoids tech companies. His IBM investment pretty much solidified this idea in my head that it's not technology companies themselves he avoids, it's fast product cycles where he can't figure out what they will even sell in 5 years. 10 years ago, Apple didn't even sell phones and now folks are trying to figure out how much they are going to invest in manufacturing cars. No matter what the gains in owning AAPL are, it's somewhat speculation in my mind since no one can explain where revenue will come from in 5 years (although iPhones are starting to represent are highly stable revenue/profit source for the foreseeable future).

 

I remember passing on Apple when it was in the $80s (~$8 split adjusted) back in 2006 and thinking it was overpriced. Yet I was buying Apple hardware like it was going out of style, should have looked at myself and friends rather than used those old dusty value metrics...would have been much richer.

 

It's likely you or your family/friends are buying a product right now from a company that in 5 or 10 years time will be much much bigger.

 

It just goes to show that even if you are intelligent and know about hindsight bias, silent evidence fallacy and so much more, you will easily fall victim to such thinking. My rule for these situations is simple (even when I know I really thought about buying something before it went up but didn't): If I didn't do it (or did it...) at the time, there was a good reason for it and my mind is just cherry picking the facts and memories that suit my safe and cozy mental models. Aka fooling myself. And even if I know and act on these revelations, I'm sure my brain is fucking it up for me through another route anyway. 

 

And hey, even if you did buy apple at $8, how likely was it that you would have held until now? I'd be extremely surprised if you didn't talk yourself out of the position ("locking in gains" right?) after a few short years. Maybe that eases some of the lost opportunity pain.. ;)

[Jurgis]

And hey, even if you did buy apple at $8, how likely was it that you would have held until now? I'd be extremely surprised if you didn't talk yourself out of the position ("locking in gains" right?) after a few short years. Maybe that eases some of the lost opportunity pain.. ;)

 

Yep, bought at $120 presplit, sold at $175 presplit IIRC. Does not ease the pain at all.  ::)

[KinAlberta]

I have Merrill Edge for a broker and with it comes access to Morningstar's premium service. In their reports for stocks they give fair value using DCF. in the report is a chart of their estimate of fair value (at the time) and stock price over the past 2-3 years. Of course you'd have to agree with their fair value assessment for you to care.

 

I guess you gave to ask yourself how much do you agree with their assessment of fair value. If you truly believe that they are doing it right than you can give your money to them to manage and you would do great.

 

I think the OP was looking to compare the value of a company that is no longer with us, thus we can really appreciate its true fair value, against the fair value that the market estimated and compare over time.

 

 

Exactly.  Forums are full of people discussing tech companies saying "my estimate of intrinsic value is..." yet their projections only go out 5 or so years on a company selling products that might be obsolete in three years.  (Think Apple of the 80-90s, Blackberry of 2005, etc.)  Imagine valuing a long bond not knowing if you will get any of your principal back in 7, 8, 9 or more years. I think tech investing is fine but you have to shorten the expected lifespan up to next to nothing whereas the companies Buffett picks have higher probability of at least a 20+ year additional lifespan.  There must be a lot of unspoken thinking on Buffett's part in looking at companies earnings with a high propensity to regress to the mean if not beyond and protect invested capital for decades.  He's essentially trying to find the barrels of fish to shoot.  (IBM's transition is a neat case in point.)

 

Anyway, looking at defunct companies to understand how the market really performed at sensing "true" intrinsic value would be very enlightening. Where and why did it get it right and where did it get it wrong. Theory vs practice.  (Buffett's "How inflation swindles the equity investor" article touched on this issue in his discussion of the investment climate in the 1950s in a low BV environment.)

 

Cool discussion, I passed on Apple for the reasons you mention when it was really cheap ($450 or ~$65 split-adjusted). I'm not sure exactly how to get a better handle on fast product cycle companies (maybe just avoid them is the answer) but I've always thought that your thoughts are exactly what Buffett meant when he says he avoids tech companies. His IBM investment pretty much solidified this idea in my head that it's not technology companies themselves he avoids, it's fast product cycles where he can't figure out what they will even sell in 5 years. 10 years ago, Apple didn't even sell phones and now folks are trying to figure out how much they are going to invest in manufacturing cars. No matter what the gains in owning AAPL are, it's somewhat speculation in my mind since no one can explain where revenue will come from in 5 years (although iPhones are starting to represent are highly stable revenue/profit source for the foreseeable future).

 

I remember passing on Apple when it was in the $80s (~$8 split adjusted) back in 2006 and thinking it was overpriced. Yet I was buying Apple hardware like it was going out of style, should have looked at myself and friends rather than used those old dusty value metrics...would have been much richer.

 

It's likely you or your family/friends are buying a product right now from a company that in 5 or 10 years time will be much much bigger.

 

It just goes to show that even if you are intelligent and know about hindsight bias, silent evidence fallacy and so much more, you will easily fall victim to such thinking. My rule for these situations is simple (even when I know I really thought about buying something before it went up but didn't): If I didn't do it (or did it...) at the time, there was a good reason for it and my mind is just cherry picking the facts and memories that suit my safe and cozy mental models. Aka fooling myself. And even if I know and act on these revelations, I'm sure my brain is fucking it up for me through another route anyway. 

 

And hey, even if you did buy apple at $8, how likely was it that you would have held until now? I'd be extremely surprised if you didn't talk yourself out of the position ("locking in gains" right?) after a few short years. Maybe that eases some of the lost opportunity pain.. ;)

 

Fast product obsolesence may be like regulatory risk and all the other downside risks Buffett tried to avoid.

[Phoenix01]

Know the industry (circle of competence). Identify the moat.  Determine the integrity and quality of the management.  After that is completed, you can determine the value of the future income stream.

 

Buy the stock at a discount to that value.  The less sure you are of the value, the greater your margin of safety should be.

 

Today you are bidding on stocks against others who are willing to take very little margins of error.  Either you need to be very sure or very patient.