You are absolutely correct but I do mean it when I say “price determines value”. Like you said, price determines the returns. That’s what investing is all about. I could be the owner of the best company in the world but it could be useless to me if I overpay too much.

But by focusing too much on value, people become emotional, overpay and never sell. Sure they hold great businesses but until it makes a ROI, it’s just another value trap.

“The lower price you pay the more value you get?” True to some degree but only if there is an underlying operating business. I didn’t bother elaborating but I would much rather buy a viable business with no moat at liquidation prices than a fair price for a great business. Just all depends on your strategy. So I’m completely the opposite of what Buffett preaches in this one.

Hope you’re fine. Congrats, nice work with the site.

I consider myself to be a rookie value investor and enjoy sites that are set to educate investors and promote intelligent investing. Thanks for your time and ideas.

If you don’t mind, however I couldn’t help but notice one phrase you wrote and just not sure if it’s really what you meant. Quote: “Price is what you pay, value is what you get. In other words, price determines value” – Price determines value? Are you talking about investment value here or value of a business? If you think about it, your phrase sounds like – as long as something is cheap, or even dirt-cheap it has a lot of value. So the lower price you pay the more value you get? Nah.. The pile labeled “value traps” is just too big on my desk of research ideas.

I think unless you’re a higly skilled seasoned value investor, cigar butts are better left alone. On the other hand, high quality businesses bought at attractive prices (even if not dirt-cheap by conventional measures – see Warren Buffett) can offer an investor tremendous returns. So I’d like to correct your statement as follows:

Price in most cases determines the return you can reasonably expect your investment to deliver. Value of an ongoing enterprise on the other hand is determined by the discounted earnings (cash flows) and is only worth considering by a rational investor when these earnings are protected by a sustainable competitive advantage (aka moat with alligators). Otherwise, as honey draws bees, high returns on capital that your business delivers will soon attract loads of competitors, which will result in shrinking profitablity and lower earnings power for the business under consideration. So, I would say that business structure/nature coupled with an excellent management is what determines the value of the business and definetely not price the market quotes.

According to Mary Buffett, Warren uses a 10% discount rate and he changes it according to various factors. I haven’t heard of him using a 6% discount rate since the 1950’s and parts of the 60’s.

Ben Graham used the PE ratio as a valid tool. The PE ratio is very effective if it is an ‘analyzed’ PE ratio rather than just taking the accountants word for it when they state it on the books (GAAP).
.-= Jim´s last blog ..Delusions of Grandeur in regards to the Covestor Investment Return =-.

1. The important part is to value the business in a normal scenario. Not based on a recession or even when the recession is booming. But rather in a flat, no growth scenario. So I still do weigh importance on 5yr and 10yr data as it is a good indication. Then just normalize it to ignore down cycles.

2. That’s actually a very good method of valuing REITs. I’m not an expert on real estate myself, but I do know that each property is worth a different amount if you come to a value for each one for a normal environment rather than a recessionary valuation and the assets far outweigh the debt, then you’ve got a winner I believe. I’ve known about BEE for a while as well.

You could also try going through Ackman’s GGWPQ presentations and value BEE with the same methods.

I know an investor who owns BEE as well.
http://slinj.wordpress.com/

However, I would like to bring up a stock I am looking at which I can’t seem to value with any of the above… so your input is greatly appreciated.

That is of properties which produce income. I have been looking at BEE for some time and like many other stocks after the debacle, all parameters are totally skewed. About a month ago, this company sold one of their hotels (Le Parc in paris) and I thought I could use some current hard facts to try to assess value. Given that its EBITDA for the full year can also be estimated with some precision I obtained its capitalization rate using the formula {ebitda (noi) / market value} and then extrapolated such cap rate to all hotels to which I had ebitda information that I could run for the full year.

Thus, I arrived to a fair valuation for each hotel applying the cap rate information in reverse. Then, I substracted the debt owed for each hotel and obtained a measure of equity for each. After adding all equity, I added to this balance cash on balance sheet plus cash I know will be coming in next quarter and then substracted other debt (outstanding notes and credit facility). Finally, I substracted the part corresponding to the preferred stock (currently trading at 30% par value) and reached a specified amount to be applied to the common.

I am aware this sounds like a back of the envelope calculation but it is the only way I could obtain a somewhat precise picture. In fact, my conclusion is that the stock is probably between somewhat undervalued to very undervalued, depending on how optimistic one is. So my questions are:

1. In times like present, where many stocks (and their parameters like revenues, profits, etc.) have collapsed and 5 years or 10 years runs would not tell the whole picture, how much weight should we give to the metrics/ratios you have listed.

2. What is your opinion on the above evaluation for BEE? Obviously, the hotels that didn’t generate enough net operating income to cover debts in relation to the specified cap rate never made it to the equity part and were not included in the calculation (Bee had 2 hotels as such).

Hopefully, I will learn something else. Merry Christmas to everyone.

@ Fabrice,
Yes it does depend on what data you use. MRQ may be a short term view but I believe Piotroski F score is a lot like EPV in how it is supposed to measure the “now” rather than the future.

The members.cox.net site is wrong on many accounts I believe.

@ Saji,
It really is hard to say. People will lean more towards different things and companies are diverse and dynamic. You just have to know which ones to use for which types of companies just like how you have to know which valuation method to use for a specific situation.

@ Tyler,
I didn’t mention P/E. Which one are you referring to?

-Saji

Main pb is that ratios change a lot according to different Websites. Sometimes it is because of TTM, MRQ, etc, sometimes it is because of wrong data?

Take Piotroski F-Score for Microsoft:

1/9 with this source:
http://members.cox.net/econisvoodoo/piotroski/piotroski.SP500.html

9/9 with this source:
http://seekingalpha.com/article/141340-piotroski-formula-yields-14-promising-investments

5/9 with SMF Tool.