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How do I value a share?

Investment discussion for beginners. Why you should invest your money, get help getting started
Dod101
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Re: How do I value a share?

#473640

Postby Dod101 » January 16th, 2022, 9:56 pm

Lootman wrote:
scrumpyjack wrote:The trouble is that the key issue in valuing a share is your forecast of the company's future (for many years!). Obviously the past is of interest and the state of their balance sheet may indicate if they can last til the future arrives. The market generally is looking at the future, not the past.

So get a really good crystal ball :D

SalvorHardin wrote:What's the outlook for the company? Can I credibly visualise what the company is likely to look like in ten years time?

I avoid using complicated formulas. Valuing shares is as much an art as a science; too much maths creates a false sense of certainty in the valuation produced. I did enough modern portfolio theory to pass an exam but I've never used it.

I think there is a lot of truth in both those statements. And to express it a different way, you do not necessarily have to be able to value a share at all in order to be a successful investor. You simply need to develop a sense of where the business is heading, whereas fundamental analysis only really tells you where it has been.

Depending on the skills you have, and the skills you lack, it can be futile to spend hours poring over balance sheets. It's also rather boring. I would much rather invest using qualitative factors than quantitative factors, and use technical analysis over fundamental analysis. Not that I am saying it is better; only that it suits me better. And in fact I would rather look at price charts than company accounts.

I feel sure that there are some good answers in this topic about how to value a share, and that was the question being asked. But there are ways to invest that don't involve doing that at all. So to my mind the real question is one about your own skills and nature, and whether you should even try to value shares.


I must say I like reading company reports not so much for all the numbers but they can tell you a lot about the culture and I think that is vital. In fact i do not really set out to try to value a share but look at all the 'soft' factors. That kept me clear of Carillion and RBS, because the culture for both was just awful. No need even to attempt to do any valuation. I think that is more or less what Lootman is saying as well. So you can 'value' a share without any numbers involved.

Dod

GoSeigen
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Re: How do I value a share?

#473664

Postby GoSeigen » January 17th, 2022, 6:42 am

As others have said, valuing shares and investing on that basis is not the only way. Personally I don't trust any valuation more than a couple of years ahead because there are so many unpredictable variables that can make a huge difference to the valuation. I much prefer to invest based on market action (the market throws up bargains almost constantly), cyclicality (be cautious when times are good, bullish when times are bad), macro issues (focus on the important variables rather than assuming them and working with the minutiae), special situations/sector problems (sectors or individual companies encounter difficult times and you can find value where others can't be bothered).

I take fixed interest very seriously because the risk is far lower and it is far more predictable. Also, I am shooting for 3% net net net so I don't need 10-baggers on a regular basis to make up for the disasters in a more risky strategy. That said, my "cautious" approach has thrown up many multibaggers already, mostly in bonds, so I can't complain, and my net net net has turned out closer to 12% (touch wood).

Behind all the above though is a sharp appreciation of how to value both bonds and wider businesses: it's no good buying something which is patently overvalued by the market.

GS

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Re: How do I value a share?

#473680

Postby JohnW » January 17th, 2022, 7:53 am

'At a 1906 country fair in Plymouth, 800 people participated in a contest to estimate the weight of a slaughtered and dressed ox. Statistician Francis Galton observed that the median guess, 1207 pounds, was accurate within 1% of the true weight of 1198 pounds.'
https://en.wikipedia.org/wiki/Wisdom_of_the_crowd
Isn't this the most suitable way to value a share?
On the other hand we all have our beliefs, attitudes and values, so that you might think a business that makes wifi devices is messing with people's brains via the electromagnetic radiation whereas the rest of us don't care. In which case it would be helpful for you to understand in depth the in's and out's of valuing a share so that you can assign your values to the EMR brain effect.
But putting that aside, is there any point seeking to understand how to value a share if you can't do it as well as the most capable people on the planet, when you've got Galton to fall back on?

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Re: How do I value a share?

#473682

Postby Mike4 » January 17th, 2022, 8:30 am

JohnW wrote:'At a 1906 country fair in Plymouth, 800 people participated in a contest to estimate the weight of a slaughtered and dressed ox. Statistician Francis Galton observed that the median guess, 1207 pounds, was accurate within 1% of the true weight of 1198 pounds.'
https://en.wikipedia.org/wiki/Wisdom_of_the_crowd
Isn't this the most suitable way to value a share?
On the other hand we all have our beliefs, attitudes and values, so that you might think a business that makes wifi devices is messing with people's brains via the electromagnetic radiation whereas the rest of us don't care. In which case it would be helpful for you to understand in depth the in's and out's of valuing a share so that you can assign your values to the EMR brain effect.
But putting that aside, is there any point seeking to understand how to value a share if you can't do it as well as the most capable people on the planet, when you've got Galton to fall back on?


A very interesting point, thank you. I'm not so sure I can find 800 people to personally value of a share so I can use their median...

If I understand you correctly, you are suggesting the median value assigned to a share by the imaginary 800 people would be the same to within 1% as the SP on that day. I'm not entirely convinced that would be true. But then I only have an 'O' Level in statistics and always found it difficult to grasp the concepts.

I guess the point is, we make money from the SP rising when our own insight into the prospects for a company turns out to be better than that of the masses. Or we just get lucky.

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Re: How do I value a share?

#473688

Postby dealtn » January 17th, 2022, 8:44 am

JohnW wrote:'
But putting that aside, is there any point seeking to understand how to value a share if you can't do it as well as the most capable people on the planet, when you've got Galton to fall back on?


I don't need to be the best. I have no intention of trying to become the best person on the planet. If I can get a return of 7% real, when the market is getting a 5% real, and I have a 50 year horizon in front of me, that is a huge win over the market even if it turns out I have materially underperformed the most capable person on the planet.

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Re: How do I value a share?

#473704

Postby JohnW » January 17th, 2022, 9:41 am

I'm not so sure I can find 800 people to personally value of a share so I can use their median...

I don't think you need to. The market has found them for you. 800, no, more like 8000 people trade the shares you're interested in every day. They have done Galton's calculation for you/him.
If I understand you correctly, you are suggesting the median value assigned to a share by the imaginary 800 people would be the same to within 1% as the SP on that day.

Well, I did draw you to that conclusion, but Galton's example alone isn't enough for that conclusion I would suggest. But there are other examples where this has been done. But I'm not sure there's any one actual value for a share (at a particular time), because we all assign different 'values' to whether wifi EMR affects the brain (for example); so that your legitimate value for that share might be different from mine. But what matters with investing is the market value since that's the price we buy or sell at.
I guess the point is, we make money from the SP rising when our own insight into the prospects for a company turns out to be better than that of the masses.

I don't think we even need that. We only need the price to go up between buying and selling, which long term as a group they have and continue to. You don't need any insight into prospects, you just buy the whole market.
Lastly, getting 7% (/year, presumably) return while the market gets 5% (/year presumably) over 50 years would put you in a league of your own. 2% (not per year, but over 50 years) I wouldn't fuss over.

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Re: How do I value a share?

#473712

Postby dealtn » January 17th, 2022, 9:58 am

JohnW wrote:Lastly, getting 7% (/year, presumably) return while the market gets 5% (/year presumably) over 50 years would put you in a league of your own. 2% (not per year, but over 50 years) I wouldn't fuss over.


20 years in and I'm very happy. I am by no means in a league of my own.

I am confused, are you now conceding there actually is a potential point in seeking to understand how to value a share, or is your view still

But putting that aside, is there any point seeking to understand how to value a share if you can't do it as well as the most capable people on the planet
?

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Re: How do I value a share?

#473717

Postby GoSeigen » January 17th, 2022, 10:09 am

JohnW wrote:
I'm not so sure I can find 800 people to personally value of a share so I can use their median...

I don't think you need to. The market has found them for you. 800, no, more like 8000 people trade the shares you're interested in every day. They have done Galton's calculation for you/him.


No they haven't. They've read your posts and those of the passive investing brigade and all bought the share at whatever price it is offered at because "wisdom of crowds".

GS

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Re: How do I value a share?

#473773

Postby BT63 » January 17th, 2022, 12:33 pm

scrumpyjack wrote:The trouble is that the key issue in valuing a share is your forecast of the company's future (for many years!). Obviously the past is of interest and the state of their balance sheet may indicate if they can last til the future arrives. The market generally is looking at the future, not the past.

So get a really good crystal ball :D


Some companies are easier to estimate than others, such as companies with less volatile earnings.
Take a ULVR-ish or DGE-ish type of company. They'll probably 'grow' in line with GDP+inflation over the long term, plus pay GDP+inflation linked dividend along the way.
Over the very long term, ULVR-ish companies might be expected to show ~6% earning growth (which the share price would erratically track over the long term, subject to ebbing and flowing of market fashion) plus ~3% dividend yield. Total return ~9% p.a.

Over the long term, such companies tend to sit on a P/E in the very high teens or low 20s. If an investor can buy below that, they'll see a small additional uplift in their long-term returns due to the likelihood of valuation mean reversion.

Or take a utility-type company whose earnings and share price will probably merely track inflation over the long term, plus pay a dividend. So probably 3% earnings growth and 4% dividend yield. Total return ~7% p.a.

But then take a gold mining company. Their cost of production might be $1500 per ounce. The current gold price per ounce is $1800. They make $300/oz profit.
If the gold price drops 17% to $1500 they're unprofitable. If it stays below $1500 for a few years they're out of business unless they have hedged some of their production, or unless they have some higher-extraction-cost mines which they can close to reduce their average cost per ounce.
If the gold price rises 17% to $2100 their profits have doubled and investors might start receiving some very nice special dividends.

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Re: How do I value a share?

#473967

Postby JohnW » January 18th, 2022, 1:07 am

(traders haven't accurately priced the share because)...the passive investing brigade .. all bought the share at whatever price it is offered at because "wisdom of crowds".

Guilty as charged. But that’s where the active brigade can strike a blow, by seeing the over-priced stock and selling it down to its correct level. And they’ve got plenty of choice for selling over-priced stocks because the passive brigade have pushed not one but every stock in the index into ‘poor value’ territory since they never buy just one but all stocks at the same time. But now the active brigade have to decide where to invest that money from selling stocks; maybe bonds or cash.

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Re: How do I value a share?

#474325

Postby Charlottesquare » January 19th, 2022, 9:32 am

Mike4 wrote:Thanks both of you.

My degree of interest in corporate finance theory is probably deeper than yer average retail investor, but not so deep that I want to take a degree in it. I guess my level would be as AiY guesses, and I want to understand the principles but not roll my sleeves up and actually do it on a daily basis.

For example I taught myself double entry book keeping but I switched to using a PC as soon as they came along. And I learned properly about house conveyancing from books to the point I could probably do my own (if no mortgage involved) but I still use a solicitor.

Similarly with corporate finance. I probable actually need to choose a book about it rather than anything on line. I'll read it, try to understand it then probably carry on picking shares by gut feeling!


I have never gone past Samuels and Wilkes (now Samuels, Wilkes, Bradshaw) re Business Finance. It covers various facets including Gordon Model , discounting, NPV and IRRs. It will not tell you how to value a share, and is somewhat out of date, but it will equip you with some of the tools you can use going forward.

Basics do not change, merely fads and fashions and if you can pick up cheap, like here, it may be worth a read.

https://www.amazon.co.uk/Management-Com ... C75&sr=1-1

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Re: How do I value a share?

#475036

Postby ChrisNix » January 21st, 2022, 12:45 pm

GoSeigen wrote:vand has hinted at this already, but learn about valuing bonds first, then move on to companies/shares. Bonds are easy, and a company is very much like a bond but with uncertain (variable) cashflows so the skills will be transferable.


GS


Very sage from GS.

There are most definitely a number of companies whose businesses can be assessed well using bond valuation principles, in particular DCF.

The good news is that in the current market the tendency is for them to be cheap.

The bad news is that such undervaluation has if anything been worsening.

Great for the coffee tin style of investing, less so for trading!


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