OK, perhaps it’s time I jump on the blind stock valuation bandwagon – there’s been some good posts/responses out there recently in that vein. I’ve noticed some issues, though, with this challenge approach: First, a blind stock valuation where nobody turns out to own the stock seems like a v sterile exercise to me. Let me just tell you now: I do own this stock, it’s v bloody interesting, and I promise I’ll be telling you more about it soon..!
So please make sure to post/email your valuation/comments asap – all great encouragement for me to get on with a write-up!
Second, reading some of the challenges, I feel like there’s been some (understandable) confusion, on all sides. Some readers state, for example, a stock’s worth $20 but they wouldn’t pay more than $10 for it. Others peg the value of another stock at $40, but highlight the market would probably pay $80. Others give a range of values. And so on… All these seem a little off-base to me – particularly in the context of a blind stock valuation.
We’re not talking risk management, or margin of safety, here – it’s not about what you’re comfortable paying, or the profit you hope to make, it’s simply about valuation. Commenting on intrinsic value vs. market valuation/trends generally isn’t too insightful either, based on the level of data/detail provided (originally) in a challenge. A range of values seems pointless also, a mid-point or an average might as well be your valuation estimate in that instance. Of course, the challenger also has to be v precise in stating the specific objective of the challenge. Mine is simply this – please provide:
- Price: A single valuation estimate in GBP millions (to one or more places of decimal!).
- Process: Some explanation & commentary re your Price would be greatly appreciated. It can be as long or short as you wish – no need to kill yourself though, considering the level of info. that I’m providing.
Let me be even clearer on Price: Going back to my last post, think of this as a rather different game of chicken. Picture yourself squaring up to that little 6 year-old gypsy kid over a chicken. You might think you own the chicken, but for your new light-fingered friend, ownership’s a rather…slippery concept! He’s also v flexible in his business dealings – as far as he’s concerned if you’re not selling, well then you must be buying! So he’s just waiting for you to name a price – then he’ll happily buy or sell the chicken at the drop of a hat, all to take maximum advantage of you. So, what price would you quote him?! That’s the price we’re looking for here.
Third, I’ll try resist setting this up as a series. I’m not convinced blind stock valuations necessarily offer the best insight into valuation techniques & approaches. What do you think? As I’ve said, personally I’ve always thought the most instructive (and comprehensive, and rigorous) write-ups come from bloggers who are actually writing about their key stock holdings. Particularly when they disclose the size of their portfolio stake (in % terms). Of course, these are the stocks they write about with the most conviction… But sometimes they can be the stocks & valuations bloggers express the most anxiety & uncertainty (or even blindness) about, and that can be v instructive too when it’s (un)consciously on display...
Then again, these challenges are an enjoyable bloggers & readers interaction, and it’s always fun to guess at/see revealed market value vs. intrinsic value estimates. And, as some bloggers have highlighted, they also serve up an immensely valuable lesson/reminder for all investors in their daily investment process:
All your stock valuations should be blind stock valuations!
I kind of fell into this habit accidentally over the years, and recognizing the benefits, I now try to do it v deliberately. Whenever you encounter a new stock (or even an old friend, it helps for them too), ignore the share price & the market capitalization, and focus on coming up with your blind stock valuation! Here’s how I do it:
- Go straight to the annual report…do not pass Go, do not collect 200 pounds.
- Go straight to the accounts, and only the accounts. And don’t forget the bloody Cashflow Statement!
- Still interested? Go back and read a few more sets of accounts, and nothing more.
- Still interested? Now go back and read all the accompanying notes to the accounts & the auditors’ reports.
- Still interested?! OK, only now should you go back and read the first half/management & directors’ section of each annual report!
There’s a method to my madness here. Starting out with the accounts really forces/helps you to think about a company as a business, rather than just a share price. As Warren Buffett (and many other great investors) point out, when you take this approach to investing, good things tend to happen. Traders always think about share prices, investors should always think about businesses…
This approach tends to insulate you from management’s deceptively rosy view of the business, and perhaps some of your own preconceptions/biases. There’s also a lot less scope for ‘adjustments‘ on the face of the financial statements and, for any that do show up, you’ve the luxury of actually deciding whether to include or exclude them for your own analysis. Exceptional charges are the obvious cardinal offence these days, of course. Scanning some years of accounts makes you aware of how frequently (every year?!) these actually show up. Depending on management, or the industry, exceptional charges often seem to be just another regular cost of doing business, and should be included in your valuation analysis. Cross-checking the P&L against Cashflow is another great way of determining underlying profitability.
I believe this also challenges you to utilize a greater selection of valuation techniques, and will force you to come up with a more holistic valuation, particularly one that incorporates any business specific/financial risks. By comparison, reading the first little section of the earnings release or annual report is an invitation to disaster. It’s all too tempting to just home in on that nice clean adjusted eps figure (or whatever else management thinks will make them look good). Then it’s a quick hop & a skip to checking the share price, and seeing how cheap is the P/E ratio… Sure, I often use the P/E ratio as one component of my valuation analysis, but frankly it’s the most abused, misused & downright dangerous ratio out there! Apart from dividend yield, of course ;-)
In fact, I think I’d describe my approach as blind stock valuation squared..! Read some sets of accounts, form an opinion & valuation of the company, and then compare with management’s often v different figures & commentary. Amazed? Then compare with the actual market capitalization. Amazed again?! This is enormously instructive, and quite addictive – it’s always interesting to circle back after and compare the accounts vs. management vs. the market and think about what you got right, and what you might have got wrong. This is one of the best investing feedback loops I can think of (well, actual portfolio losses should be even more instructive!).
OK, on to the Challenge:
The info. I’m providing is fairly limited, but should be enough to allow you a decent stab at valuation. There’s a twist, of course, which I’ll write about more next time (to make another point), and I think makes it near-impossible to identify the actual stock/company involved. But I don’t want this to be an abstract exercise – the data provided (note Year 0 is the most recent of the financial years provided) is definitely v relevant to the current valuation of this company:
So, what’s your price, boss – and how did you get there?!
Please just comment on the post, or email me at email@example.com if you prefer, and I’ll follow up asap when we hopefully have some decent feedback. Please pass along, blog or tweet about this challenge too, thanks!