Ayush
Thanks for taking the trouble to reply.
I have been struggling to make sense of valuation. I have a few thoughts on this so please allow me to give my two pennies worth of opinions. I am normally hesitant to comment as I feel this forum is way above my abilities, with a quality of analysis that I only aspire. So I rather read and learn. I have learnt a lot and perhaps replies to this post will help my search for enlightenment.
My experience tells me that a portfolio suffers greatest damage when bought at too high a price. Or more specifically, as someone said, to buy poor quality stocks in a bull market. Those who buy ‘cats and dogs’ that rise in value during bull markets are left with junk when the bears rule.
By definition therefore, value first has to be quantified, with an approximate number, prior to any transaction decision. Margin of Safety, Deep Value investing etc are concepts that reflect this belief. Without quantifying value we are paying ‘lip service’ to the underlying principles.
Whilst reading around the subject I find that everyone talks of value. Switch on the TV here and the gurus refer to it. Often enough I hear that them say that ‘shares are cheap’ or that shares are at ‘mouth watering valuations’. A relatively cheap share is what everyone wants to buy. Rarely do they say what makes it cheap. Maybe these are trade secrets.
Yet if one digs deep enough there are pointers to how value decisions are made. In my recent discovery of the website “manual of ideas” (thanks to valuepickr) I find some, not all, use screeners to identify stocks according to a chosen criteria, and then determine the price/value matrix prior to commitment. I have yet to read the book so can’t comment on their valuation methodologies but there are pointers that they do.
Elsewhere some analysts refer to various relative valuation measures like PE, P/bv P/s multiples etc. In other cases, others like the Relaxo analysis refer to Buffet’s reverse dcf to value implicit growth. Still others refer to Damodaran or Copeland etc try the dividend discount model or dcf or whatever.
But the question is what works and when? (P/b for finance, nbfc etc) Is there a workable methodology? This is an answer I am looking for, from the successful investor, the horse’s mouth so to say. Not the text book or the theory.
In light of the above my point is : at first instance for you is it just low PE or what different measure, as appropriate to each industry, is used?
Ayush, the one takeaway I get from your reply to my query is to first find a metric that suggests cheapness. Eg low PE. Follow this up with identifying, qualitatively or quantitatively, what makes it so. Much like Peter Lynch’s suggestion to use your preference for a brand of doughnuts as a starting point for further reasearch.
Many thanks & regards again from,
Kumar