The ideal method is to value all the underlying businesses separately (In whichever way you want to) and simply add them up. In my opinion, there should be no ‘discount’ for trading companies. I understand that the market usually disagrees with this notion.
But think about it. If you were able to buy a controlling stake in the company, you could be an active shareholders and force the management to either pay up or liquidate completely. Coming to more realistic terms, most of us probably won’t have a reasonable enough stake to trigger such an action. But it is logically impossible that the same shareholder can, at the same time, value a company at two very different price points.
In the end, I think only two conclusions and one exception can be drawn:
- If you trust in the management to pay regular dividends and liquidate unused assets from time to time and if you find the holding company to be undervalued, buy it.
- If you have doubts regarding what the management will do with the underlying businesses / investments / assets, don’t invest in the holding company. It is not a question of whether you should make a ‘discount’ and purchase it at a lower price point. This is a question of your competency in the business and the management. You are not competent enough to judge what the business / management will do. So, don’t invest in the company. That’s it.
- If a holding company is trading at ridiculously cheap valuations (Ex: B&A Limited), then you can probably do a Cigar Butt kind of trade without taking on a lot of risk. The inherent crazy levels of cheapness should make up for any risk related to low dividend payment or liquidation issues.
Disc: I am invested in B&A Limited to a tiny extent of my PF.