10 January 2014
Motivation
The motivation of estimating the intrinsic value of a company or
business is to provide a benchmark and reliable information for us
to make a better investing decision (Buy or Sell or Hold).
Example of valuation
The reliable information that we are going to compute is the
intrinsic value of the company or business. This is slightly similar to a
situation for us to figure out whether the price of "Nasi Lemak" is
reasonable, cheap or expensive.
That is, we need to quantitatively and qualitatively compare the
price of a "Nasi Lemak" with others, and also other related products
such as "Nasi Goreng", "Mee Goreng", and "Fast food".
In other words, the more information we have, the better the
estimation we will make, and also the more complex the estimation is.
Investment Objective
Just like doing anything else, we need a clear objective.
Otherwise, we will easily be affected by others and may do something
that never lead us to the place we want to reach in the end of our life.
My Investment Objective is very clear, that is, maintain or even
improve the purchasing power of my hard-earned money. To reach this
objective, all I need to do is to maintain a return of more than six
percent annually.
Limitation of Stock Market Investment
Unlike doing our own business, one limitation of stock market
investment is we do not have the right to involve in the business we
have invested.
Therefore, it is very important to invest in a business that
managed by a team who takes care the interests of all shareholders. One
solution to minimise this limitation is to only invest in a business
with a good track records based on what they have done in the last few
years (the longer the better).
Dividend amount is another way to evaluate whether the management
team is willingly to share the profits. Besides, I think we need to
evaluate whether the management team is capable of using the money or
profit wisely.
Personally, I like to invest businesses with good dividend payout.
Nonetheless, I also invest in businesses that used their money wisely
for greater profit return in the future if opportunity is available. In
short, we need to know WHY we buy the shares of this business, for
dividend return, future profits or simply speculation.
One failure strategy is to use the speculation strategy to buy a
good business; and to use long term strategy to buy a bad business.
That's all for today. After having a short introduction about the
motivation, example of valuation, investment objective, and the
limitation of stock market investment, I will try my best to further
explain the way to estimate the intrinsic value of a company or business
from other perspectives.
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Written by: Xaivier Chia
P/S: The above sharing is solely based on personal insight and information that believed to be reliable. Your valuable feedback are very welcome.
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