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kanaka_basi
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Quote kanaka_basi Replybullet Posted: 20/Feb/2009 at 6:52pm
Originally posted by 9StockPortfolio

 
Discount rate is what your Internal Rate of Return. Lesser the discount rate higher the Intrinsic value.

For Example
My calculation of Thermax with 8.5% growth rate & 12.5% Discount rate for 10 years, that gives me Intrinsic value Rs 320. So i will buy it at 50% margin Rs 160.

But if you assume growth rate 30%, Discount rate of 6.75% then it would give me horrible intrinsic value of Rs 1600, means i should buy it at 800. Since CMP is much lower than 800, i will definitely buy Thermax. Which i think is not correct. I always remain conservative, try to bring down bargain price so that i would get good company at lowest possible value.

Some of my calculation about L&T gives me buy price of 350, Asian paints 285, RIL 400 & so on.. so i will wait for those prices Smile

 
I use the DCF for 5 years... the worst case scenario that the company stops growing its EPS in 5 years...
 
The discount rate which i use is the t-bill rate (the least riskiest that i'd lose my capital amount). My understanding of the discount rate is that its my opportunity cost of not investing in T-bill (or RBI Bond)...
 
I use a confidence measure to adjust the fact that it might not be possible for the company to grow at the same growth rate for the next 5 years...
 
Generally i use the confidence measure as 50%.. that the company would be able to meet its growth rates...
 
The max growth rate i use is 20%, definitely not 30% and not for 10 years....
 
 


Edited by kanaka_basi - 20/Feb/2009 at 7:04pm
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Quote kanaka_basi Replybullet Posted: 20/Feb/2009 at 7:02pm
Originally posted by kannanravi1

 
Hi Srini,
        Discount rate is typically what you think you should earn for taking the risk of owning stocks. Typically many fund managers add a risk premium over the treasury bond rates (treasury rates are thought to be zero risk). Eg: If treasury rates are 5%, some may think that 10% should be the risk adjusted rate. Buffett always goes by the treasury rates because he believes that his picks have zero risk! So, I guess one has to find his own comfortable rate.
 
Kannan
 
PS: Any suggestions about how wrong/ right this method is??
 
Hi Kannan,
 
I saw this link http://www.moneychimp.com/articles/valuation/buffett_calc.htm which uses the discount rate as an opportunity cost of not investing in the least riskiest of asset classes (treasuries).
 
I thought that the expected confidence percentage (or probability that the earnings growth would be met) and the fact that my opportunity cost would be the treasury rate gave me the worst case scenario in trying to find the intrinsic value of the stock... and also the assumption that the compnay would grow only 5 years into the future...
 
Your opinions??
 
 
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Quote kanaka_basi Replybullet Posted: 20/Feb/2009 at 7:13pm
 
By Risk free rate, I meant no risk of default, no chance of my capital being wiped out (a possibility with stocks)... which is ideally (or theoretically) the treasury rate...
 
 
If inflation today is 13% and an investment *promises* you 20% that does not mean the 7% above inflation rate is risk free... it means the entire 20% is risky.. Unless, of course, the investment is in TIPS...if TIPS did exist in India (iam not sure if it does or not) , I'd use that rate as the discount rate...
 
According to this article http://www.marketoracle.co.uk/index.php?name=News&file=article&sid=4200 , even TIPS lost the battle against inflation...
 
Looks like Inflation can't be beaten.. live with it...
 


Edited by kanaka_basi - 20/Feb/2009 at 1:26am
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Quote kannanravi1 Replybullet Posted: 22/Feb/2009 at 9:31pm
Originally posted by kanaka_basi

Originally posted by kannanravi1

 
Hi Srini,
        Discount rate is typically what you think you should earn for taking the risk of owning stocks. Typically many fund managers add a risk premium over the treasury bond rates (treasury rates are thought to be zero risk). Eg: If treasury rates are 5%, some may think that 10% should be the risk adjusted rate. Buffett always goes by the treasury rates because he believes that his picks have zero risk! So, I guess one has to find his own comfortable rate.
 
Kannan
 
PS: Any suggestions about how wrong/ right this method is??
 
Hi Kannan,
 
I saw this link http://www.moneychimp.com/articles/valuation/buffett_calc.htm which uses the discount rate as an opportunity cost of not investing in the least riskiest of asset classes (treasuries).
 
I thought that the expected confidence percentage (or probability that the earnings growth would be met) and the fact that my opportunity cost would be the treasury rate gave me the worst case scenario in trying to find the intrinsic value of the stock... and also the assumption that the compnay would grow only 5 years into the future...
 
Your opinions??
 
 
Hi,
    I too use the very same link for my DCF calcs!! Good to see I am not alone! I typically use a confidence margin ranging from 50% to 75% (for companies with extremely strong moat I use 75%). I use the opportunity cost as the treasury rate (I don't track the rates religiously but use 6 to 8%). I also predict growth only for 5 years and love to get stocks with no growth priced in. Even if I assume growth I try to keep at or below the GDP growth rates. Don't know if this gives me worst case scenarios but hopefully I am being conservative enough so that I have cushions for any mistakes in my valuation. Also personally I think that the best way to be conservative and risk-free is through buying companies with significant moats. This is a qualitative factor though unfortunately. Buffett once stated that he uses risk-free treasury rates because he believes that the companies he buys in are as stable and risk free as a treasury bill!!
kannan
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Quote kanaka_basi Replybullet Posted: 22/Feb/2009 at 12:38pm
 
I hope we are not wrong Smile
 
I think people look at ROCE and decide if the moat is sustainable etc, so that does mean it is quantifiable, right? Although assessing the quality of management etc makes it a lot subjective
 
 
<kannan>
I also predict growth only for 5 years and love to get stocks with no growth priced in.
</kannan>
 
What did you mean by that?
 
<kannan>
Buffett once stated that he uses risk-free treasury rates because he believes that the companies he buys in are as stable and risk free as a treasury bill!!
</kannan>
 
Oh, was that the reason of using the discounting rate as a T-bill rate? If yes, then i think I have totally misunderstood him.
 
My logic of using that T-bill rate was as an opportunity cost - of not investing in non-risky (no capital loss) T-bill ...
 


Edited by kanaka_basi - 22/Feb/2009 at 1:38am
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Quote 9StockPortfolio Replybullet Posted: 24/Feb/2009 at 1:00pm
Originally posted by kanaka_basi

 
I hope we are not wrong Smile
 
I think people look at ROCE and decide if the moat is sustainable etc, so that does mean it is quantifiable, right? Although assessing the quality of management etc makes it a lot subjective
 
 
<kannan>
I also predict growth only for 5 years and love to get stocks with no growth priced in.
</kannan>
 
What did you mean by that?
 
<kannan>
Buffett once stated that he uses risk-free treasury rates because he believes that the companies he buys in are as stable and risk free as a treasury bill!!
</kannan>
 
Oh, was that the reason of using the discounting rate as a T-bill rate? If yes, then i think I have totally misunderstood him.
 
My logic of using that T-bill rate was as an opportunity cost - of not investing in non-risky (no capital loss) T-bill ...
 

Nobody is wrong in the market. No two people will quote exact same intrinsic value. My experience of having 10 year DCF model (first 7 years with 10% growth, rest 3 with 5%, and 0% thereafter) with 12.5% discount rate has helped me to fetch good companies at cheap rates. I have not repented for buying at high.

I believe we all are following our own investment model & plan.
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Quote 9StockPortfolio Replybullet Posted: 05/Mar/2009 at 2:19pm
Originally posted by vijayM

9STOCK JI,
 
what is comfort buying level for HDFC bank? Give details of calculations.
 
vijayM


Vijay M

Hope you are accumulating HDFC Bank's shares. Also you might be interested in L&T around 450.

Do you think Price is following the value? or effect of overall slowdown?
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Quote Hitesh Shah Replybullet Posted: 05/Mar/2009 at 2:29pm
This is from the Man's latest newsletter:

INTRINSIC VALUE

Now let’s focus on a term that I mentioned earlier and that you will encounter in future annual reports.

Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover—and this would apply even to Charlie and me—will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value.

What our annual reports do supply, though, are the facts that we ourselves use to calculate this value. Meanwhile, we regularly report our per-share book value, an easily calculable number, though one of limited use. The limitations do not arise from our holdings of marketable securities, which are carried on our books at their current prices. Rather the inadequacies of book value have to do with the companies we control, whose values as stated on our books may be far different from their intrinsic values.

The disparity can go in either direction. For example, in 1964 we could state with certitude that Berkshire’s per-share book value was $19.46. However, that figure considerably overstated the company’s intrinsic value, since all of the company’s resources were tied up in a sub-profitable textile business. Our textile assets had neither going-concern nor liquidation values equal to their carrying values. Today, however, Berkshire’s situation is reversed: Now, our book value far understates Berkshire’s intrinsic value, a point true because many of the businesses we control are worth much more than their carrying value.

Inadequate though they are in telling the story, we give you Berkshire’s book-value figures because they today serve as a rough, albeit significantly understated, tracking measure for Berkshire’s intrinsic value. In other words, the percentage change in book value in any given year is likely to be reasonably close to that year’s change in intrinsic value.

You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education’s cost as its “book value.” If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.

For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education. Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn’t get his money’s worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.


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