Stock Valuation: A battle of Ratios....

Valuation means assigning a ''proper'' value, or price, to a stock. The quote marks around ''proper'' remind us that while the word implies that there is a single ''correct'' price, in fact the concept is theoretical. Valuation is nevertheless an important guide to what price at which to buy or sell a stock. If you pay too much for a stock—more than it is ''worth''—your returns will suffer forever after.

Many large-scale institutional investors—mutual funds, brokerages, hedge funds—have developed complex mathematical models for determining a stock’s ''proper'' price. The individual investor needs to go a different route.

Fortunately, a second method exists which is just as good, easy to understand, and readily available. This second method uses what are called valuation ratios.

Valuation ratios divide the stock’s current price (P) by quantifiable aspects of its business: its earnings, its revenue, its book value, and so on. Each ratio is then compared to historical norms to tell whether the stock is fairly priced at its current price P.

Here are some common valuation ratios that the Sensible Stock Investor uses:

--P/E, or price-to-earnings ratio. This compares the stock’s price to the company’s reported earnings. This is the famous ''multiple'' that one often hears about.

-- P/S, or price-to-sales ratio, which compares the stock’s price to the company’s revenue.

-- P/B, or price-to-book ratio, which compares the stock’s price to the company’s book value (as computed by accepted accounting principles).

-- PEG, which is the P/E ratio divided by the earnings growth rate of the company.

-- P/CF, or price-to-cashflow, which compares the stock’s price to its annual flow of cash.

Happily, all of these valuation ratios, plus others, are available for free on virtually all financial Web sites. They are usually current to the very day. If you know the historical benchmarks, it is easy to interpret each ratio as indicating whether, like Goldilocks’ porridge, a stock’s price is too hot, too cold, or just about right.

Stock Investing -- Buy and Hold vs, Timing

The most important factor in stock market success is controlling risk. Risk, of course, includes not only the possibility that you will lose money, but also the possibility that you will miss out on a chance to make money.

The Sensible Stock Investor uses a variety of methods for managing risk. One of these is timing. Timing means selecting the optimum point in time to make a transaction--to buy or to sell.

Much stock investment literature derides timing as a risk-control measure. Most advisers focus solely on asset allocation and diversification. For example, whenever you see statistics about how much of your money you ''should'' have in large-cap stocks, small-cap stocks, bonds, cash, etc., the recommendations are based on long-term performance statistics for those asset types. In other words, the advice is always based on the presumption that you will Buy and Hold each asset. That underlying premise is almost always unstated. The use of timing as an additional way to control risk is ignored or criticized as impossible.

However, to the Sensible Stock Investor, timing--that is, not Buying and Holding everything--is a valid risk-control technique. It turns out statistically that not being invested in stocks when they are going down contributes much more to positive returns than being fully invested all of the time.

Timing can be used in both buy and sell decisions. It helps determine when to purchase a stock (thus reducing the risk that you will miss out on a chance to make money on the stock), and it also helps determine when to sell it (thus reducing the risk that you will lose money on the stock). Even Warren Buffett--who is reflexively associated with Buy-and-Hold--practices timing. There are many times when he holds a great deal of his assets in cash--waiting for the right time to buy.

Therefore, timing is a tool in the toolkit of the Sensible Stock Investor to practice risk management. It does not fully control buy, hold, and sell decisions, but it does influence them. The idea is to have more of your money in the market when there is a greater chance for gain, and to have less invested when there is a greater chance for loss. The whole idea is to stack the odds in your favor as much as you can. Timing helps you do that.

Timing is based on ''indicators.'' Indicators are simply pieces of information that may be predictive of future performance. Thus, they are signals whether to buy, hold, or sell. We'd like to be more fully invested when the market is going up, and less fully invested--or entirely in cash--when the market is going down. Indicators can help us toward that goal.

Because individual investors cannot spend all day studying the market, the best indicators for the individual must be (1) readily available, (2) free, and (3) easily understood. It turns out that we can find such indicators without too much trouble.

For example, we can employ indicators such as broad market trends, broad market valuation, individual stock trends and valuations, economic trends, and interest rates. It turns out that a straightforward set of such indicators can be obtained for free, put together in a logical fashion, and kept up to date with relatively little expenditure of time and no expenditure of money. The result is called a ''Timing Outlook.''

The Sensible Stock Investor then uses the Timing Outlook to influence--but not totally determine--his or her decisions about when and whether to buy, hold, or sell particular stocks. The Timing Outlook is used in conjunction with the other tools of Sensible Stock Investing. The whole toolkit--selecting excellent companies, valuing their stocks, maintaining a well-rounded portfolio, using sell-stops, and so on--creates a sound latticework of complementary techniques. These techniques lead to superior results, principally because they help you to manage investment risk.

A word about psychology: The Sensible Stock Investor creates all his or her tools as objectively as possible--when he or she is thinking most clearly, not in the heat of a fast-moving market. Psychologically, it can be hard to follow any system which is giving a seemingly non-intuitive signal. But that's why you have a system in the first place: So you can follow it when objective thinking is most difficult. The Timing Outlook helps take emotions out of the equation. That's a good thing, because in finance and investing, emotions often point in the wrong direction. Level-headedness usually wins out.
by DVK Group, Inc.

Watch how Warren Buffett Started his Journey of value Investing....

This is one of the most insightful video i have ever come across, in which Mr. Buffett unveils his journry.

Guess What? Mr. Buffett bought his first value stock when he was 11, he bought 3 sharse of Citi Services @ $38, he made $5 each share. Check Out More Facts....

Picking the best stock is like choosing your Best friend…

Dear Friends,

I am so glad to share this real life case in which I learned to pick the best stocks through selecting the best friend. I am aware at first it may sound bizarre to you.

I ask you to select your best friend out of your batch and if you are working then select your best peer. Take my example, I have just completed my MBA. I am very selective in making friends after all it is not about how many friends do you have or how rich and influential your friends are but what “value” your friends create to you. No matter you have only one.

Approach 1: I rather prefer to select a guy who really adds value to me than to a girl friend. Because that friend of mine has Guts he is really different. He has feeling of technology.

Learning: Do not pick stock that only add fancy to your portfolio, it is just like a girlfriend, invest in companies having what Warren Buffett terms “Durable Competitive Advantage”. That makes the company unique.

Approach 2: Think how your friend can create value to you? My friend, is a highly Tech Savvy guy, he is my technical mentor, others ignored him because he was reserved nature person always busy with his Laptop. I had all options to roam around with friends, girl friend and to damn care for any value addition. And that is called following the herd or “ the peer pressure.”

Learning: Choose for the companies which are different, understand the competitive advantage of the Business, than to just go by what others investing in. do not let your Stock Picking instinct get influenced by Peer Pressure. So I would say, “ Have Guts to Be Different.”

Approach 3: My friend did not perform very well academically, because he was more busy doing something creative on internet, Others thought this fellow is dumb and waste, he is a crazy guy, does not bother for marks. Others ignored him but I picked his, because I was sure that this guy can create value to me.

Learning: Do not peep into others basket, decorate your own. I mean keep your portfolio intact of others’. If u understand the Competitive Advantage of the business and understand it than I will strongly recommend Dare to be different.

Approach 4: Since my friend was of reserve nature, I found it difficult to befriend with him, so I found the best opportunity, once he could not complete his assignment that time he was in need and I helped his to give him a sense that I was his best buddy, after all, “A friend in need is a friend indeed.” I picked my friend when he was down.

Learning: with this approach I want to tell what is the right time to pick a stock? Well, once you have thoroughly understood the Durable Competitive Advantage of the business, it Is now high time to wait and watch, to pick the stock when the stock Is undervalued, I mean “Margin of Safety” the concept given by the Great Ben Graham, I befriended with my friend when he was down (depressed), likewise pick a stock when it is Undervalued, or trading at lesser that the intrinsic value.

Approach 5: I do not believe in changing friends frequently, I ignored the minor mistakes of my friend thats how I could hold with him for a long time.

Learning: Do not get carried away by the daily fluctuation into the market price of the stock you have picked. Ignore it like I ignored the minor mistakes of my friend and could hold him for long term.

Approach 6: I hate taking any crucial decision on the basis of behavioral mistakes of my friend; also I do not quit friends and make friends frequently based on their sudden failures or success.

Learning: Do not trade, I mean a value investor should not trade. In the sense, do not buy and sell your stock too frequently, ignore the daily fluctuations, patiently wait and let the competitive advantage of the business work. It will surely generate not only returns but what Warren Buffett says “Compounding Returns.”

Approach 7: This approach might sound that i am selfish or I stared spending more time with other friend of mine who has different talent. It is because my earlier friend has already created value to me up to my expectation. So now its time to “Let Him Go.” And look for other friend who can create more value.

Learning: Wait and watch does not mean to be passive about your stock. Set your return expectation one they are fulfilled dare to sell and pick other stock which has other competitive advantage as I changed my friend.

Today that friend of mine is a successful freelancer, he has assured earning or cash flows, he created value in my life at its full measure, had I also ignored him like my other friends did, i would even not have started this blog. Likewise, the stock that you have picked will surely fetch you more than expected returns or value creation for you, because if a business has true durable competitive advantage its future cash flows and earnings are going to be above average and assured.

This I show I made my value investing decision. The idea of selecting the Best friend is like picking the Best business Is taken form Warren Buffett’s Speech in the University of Florida, you can watch the full video at: Click me

Happy Value Investing!!!

Why Durable Competitive Advantage Matters?

Durable competitive advantage: it sounds nice, but what does it mean? And, as an investor, why should I care about it? Sometimes referred to as a "business moat", durable competitive advantage, in its simplest term, means the scale of a business in its field vs. its peers. That is its "competitive advantage."

But what makes it durable?
What make an advantage durable is the cost and time it would take a current or potential competitor to grow large enough in this area (high barrier of entry) to adversely impact our business. A high level of durability allows us a greater degree of accuracy to predict future earnings, and thereby arrive at a price for which we are willing to purchase a piece of the business (share of stock).

How do we recognize and find those businesses that have this (or don't)?
Strict adherence to the "durable" portion of the phrase enables us to do one thing before we even begin to look at possible stocks: eliminate entire sectors of possible investment. This makes our investing easier by shrinking the field of candidates, while reducing the chances of mistakenly investing our money in a good company in a lousy business.

Understand the inportance of Margin of Safety.

Essential to Benjamin Graham and Warren Buffett was the concept of margin of safety in an investment. If a stock's price is well below its' intrinsic value, then there is a margin of safety by default. This golden rule of value investing was been a central tenet for many years.
Benjamin Graham was the father of securities analysis and taught the principles to many students at Cornell University, including an eager to learn teen Warren Buffett. Once you knew the value of a company, then it was easy to deduce what investment decision to make.
Prior to Graham's seminal work, there were no standard methods of valuing companies.
In Security Analysis, Graham wrote that intrinsic value was "that value which was determined by the facts." The facts involved dissecting the company's earnings and assets, and making a guess a the future earnings. The future earnings were the toughest to calculate, but the most important because they helped give the analyst the information needed to determine the intrinsic value and the margin of safety.
He framed the intrinsic value thus: estimated future earnings multiplied times a capitalization factor that was derived from the company's earnings and assets as well as the balance sheet.
Graham knew that the intrinsic value was imprecise and that some amount of uncertainty existed in using it. Despite that, he felt it was a superior way of valuing securities.
As long as you knew the intrinsic value of a company, you could easily calculate the margin of safety.

Insightful Video By Warren Buffett...

Dear Value Investors,
Listen what the great Value Investor of its time has to say. And do "Gain from his Perspective." In this video Mr. Buffett shares his learnings, his techiniques, his investment mistakes. Its a 1 hr. 27 Mins quality time video.
wish you a Happy and Value Investing..... Enjoy.....

Download the Book "The Warren Buffett Way"

Starting with $10,000 in 1956 and today worth some $8.5 billion, with significant holdings in Coca-Cola, Capital Cities/ ABC and the Washington Post Company, Omaha, Nebr.-based Buffet is a major player on Wall Street. Financial consultant Hagstrom, who did not interview his subject but obtained permission to quote from his Berkshire Hathaway annual reports, here outlines Buffet's iconoclastic tenets for investing. Unlike many entrepreneurs who take over companies to sell them off in bits, Buffet buys and holds. He rejects the "efficient market theory"; he doesn't worry about the stock market; and he buys a business, not a stock. He manages with a small staff, no computers and a "hands off" strategy. Learning his secrets here, now the rest of us can do a Buffet?

To Download Click the link http://s180127837.onlinehome.us/1_5/2/A/J/The%20Warren%20Buffett%20W.pdf

(Please drop in your comments. Visit Again for exciting contents)

Pick Stocks like Warren Buffett: A Case Study ( How Warren Picked Coca-Cola?)

Dear Investors or Buffettologists,
Here is a Case study that throws a light on all the important aspects that the Great Buffett looks through. Its no magic, there is nothing complicated about it, just feel the bussiness and have disciplined investing approach.

Happy Investing.........

Coca Cola

In answering the question for ourselves whether Coca Cola is a company worth consideration as an investment, at the right price, we have used summary and other figures available from Value Line.

Question 1: Does the company sell brand name products that are likely to endure?

The answer to this seems quite simple. The major product of the company has been around for many years, is sold worldwide and is considered the best-known brand name in the world. More importantly, its customers would not do without it, and have demonstrated a loyalty that makes it unlikely it would change to other products. It also has other well-known brands on its books – Sprite, Fanta, Evian, Minute Maid, PowerAde.

2. Is the business of the company easily understood?

We think so. Its core operation is the production and distribution, both for itself and under franchise, of non-alcoholic beverages and associated products.

3. Does the company invest in and operate businesses within its area of expertise?

We would think so. Consideration of the Value Line information suggests that the company restricts itself to its core operations. We do not see it dabbling in areas outside its expertise.

4. Does the company have the ability to maintain or increase profitability by raising prices?

The real question here is whether, if Coke were to lift its prices by a margin that would allow it to keep pace with inflation, sales would suffer. This is unlikely.

5. Is the company, looking at both long-term debt, and the current position, conservatively financed?

a) Long term debt to profitability

The long-term debt of this company in 2002 was 2700 million dollars. The profit for that year was 4134 million dollars. At this rate, Coke could wipe out its long-term debt in .65 of a year, just over six months.

b) Current ratio

In 2002, Coke had current assets of 7352 million dollars and current liabilities of 7341 million dollars, a ratio of debt to assets of .99. This is lower than would be the desired ratio for industrial companies, but having regard to the nature of the business, and the ready cash flow, is acceptable.

c) Long term debt to equity

In 2002 the long-term debt was 2700 million dollars and shareholders equity was 11800 million dollars a comfortable ratio of .22.

6. Does the company show consistently high returns on equity and capital?

The company has shown an average rate of return on equity over the past five years of 37.08%. In the same period, it showed an average return on capital of 33.6% .The figures are consistent.

Year	ROE	ROC
1998	42.0	39.1
1999	34.0	31.5
2000	39.4	36.4
2001	35.0	31.9
2002	35.0	29.1
Average	37.08	33.6

7. Have the earnings per share and sales per share of the company shown consistent growth above market averages over a period of at least five years?

The figures for this period are as follows.

Year	EPS	+ or - %	SPS	+ or - %
1997	1.64		7.64
1998	1.42	-13.4	7.63	-.13
1999	1.30	-8.45	8.01	+4.98
2000	1.48	+13.85	8.23	+2.74
2001	1.60	+8.11	7.06	-14.2
2002	1.66	+3.75	7.92	+12.18

Looking at a five-year rolling period, we can calculate, using a hand-held Texas Instruments BA-35 Solar Calculator, the increase in earnings and sales over the rolling five-year period 1998-2002. For earnings, this is 16.9 %, for sales only 3.8%. The compound rate of return for earnings is 3.185, for sales, .75%.

This is not a strong rise in earnings or sales, and the question would be whether this is as a result of a slow-down in the US and world economies over this period or whether there is some more structural reason.

8. Hs the company been buying back its shares, and if so, has it bought them responsibly?

In 1998, the company had common shares outstanding of 2465.5 million. In 2002, the figure was 2471 million. The shares on issue are basically unchanged.

9. Has management wisely used retained earnings to increase the rate of return to shareholders?

The company has the following earnings per share and dividend per share record over a five-year period.

Year	EPS	DPS
1998	1.42	.60
1999	1.30	.64
2000	1.48	.68
2001	1.60	.72
2002	1.66	.80
Total	7.46	3.44

The company has therefore retained earnings totalling $4.02. In 1998, the shares reached a low of $53.6. In 2002, the shares reached a high of $57.9. An investor who bought at the lowest price in 1998 and still had them at the highest price in 2002 would have been showing a profit of $4.30. Thus the shares would have just slotted into Warren Buffett’s requirement for showing an increase in market value of a dollar for every dollar retained.

Using the approach of Mary Buffett and David Clark, we could calculate the percentage increase in earnings per share resulting from the retained profits. EPS in 1998 were 1.42, and in 2002 were 1.66, an increase of .24. Thus, from the total earnings retained of $4.02, earnings have increased by a total of .22, a percentage increase of 5.97%: not high.

10. Is the company likely to require large capital sums to ensure continuing profitability?

Value Line suggests that in the two years following 2002, the company would be spending about .40 a share on capital items. The long-term average is .31, unadjusted for inflation. These figures seem to be in line with historical expenditures.

Biography of Benjamin Graham ( the Guru of Warren Buffett)

Benjamin Graham was born in London in 1894, the son of an importer. His family migrated to America when Ben was very young and opened an importing business. They did not do well, Graham’s father dying not long after moving to America and his mother losing the family savings in 1907 during an economic crisis.

Graham, a star student, managed to get to Columbia University and, although offered a teaching post there after graduation, took a job as a chalker on Wall Street with Newburger, Henderson and Loeb. Before long, his natural intelligence won out when he began doing financial research for the firm and he became a partner in the firm. He was soon earning over $500,000 a year, a huge sum; not bad for a 25 year old.

In 1926, Graham formed an investment partnership with another broker called Jerome Newman. He also started lecturing at night on finance at Columbia, a relationship that was to continue until his retirement in 1956.

The Crash of 1929 almost wiped Graham out but the partnership survived with the assistance of friends and the sale of most of the partners’ personal assets. At one stage, Graham’s wife was forced to return to work as a dance teacher. Graham was soon back on his feet but he had learned valuable lessons that would soon be brought home to investors in his books.

In 1934, Benjamin Graham together with David Dodd, another Columbia academic, published the classic Security Analysis which has never been out of print. Despite the crash, the book proposed that it was possible to successfully invest in common stocks as long as sound investment principles were applied. Graham and Dodd introduced the concept of ‘intrinsic value’ and the wisdom of buying stocks at a discount to that value.

The partnership between Graham and Newman continued until 1956 but never again lost money for its investors, earning, we understand, an annual return of about 17 per cent. Graham continued as a partner, while writing and lecturing at Columbia, before retiring from that institution, also in 1956.

Warren Buffett studied under Graham at Columbia and approached him for a job in his investment firm. Graham declined but Buffett was persistent, and Graham finally yielded, giving Buffett a job in the firm. This was the start Buffett needed and he has never failed to acknowledge what he learned from Ben Graham.

It is interesting that one of the Graham Newman investments was GEICO, which, as you probably know, was an early acquisition of Berkshire Hathaway and which remains today a major investment vehicle in the Buffett Group.

Graham had originally bought GEICO in 1948. Apparently, after the partnership bought it as a private business, it was found that an investment firm could not own an insurance company and accordingly Graham and Newman converted it to a public company and distributed its shares amongst their investors.

In 1949, Graham wrote The Intelligent Investor, considered the Bible of value investing. That book too has never been out of print.

Benjamin Graham died in 1976, with the reputation of being the ‘Father of Security Analysis.’

(source: www.buffettsecrets.com)

Warren Buffett: a short biography

Early life

Buffet was born in 1930 in Omaha, Nebraska, the son of a stockbroker and Congressman, and has become probably the world’s most successful investor.

As a boy, irrespective of his family background, he delivered newspapers to make extra money and this probably sparked his interest in the media where he has made several successful investments including the Washington Post Company, a stock that has made him a lot of money and which he vows never to sell.

Imbued with a determination to make good and an entrepreneurial nature, Warren dabbled in several part time businesses but his destiny was chartered early in the piece when, after graduating from the University of Nebraska, he studied business at the Columbia Graduate Business School under the legendary Benjamin Graham.

Working with Benjamin Graham

He tried to get a position with Graham’s firm and was at first unsuccessful. He finally got the job and, as he generously acknowledges, learned a lot about stock investment from The Master.

Graham eventually retired and Buffett started a limited partnership in Omaha, using capital contributed by family and friends. The partnership was a great success and Buffett is said to have averaged an annual rate of return for the partnership in excess of 23 per cent, far in excess of the market.

Buying Berkshire Hathaway

Buffett, after several years, decided to wind up the partnership, returning the lucky investors their capital and their share of the profits, and bought an interest in Berkshire Hathaway, a textile company, giving his original investors the the chance to invest. The smart ones did so.

Buffett’s early days at Berkshire Hathaway were not great. The company was in an industry facing real challenges from exports and high manufacturing costs. Warren Buffett had not, however, forgotten what he had learned under Graham, and arranged for the company to buy out two Nebraska insurance companies.

This was the start of Buffett’s interest in insurance and the rise to financial fame of both himself and Berkshire Hathaway. The insurance game is a hard one but under Buffett, the company has become, not only a successful share investor, but a leading provider of insurance.

Buffett and Charlie Munger

Buffett struck up a friendship with Charles T Munger, a lawyer and investor and Charlie Munger eventually joined Warren at Berkshire Hathaway as his Vice-Chairman, alter ego, and friend. Warren Buffett is always the first to acknowledge the contribution that Charlie Munger has made to Berkshire Hathaway. (Listen to an interview with Charlie Munger, or read our biography)

Under Buffett and Munger, Berkshire Hathaway has become an investment giant that wholly owns a number of successful companies that include:

• Geico Corporation
• Nebraska Furniture Mart
• See’s Candy Shops

Warren Buffet, the man

Warren Buffett, the man, is just as hard to define as Warren Buffett, the investor. He projects a homespun frugality but one suspects that he plays his personality as close to the chest as he does his investment secrets. He always claims that it is his partner, Charlie Munger, who keeps his feet planted firmly in the ground.

Warren Buffet has become a legend and is generally ranked, along with his mentor, Benjamin Graham, first in a stellar cast of investors that includes Peter Lynch, John Neff, and Philip Fisher.

Best Warren Buffett biography

The best full-length Buffett biography that we have come across is Buffett, The Making of an American Capitalist, by Robert Lowenstein.

( source: www.buffettsecrets.com)