@@IntelligentStockInvesting great video Richard, I’ve subscribed to your channel.. Would I be able to use the spreadsheet for my own valuations? I have requested access to use. Cheers
Thanks for the great videos! I'm learning a ton! I keep coming back to reference. Any chance of sharing that spreadsheet for those of us who are Excel challenged?
I'm glad it's been helpful!! Let me know if you have any follow up questions. Here is a link to a copy of the sheet: docs.google.com/spreadsheets/d/1DKPz1wscxWILjwbEjB7EYdvKK4OWAhZ5WPtwpRKL8vs/edit?usp=sharing Enjoy! remember to be conservative with your estimates :)
I see I was the last person to comment. I have just come back to this video after well over a year as it is so good. A shame you stopped creating content but I get how much work it must be. You had some very high quality material.
Thanks Rob I really appreciate it. I actually would really like to update this video as I've advanced a lot since making it. However any time dedicated towards making youtube videos is time away from higher yielding activities and right now the return on time investment of making youtube videos is very low compared to other things I am working on. Eventually I will make videos again but it may be 5+ years from now. If you want to take it to the next level I suggest the book Value Investing 2nd edition by Bruce Greenwald. I would not say it's beginner friendly though. Thanks for your comment :)
@@IntelligentStockInvesting I would argue that simplicity is the ultimate in sophistication and your advancment may detract from the quality of this video. It would be tempting to add all of the amazing material from Greenwalds book (which is incredibly important) but it would complicate the video a lot as well. Yes greenwalds 'Value Investing' is a great insight as to how we need to be thinking and it's clearly how Buffett thinks. Earnings growth alone is meaningless. Are you familiar with Chris Bloomstrans work? He thinks very much along these same lines.
The main thing to take away from this video is that it is possible to calculate the intrinsic value of a company. Whereas a lot of people just buy some thing because it’s gone up recently and they don’t want to miss out on it going out more but have no idea of what it’s worth - That’s the wrong approach. In the future I will make a video about picking stocks without needing to go through a calculation like this. But it might be worthwhile to go through this exercise with a few stocks of companies you know like popular ones that have consistent earnings and then decide which one would be the best investment right now.
Amirone The easiest would be to use whatever bank you have your main bank account with. Tell them you want to set up a direct investing account so you can pick individual stocks and ETFs :)
I have been watching intrinsic value calculation on RUclips for past 3 days taking bits of knowledge from each of them. But this one is like the last missing piece bringing everything together. Great video. 🙏 Namaste
Thanks for the fantastic video! With lockdown in place, I'm spending my holidays learning from you. Going to start my own spreadsheet of companies I'm currently investing in (and will invest in).
I do discuss it a little in these older videos of mine: ruclips.net/video/YignWj5QDi8/видео.html and ruclips.net/video/AMYL4t9O9Ds/видео.html which you may enjoy. Essentially it was buying below net current asset value... So they would take the Current assets (cash and equivalents, accounts receivable, inventory) and subtract all liabilities, then he would buy the stock only if it was trading below that. Companies that were this cheap AND were also profitable were common in the 50s and 60s even. These days nothing is that cheap - at least not in North America.
Amazing video very well explained, i wanted to ask when you do your intrinsic calculation do you always use eps? And also is this h you calculate the intrinsic value on every company you analyze ? Can you do another video like this please or a step by step on how you reasearch and analyze. Thank you very much
Check out this other video I did: ruclips.net/video/ZZrt7aepQ3Y/видео.html There are some others that I've done that should help to answer some of your question in this comment: ruclips.net/video/Ic0Hb0UoZPM/видео.html ruclips.net/video/ruFrvWIZYz8/видео.html ruclips.net/video/p8KcJjryvXY/видео.html
Great example. Definitely not on the level of Munger & Buffett when it comes to how they measure value of a company. Sometimes you can just see the value these companies bring and what their competitive advantage is. Great video!
@@garrettkelly5568 You're somewhat right, yes - To use the discounted future cash method you have to estimate the future cash that the business will generate and then discount it back to its present value. We don't know what the future will hold though. This is why Buffett and Munger (in the clips at the end) say they don't use a 'rigid formula' - because you're kidding yourself if you think you're going to be able to accurately estimate the future precisely. This is why they stress the importance of having a "margin of safety" - which basically just means to be very conservative in your estimates - whether you're doing it in a spreadsheet, like in this video, or doing it in your head. Basically, the way they make investment decisions is they just wait for the investments that are very obviously good. If it's not an obviously good investment they wait for one. Back in the Benjamin Graham years / early Warren Buffett years the types of stocks they would look for would be the ones trading at a discount to their net assets (net-nets or "cigar butt stocks"). That's a different game - in that game you're buying assets, so no estimation of the future cash is required. The problem with investing that way though is that you need to sell once your stock reaches its intrinsic value - so it's a less passive approach. And there are a few other reasons I prefer to buy earnings than to buy cheap assets. If you have a lot of money and can buy a majority stake in a business trading below its net assets then you can use your voting power to unlock that value. I could keep rambling on about this but I think I'll have to put what's in my head right now into a future video :P Buffett has a quote "It's better to buy a wonderful business at a fair price than a fair business at a wonderful price." and I agree with him. Another way to think of intrinsic value is you can think of it as the price that would be discovered in a negotiation between two equally informed parties if it was a private business being sold. Hope this helps.
Do you have a link or specific way to set up this spreadsheet (preferably through google sheets if possible)? Thanks for the videos man, keep em comin!
Hey Richard, awesome video and explanations! But there is a thing I don't fully get, maybe you could shed some light. At 12:35 you say that we are spending $113 to purchase the stock, which I totally agree with. But then you mention that the sum of future EPSs is the money we are going to get in the future. Now, the only way we are going to get money in the future is by selling that share. Is the increase in the future market price somehow correlated with the EPS?
Hi Alexandru, great question. In the case of Apple, since they pay a dividend, your return will come from a combination of dividends and share appreciation. Share appreciation also comes from Apple doing share buybacks. This on its own increasing earnings per share because the number of shares outstanding are reduced. Share buybacks are often a good thing for you as the shareholder because as more shares are retired it means the percentage of ownership your shares represents increases. To answer your question, yes the future market price is correlated to earnings. It's not directly correlated because the price at any given moment is based on the people doing the buying and selling. But over the longer term, the price oscillates above and below the companies intrinsic value. Because ownership of shares entitles you to your ownership percentages worth of the companies future earnings, the price will be correlated to earnings, but just not directly. I hope that makes sense :) Typically, value investors have to wait 6-36 months usually for the market to recognize the value they've found. Sometimes it happens faster. If you do good work valuing, the market will always recognize it, eventually. Warren Buffett likes to talk about how when he buys shares of stock he wouldn't care if the stock market then closed down for 10 years. This is because when he buys shares he's just thinking of it as ownership purchased at a good price and doesn't concern himself with the price the market subsequently gives to it in the short term. Did you watch this video here yet? I think it will be a good one to watch next if you haven't specified the part about retained earnings. :) ruclips.net/video/EcPZJpIGYcc/видео.html
Yes, it really makes sense actually. So just to make sure I understand correctly, it's like a positive feedback loop, right? I mean the company publishes the earnings, then the investors notice that the intrinsic value has increased, which leads to more buying, which makes the market price increase and so on. I haven't reached the video you mentioned, yet, right now I'm binging them chronologically. But it seems I'm going to reach it pretty soon :) I really appreciate the work you're doing and I'm sure that you'll soon become THE youtube investing channel!
Well done, Richard. This is the clearest explanation of DCF that I've seen to date. Beautiful job! Do you have an Excel spreadsheet download by any chance?
Banks and insurance companies are hard to value. A good bank will have high return on assets and will be cheap if it can be bought at a low price-to-book ratio. I generally stay away from financial companies myself though.
Fantastic tutorial. My only concern is whether Apple isn't already heading into "declining average territory"? They went public around forty years ago. Perhaps I am looking at the timescale incorrectly. After all, they didn't really hit huge share price gains until the ipod/iphone/ipad era kicked in.
Thanks Wayne, I'm glad you enjoyed it! Absolutely hear you. I could have been even more conservative potentially in the chosen estimates. On the other hand, Apple does have a great business for sure which has great pricing power and monopoly like characteristics too. Coca Cola, another great business, grew earnings by double digits for a long time but that growth rate eventually slowed down. Estimating the future is the hardest part for sure but the good news is that the best investments will be glaringly obvious! Where are you at in your investing journey? It's good to connect with others that think rationally about stock investing amidst all the speculators that make up the majority of the stock activity!
CAPM aims to consider a stock's "risk" which is based on a stocks historic volatility but I don't agree with the idea that risk = volatility (and nor do the Warren Buffett's of the world). In this video I show how discount rate can be side stepped with the use of IRR.
Amazing value video Richard. So for calculating intrinsic value you're using earnings per share and current share price to calculate NVP. What other metrics can I use or pair of metrics so that I can calculate both PV and NPV and of course IRR :) ? I've already recreated your formula in my own sheet but I'm struggling with other pairs as I'd like to compare my findings with calculations of other people that use different pairs.
Hey Mat, great question. In this video I did use per-share data. This can also be done on an entire company basis in which case you would be using market cap instead of share price and net income instead of earnings per share. I tend to prefer doing in on the per share level. As for different variables I would look into earnings vs. free cash flow vs. owner earnings... Owner earnings would be a better method to be more exact. EBIT (earnings before interest and tax) which is the same as operating income is also a good metric to use. The important part in that regard is to just do the same thing and use the same metrics for each company so you're comparing apples to apples rather than doing it one way for one company and one way for another. Here are two videos that I think would be good for you at this point: ruclips.net/video/ZZrt7aepQ3Y/видео.html ruclips.net/video/bH-bz1iIyy4/видео.html
Seems DCF doesn't count the book value of a company, should we add it to get the total value? For example, Apple has lots of cash and other assets, which should be reflected in the stock price.
Great question. The full answer is very long. The short answer is that I typically use Enterprise value per share rather than the market price. This allows debt and cash to be accounted for. check out this video on enterprise value: ruclips.net/video/bH-bz1iIyy4/видео.html Check out this video on calculating intrinsic value that was made more recently then this one: ruclips.net/video/aJGtpAD-G2A/видео.html
Hey Richard, thanks for the informative video. I wonder how the discount rate will affect the IRR here, because according to your calculation, it seems like they don't affect each other. I'm understanding it like this: buying a stock at a cost which is higher than its estimated intrisic value, even higher 30-40%, is still totally okay if IRR results me 20%?
Hey Richard Can you make a video on how to value a stock with different methods. I still have problem doing so. Also I wanted to know if there is difference between Enterprise Value and the Intrinsic Value. I'm confuse. Please help. I understand how to calculate the EV with the formula you gave in a previous video but I still don't understand how to do the intrinsic. It's a bit difficult. Is there other methods. Thanks
Hey Thierno, yes there is a difference between enterprise value and intrinsic value. Enterprise value is just the price for the stock after accounting in the cash and debt, where as intrinsic value is the the true value of the company based on the future cash flows discounted back to their present value. Have you watched this video by any chance? ruclips.net/video/ilfeKFmbURc/видео.html if not, watch that one next. Let me know though if you have already and still having difficulty because I do want to help :) As far as other methods... I've seen some people do something where they predict what the earnings per share will be in 10 years and then assume what PE ratio it might trade at in 10 years and do something like that... but that's not really a good way to do it. The discounted cash flows method is the only real way to do it.
@@IntelligentStockInvesting I've just finished it. BTW where does the 1$ comes from when you were calculating the E/S growth. You took some 0.9..$:0.8..$ then minus 1, I don't get it. I think I would understand more if you used a chalkboard but it's OK. It's still confusing but it's ok, I don't want to waste your time. Thanks again for answering 👍🏾
I see what you mean now. Those numbers are what the earnings per share have been in past years leading up to now. The point of that part is to look at how the earnings per share has grown in the past and use that to estimate the rate at which they may grow in the future.
Looking at the company’s history can give you an idea of what could be expected in the future. But you also want to think about that premise for each company and consider if that’s possible or if something has or will change. It’s easiest to value consistent companies that have been consistent for a long time. After the first 10 years I usually lower down to ~5% (the rate the economy grows at) and negative 5% in terminal years. Most companies will eventually come to an end. The present value of the earnings from the far out future years isn’t as significant as the near term earnings anyways. Of course there’s some companies that might grow for 5% per year almost indefinitely. A bit of ramblings here but hopefully it’s helpful :) essentially the answer to your question is some guesswork :) I think you’ll like this video too if you haven’t watched it yet: ruclips.net/video/AMYL4t9O9Ds/видео.html
Hi Darryl, thanks for watching. So far just RUclips. Although you could find me on my personal facebook. I'm also active in some facebook groups. Thanks for your support!
I don’t understand why people look at the intrinsic value for the life of the company. This is a picture of me in 75 years 👻 I’m doing it for my lifetime.
Good question. When you plan to sell in the future is not related to, and does not need to be a consideration when calculating a company's current value. So for example, it would not make sense to calculate a company's intrinsic value only based on the cash it will generate in the next 5 years just because 5 years is how long you intended to hold it for. I mean, you could do that if you wanted to... but then I'd suggest using the same timespan for all companies you value. You wouldn't want to use 5 years when valuing one company and 10 years when valuing another because then you wouldn't be comparing apples to apples. Hope that helps! Here's a video on when to sell that you might enjoy :) ruclips.net/video/hdcQu2qbF38/видео.html
Hey Richard, I was following along in Excel with your video (very helpful btw!!!) and I went with the formulas you used. I was very conservative (perhaps too conservative) with the EPS growth and the discount rate, is it normal to come out with a good NPV difference even if I put the discount rate at 15%??? I’ve done simulations with different companies but I have one or two that have nearly double the NPV in comparison to share price
Hi Jason, first, excellent work being very conservative with your estimates :) second, it sounds like you're doing it right however I would add to more considerations: how do the numbers change if you use Enterprise value (or enterprise value per share) instead of price per share?.. some companies might have a market cap of 2 billion let's say, but they have also come with like 5billion of debt. so they enterprise value is ~7 billion. meaning that if the price per share was $100 for example, the enterprise value per share would be $350. This would be a better number to use in the price field... also, consider free-cash-flow instead of earnings. check out his quote from charlie munger: “There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested - there's never any cash. It reminds me of the guy who looks at all of his equipment and says, "There's all of my profit." We hate that kind of business.” free cash flow is a better than earnings per share for identifying the businesses that generate CASH.
@@IntelligentStockInvesting thanks for your tips on working with different numbers!!! It really changed the whole picture for my valuations and it showed some strengths in some areas and weaknesses in others so now I have a better scope on looking at the prospects of specific stocks. I always like to look at the variables before jumping in and I love this approach
Hello Richard, thank you so much for all your videos. I am excited to watch them all. I came to you tube to learn and found your channel. I am very very very new to all this. I wanted to ask you , the EPS you grabbed of the TTM - what site/page you are on ? I am having hard time finding out TTM for other stocks. So many places I look at say no data available. Or maybe I don't know where to look. But can you please point me in the right directions where can I find TTM for other companies. Thank you.
OH shoot I forgot to ask you another question - I tried playing around with the spreadsheet you shared. But somehow I just get error message when I try to put negative EPS. Can you give me example please how I can do it, or if you have a video ? Or even just a screen shot. Thank you. I don't understand why the formulas will not take a negative number. I try to put -0.03 in the EPS on the spreadsheet, and The Expected annual rate of return F13 I get #NUM " In IRR evaluation, the value array must be positive or negative numbers". Thank you.
Hi Kalinka, thanks for commenting. The website i was using in this video to get EPS data was morningstar.com :) Also, negative EPS won't work in this calculator. Negative EPS is kind of another story all together. You should check out this video here too when you get a chance about valuing companies that aren't profitable yet: ruclips.net/video/Ic0Hb0UoZPM/видео.html
@@IntelligentStockInvesting Ok thank you so much for the website and thank you for the video. And thank you for the quick reply. :) Have a wonderful day!
There were a number of small cap stocks that did well once the pandemic ramped up. Oil demand pulled back (which consequently brought share prices wayy down), obviously, a number of the :stay at home" stocks faired very well. Amazon shot up around 300%. Common knowledge for sure. The Buffet Indicator is really high. A lot of people are expecting a market crash in the near-mid future. That could present huge buying opportunities for those who can afford it. Let's just hope the entire economy doesn't collapse in its wake.
It's impossible to know of course but the good thing is that the majority of a companies value is made up of the present value of the cash flows it will generate in the next 10-20 years anyways. The further out you go in time the less those cash flows contribute to the value because of the time value of money. the other thing you can do to make sure it doesn't matter is to only buy the companies that are so obviously a good investment that whether it lasts for 20 years or 40 doesn't matter. Hope that helps! It's a great question.
@@IntelligentStockInvesting Thank you. And one other question. Would you use enterprise value per share for someone like Coca Cola who has quite a lot of debt?
@@korayhalil2155 I would use enterprise value per share yes. I think of buying shares in the same way that I would think about it if I was buying the entire business. $100 purchase price + taking on $50 of debt that will need to be paid back eventually, is the same as a $150 purchase price and no debt taken on. Hope that helps! :)
@@IntelligentStockInvesting Thank you i appreciate it. Can you just kindly explain what you did at 2:13? Did you add up the percentage changes and divide by number of years? Why did you add up the first 3 years and divide them by 3 and not add up all of them and divide the total??
@@korayhalil2155 Hi Koray, what I was trying to do there was get an idea of the average growth rate from one year to the next but over 3 year period increments. I don't like this way of doing it now though and I'm going to put out a video next week on the best way to use historical data to estimate future growth rates :)
Lol I just tried this with BP, and halfway through I realized that it's impossible to get a consistent average earnings growth rate because their numbers are all over the place...
WATCH NEXT: Exactly When to Sell a Stock (3 REASONS): ruclips.net/video/hdcQu2qbF38/видео.html
Could you link us to the spread sheet you were using? it was very helpful :)
@@sarahbinakaj6530 Here you go :) docs.google.com/spreadsheets/d/1DKPz1wscxWILjwbEjB7EYdvKK4OWAhZ5WPtwpRKL8vs/edit?usp=sharing
Richard, where is the Owner Earnings video you refered to? Can't find it.
@@IntelligentStockInvesting great video Richard, I’ve subscribed to your channel.. Would I be able to use the spreadsheet for my own valuations? I have requested access to use.
Cheers
What kinda math do you have to know to do stocks and investing?
Your explanation is brilliant
This has been the most straight forward video about DCF for me.
Highly underrated channel 😍😍😍😘😘😘😘♥️♥️♥️♥️♥️♥️♥️
Thank you!!
More people should talk about owner earnings, nice reference. I was also at the 2018 meeting. There's nothing like being there in person!
Awesome! thanks for watching :)
Definitely worth a re-watch. Thank you for breaking it down and making stocks easier to understand!
Glad you enjoyed and learned from it! Thanks for your support :)
You sir are a wonderful teacher. Sincerely thanks for enlightening us all.🙏
This will be one to come back to a few times. Big time eye opening
Will Tischler awesome!! Glad to hear :D
Thank you for making it so easy to understand for everyone.
No problem :)
Love it!! Great video for understanding NPV and IRR.
Perfect!! Happy to help :)
Thanks for all the information Richard you videos being great conversations to the table when speaking to my advisors!
Haha, I feel sorry for those advisors ;) thanks for your support :)
Thanks for the great videos! I'm learning a ton! I keep coming back to reference. Any chance of sharing that spreadsheet for those of us who are Excel challenged?
I'm glad it's been helpful!! Let me know if you have any follow up questions. Here is a link to a copy of the sheet:
docs.google.com/spreadsheets/d/1DKPz1wscxWILjwbEjB7EYdvKK4OWAhZ5WPtwpRKL8vs/edit?usp=sharing
Enjoy! remember to be conservative with your estimates :)
I see I was the last person to comment. I have just come back to this video after well over a year as it is so good. A shame you stopped creating content but I get how much work it must be. You had some very high quality material.
Thanks Rob I really appreciate it. I actually would really like to update this video as I've advanced a lot since making it. However any time dedicated towards making youtube videos is time away from higher yielding activities and right now the return on time investment of making youtube videos is very low compared to other things I am working on. Eventually I will make videos again but it may be 5+ years from now. If you want to take it to the next level I suggest the book Value Investing 2nd edition by Bruce Greenwald. I would not say it's beginner friendly though. Thanks for your comment :)
@@IntelligentStockInvesting I would argue that simplicity is the ultimate in sophistication and your advancment may detract from the quality of this video. It would be tempting to add all of the amazing material from Greenwalds book (which is incredibly important) but it would complicate the video a lot as well. Yes greenwalds 'Value Investing' is a great insight as to how we need to be thinking and it's clearly how Buffett thinks. Earnings growth alone is meaningless. Are you familiar with Chris Bloomstrans work? He thinks very much along these same lines.
@@robsmith756 Thanks a lot Rob. You make a great point. I appreciate your comments and I will check out Chris Bloomstran right now. Thanks!
This is awesome! It was great seeing your use of Excel as well.
Thanks bro 🙏🙏
Damn this video was so easy to understand and was laid out perfectly! Subbed!
Amazing! I’m really happy to hear that. Thanks for letting me know too. If you have any questions along the way ask away, I’m happy to help :)
My mind is blown. I didn’t understand anything LOL ITS SOO HARD AND CONFUSING
The main thing to take away from this video is that it is possible to calculate the intrinsic value of a company. Whereas a lot of people just buy some thing because it’s gone up recently and they don’t want to miss out on it going out more but have no idea of what it’s worth - That’s the wrong approach. In the future I will make a video about picking stocks without needing to go through a calculation like this. But it might be worthwhile to go through this exercise with a few stocks of companies you know like popular ones that have consistent earnings and then decide which one would be the best investment right now.
Richard Hopkins - Stock Investing I don’t even know how to buy stocks, I’m just learning right now. Is there like a website for buying stocks?
Amirone The easiest would be to use whatever bank you have your main bank account with. Tell them you want to set up a direct investing account so you can pick individual stocks and ETFs :)
I have been watching intrinsic value calculation on RUclips for past 3 days taking bits of knowledge from each of them. But this one is like the last missing piece bringing everything together. Great video. 🙏 Namaste
Amazing!!! 🙏🙏
Thanks for the fantastic video! With lockdown in place, I'm spending my holidays learning from you. Going to start my own spreadsheet of companies I'm currently investing in (and will invest in).
Thanks so much! That’s really amazing to hear :) let me know if you have any questions! I’m happy to help.
I really appreciate all the comments and support :)
I would be happy to pay for this on Udemy not because I learnt anything new but you took great deal of efforts to make it simple
Wow thanks very much that’s a really great compliment. Thank you !! 🙏🙏 really appreciate your comment and your support :)
Richard, would you consider creating a spreadsheet tutorial breaking down Graham's Cigar-Butt Technique?
I do discuss it a little in these older videos of mine: ruclips.net/video/YignWj5QDi8/видео.html and ruclips.net/video/AMYL4t9O9Ds/видео.html which you may enjoy. Essentially it was buying below net current asset value... So they would take the Current assets (cash and equivalents, accounts receivable, inventory) and subtract all liabilities, then he would buy the stock only if it was trading below that. Companies that were this cheap AND were also profitable were common in the 50s and 60s even. These days nothing is that cheap - at least not in North America.
Amazing video very well explained, i wanted to ask when you do your intrinsic calculation do you always use eps? And also is this h you calculate the intrinsic value on every company you analyze ? Can you do another video like this please or a step by step on how you reasearch and analyze. Thank you very much
Check out this other video I did: ruclips.net/video/ZZrt7aepQ3Y/видео.html
There are some others that I've done that should help to answer some of your question in this comment:
ruclips.net/video/Ic0Hb0UoZPM/видео.html
ruclips.net/video/ruFrvWIZYz8/видео.html
ruclips.net/video/p8KcJjryvXY/видео.html
Great work can you share the spreadsheet ? I’m going to share this video
Here it is :) docs.google.com/spreadsheets/d/1DKPz1wscxWILjwbEjB7EYdvKK4OWAhZ5WPtwpRKL8vs/edit?usp=sharing
Great example. Definitely not on the level of Munger & Buffett when it comes to how they measure value of a company. Sometimes you can just see the value these companies bring and what their competitive advantage is. Great video!
Well said! Thanks for your support Kamran.
Subscribe for a new video every week :) ruclips.net/channel/UC8hyOJoF1gS_uGUL5uQqRhg
@@garrettkelly5568 You're somewhat right, yes - To use the discounted future cash method you have to estimate the future cash that the business will generate and then discount it back to its present value. We don't know what the future will hold though. This is why Buffett and Munger (in the clips at the end) say they don't use a 'rigid formula' - because you're kidding yourself if you think you're going to be able to accurately estimate the future precisely. This is why they stress the importance of having a "margin of safety" - which basically just means to be very conservative in your estimates - whether you're doing it in a spreadsheet, like in this video, or doing it in your head. Basically, the way they make investment decisions is they just wait for the investments that are very obviously good. If it's not an obviously good investment they wait for one. Back in the Benjamin Graham years / early Warren Buffett years the types of stocks they would look for would be the ones trading at a discount to their net assets (net-nets or "cigar butt stocks"). That's a different game - in that game you're buying assets, so no estimation of the future cash is required. The problem with investing that way though is that you need to sell once your stock reaches its intrinsic value - so it's a less passive approach. And there are a few other reasons I prefer to buy earnings than to buy cheap assets. If you have a lot of money and can buy a majority stake in a business trading below its net assets then you can use your voting power to unlock that value. I could keep rambling on about this but I think I'll have to put what's in my head right now into a future video :P Buffett has a quote "It's better to buy a wonderful business at a fair price than a fair business at a wonderful price." and I agree with him. Another way to think of intrinsic value is you can think of it as the price that would be discovered in a negotiation between two equally informed parties if it was a private business being sold. Hope this helps.
I just did a video on finding Intrinsic value and another on AAPL stock analysis/valuation. Good work
great job always nice to find another value investor ;) goodluck!
@@IntelligentStockInvesting yes of course! Let’s grow the community organically ✊
Thank you! You made me learn a new way to calculate intrinsic value. I'm just started trading and this video definitely helps a lot!
No problem :) glad you enjoyed it. And thanks for commenting to let me know!
Anther great one dude!
Big up 🙌
Good content.
You got mad Excel skilz too
Thanks! 🤓🤓
Seriously good material here. Thanks.
Thanks so much for the comment :)
Do you have a link or specific way to set up this spreadsheet (preferably through google sheets if possible)? Thanks for the videos man, keep em comin!
I think the google sheets link is in the description or one of the comments :)
Hey Richard, awesome video and explanations! But there is a thing I don't fully get, maybe you could shed some light. At 12:35 you say that we are spending $113 to purchase the stock, which I totally agree with. But then you mention that the sum of future EPSs is the money we are going to get in the future. Now, the only way we are going to get money in the future is by selling that share. Is the increase in the future market price somehow correlated with the EPS?
Hi Alexandru, great question. In the case of Apple, since they pay a dividend, your return will come from a combination of dividends and share appreciation. Share appreciation also comes from Apple doing share buybacks. This on its own increasing earnings per share because the number of shares outstanding are reduced. Share buybacks are often a good thing for you as the shareholder because as more shares are retired it means the percentage of ownership your shares represents increases. To answer your question, yes the future market price is correlated to earnings. It's not directly correlated because the price at any given moment is based on the people doing the buying and selling. But over the longer term, the price oscillates above and below the companies intrinsic value. Because ownership of shares entitles you to your ownership percentages worth of the companies future earnings, the price will be correlated to earnings, but just not directly. I hope that makes sense :) Typically, value investors have to wait 6-36 months usually for the market to recognize the value they've found. Sometimes it happens faster. If you do good work valuing, the market will always recognize it, eventually. Warren Buffett likes to talk about how when he buys shares of stock he wouldn't care if the stock market then closed down for 10 years. This is because when he buys shares he's just thinking of it as ownership purchased at a good price and doesn't concern himself with the price the market subsequently gives to it in the short term. Did you watch this video here yet? I think it will be a good one to watch next if you haven't specified the part about retained earnings. :) ruclips.net/video/EcPZJpIGYcc/видео.html
Yes, it really makes sense actually. So just to make sure I understand correctly, it's like a positive feedback loop, right? I mean the company publishes the earnings, then the investors notice that the intrinsic value has increased, which leads to more buying, which makes the market price increase and so on.
I haven't reached the video you mentioned, yet, right now I'm binging them chronologically. But it seems I'm going to reach it pretty soon :)
I really appreciate the work you're doing and I'm sure that you'll soon become THE youtube investing channel!
Amaizing ♥️♥️♥️
Cloud Computer thanks glad you enjoyed it :)
ty so much
Well done, Richard. This is the clearest explanation of DCF that I've seen to date. Beautiful job! Do you have an Excel spreadsheet download by any chance?
Forget that...just saw a comment with the link, Thanks, Richard!
Awesome! Thanks so much. I’m glad you found it :)
beside the year 1 to 10 of 12% growth, the rest(7%, 5%,-5%) are basically guess-work. the final PV will be totally different depend on your guess-work
Thanks!
Great video. When we calculate intrinsic value in bank it is better to consider NAVP? Coz their cash is main source of income.
Banks and insurance companies are hard to value. A good bank will have high return on assets and will be cheap if it can be bought at a low price-to-book ratio. I generally stay away from financial companies myself though.
nice presentation
Thank you :)
Fantastic tutorial. My only concern is whether Apple isn't already heading into "declining average territory"? They went public around forty years ago. Perhaps I am looking at the timescale incorrectly. After all, they didn't really hit huge share price gains until the ipod/iphone/ipad era kicked in.
Thanks Wayne, I'm glad you enjoyed it! Absolutely hear you. I could have been even more conservative potentially in the chosen estimates. On the other hand, Apple does have a great business for sure which has great pricing power and monopoly like characteristics too. Coca Cola, another great business, grew earnings by double digits for a long time but that growth rate eventually slowed down. Estimating the future is the hardest part for sure but the good news is that the best investments will be glaringly obvious!
Where are you at in your investing journey? It's good to connect with others that think rationally about stock investing amidst all the speculators that make up the majority of the stock activity!
Hello, really love your content! Question- Can I use CAPM Formula for Discount Rate?
CAPM aims to consider a stock's "risk" which is based on a stocks historic volatility but I don't agree with the idea that risk = volatility (and nor do the Warren Buffett's of the world). In this video I show how discount rate can be side stepped with the use of IRR.
great excel fingers haha!!!!!!
🙌🙌
Amazing value video Richard. So for calculating intrinsic value you're using earnings per share and current share price to calculate NVP. What other metrics can I use or pair of metrics so that I can calculate both PV and NPV and of course IRR :) ?
I've already recreated your formula in my own sheet but I'm struggling with other pairs as I'd like to compare my findings with calculations of other people that use different pairs.
Hey Mat, great question. In this video I did use per-share data. This can also be done on an entire company basis in which case you would be using market cap instead of share price and net income instead of earnings per share. I tend to prefer doing in on the per share level. As for different variables I would look into earnings vs. free cash flow vs. owner earnings... Owner earnings would be a better method to be more exact. EBIT (earnings before interest and tax) which is the same as operating income is also a good metric to use. The important part in that regard is to just do the same thing and use the same metrics for each company so you're comparing apples to apples rather than doing it one way for one company and one way for another. Here are two videos that I think would be good for you at this point: ruclips.net/video/ZZrt7aepQ3Y/видео.html ruclips.net/video/bH-bz1iIyy4/видео.html
@@IntelligentStockInvesting Amazing, thanks so much!
Seems DCF doesn't count the book value of a company, should we add it to get the total value? For example, Apple has lots of cash and other assets, which should be reflected in the stock price.
Great question. The full answer is very long. The short answer is that I typically use Enterprise value per share rather than the market price. This allows debt and cash to be accounted for. check out this video on enterprise value: ruclips.net/video/bH-bz1iIyy4/видео.html
Check out this video on calculating intrinsic value that was made more recently then this one: ruclips.net/video/aJGtpAD-G2A/видео.html
Hey Richard, thanks for the informative video. I wonder how the discount rate will affect the IRR here, because according to your calculation, it seems like they don't affect each other. I'm understanding it like this: buying a stock at a cost which is higher than its estimated intrisic value, even higher 30-40%, is still totally okay if IRR results me 20%?
Ya it’s all about the IRR. Compare the IRR of multiple investment opportunities and select your favourites
Hey Richard
Can you make a video on how to value a stock with different methods. I still have problem doing so. Also I wanted to know if there is difference between Enterprise Value and the Intrinsic Value. I'm confuse. Please help. I understand how to calculate the EV with the formula you gave in a previous video but I still don't understand how to do the intrinsic. It's a bit difficult. Is there other methods. Thanks
Hey Thierno, yes there is a difference between enterprise value and intrinsic value. Enterprise value is just the price for the stock after accounting in the cash and debt, where as intrinsic value is the the true value of the company based on the future cash flows discounted back to their present value. Have you watched this video by any chance? ruclips.net/video/ilfeKFmbURc/видео.html if not, watch that one next. Let me know though if you have already and still having difficulty because I do want to help :) As far as other methods... I've seen some people do something where they predict what the earnings per share will be in 10 years and then assume what PE ratio it might trade at in 10 years and do something like that... but that's not really a good way to do it. The discounted cash flows method is the only real way to do it.
@@IntelligentStockInvesting I've just finished it. BTW where does the 1$ comes from when you were calculating the E/S growth. You took some 0.9..$:0.8..$ then minus 1, I don't get it. I think I would understand more if you used a chalkboard but it's OK. It's still confusing but it's ok, I don't want to waste your time. Thanks again for answering 👍🏾
Can you comment on that video the time stamp of the $1 thing you’re referring to and I’ll watch that part again and try to explain
@@IntelligentStockInvesting actually it's from this video at 1:57 I think
I see what you mean now. Those numbers are what the earnings per share have been in past years leading up to now. The point of that part is to look at how the earnings per share has grown in the past and use that to estimate the rate at which they may grow in the future.
Hi, how do you rationally determine the EPS growth in each period?
Looking at the company’s history can give you an idea of what could be expected in the future. But you also want to think about that premise for each company and consider if that’s possible or if something has or will change. It’s easiest to value consistent companies that have been consistent for a long time. After the first 10 years I usually lower down to ~5% (the rate the economy grows at) and negative 5% in terminal years. Most companies will eventually come to an end. The present value of the earnings from the far out future years isn’t as significant as the near term earnings anyways. Of course there’s some companies that might grow for 5% per year almost indefinitely. A bit of ramblings here but hopefully it’s helpful :) essentially the answer to your question is some guesswork :) I think you’ll like this video too if you haven’t watched it yet: ruclips.net/video/AMYL4t9O9Ds/видео.html
@@IntelligentStockInvesting thanks!
Richard what other social media platforms can I follow you on ?
Hi Darryl, thanks for watching. So far just RUclips. Although you could find me on my personal facebook. I'm also active in some facebook groups. Thanks for your support!
You used a simple average return over 3 years. Wouldn't it be better to use a compounded average return?
Sure that works. In time you won’t need an Excel sheet.
Can you give the excel sheet so we can download it
Check the comments i have provided a link in a reply to someone :)
There also appear to be a number of undervalued (and affordable) opportunities in the emerging markets space.
Excellent. Some of the best opportunities are to be found in the less fished in lakes :)
great content but you should use buffets owners earnings to calculate intrinsic value its way more accurate than fcf and eps
Thanks! Glad you enjoyed it. I agree! I did a video on that subject here that you might enjoy :) ruclips.net/video/ZZrt7aepQ3Y/видео.html
Is possible to share this spreadsheet
Check the description or comments I think I shared a link in this video or another
I don’t understand why people look at the intrinsic value for the life of the company. This is a picture of me in 75 years 👻 I’m doing it for my lifetime.
Good question. When you plan to sell in the future is not related to, and does not need to be a consideration when calculating a company's current value.
So for example, it would not make sense to calculate a company's intrinsic value only based on the cash it will generate in the next 5 years just because 5 years is how long you intended to hold it for.
I mean, you could do that if you wanted to... but then I'd suggest using the same timespan for all companies you value. You wouldn't want to use 5 years when valuing one company and 10 years when valuing another because then you wouldn't be comparing apples to apples.
Hope that helps! Here's a video on when to sell that you might enjoy :) ruclips.net/video/hdcQu2qbF38/видео.html
Hey Richard, I was following along in Excel with your video (very helpful btw!!!) and I went with the formulas you used. I was very conservative (perhaps too conservative) with the EPS growth and the discount rate, is it normal to come out with a good NPV difference even if I put the discount rate at 15%??? I’ve done simulations with different companies but I have one or two that have nearly double the NPV in comparison to share price
Hi Jason, first, excellent work being very conservative with your estimates :) second, it sounds like you're doing it right however I would add to more considerations: how do the numbers change if you use Enterprise value (or enterprise value per share) instead of price per share?.. some companies might have a market cap of 2 billion let's say, but they have also come with like 5billion of debt. so they enterprise value is ~7 billion. meaning that if the price per share was $100 for example, the enterprise value per share would be $350. This would be a better number to use in the price field... also, consider free-cash-flow instead of earnings. check out his quote from charlie munger: “There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested - there's never any cash. It reminds me of the guy who looks at all of his equipment and says, "There's all of my profit." We hate that kind of business.” free cash flow is a better than earnings per share for identifying the businesses that generate CASH.
@@IntelligentStockInvesting thanks for your tips on working with different numbers!!! It really changed the whole picture for my valuations and it showed some strengths in some areas and weaknesses in others so now I have a better scope on looking at the prospects of specific stocks. I always like to look at the variables before jumping in and I love this approach
@@jasonalexander5249 no problem Jason :) I think you will do well at this :) keep the questions coming if you have more in the future!
Hello Richard, thank you so much for all your videos. I am excited to watch them all.
I came to you tube to learn and found your channel.
I am very very very new to all this.
I wanted to ask you , the EPS you grabbed of the TTM - what site/page you are on ?
I am having hard time finding out TTM for other stocks. So many places I look at say no data available. Or maybe I don't know where to look. But can you please point me in the right directions where can I find TTM for other companies. Thank you.
OH shoot I forgot to ask you another question - I tried playing around with the spreadsheet you shared. But somehow I just get error message when I try to put negative EPS. Can you give me example please how I can do it, or if you have a video ? Or even just a screen shot. Thank you. I don't understand why the formulas will not take a negative number. I try to put -0.03 in the EPS on the spreadsheet, and The Expected annual rate of return F13 I get #NUM " In IRR evaluation, the value array must be positive or negative numbers". Thank you.
Hi Kalinka, thanks for commenting. The website i was using in this video to get EPS data was morningstar.com :) Also, negative EPS won't work in this calculator. Negative EPS is kind of another story all together. You should check out this video here too when you get a chance about valuing companies that aren't profitable yet: ruclips.net/video/Ic0Hb0UoZPM/видео.html
@@IntelligentStockInvesting Ok thank you so much for the website and thank you for the video. And thank you for the quick reply. :) Have a wonderful day!
@@KalinkaBg24 thanks, you too!
@@KalinkaBg24 thanks, you too!
There were a number of small cap stocks that did well once the pandemic ramped up. Oil demand pulled back (which consequently brought share prices wayy down), obviously, a number of the :stay at home" stocks faired very well. Amazon shot up around 300%. Common knowledge for sure. The Buffet Indicator is really high. A lot of people are expecting a market crash in the near-mid future. That could present huge buying opportunities for those who can afford it. Let's just hope the entire economy doesn't collapse in its wake.
We'll have to see how it all plays out ;)
How would I know the life span of a company?
It's impossible to know of course but the good thing is that the majority of a companies value is made up of the present value of the cash flows it will generate in the next 10-20 years anyways. The further out you go in time the less those cash flows contribute to the value because of the time value of money. the other thing you can do to make sure it doesn't matter is to only buy the companies that are so obviously a good investment that whether it lasts for 20 years or 40 doesn't matter. Hope that helps! It's a great question.
@@IntelligentStockInvesting Thank you. And one other question. Would you use enterprise value per share for someone like Coca Cola who has quite a lot of debt?
@@korayhalil2155 I would use enterprise value per share yes. I think of buying shares in the same way that I would think about it if I was buying the entire business. $100 purchase price + taking on $50 of debt that will need to be paid back eventually, is the same as a $150 purchase price and no debt taken on. Hope that helps! :)
@@IntelligentStockInvesting Thank you i appreciate it. Can you just kindly explain what you did at 2:13? Did you add up the percentage changes and divide by number of years?
Why did you add up the first 3 years and divide them by 3 and not add up all of them and divide the total??
@@korayhalil2155 Hi Koray, what I was trying to do there was get an idea of the average growth rate from one year to the next but over 3 year period increments. I don't like this way of doing it now though and I'm going to put out a video next week on the best way to use historical data to estimate future growth rates :)
I slowed the Video down but I can’t see all the equations even if I pause it. So now I’m not understanding how to get it right.
Lol I just tried this with BP, and halfway through I realized that it's impossible to get a consistent average earnings growth rate because their numbers are all over the place...
Ya it's tricky for some companies 😛
I love this series. I wrote a small dumb intrinsic value calculator in python based on what I learned here:
github.com/thehoneymad/StockCat
Neat! Nice work.
guessing game
Absolutely! But the idea is to only take the bets that are obvious :)
This calculation is wrong
What’s wrong about it?
the best teacher i never had until now 🥹
Thank you sir
Back when Morningstar had nice historical table. Good times. Today it is useless.