Oct 28, 2016
Learn ways technology is impacting value investing and ways it’s not.
Have you checked out the Creating Wealth podcast yet with Jason Hartman? It’s full of amazing information and over 700 podcasts about real estate investing. If you like this podcast, you’ll like that one too. http://bit.ly/wealthpod
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Listener question Friday! Here’s a question from Torben.
I've listened to your podcast for several months now and find it very useful. Your pragmatic approach to finance is very applicable in real life. I personally apply the value investing approach with inspiration from the growth investment theories. Perhaps you could do a podcast about value investing? From Graham and Buffet, over the ModernGraham approach, to how value investing will play a role in an investing world, where tangible assets are much smaller than intagibles, and most products and services can be replaced by technological developments in an instant? These developments challenge the fundamental value approach, which looks for large, stable, and cash generating businesses - so how are these theories going to survive in a world where these types of companies become more scarce?
I hope this could be inspiration for a podcast topic.
In value investing, you’re looking to buy businesses below their value. Of course a business is worth it’s assets minus liabilities + a multiple of cash flow. What is the multiple? It depends on the type of business, how regular the income stream is, etc. A steady rental income vs. a biotech.
Being overly concerned with a PE ratio can be a value trap. Today, many financials have low PE’s, but I wouldn’t want to own them. I’ve found many of the best quality stocks have high PE ratios and I’ve always been ok with that as long as it’s not excessive.
There are times that the whole stock market can get excessive PE ratios, that’s a time to be cautious. In 1999, PE’s hit 50 and higher, but it was in 2009 that PE’s hit 120! Today, they are at about 23-24 which is on the higher side historically, but no where near where they have been. A PE will average around 18, so anything above that is more expensive and below is considered a value or cheap.
I’ve found placing too much emphasis on PE is NOT the way to buy stocks. For me, earnings are everything and IBD is good at putting stocks through a CANSLIM filter that picks the best for you. Some in the IBD 50 even have PE ratios of 14, 16, & 22 if that’s important to you.
They are not “value” stocks, they are “growth” stocks, but that’s a matter of philosophy, personal choice and comfort level. I’ve not found a lot of investors who can copy Warren Buffett’s success, but I have seen a lot of investors who are very successful investors without following his or Ben Graham’s formulas.
So what about valuing businesses?
If a business doesn’t have tangible assets, but is intellectual property, like an app, you’re going to base the valuation more on the cash flow.
If you’re buying a gold mine and there’s gold in the ground, obviously you have to value the gold separately from the cash flow.
It doesn’t change value investing. You still want to buy at a discount. You still can have a “margin of safety” if the valuation is higher than the stock price.
If Google is worth X because of it’s advertising revenue, but it’s selling at a lower price because the stock market drops, you’ll still want to buy it on sale!
The fact that there are more businesses being started with intangibles is probably a long-term trend.
But there are still a lot of brick and mortar businesses that are getting funded. Clothing, food, beverages, restaurants, etc.
When making a long-term investing decision, you will want to think about such things. I think that’s why Buffett was reluctant to invest in tech in the past, because it was hard to know who was going to be a winner long-term.
I remember Nokia phones and Blackberrys and how they were the rage before iPhones replaced them. If Apple doesn’t keep innovating, another phone may come along and replace it!
Think about the things that we will still need to be using in 10 - 20 years. Keep away from a “trend” that could be a “flash in the pan” like maybe “Pokemon go”?
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