The History and Rebirth of Growth Stocks Investing.

By BetterInvesting On April 5, 2012 ·

The editorial of the January issue of BetterInvesting Magazine features a letter from Ted Brooks of North Carolina, who provides a brief history of growth stock investing and the important role BetterInvesting co-founder George Nicholson played in popularizing this investing philosophy. In 1940, when Nicholson was just beginning his “bold experiment” of helping individual investors form investment clubs to pool resources and analyze stocks, growth stock investing was no longer in vogue, replaced by Benjamin Graham’s value approach in light of the 1929 crash.

January 2012 vol 61, No. 5 BetterInvesting Magazine

Reader’s Letter Provides Context for the SSG (The Stock Selection Guide)
In investing circles we tend to take some ideas for granted. In August 2005 we published an article discussing the history of growth stock investing. But a recent letter from reader Ted Brooks of North Carolina, spurred by our article on Better¬Investing’s 60th anniversary in the November issue, provides an excellent history lesson. Below is his letter, edited for Associated Press style and length.

When the Dow Jones industrial average was introduced on May 26, 1896, the world of common stocks was beginning to evolve into three distinct categories: railroads, public utilities and “industrials” (everything else). It is important to note that the “industrial” common stocks were not considered an appropriate investment vehicle for the prudent investor at that time; such investors would limit their holdings to bonds, preferred stock and perhaps an occasional railroad or public utility common stock. This attitude prevailed until around World War I.

While eschewing common stock for bonds and preferred stock sounds strange to our ears, it was not without justification. The DJIA started off as an arithmetic average of the stocks’ closing prices. In other words, the average price of stocks in the DJIA initially bounced between about $40 and $80 and did not break $100 until 1906. What few people realize is that prior to 1915, common stock prices were quoted as a percentage of par value (like bonds and preferreds), and par value was typically $100. If these sound like “junk bond” prices to you — you’re right!

During this period, value investing — focusing on dividend yields, low P/E and discount to book value — prevailed. These concepts carried over readily from the realm of bond and preferred stock analysis.

The man generally credited with introducing the concept of growth stock investing is Edgar Lawrence Smith. Smith’s book, Common Stocks as Long Term Investments, stated that common stocks had a history of outperforming bonds under all economic conditions, going back at least to the end of the Civil War. Now, in early 1925, both the book’s title and theme were outrageous statements that flew in the face of all prevailing logic — something present-day investors do not fully appreciate. Unfortunately, Smith’s book and ideas would see a meteoric rise and fall.In the first edition of Security Analysis (c. 1934), Benjamin Graham wrote a harsh criticism of Smith and his “growth stock” ¬disciples, and he urged investors to go back to the old rules of valuation that were discarded as obsolete during the bubble (leading to the 1929 crash).…

Against this backdrop, it is easier to understand George Nicholson’s courage in proposing the idea of investment clubs in 1940. Individual investors analyzing stocks? Buying growth stocks? George, where have you been for the last decade — living under a rock?

The BetterInvesting principles of demanding consistent growth in sales and earnings over a period of five-10 years, stable or increasing profit margins and closely watching valuations did not come out of thin air. They all came out of the hard lessons learned in the late 1920s when they were disregarded (as they were during the tech and dot-com bubble of the late 1990s). Nicholson recognized that focusing on these aspects — together with a graphical representation known as the SSG — allowed new investors to gain experience without wading into the trickier aspects of differentiating between a “value play” and a “value trap.” Nicholson’s “bold experiment” required a leader possessing both courage and clear thinking to make it reality in that historical context. I think all of these things combine to make Nicholson’s legacy what it is.

Neil Woodford: Why I Sold Tesco

Neil Woodford: Why I Sold Tesco

Barney Hatt

Published in Investing on 16 April 2012

The City super-investor explains why he no longer holds the supermarket.
Neil Woodford has revealed why he sold all of his shares inTesco (LSE: TSCO), despite admitting some reservations with the price trading at a "distressed" valuation.
Mr Woodford, who is possibly the City's most successful fund manager, owned about 167 million Tesco shares before the sale, which at the time represented about 3.4% of his market-thumping Invesco Perpetual Income and High Income funds.
Writing in the Telegraph, Mr Woodford said he placed too much confidence in the business's ability to cope with the economic headwinds:
"Until recently, I believed that food retailers such as Tesco would prove more resilient to the travails of the UK consumer than those that were more reliant on discretionary spending, but Tesco's Christmas trading update earlier this year changed my mind".
"However Tesco's problems are not just down to the difficult consumer environment and with the benefit of hindsight it is evident some of the company's investment decisions in recent years have not created the value that they should have -- or not yet at least."
In January's trading update, Tesco revealed a poor Christmas period and acknowledged rising costs, a move that sparked a 16% share-price fall.
The profit warning, reportedly Tesco's first for at least two decades, spooked the market and investors who backed the stock in the belief food retailers would be a defensive play in the volatile markets.
Mr Woodford explained: "Moves into non-food merchandise and building much bigger stores to cope with an expanding product range seem to have contributed to Tesco's current issues, lessening its defensive qualities."
"Investments overseas in areas such as the US, India and China, have not yet fulfilled their potential or enhanced shareholder returns."
He added another worrying aspect about holding the shares was rivals seizing upon the opportunity to regain market share as Tesco went through a period of transition:
"I have held Tesco shares in my funds for most of the past 20 years, during which time it has proved to be a very successful long-term investment."
"But I now find myself worrying more than ever about the risks -- both macro-economic and business specific risks -- that this investment now entails."
Mr Woodford believes his other holdings are better blue-chip bets, including the UK's fourth-largest supermarket, Wm Morrison (LSE: MRW), which has better growth opportunities in the UK and less exposure to non-food items.
The rest of the proceeds have been recycled into less cyclical businesses, which Mr Woodford believes will reduce the overall economic sensitivity of his Invesco portfolios. 
Indeed, he may have added to smaller holdings such as Smith & Nephew (LSE: SN) andSerco (LSE: SRP), or topped up on old favourites such as GlaxoSmithKline (LSE: GSK) andVodafone (LSE: VOD)
However, at least one master investor is sticking by Tesco.
While Mr Woodford was selling the retailer, Warren Buffett was buying and has now accumulated 508 million Tesco shares, which represent about 5% of the supermarket and roughly 1.5% of the common-stock portfolio within Mr Buffett's Berkshire Hathaway (NYSE: BRK-B.US) conglomerate. You may wish to read this special free report produced by the Fool, which explains why Warren Buffett still rates Tesco as his top UK blue chip!
On Wednesday, Tesco is expected to own up to further trading pressure when it reports its full-year results. Brokers reckon a 2% decline in first-quarter domestic sales may be revealed.

Equity Valuation Methods

Insightful discussion on valuation methods from a blog.

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.


PS: Any suggestions about how wrong/ right this method is??

Hi Kannan,

I saw this link 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??

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!!

Dividend Discount Model

Dividend Discount Model

The dividend discount model is a more conservative variation of discounted cash flows, that says a share of stock is worth the present value of its future dividends, rather than its earnings. This model was popularized by John Burr Williams in The Theory of Investment Value. Williams wrote his book in the 1930s, when people were trying to establish a science of investing after getting burned by the irrational exuberance and accounting tricks of the previous decade. (Plus ca change, Jack.) Williams decided that reported earnings were way too nebulous to be trusted, like buying "bees for their buzz" instead of their honey, and that the only return you could really believe in was an actual check in the mail:
... a stock is worth the present value of all the dividends ever to be paid upon it, no more, no less... Present earnings, outlook, financial condition, and capitalization should bear upon the price of a stock only as they assist buyers and sellers in estimating future dividends.
Short version: you buy "a stock, by heck, for her dividends."
If you'd like to try this method out, you can use the regular calculator, substituting dividends for earnings.  (You presumably use a lower discount rate to reflect lower risk, since a dividend is more of a sure thing than reported earnings; the only guidance Williams gives here is that you use your desired rate of return as the discount rate.) You can also see the dividend discount formula - again, think "dividends" when the page says "earnings".

The dividend discount model can be applied effectively only when a company is already distributing a significant amount of earnings as dividends. But in theory it applies to all cases, since even retained earnings should eventually turn into dividends. That's because once a company reaches its "mature" stage it won't need to reinvest in its growth, so management can begin distributing cash to the shareholders. (Plan "B" would be for the CEO to pursue some insane acquisition, just to gratify his bloated ego.) As Williams puts it,

If earnings not paid out in dividends are all successfully reinvested... then these earnings should produce dividends later; if not, then they are money lost.... In short, a stock is worth only what you can get out of it.

Dividend Taxes

Williams mentions that the "rich men" of his day were starting to prefer dividends over capital gains, due to some recent changes in the tax code.  Fast-forward a few generations... and in May 2003 the tax rate on dividends was lowered to match that on long term capital gains. Whether or not any rich men were involved, the change is logical in the sense that companies that ought to be paying dividends will no longer have a disincentive for doing so out of concerns for the tax consequences to their shareholders. But one thing that probably won't ever happen is setting the dividend tax even lower than the long term capital gains tax, because doing so would disadvantage the stock of growing companies that really can't pay dividends yet - what would it mean for our economic growth if we made it harder for "growth" companies to raise capital? 

Substitute Dividends for Earnings in these calculators

Discounted Cash Flows Calculator

Is Investing Gambling?

I recently returned from a vacation in Las Vegas, Nevada and while I was out there, I received an interesting e-mail from a lawyer in Texas who was hesitant to let his teenage son begin investing because he thought it was just a legalized way for his son to gamble away his college savings. Now, I've heard many reluctant people refer to investing as "another legalized form of gambling" and I usually shrug it off with a smile but the fact is that investing is NOT gambling.

Webster's dictionary defines gambling as "to engage in a game of chance for something of value". In that sense, I suppose you could say investing is gambling but there is a more to it than just a dictionary definition.Gambling, for the most part, is simply a game of chance where the odds are in the house's favor. You hear amazing stories of how people have won thousands of dollars on a single slot pull, but the fact remains that you aren't expected to win. You enter a casino and you hope to win big but the odds of it happening are slim to none. That's the reason why a city like Las Vegas can grow so large. After all, the town wasn't built on winners.

Investing, on the other hand, is something in which the investor has the odds in their favor. One invests with the expectation of increasing the value of their portfolio. The reason is because the stock market has historically returned an average of 13% each year. Granted, there are risks involved and you don't always earn a positive return but, with the proper research, you can tip the odds even more in your favor.There are some professional gamblers who are successful but I doubt that they were successful from the very start. They probably lost money when they first started out and then learned from their mistakes in order to become as successful as they are now. But with investing, you don't have to lose money in order to invest properly. You can educate yourself before you begin by learning how investing works and then invest for the long-term.  Investing for the short-term or daytrading can be considered gambling because it's virtually impossible to see the very near-term future of a stock, but if you educate yourself and then take a long-term perspective, there is an excellent chance that you will earn a great return on your investment.

Buffett's Opinion on Calculation of Intrinsic Value

Try using Free cash flow.
Set a process for identifying future cash flows and based on that try to calculate intrinsic value of a company.

Read what is written by Warren Buffett in his letters to shareholders. 

While writing about Calculation of Intrinsic value in the Owners manual Buffet says...

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.

Read owners manual on

Common Investing Mistakes

Investing for the long-term can be extremely beneficial to the person who takes advantage of it. But that doesn't mean that there aren't any pitfalls. Here are five common investing mistakes that you should avoid if you hope to fully benefit from a long-term investing approach.

Investments Are Too Conservative/RiskyA big mistake people make is that they pick investments which are too conservative or risky for their investment goals. For example, a person who invests too conservatively with quite a bit of time before retirement might find that they will need to save more than they planned to because their investments aren't appreciating enough. An investor who is nearing their financial goals who decides to put their money in more volatile investments will find that they are taking unnecessary risks with their portfolio.

If you want to find out how much risk you should be taking with your investments, take time to ask yourself three questions: "What am I investing for?", "How much time do I have before I need the money?", and "How much can I invest?" Then you might want to talk it over with an investment professional. Or look at our model portfolios.

Losing Interest in InvestingI know it's hard to imagine but there are actually some people who just aren't interested in investing. While you don't have to have a passion for investing to accumulate wealth in the long-term, it definitely helps. What I've found is that a lot of people lose interest in their investments after a couple years. When they first begin investing, they might tell themselves "I am going to invest $100 each month until I retire" but as time passes, they decide that they would rather spend that extra money each month. This is a big pitfall that you should avoid because that extra spending money could literally cost you hundreds of thousands of dollars in the long run.

Losing Sight of Your Financial GoalsThe 1990's had an incredible bull market that spawned a new type of investing...daytrading. This bull market led to great gains and has made quite a few people extremely wealthy, and the media has hyped high-flying stocks to get people's attention. The problem with this is that it has caused many people to forget their financial goals. With all this hype, people are investing in these hot stocks, even with college or retirement just around the corner.If you're nearing retirement or whatever it is you're saving for, don't give in to the hype. Instead, keep your mind on your goals, instead of ways to get rich quick.

Investing in What You Don't KnowYou may have heard of the popular investing concept "invest in what you know." Another way of saying this is "don't invest in what you don't know". A lot of people invest in companies that they know little or nothing about. This can hurt them because a situation might arise that they didn't know about.You can't expect to know everything about a certain stock but it does help to invest in what you know the most. Rather than investing in what you don't know, get out a piece of paper and write down the names of some companies that you do know about and then look up their stocks.

Not Educating YourselfThe previous four mistakes that investors make are important ones but this is probably the biggest mistake of all. Far too many people want to invest but they don't know enough about it. Rather than taking the time to learn what they can, they decide to try investing on their own first.It is extremely important to have a good understanding of how investing works before you actually start, especially if you plan on investing in stocks or any riskier investments. Getting experience in investing is important but it's wise to have at least a basic understanding before you decide to do so.From time to time, investors do make mistakes but these are five of the biggest mistakes that you should try to avoid. If you can do that then you will be tipping the odds in your favor when you are investing.

The Five Forces of Competition

" We would rather own a great business at a fair price than bad a business at a great price" - Warren Buffet
These words have always been an issue for me. After all, it seems that we spend so much time worrying about discount rates, analysts' projections ,and discounted cash flow valuations. Who has time to try and go through the very hard, time-consuming task of not just analyzing the financial statements but the entire business structure as well?
Unfortunately we are never really taught how to evaluate a business. After all, long-term competitive advantage doesn't quite have the same appeal as easy-to-package ratios like a P/E ratio or book value. Yet for those of us who invest in the market, analyzing this is perhaps one of the most important and left-out steps in buying a share in a company.  Sure the price you pay is important but in the end the sad truth is that no one knows what any one company is going to earn in the future.  So how do we figure out if a company has the prospects we are looking for without an MBA? Michael Porter of Harvard University and author of Competitive Advantage developed the best method I know of. It is called the 5 forces of competition and it tells us in a nutshell the 5 things we must determine when evaluating a business's profitability in the future. These are as follows.

1. Threat of entry
This is how easy it is for a firm to enter the industry that your company is in. This is important because any industry worth looking at should earn above average returns. Those returns ultimately attract competitors who want to earn those high returns as well. However, when too many competitors join the fray it eventually drives prices and returns down and makes the industry unattractive. Usually companies that can protect themselves (also known as having a moat around their business) are either business that require high investment to enter (like Aerospace or Oil), have important brands (like Coke), have high switching to change (like Microsoft) or have a patent barring competitors (like drugs)

2. Bargaining power of suppliers

Companies who have only a few suppliers can't bargain with them or play one off another for better prices. Thisleads to higher priced inputs and dilutes returns (like airlines).

3. Bargaining power of buyers

This is affected by how big your customers are and how much revenue they constitute as well as other things. For instance Wal-Mart has a lot of power with suppliers because it buys so much of their inventory and is thus a large percent of those companies revenues. It is no surprise then that these companies have lived and died with Wal-Mart's orders and would do anything to protect their business with them.

4. Availability of substitutes 

This is how easily people can find something else if you were to raise prices or if they somehow found your offering unfavorable. For instance, oil has no substitute to date. People either pay the price or don't drive. Compare this with designer clothes, where if the price goes up you can always buy low priced jeans instead. For those of us who are economics students, this is also called elasticity of demand.

5. Competitive rivalry

This is how competitive an industry is. For instance, if there are lots of companies selling essentially the same products there will always end up being a price war which will severely hurt the company' profits. The wireless companies have had this problem for years and fierce competition has made it tough for them to make a profit.

Now let's take a look at an example of how we can use this when analyzing the cable industry.

Intrinsic Stock Value

When it comes to investing, everyone wants to know what stocks are going to go up. Unless you have the ability to see into the future, you'll have to settle for doing things the old fashioned way: by research them. Even though it may not be possible to be right on all of your stock picks, you can tilt the odds in your favor by learning as much as you can about the stocks you're investing in. One useful tool that you can use to make an educated decision on whether or not to buy a stock is the intrinsic value, which gives you an idea of approximately what the stock is worth.

Valuing a stock is not always very easy to do. Ratios like the P/E ratio give you a quick idea but it doesn't go into depth very well. The intrinsic value makes up for some of what the P/E ratio lacks by accounting for its growth rate and the discount rate. The growth rate allows the intrinsic value (IV) to value the stock not only on their currentearnings per share but also on their future earnings per share. The term "discount rate" refers to the rate that you would have to earn to make an investment worth the risk. By accounting for this, it helps weed out some stocks that may be less lucrative investments.

Calculating the Intrinsic Value
There are actually a few different ways to calculate the IV but we'll just go over the most common method. To get started, you must first gather the company's EPS figures. You then take this number and divide it by the annual return of the investment you are comparing it with (discount rate). For example, if XYZ stock has $3.46 in earnings per share and you want to compare it with 6% treasury bonds, you simply divide 3.46 by .06 to get an intrinsic value of 57.66. This means that XYZ stock has an intrinsic value of 57.66. So this means that, relative to government bonds, the stock is "worth" about $58 per share.

That example only takes into consideration the stock's current earnings. If you are interested in finding out what the stock will theoretically be worth next year, you just substitute next years expected EPS with the current one. So if XYZ stock is expected to earn $3.90 per share next year, you divide 3.90 by .06 which gives you an intrinsic value of $65, relative to government bonds.

Calculating the intrinsic value seems pretty complicated and if you don't like doing all of the math, you can cheat by using's evaluator to have it figure the IV for you.

Using the Intrinsic Value
I know all of this sounds pretty confusing but, trust me, it really isn't. Calculating the intrinsic value is probably the most confusing part. Using it is actually pretty easy. Now that you know what the stock is "worth", you can compare its current stock price with its intrinsic value to decide if it is worth the risk. For example, if XYZ was trading at $45, you would consider it undervalued because its trading at a price that is less than its IV of $58. However, if it was trading at $75 per share, it would be considered overvalued.

The only big disadvantage that the intrinsic value has is that it doesn't allow you to calculate it for stocks that don't have positive earnings. So if you were hoping to figure out the value of that hot new internet stock, you might want to use another method. But, in general, the intrinsic value has very nice advantages over other methods and I've even found it more accurate. By using it, you give yourself one more way to check out a stock to decide if it really is worth the risk.

Calculation of Intrinsic Value

Calculation of Intrinsic Value

I have created an excel sheet that could be usefull when calculating Intrinsic values of stocks.
All you have to do is open the excel sheet, and fill in the red numbers in the excel sheet, which you can find on the links next to each box.
Excel will then automatically calculate the intrinsic value of the stock you are analyzing.
If you want to change the ticker, open a hyperlink in a box next to a red number, and change the ticker in the web address.
For example, if you are looking at and you would like to see the data of Coca Cola co. instead of Pepsico, change the ticker from PEP (which is the ticker of Pepsico) to KO (which is the ticker of Coca Cola).
The link to visit then becomes: for example.
Method number one is a very simplistic model, which calculates a price target for the next 5 years based on historical valuations, the last 4 quarters results and future growth.
Method number 2 is more advanced, and takes into account Free cash flow, net cash position and future growth.
This method discounts the future values at a discount rate of 9% per year, which is the return you can expect over the long run in the stock market (7% price appreciation per year + 2% dividend yield per year).
To open the excel sheet, please click hereCalculate_Intrinsic_Value
Please be aware that calculating an intrinsic value is not an exact science. It is based on subjective estimates.
The best thing you can do is to use methods used by the biggest value investors in the world, such as Warren buffet, Joel Greenblatt, Monish Pabrai and the likes…

How to Calculate Intrinsic Value for Stock Investing

How to Calculate Intrinsic Value

Discounted Earnings, Instead of Just Cash Flow

Summarized Overview

You will find information about why you should calculate intrinsic value in stock market investing, and step by step guide on how to do it.
You will also find information about which key financial ratios to use and what you have to do after calculating intrinsic value.

Why You should Calculate Intrinsic Value

Simply because, you don't buy any stock at any price, do you? Do you know why? Because you want as much return as possible!
The price you are paying is the ultimate determinant for the rate of return that you'll be earning. The higher the price you pay for it, you'll be getting lower rate of return. This is why, you need to know how much a stock worth. Once you know its value, you can identify which stocks are traded at discounted price.
However, buying a stock simply because it is cheap is not the right approach either. This is another reason to calculate intrinsic value. To buy quality stocks at discounted price, value for money right?

How to Calculate Intrinsic Value

The way to go is, search for stocks whose prospects you believe in ( with good stock pick method ) and then use a valuation technique to ensure the purchase price is acceptable. Here, I use net present value (NPV) formula.
How to do it? Let say you are valuing stock ABC,
Case Study to calculate Intrinsic Value
From 13 years historical data, you get the information as above. To proceed, you also need to firm up your expectation based on your risk profile. In this example:
  • I set my investment horizon as long as ten years from 2007. So that in 2018 I can use the fund to finance my children's study
  • I am confident stock ABC will continue growing 13 per cent per year for the next ten years (13 years records prove this stock able to grow 13 per cent EPS per year)
  • I assume stock ABC will be having the same PER and dividend payout by end of 2017 (or early in 2018)

  • I am expecting 12 per cent return on investment (ROI) so that my initial investment able to cover my children's tuition costs in ten years time.

  • Let's start calculating intrinsic value of stock ABC.
    Step One: Forecast Share Price

    First of all, you need to forecast its share price ten years down the road. In this case, I project the price for the next ten years using 13 per cent per year growth.
    Step Two: Forecast Total Future Value

    Secondly, you need to calculate the total future value. This must include the potential dividend as well.
    Dividend Payout


    Future Value 2018
    Look, some investors doesn't care much about dividend. To them, dividend is just too small to be considered. But as it has effect to the total future value, it should be taken into consideration.
    By the end of the day, you can compare the stock's profitability to others; which may not pay any dividend at all.
    Step Three: Calculate Intrinsic Value

    After having all these data, then only you can calculate the intrinsic value for stock ABC.
    Intrinsic Value stock ABC
    Step Four: Compare with Current Stock Price

    The intrinsic value above is because my goal is to get 12 per cent per annum from this stock. If so, current stock's price, which is $33.50, is acceptable indeed (stock price is below the intrinsic value).
    How Do You
    Intrinsic Value?

    Discounted Cashflow
    Discounted Dividend
    Discounted Earnings
    Never Calculate
    What For?
    But if your goal is about getting 25 per cent per annum return on investment, the intrinsic value will be $22. In this case, the current stock price will no longer acceptable for you.
    For this same reason, you can say that current stock price is suit to those who are aiming for 15 per cent return per annum (in economics, this called as Internal Rate of Return or IRR)

    What's Next?

    As you can see, intrinsic value can be relatively different from one investor to another depending on the expected return. Expecting very high return will limit your investment options. On the other hand, having very low expected return may as well better keep the cash in fixed deposit.
    As an investor, it is crucial to set a realistic target on the expected profits.

    It is better if before you calculate intrinsic value of your selected stock, assess your own risk profile first. This will help you to determine your realistic preferred return based on your need, ability and investing habits.  Eager to buy stock? Hang on first! You need to have the fair value as another comparison. This is what mention by Warren Buffet's guru, the margin of safety 

    The Evolution of Warren Buffett as an Investor

    The Evolution of Warren Buffett as an Investor
    June 16th, 2011

    Before Warren Buffett became Chairman and CEO of Berkshire Hathaway, he ran a successful investment partnership. But his style of investing was not always the same, it gradually evolved over time. His high school jobs consisted of varied ventures including selling golf balls and delivering papers. The money he saved from these jobs was invested in the stock market using different investment styles.
    Perhaps trying to find the best style for himself, Buffett had read every book related to finance in the Omaha Public Library by the time he graduated college.
    His investment style up to this point was wide ranging. He had studied many different techniques including odd-lot investing and technical analysis.

    Buffett’s Investing Framework Takes Shape

    In 1950 he came across a copy of The Intelligent Investor by Benjamin Graham, his future mentor at Columbia. This book had a dramatic effect on Buffett’s investment style.
    Graham’s investment style could be seen on a deeper level in his other book, Security Analysis, which was co-authored by David Dodd.
    Within Graham’s two books, an investing framework was outlined that would shape Buffett’s stock selection for the rest of his career.
    Graham favored looking at a stock as a piece of a business. He viewed volatility more as an opportunity and less as a risk.

    Working for Graham

    While also a professor at Columbia, Graham ran the investment partnership Graham-Newman Corporation. Through his investment partnership he invested using the Net Current Asset Value formula to identify companies. Using this formula he was able to find companies selling for below an estimation of liquidation value.
    In the early 1950s, Buffet was piggybacking off of Graham’s ideas with his own money.
    Through his partnership, Graham would sometimes buy large stakes in companies to influence managements and join the board of directors. Some examples include investments in Northern Pipeline, Philadelphia and Reading Coal & Iron Company, and Marshall-Wells.
    It was at the Marshall-Wells annual stockholder meeting that Buffett first met Walter Schloss, whom he would later be colleagues with. It wasn’t until 1954 that Buffet finally convinced Graham to hire him at Graham-Newman.
    There, Buffet worked alongside Schloss in a spare room manually computing the liquidation value of companies. A signature trait of this investing was that little time was spent evaluating management. Buffet and Schloss merely filled out simple forms which would be used by Graham to make his investment decisions.
    By ignoring the qualitative side, Graham’s method was largely quantitative.

    The Early Partnership

    After the Graham-Newman partnership was closed in 1956, Buffet formed his own investment partnership. He employed many of the same methods that he used while working for Graham.
    Buffet followed in his mentor’s footsteps by buying companies selling below liquidation value and then proceeding to influence management. He did this with success at Sandborn Map, Dempster Mill Manufacturing, and Berkshire Hathaway.

    The Birth of Berkshire Hathaway

    Berkshire Hathaway did not start out as the conglomerate it is today, but as a textile mill selling below liquidation value. Buffett first began buying it in 1962 and by 1965 he had taken control of the company’s board and made himself Chairman.
    During this time, Buffett’s investing style began to change again.
    While he still favored buying companies that were selling below intrinsic value, how he came to a company‘s intrinsic value began to change.
    While still managing his partnerships, Buffett was introduced to Charlie Munger. Munger felt better about buying a great business with high returns on capital than buying a struggling company selling below liquidation value.

    Buffett’s Investing Style Today

    Over time, Buffett and Munger both began to move further from the strict Graham approach and more towards buying great businesses. By placing a greater emphasis on the intrinsic value as determined by the operating company’s future cash flows (rather than the company’s assets) a company’s qualitative characteristics became more important.
    Buffett views Phillip Fisher’s book Common Stocks and Uncommon Profits as the best guide to successful qualitative investing.
    By 1970, Buffett’s partnerships had been wound down and Buffett concentrated his efforts on running Berkshire Hathaway.
    Over the past 40 years Buffett has been able to combine the quantitative style of Graham with the qualitative style of Fisher, and in doing so has become arguably the greatest investor of all time.
    About the Author: Daniel Rudewicz is a CFA charter holder and the managing member of the deep value investment company Furlong Financial, LLC. He will begin attending Georgetown Law in the evenings this fall. To contact him please send an email to .

    Why your portfolio may not be as healthy as you think

    Why your portfolio may not be as healthy as you think
    Quarterly statements rarely tell the whole story
    By Tom McFeat, CBC News Posted: Feb 27, 2012 5:36 AM ET

    You can scan your quarterly statements for mention of your personal rate of return, but you may not find it. Many investment advisers and firms don't routinely provide it. (iStock)

    You've just received the quarterly statement from your mutual fund company or financial adviser, and the results seem good. Your portfolio's worth has grown by five per cent from the last quarter and by 15 per cent over the past year —in fact, you see that your portfolio has doubled in the past five years.
    Wow, you think, my financial adviser is a genius!
    Not so fast.
    Chances are that the figures you've been provided with show the overall value of your investment holdings. The catch is that most statements don't clearly show how that figure has been inflated by your regular contributions and perhaps by regular deposits of interest.

    Warren MacKenzie, CEO of Toronto-based Weigh House Investor Services, says that when he worked at a big mutual fund company 20 years ago, he suggested they provide clients with calculations of their personal rate of return rather than the overall growth of their portfolio.In other words, that seemingly glowing return on your investments could be due in large part to the additional contributions you've made, not to growth of the investments themselves.
    "'Great idea,'" they said. 'We'll get right on it.'"
    Twenty years later, he's still waiting.

    Common error

    To figure out the real performance of your portfolio, you have to account for all those deposits (and any withdrawals). Failing to do that will leave you with a wildly inaccurate picture of how your investment portfolio has been doing.
    It sounds simple, but it's surprising how often this factor is overlooked.
    Back in the 1990s, a group of women investors from Beardstown, Ill., realized they'd made this mistake – but not before they'd written a best-selling book about how their small investors club had beaten the stock market and produced an annualized return of 23.4 per cent over 10 years. The book crowed about how their approach to investing delivered results that far surpassed what most professional money managers had been able to achieve.
    The only trouble was, they had forgotten to account for those cash inflows into their club. The investment growth of their portfolio over those 10 years was actually just 9.1 per cent annually — six percentage points lower than what the broad market had returned.
    Embarrassing doesn't begin to describe the fallout. Their well-meaning but hopelessly inaccurate bestseller — The Beardstown Ladies Common-Sense Investment Guide: How We Beat the Market and How You Can Too — was pulled from store shelves just as the lawsuits began to fly.

    Rate of return

    So, how do you avoid the Beardstown fiasco and figure out how you'rereally doing financially?
    What you need to calculate is your own internal rate of return (IRR) — also known as the personal rate of return or the dollar-weighted rate of return.
    What you need to calculate is your own internal rate of return (IRR) — also known as the personal rate of return or the dollar-weighted rate of return.
    You can scan your quarterly statements for a mention of this figure, but you may not find it. Many advisers and firms don't routinely provide it.
    Why not?
    Well, that would make it easier to compare just how well your portfolio has done relative to an appropriate benchmark, such as the average return of the markets. Some advisers, it seems, don't want their clients to know the ugly truth that they aren't adding much, if any, value for the fees they charge.
    MacKenzie has witnessed first-hand how reluctant some advisers are to reveal how well (or poorly) their clients are actually faring compared to the benchmark.
    "One woman who came to see us said her adviser told her that [calculating her benchmark] couldn't be done because she had both stocks and bonds," he said.
    The bottom line quickly became clearer, said MacKenzie, when his own calculations showed the adviser had badly underperformed the benchmark.
    "I think he's afraid he'll lose the account if he comes clean," MacKenzie said.

    Figuring it out

    Figuring out one's personal rate of return in a portfolio is not the easiest calculation to perform, especially for the mathematically challenged. MacKenzie's firm has an online calculator that will do the figuring for you.
    "It's the best one I've seen on the web that's free," says Justin Bender, a portfolio manager at PWL Capital, a fee-based investment management firm.
    Bender cautions that large contributions made just before periods of relatively good or poor performance can skew the results. But for most investors, he says, the Weigh House calculator works well.
    "A lot of advisers like to pretend that active management is paying off," says Bender.
    The calculator can reveal the truth — that most advisers don't outperform benchmarks over the long term.
    Besides its rate of return calculator, Weigh House also has calculators that can figure out if your portfolio's performance is falling short of the appropriate benchmark. One has users spell out their asset mix and compares that with appropriate benchmarks, so if their portfolio is 50 per cent equities and 50 per cent fixed income, they won't be comparing returns to an all-equity benchmark.
    A third calculator tells you how much underperformance can cost you over time. Seeing how relatively small changes in the rate of return can have a huge impact on how much money you'll have in your golden years is sobering stuff, and it leads you to wonder why there isn't a requirement to routinely disclose this information.

    Adviser fees don't always translate into profits

    FAIR Canada — the Canadian Foundation for Advancement of Investor Rights — supports moves to have the industry provide better performance information to investors.
    'Many investors find after 10 years that they're no further ahead than when they started.'— Ermanno Pascutto, Canadian Foundation for Advancement of Investor Rights
    "Performance reporting has not been particularly uniform," says the group's executive director, Ermanno Pascutto, noting that sometimes such reporting is non-existent.
    "Many investors find after 10 years that they're no further ahead than when they started, but the financial adviser has generated large fees."
    That makes it even more critical, he says, that investors be given easy-to-understand information about how their portfolio has been doing so they can see whether their advisers have been earning those fees.
    Still, some firms are coming through. BMO InvestorLine and RBC Direct Investing are two discount brokerage firms that routinely provide their do-it-yourself clients with personal rate of return calculations. Investment counsellors often do this for their high-net-worth clients. But many other firms that actively manage money don't routinely do this, nor do most financial planners.
    What should you do if your adviser says he or she can't — or won't — provide this calculation for you?
    "Find a new adviser," says MacKenzie. "In most cases, they won't volunteer it. But in most cases, if you ask, you can get it."