expr:class='"loading" + data:blog.mobileClass'>

Thursday, December 18, 2014

Is my MBA worth it?

I have just completed my MBA degree at a local institution which has lasted for 18 months and I thought I could share my experience with the program for the benefit of those who are interested to get one.
 
To begin with, there are always two sides of a coin. While there are people who are pro doing it, there are people who are against it on the other side. In this post, I will try to balance both views from my experience with the program.
 


 
My Experience
 
I started off applying for the program much younger during the days. I was 26 when I submitted my applications along with my GMAT score and was contemplating choosing between taking an overseas or local degree and the opportunity costs for each of the program. At the end, I decided on a local institution which allows me to complete the course on a part-time basis and they are located near the town area so I can commute easily after work. Even then, I postponed the admission until a year later due to marriage and job change factor during that year.
 
Midway through the course, I was juggling between work, school, family (with a kid) and blogging at the same time. There were some really busy times when I thought I would have given up but I did not. As a result of these grinding experience, I have become a much better allocator of time where I had to do things very productively with little time to waste. Until today, I still bring this to apply to my everyday life.
 
There are different set of objectives for the people who chose to do their MBA program. Some wanted to change career while others wanted to land an investment banking or consultant role or simply a higher paying job. For me, I wanted to improve on my self-efficacy throughout the program so I could be a better person myself. My objective was clear throughout the program so I just had to focus on it.
 
Thinking back, I have no doubt that taking the course have led me to become a more complete person. For instance, on soft skills, I had become more outspoken and confident giving presentations to the upper management which was not the case prior to the program. The fact that every single module in an MBA class requires at least one project presentation helped to mitigate the fear and get used to it. In terms of the hard skills, I started to look and analyze things on a deeper level and from a different angle, something which was not too apparent to me previously. Also, I learnt that for every decision I made had to be supported with justifications which in some way helped me in my investing because I no longer had to depend on gut feels.
 
Is the $69K MBA worth it?
 
However, to make the argument more logically balanced especially for those who are interested to get one, the MBA is not all rosy as what the media or internet suggested.
 
One of the biggest opportunity costs for taking the MBA is the tuition fees which does not come cheap. I paid $69K for the program over 3 instalments during the 18 month span and $69K can buy you many things, including knowledge. There are also people who will argue that you can learn the course online on your own. Through experience, I affirm that is a true statement. However, what you will miss is the interaction with fellow classmates and professors who will give you different inputs based on the same objective. You probably will also need to be really determined to learn things by yourself and not lose focus along the way. For me, the program was sort of acting as an enforcement to ensure that I adhere to all these commitments without losing focus to the external noises.
 
There are readers who have asked me previously whether the huge tuition fees is worth going for. To me, there are certain financial efficacies in life that should be prioritized first. Basic needs and emergency funds are one of those that I would place a greater focus above anything else. Once these financial issues are sorted out, only can we think about whether the tuition fees are worth going for.
 
There are also some people who think that the MBA is a gateway ticket to higher paying jobs. While to some extent that is true, many will be disappointed if the sole focus is on achieving a high paying dream job.
 
Overall, the MBA is a great program. Taking the MBA is akin to investing in growth companies with potential growth catalysts incorporated into the high target prices set by analyst. It will be up to us to ensure that our own intrinsic value match the expectations at the end of the day. Now, whether or not they are worth going for will depend on your needs, goals and financial situation in your life. Are you game?

Saturday, December 13, 2014

Revisiting Projection Target for 2015

I've been wanting to revisit my projection target for some time now but fails to do it everytime I said it to myself. Some readers have also asked regarding how I came up with my projection target so I thought this would be a good time to explain them.




When I set my projection target back then in 2011, I was leading a single life with an aggressive mode of savings plan with very little mandatory expenses to care for. Saving money was very simple back then. If I feel I wanted an extra challenge to save more money for the week, I'll settle for hawker food all week long and stay out of the malls for the weekends. I am an introvert by nature so staying weekends to play either Football Manager or watching drama would make me very satisfied. Those who played the game or has a habit of watching drama would know what I am talking about. They are addictive in nature so time would pass by extremely quickly. On good times, I could save up to around 90% of my pay. On average, they are usually in between 80% to 85%.

Given the situation back then, I made a very stretched projection target for myself to retire (or semi-retire) from the corporate office by 2020, accumulating $1,414,705.83 in the process and yielding passive income enough to pay for my household expenses. This was done by injecting $60,000/year or $5,000/month and yielding a dividend rate of 6% reinvested into the portfolio. I took out all the other assumptions such as bull or bear scenario because it is something I cannot predict anyway.

Projection Target (Original)
YearYearStarting CapitalCumulative Annual Capital Injection Dividends on Starting CapitalTotal Yearly Dividend PayoutMonthly Passive Income
01/9/2012$100,000.00$60,000.00$6,000.00$6,000.00$500.00
11/9/2013$166,000.00$60,000.00$9,960.00$13,920.00$1,160.00
21/9/2014$245,920.00$60,000.00$14,755.20$19,190.40$1,599.20
31/9/2015$345,030.40$60,000.00$20,701.82$25,453.25$2,121.10
41/9/2016$469,594.05$60,000.00$28,175.64$33,302.84$2,775.24
51/9/2017$627,460.53$60,000.00$37,647.63$43,245.80$3,603.82
61/9/2018$828,572.82$60,000.00$49,714.37$55,909.12$4,659.09
71/9/2019$1,085,594.23$60,000.00$65,135.65$72,090.20$6,007.52
81/9/2020$1,414,705.83$60,000.00$84,882.35$92,807.76$7,733.98


Dividend yield of 6% per annum was somewhat the baseline target I would like to achieve at the end of the day. Of course, judging by my current portfolio, it is yielding at around 5.14% right now so it's not a major problem I would foresee going into the future.

Capital injection of $60,000/year or $5,000/month is the key to the acceleration and this pose a bigger problem going into the future. I was drawing around gross at $5,000/month back in 2012 (I only received started contributing to CPF in 2013 after my SPR application was approved) so the amount of capital injection projected was based on 100% savings rate to target for. Of course, there is still the allowances, 13th month and performance bonus which I did not include that played a part as well but the idea of injecting the full $5,000/month was stretched. I was pretty sure that this was not going to be sustainable but I keep it as it is until today.

Getting a higher education, married life and a kid change the whole perspective of my financial set up today. I am drawing a higher salary compared to back then but the expenses have gone faster than the increase in income. I have also since started my contribution to the CPF since 2013 so the net salary I am taking home has very much been reduced. I am no longer able to save in the high end of the bracket like I used to in the past. These days, I am usually looking at the 50% rate as a personal target. Anything above that, I would consider the month to be extremely successful.

With that in mind, I will be doing a revised projection target by using a rolling forecast method to incorporate my short term target. Since I am using the rolling forecast methodology, I will be revisiting them regularly to see where I stand at certain situations and make changes to them more regularly. The advantage of doing this is I can incorporate changes whenever there are a bull or bear case scenario that are not within our control.

The changes I would make to this is to the capital injection which I have revised from $60,000/year to $36,000/year ($3,000/month). The current starting capital and dividend yield rate would remain as what I currently have in my portfolio. Even though there might be a chance that I will miss out on my 2020 target or possibly face a bear case scenario in the market, I think it's much more realistic to project a short term target this way.

Short-term Projection Target (Rolling Forecast Method)
YearYearStarting CapitalCumulative Annual Capital Injection Dividends on Starting CapitalTotal Yearly Dividend PayoutMonthly Passive Income
31/1/2015$280,820.00*$36,000.00$14,434.00$16,285.00$1,357.00
41/1/2016$333,105.00----






*Based on market value as at Nov 14 portfolio update

I'll be updating my About Me page in a while to incorporate these changes and provide a more realistic and sustainable way of tracking them.

What do you think of the idea? How would you plan for your short term target?Interested to know on some of the other methodology other people are using.


Wednesday, December 10, 2014

Are you having trouble with your own cashflow?

I have written a couple of posts on the concept of cashflow recently. We have looked at how important for companies to maintain a good cashflow management structure to ensure they do not run out of money especially during credit crunch period.
 
In this post, I am going a little personal and closer to what we are dealing with in our daily lives. We will look at the importance of cashflow management from a business entrepreneur and individual employees point of view.
 
 
 
 
Business Entrepreneurs
 
According to research studies, only about 20% of business entrepreneurs bother to track their cashflow movement. Interestingly, 98% of these entrepreneurs are more concerned with their profitability and they pay closer attention to the sales and procurement activities more than anything else. As a result of this, we often see great businesses that are doing exceptionally well ended up under going concern in the end. And it's a shame to be honest.
 
There is no doubt that all companies ultimately depend on profitability to continue their operations. However, while profitability is at the center of the heart of the business, cashflow is the arteries and veins connecting blood to the business. In other words, while it is important for a company to maintain profitability, proper cashflow management ensures that the company is able to function operationally with the navigation of its working capital.
 
If you happen to have set up your own business or experience working in a finance department previously, you would know that companies usually struggle with their collection of receivables for customers that are under sales on credit, even if risk management checksteps have been taken. Without being able to collect these money, there will not be sufficient turnover to pay off the vendors on the other end. It is therefore critical that the Accounts Receivable (AR) and Accounts Payable (AP) are to be aligned and managed effectively. In fact, any businesses should place a considerable amount of effort in controlling cash management activities.
 
Employees
 
From employees point of view, we are often faced with managing our personal cashflow ourselves. If you are working for an organization as an employee, your cash-inflow would be relatively predictable in the form of salary at the end of the month. It will then be up to you on how you would manage this lump sum cash you received to pay off the multi-expenses you have to pay on your list.
 
Working in a finance department myself, I often get requests for salary advance from colleagues who interestingly belong in the top high end bracket. They are not your average type of colleagues whose salaries are bare minimum for them to get through the basic necessities. They are people flushed with cash and with their income could easily purchase almost any tangible things in the world. The strange thing you would ask is why these people are struggling with cashflow with the amount of salaries they earned?
 
December is a special month
 
 
 
For those who are working in organization that entitled you to a 13th month AWS, you may be feeling pretty excited this week as most companies are giving an advance December salary and AWS in view of the upcoming year end closing (for companies with 31 Dec financial year end).
 
I see so many excited faces of colleagues who are awaiting for this moment. But little did they realize that they have to wait a longer period for the next salary in Jan to come in. I expect many will struggle, just as I have experienced myself in the past. We get so used to monthly cashflow turnover that when these patterns are disrupted, all chaos will break loose. Now imagine a worse situation when your work are no longer safe and you are facing the possibility of retrenchment. Are you prepared for that to take place?
 
Now, it is often easy to imagine plans in the head but with little action. We often know that we are vulnerable for these things ourselves but fail to take the next piece of action. It is therefore important that you walk the talk to ensure that you plan well for these emergencies. There are things that I can think of which you can do to help navigate your cashflow:
 
1.) Increasing cashflow frequency
 
For most employees, our incoming cashflow is most likely once a month in the form of salary. The only way we can probably increase our frequency (and amount) is through other investment activities.
 
If you have not start investing,you may consider this option as it can provide you with additional income that compliments your monthly salary. Income generating asset classes such as Stocks, Bonds or Properties provides an alternative route for investors to yield additional income on top of the salaries figure they receive at the end of every month, mostly only fixated at their frustrations. Do note however that you don't lose your capital from your investment by chasing after ridicilous return offered. Always do your own due diligence prior to investing your money.
 
2.) Use last month income to pay for this month expenses
 
A couple of fellow bloggers, LP and Drizzt, talked about how you can utilize a budgeting exercise to use last month income to pay for this month expenses and conversely use this month income for next month expenses and so on. Budgeting and planning ahead would probably save you some serious trouble you can avoid at a later stage, so it would be prudent to use the income you already have in hand to dictate how much you should be spending on your expenses.
 
3.) Credit Card as an alternative
 
Credit card is a double edged sword. They can be extremely useful and beneficial if you know how to use them (by that I don’t mean swiping the card). By using them as an alternative to cash, you are delaying cash outflow into the future and that can save you some ample time to reorganize some of your cash if you are tight. Some people who are less prudent with money management will find this extremely difficult and may backfire in the end. But for those who are savy, credit card can be a very useful handy tool to use.
 
What about you? How do you deal with your cashflow issue?
 

Monday, December 8, 2014

LMIR Trust - Placement issue @ $0.34/share

I can understand why existing shareholders of LMIR Trust are frustrated and this has sent the share price down by 6% today.
 
Sometime in the mid of Sep earlier this year, the management had announced their intention to acquire Lippo Kemang Mall into their portfolio at a cost of $385 million. You can refer to the circular if you wish to read on further on the acquisition.
 
Back then, the Pro Forma for the acquisition looks like this (see below table). The management has intended to fund this acquisition via a mix of internal cash, debt and equity. For the equity portion, the pro forma below used is based on raising $45 million at $0.405/share with an additional 111,111,111 units.

Pro Forma details from Circular

A couple of months passed and shares of LMIR has dropped since then. At a price of $0.37 before yesterday announcement was made, it simply does not make sense to issue the placement at $0.405 anymore since market price is lower. So they came out with a revised by deciding to raise $40 million at issuance $0.34/share with an additional 111,647,000. As a result of this move, this has sent the share price dropping by 6% today. Current price is at $0.34.
 
I've done a quick revised Pro-Forma over my lunch break and changed the additional units as a result of the revised placement. The impact is minimal. DPU has gone down by 1 cents over 6 month period while annualized yield has gone down by 10 basis point. Everything else is assumed to be constant.
 
In fact, at a current price of $0.34, this means that the annualized yield is at an enticing 8.5% (2.9/34). Pretty decent in my opinion.

 
 
Conclusion
 
Existing shareholders must be pissed at the lag of such fund raising timing which cause them to be unfavorable as compared to the original pro-forma. New shareholders who can get in at $0.34/share in the open market are looking at an enticing yield of 8.5% annualized, but do take note that there is a $5m difference ($45m - $40m) from the original pro-forma which the management had to fund now via cash or debt. In other words, if you are a new shareholder, you are getting a better yield but slightly higher gearing on the company.

Earnings Valuation Method - EPV vs DCF

Some people have stressed on referring to a few different metrics when analyzing a company. And they are rightly so.

In this part 3 sequel of the posts, I will share on one of the earnings valuation methodology favored by Bruce Greenwald which is best used in conjunction with the Reproduction Cost value method discussed in the previous post.

Just like how the balance sheet had to be adjusted in the Reproduction Cost method, the income statement had to be adjusted this time in the EPV (Earnings Power Value) method.

The EPV method of valuing earnings are constantly being debated and compared against the more known DCF (Discounted Cash Flow) and DDM (Dividend Discount Model) used across tertiaries and research house. The biggest difference amongst the 3 valuation methodology, as you will see later, is that the latter two takes into account future potential growth and earnings optimism while the EPV method doesn't.

As mentioned previously, the EPV method is best used in conjunction with the Reproduction Cost method, and are suitable to value companies whose cash flows are more volatile and has a young history. So here we go.

The concept of EPV starts with EBIT and begin working through items to adjust from it.

1.) Consider historical trough or peak

The idea is to adjust historical EBIT or EBIT margins based on cyclical business conditions through volatile economic conditions during trough and peak and even them out. This is to ensure that you do not account only for a year of profitability.


2.) Adjust for one-off or extraordinary items

You need to add back any one-off cost or extraordinary items into the EBIT since this does not represent future earnings value. Similarly, any one-off income will need to be deducted from the EBIT.


3.) Add back SG&A and R&D expenses

Greenwald proposed adding back 25% of SG&A and R&D expenses into the EBIT.

The rationale for adding these items back is to account that these costs are expected to provide future earnings benefit to the company, so considering that the EPV method is ignoring terminal growth rate like what is used in DCF, 25% is used as a conservative figure.


4.) Add back Depreciation & Amortization

Greenwald proposed adding back 20-25% of Depreciation and Amortization expenses into the EBIT.

The amount of percentage to be added back depends on the type of accounting treatment used to depreciate the assets. Use this constantly when adding back the PPE on the Reproduction Cost method.


5.) Deduct Maintenance Capital Expenditure

Last but not least, deduct the average amount of maintenance CAPEX used to operate the business.

Once this is done, you get your adjusted EBIT figure and do the same by discounting* them to get your Net EPV.

*Rather than using WACC where you have to work out the CAPM based on specific beta, it will be easier to use a range of discounted rate for discounting purpose.

After you get your Net EPV, compare them with your Reproduction Cost value you have computed earlier. There would be 3 cases you would end up with.





Case A: Asset Value > EPV. In this case, the company has no moat, no strategic advantage, bad management and in a sunset industry.

Case B: Asset Value = EPV. In this case, the company has no moat and is in a competitive industry where companies are earning only their cost of capital. Free entry and exit barrier.

Case C: Asset Value < EPV. In this case, the company has a strong moat, brand recognition, good management and in a sunrise industry.


Comparison with DCF method

DCF method of valuing companies based on earnings is one of the most commonly used across analyst's research house and education tertiaries. The reason why they are being commonly used is because of its simplicity to implement, but Greenwald thinks otherwise. He thinks there are ways too many assumptions and importance placed on future growth that makes the DCF rather unconservative. This is the very same reason why you always see analysts putting high target price for growth companies.

Another notable difference with the DCF method is probably that DCF requires consistent cashflow throughout the predictive nature of the business. This isn't always the case, unless we are talking about companies with predictable recurring income.

In case anyone out there wants a comprehensive template for computing the DCF method, you can contact me at my personal email and I will send you the file. The template is comprehensive as it covers a whole range of additional things such as sensitivity risk of WACC and growth rate, inflation, ROI and plowback ratio. They are done during one of the classes in my MBA program. Here's a preview below.


 

 
 

Conclusion
 
There are no one fits all type of valuation methodology.

The DCF is still one of the most commonly and easiest to use across earnings valuations methodology. If you are uneasy about putting future growth expectations on DCF methodology, you can either increase the discount rate or use a reverse DCF methodology to find out the current market growth expectations based on current price.

If I were to choose, I'll probably use the lower of the two method for conservative purpose when analyzing a company. Again, the devils is always in the detail you put in.

What about you? Which type of earnings valuation do you prefer and why?


Saturday, December 6, 2014

Reconstructing Book Value using Reproduction Cost Basis Method

Triggered upon comments from couple of fellow bloggers, MusicwhizGMGHRichard and Jason in the previous post, I went to read further on Greenwald's take on reconstructing the book value using a Reproduction Cost Basis methodology which I will talk in detail in this part 2 series of valuing assets and how when combined with other earnings metrics such as EPV which he favored (which I will talk in part 3 of the sequel later) more than the DCF method, this could become a powerful valuation method.

This will be a rather long post because I will explain each balance sheet item but if you can stay till the end, you probably will think behind the reason for doing so and can help you in your future asset valuation. I certainly learnt a lot just by doing this.

The idea for this type of asset valuation is to figure out how much a competitor would have to spend in order to replicate the company's business. Unlike Graham's method where he discounted certain percentage of the assets value in his books, the reproduction cost method requires you to go through each line item of the balance sheet thoroughly to see if they require any adjustment.

This may require you to understand some of the accounting treatment and business moats of the company, but we'll see where it takes us.




Balance Sheet (Assets)

1.) Cash & Cash Equivalent

These are taken at face value, assuming you are confident that the cash is really available in the books. So no adjustment is required here.


2.) Marketable securities or investment

These assets are marked to their market value so again no adjustment is required here. This is the very same reason why book value for trading companies and banks are more relevant than say biochemical companies.


3.) Accounts Receivable

You need to add a doubtful reserve premium to this category because a competitor will not have the same competency of being able to perform the same level as the original company.

Do also look out on whether the Accounts Receivable have bad debt provision already accounted for when they are reported in the books. Most accounting treatment requires companies to report net of Accounts Receivables (after less off bad debt provision) in their books but for those who has reported separately, do discount the adjustment for the provision. Depending on the company's risk profile, the provision may look like this.

Overdue Ageing Outstanding

Current - 0%
1-30 days - 2%
31-60 days - 5%
61-90 days - 10%
>90 days - 50%


4.) Inventory

Here, you probably need look at whether you are analyzing US or other Asian companies.

Under IFRS, the LIFO (Last-in-First-out) method for accounting for inventory costs is not allowed, so you can be safe that every companies are using similar accounting treatment. In this case, no adjustment is required.

But if you are analyzing US companies under the US Gaap, some companies may either use LIFO or FIFO method for accounting their inventory. In this regard, you may need to adjust by adding back if the company is restating its accounting treatment from LIFO to FIFO and vice versa.

Do take note also that under IFRS, inventory's write down can be reversed in future periods while US Gaap prohibits that writeback. In any case, do account for all these matters when you are adjusting for reproduction cost.


5.) PPE (Property, Plant and Equipment)

This is one of the thing I have highlighted in my previous post.

Items on the PPE will need to be depreciated over time. And depending on the types of depreciation method the company has chosen, you may be required to adjust back when restating them to a different depreciation method of accounting. E.g: From Double Accelerating to Straight Line method.

Freehold and Leasehold land would also need to be restated to their latest appraisal market price. This means that you would most likely need to add back since they are recorded at historical costs on the PPE.

Machinery and Equipment is a little tricky as they become obsolete over time. However, if the equipment is specialized, they may have a special salvage value you can adjust for.


6.) Goodwill

Goodwill is harder to estimate as they represent an intangible part of the company that may be most important to the company. Think Pfizer or Coca-Cola. 

If you want to be conservative, you can take the value as it is on the books.



Example of Reproduction Cost Asset


Balance Sheet (Liabilities + Equities)

On the other side of the equation, we have the liabilities and equities portion to match replicate the assets.

Unlike normal book value computation where we subtract all the total liabilities, the reproduction cost method only require you to deduct certain liabilities such as spontaneous and circumstantial liabilities.

1.) Spontaneous liabilities

Spontaneous liabilities arise from the day to day working capital operations that are not required by the new business. Thus, this amount should be deducted from the reproduction value.

These can be tied to changes in the cost of goods or sales or accounts payable. For example, you can take 10% of cost of goods sold as those not needed by the new business.


2.) Circumstantial liabilities

As the name suggests, these are usually your liabilities circumstances depending on the business you are operating. For example, oil companies usually need to accrue for items such as oil spills or lawsuit and these type of liabilities do not add any value to generating assets, thus they are deducted.


3.) Cash not required to run the business

These are probably conservative cash figure that is deducted for not requiring to run the business. Usually, these are taken at around 1% of sales or cash amount.



Thus putting it all together, we get Reproduction Value at:

Adjusted Asset Value - Spontaneous liabilities - Circumstantial liabilities - Cash not required in business


You can see how this is more intensive than simply computing the book value, which is your NAV of the company you are tracking. As with all valuation method, this only takes into account the balance sheet value, and it probably need to be combined with other earnings metric to get a better overall valuation out there.

I will read up on some of the earnings valuation and share in part 3 series in time to come.

Thanks for reading and let me know your thoughts or comments.


Friday, December 5, 2014

Price to Book value - How reliable is this metric?

Book Value is essentially a measure of all the company's assets minus liabilities. In other words, they are your equities portion in the financial statements.

Many times investors try to use the price-to-book metrics when deciding on whether to invest in a particular company. A quick way to look at this is through filtering of the price-to-book ratio. Anything above 1 means you are paying more for what they actually are. Surely we don't want to pay extra for something worth lesser than what they are.



But how reliable is this metric?

The truth is you probably need to take a closer look of how a company's book value is derived to help you decide on your investment purchasing decision. Depending on how you see them, they can be either a value trap or value play.

Value Trap

Imagine this scenario.

You have plenty of cash and are ready to hunt for bargain counters which has been trading at low book valuations. You did some basic calculation and are convinced that you are ready to part with your money on this counter. You put all your savings thinking that you are a long term investors and are paying a decent entry price to the counter.

10 years. 20 years. Your hair color has changed and you have grown slightly shorter. The company you owned since those days announced bankruptcy. Oops. All goes the nest eggs you have saved all these years. What has gone wrong?




A value trap is a concept that specify market price which looks inexpensive relative to its intrinsic value, but with hidden agenda. Because investors buy stocks on the assumption that they will one day return to their intrinsic value, they may get stuck on these stocks for a very long time or in the worst case scenario lose completely their capital.

There are many explanations for why a company can be considered a value trap. Below is what I have considered as one of them.

A good deceptive usage of book value would be manufacturing companies who hold plenty of machineries and equipment on their balance sheet. They are part of the PPE portion on the assets segments which are depreciated on a yearly basis. Depending on the treatment of the depreciation method the company is adopting, they usually result in lower book value at the end of the day since these assets are depreciated over time. Even if there is a resale value for these equipments, they usually go down faster than how they would have been depreciated, thus causing a value trap for investors who only rely on the price to book ratio to make decision. To a layman who don't understanding all of these, think property and car for example. While one can appreciate in value, one depreciates in value. The book value 10 years ago and 10 years later assuming everything else the same will not equal the same since the latter has been depreciated.

Value Play

On the other hand, a value play is something which is completely the opposite of the former.

If you are cashing in on a value play counter, you usually make a multi-bagger returns for the amount of known unknown risk profile you have taken. Sometimes it may take several years for those value to be unlocked, but you will be handsomely rewarded if you get it right.

Just like the former, there can be many different explanations and justifications for finding a great value play stocks.

One example in finding value play companies is understanding the adoption certain accounting treatment. Take the recently implemented new standards of fair value accounting for Non-Mark to Market Assets treatment for instance.

Some years ago, many assets that you see in a financial statement were valued at their historical costs. Since then, the Financial Accounting Standard Board (FASB) and International Accounting Standard Board (IASB) have been working on harmonizing such standards related to fair value accounting. Today, companies are encouraged to report their non-mark to market assets under development on fair value accounting to provide a more transparent way of disclosure. There are many companies who are already doing this and this is evident from the many one-off gains recognized in the financial statements especially from this year. Some companies may not have adopted this method of reporting yet and this may be something you can take advantage on as an investor since the known unknown is not disclosed readily to the public.

Conclusion

There are no hard rules for right or wrong investment decision based on any metrics you have. That said, having a better understanding of how a book value is derived would help you think deeper and whether the stock you see at face value fits your investment profile. Filtering is a great tool to help you save time, but they won't be your life saver when you need them.

Book value hunting is no easier than any other types of investing.
Always be safe and dig deeper.

What about you? What is your perception of the Price to Book value metrics? Any counters that meets your value play profile?
UA-57154194-1