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Value Investing

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  • Value Investing Sydney NSW Australia

    Weekly Value Investing Report
    Market Commentary | Insights | Analysis

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What is Value Investing? Why Us?

We all know that the market can be a volatile place. Changes in the market are now happening in lighting fast microsecond transactions and an inexperienced investor can be caught out in the space of just a few minutes. The Value Investing methodology doesn't seek to compete in this field. Instead, Value Investing seeks to exploit market volatility and the erroneous judgments made by others that contribute to market valuation. Put simply, Value Investing is the practice of purchasing stocks when they are undervalued in the market and selling them when they are overvalued. Obviously, there is more to the methodology and its stock buying and selling strategy than this brief introduction… Keep reading if you want to find out how we value our stocks in the market.

History of Value Investing – Ben Graham’s “Mr. Market”

Derived from the insights on investment set forth by Benjamin Graham and David Dodd in 1928 (subsequently published in their book Security Analysis; and later published by Graham in his 1949 book The Intelligent Investor) Value Investing has a long history in share analysis and stock market trading and is still used to this day.

Interestingly, Graham and Dodd actually never used the phrase: "value investing" — the term was later coined by followers of the various strategies and insights Graham and Dodd set forth.

Perhaps best explaining the Value investing approach is Graham himself in his famous analogy of the marketplace – Mr. Market.

Mr. Market; is an obliging fellow who presents themselves every day at the shareholder's desk and offers to buy or sell his shares at a set price (market quote). Often, the price quoted by Mr. Market seems accurate, but sometimes it is absurd. The investor is free to either agree with his quoted price and trade with him, or ignore him completely. Mr. Market doesn't mind which avenue you chose to persue, and will always be back the following day to quote another price.

The point of this anecdote?

The investor should not regard the whims of Mr. Market as a determining factor in the value of the shares that they, the investor, owns. You should profit from market folly rather than participate in it. The investor is advised to concentrate on the real performance and value of their investments, rather than to be too concerned with Mr. Market's often irrational behaviour.

Value Investing Strategy Today

Today the Value Investing approach involves the investment strategy of finding quality shares that are undervalued in the market by using an approximation of the stock’s actual value (their true worth).

The stock’s value (worth) is based on the performance of the company and a view of its future sustainable profitability, also known as normalised return on equity. There are many variables used to calculate a stock’s value and not all traders use the same formula. To read more see below

The Value Investing Formula: Variables You Should Consider

The concept of intrinsic value (the true worth of a share) has been developed over decades with the intellectual rigour of some of the world’s most successful investors most notably Walter Schloss, Charlie Munger and Warren Buffet. Value investing centres on the calculation of intrinsic value. Intrinsic value is not a range of values, rather it is a precise assessment of a company’s worth based on its’ performance and a view of its’ prospective sustainable profitability.

There are several components of the intrinsic value formula:

Normalised Earnings:

There are many components to a share’s true worth and all these must be accounted for. Shares may have regular pay outs (share dividends) paid by their respective company to shareholders based on the profits and reserves of the company. There is also income of a corporation that is retained by the corporation, excluding that which is distributed to shareholders as dividends. The reserves at the disposal of a company may also fluctuate (e.g. the rise and fall of foreign currency gains). As you might know already, all Australian investors benefit from receiving franking credits at tax time in offsetting assessable tax or being refunded by the Australian Tax Office. This too needs to be accounted. And, one off abnormalities such as the gains or losses associated with asset sales must too be accounted. When these factors are calculated we get a Normalised Earnings value.

Normalised Return on Equity:

Next, we need to calculate the Normalised Return on Equity (NROE). Often investors put too much focus on a company’s value in the way of profits and dividends rather than focusing on the capital that has gone into a company to produce the profits. The key; consider both via the Normalised Return on Equity measure of true profitability. Normalised Return on Equity is calculated as a proportion of the Normalised Earnings of a company based on its equity past and present.

Reinvestment Strategies and use of Capital of the Company:

We also need to reward companies that have high NROE and can retain capital and reinvest it to compound it at attractive rates. Conversely we need to punish businesses that have low NROE and decide to retain capital at sub-par rates of return. This is where the Payout Ratio comes into play.

Recognition of Future Growth Potential and Profitability:

Our approach recognises that there is also both a bond and growth characteristic within each company. We account for this via the Equity Multiplier.

Once the Equity Multiplier has been calculated, the final step is to apply this to the equity per applicable share. The product of this calculation is the ‘Intrinsic Value’. Thus through the Value Investing methodology you arrive at a mathematical equation to calculate the intrinsic value of a share.

Intrinsic Value Equation:

Intrinsic value = Equity Multiplier x Equity Per Share

Our Value Investing Approach

Probably best put by our Chief Investment Officer, John Abernethy, “on a day-to-day basis, value investing is all about sticking to your valuation process and turning off the ‘noise’ coming from the market”.

Some people think that the way to make a profit in the stock market is to buy shares at a certain price and then sell them at a higher price over the following days or weeks. However, as history has illustrated, prices are unpredictable and are often influenced by the irrational activity of market participants – many of whom are either undisciplined investors, uneducated or consistently irrational. Attempting to second guess these people and the market is quite frankly, pointless. On occasion you win, and other times you lose.

Put simply, we look to acquire quality shares that are undervalued in the market, then sell them at a later date when they are overvalued by the market. This is done using an approximation of the stock’s intrinsic value. The diagram below illustrates our Value Investing investment strategy.

Value Investing Strategy Sydney Australia

Why register for Clime's Value Investing Newsletter?

If value investing is all about sticking to your valuation process and turning off the noise coming from the market, it is understandable that you wouldn't want to sign up for any more information than what is absolutely essential. But what if you don't have a valuation process or you aren't sure your's is right? You still need detailed reports and analysis that cut through the noise and can distill all the information into solid investment strategies. You need in-depth insights form some of the most knowledgeable investment technicians in the business to help you create and verify your value investing methodology. You need to understand how to get the right risk-return trade off for your needs. If you are interested in the value investing strategy, a strategy used by the world's best investors, then register now to receive weekly information to help you secure your investment strategy but more importantly your future.

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  • Weekly Stock Market Reports Sydney NSW Australia

    "Investors are the market. So if we behave like other investors, then we will only ever be average. The only way to create real wealth and beat the market is to be different."

    John Abernethy - Chief Investment Officer

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    "Many people are taking enormous risks to chase that last five per cent return. But investing is a seven to ten-year endeavour – if not longer."

    John Abernethy - Chief Investment Officer

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There’s no shortage of material to read about personal investment, but with the weekly investing report we cut out the ‘noise’ and provide concise and considered insights into the market. The weekly report delivers what you need to know every week for better informed personal investment decision-making.

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At Clime Asset Management we can enable our customers to value-invest, with:

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Weekly Stock Market Analysis

Current market trends, reports and commentary by industry experts

Weekly Summaries

There’s a wealth of material to read about investment, but with the weekly report you’re being selective. The report delivers a wealth of information for better informed investment decision-making.

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Clime Asset Management's team of skilled financial specialists focus on proven approaches to successful investment. Keep up to date with current market insights according to the latest market research.

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Value investment requires evaluation of comparative financial market factors, technical and detailed work. Keep up to date with current market insights to get on top of the rest.

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Not every investment is a winner; returns will vary. But the value investing methodology enables you to make better informed decisions in the risk-return trade off.

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Our financial analysts are doing the hard work to continuously identify hidden value in financial assets. Receive up to date and historical reporting of stocks in the weekly round-up.

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Getting a good return often depends upon identification and assessment of that margin between price and value. Better understand the true worth of stocks with the weekly report.

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The man who buys a TV because the salesman says “it’s our most popular model” is following the herd, and probably ignoring any technical evaluation of the product. So too with investment products. Not every investment is a winner; returns will vary. But the value investing methodology enables you to make informed decisions in the risk-return trade off. Don't be part of the herd. Become informed with the weekly round-up offered by Clime Asset Management's weekly value investing report.

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