Investing Feeds

Three months ago Google shares reached a record high of $741.79. I personally berated myself for my failure to buy up some shares back when cost per share was around $300. I promised myself that I’d watch the stock more closely and grab up a few shares the moment cost per share dropped below $500.

Last week has been called one of the stock market’s most volatile weeks in memory. That week saw Google shares close around the $570 mark. At this specific moment a share of Google stock is $566.40, but the market has yet to open for the day.

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OK, unless you live in a cave in the middle of nowhere you must by now be aware of the turmoil hitting the global markets. With many of the major financial markets reporting losses of between 3 and up to 7 per cent on Monday (Thank god the American markets were closed) and at least £70bn wiped out of the FTSE 100 in The UK, there are real causes of concern for investors. However, the next day the markets were buoyed to some extent by buyers rushing in to snap up value shares. [Read more]

In all of the theory which I have covered in my articles I have often referred to a perfect market, or perfect conditions. It is important that potential investors understand what is meant by Perfect Market in relation to theory. A perfect market has two sides, first the companies or entities involved in the market would behave in a mathematically perfect way in terms of investment and financing, they would all utilize NPV analysis to make decisions and would subscribe to Fishers normative function of maximizing shareholder wealth. Secondly Investors would act in a perfect way by also utilizing NPV to make decisions about investing and financing decisions. [Read more]

Following on from my previous article on Goodwill it is worth mentioning that Goodwill can be measured in a number of ways, not just as a premium on share price multiplied by issue. There are a number of mathematical ways to model Goodwill and the Investor would be wise to consider some of the alternatives in arriving at a price. Rather than going through them all here I am providing links to a good site which has detailed explanations and worked examples.

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Following on from the article on ‘Valuing a company from Public Records’, presents me with the perfect opportunity to introduce the concept of ‘Goodwill’. Goodwill is the amount of value the market places onto a company that represents the intangible worth of that company. To illustrate let us consider the following data:

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The value of a company can be arrived at in a number of ways from records available publicly. Whilst the stock price will let you know what the market thinks a company is worth, it is important for the prospective investor to be able to spot quickly if a stock price is actually underpricing a company.The first way in which analysts will arrive at a value for a company is by comparing the Net Assets of a company to its stock issue. This generally gives a figure which equates to the value of a company if it were taken over, or went into administration, and was broken up and sold off. Follow a simple example thus:

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Irving Fisher’s Separation Theorem is the bedrock of modern financial theory. Essentially it asserts that in the modern, listed, business entity there is a divestiture of ownership (Shareholders) and control (The Board) and as such, this separation produces the need for the control to maximize the present value (see article on NPV) regardless of the market opportunities of the owners. In simple terms, the interests of the owners of a firm are always served by utilizing NPV as a tool of investment appraisal. It’s main assumptions are therefore that:

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In a break from the tutorials, as I am trying to put a lot of material into an order which suits the development of the series, I felt that it was a good time to introduce a list of wider reading sources from the internet to help with the assimilation of all of the theory. One of the most important aspects of learning to Invest is to strike a balance between theory and practice, and the only way to do that is to develop a personal understanding of how the markets work. [Read more]

Net Present Value (NPV) Part Two

Before the worked examples, it is important that you read the first part of NPV, as the underlying concepts, and their limitations, are very important. To utilize NPV as a tool for ranking Investments it is important to arrive at a rate at which to discount the estimated future cash flows. In terms of Share purchases, future cash flows are either dividends paid, or increase in share value. The following is a highly simplified example, and care should be taken when arriving at estimates of growth and dividend payments, as well as the rate at which those estimates are discounted.

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If you invest in a firm, you want to hope they utilize NPV as a tool for vetting potential projects, as this method is the only mathematically correct measure of the Economic Value Added (EVA) to a company (which should then equate to Market Value Added (MVA), or an increase in share price.) NPV is a method of discounting future revenue to arrive at a dollar figure which is the present value of that revenue today (or as Economists say, at time period 1.) [Read more]