Equity Valuation - 01

Introduction of Equity Valuation

The fundamental value (= intrinsic or fair value) of each investment is the present value of its expected, future cash flows discounted at an appropriate risk-adjusted rate. 

Virtually every sophisticated equity valuation model used by leading investment banks today is based on discounted cash flows (DCF). The structure and the names of the models might differ, but the underlying idea is always the same. They are all rooted in the present value framework for equity valuation pioneered by Merton Miller and Franco Modigliani in the early 1960s.

Economists use models to simplify the complexity of the real world. A good valuation model is simple and helps investors to make informed decisions. 

Many financial analysts today forget that a good model is simple, not complex!

Financial economists subjectively make simplifying assumptions to focus on specific valuation aspects while neglecting other aspects. As a result, a plethora of “different” discounted cash flow approaches exists today, each with its own acronym: dividend discount models (DDM), free cash flow to the firm (FCFF) and Economic Value Added (EVA), to name just the most popular models discussed in academic literature.

Financial analysts at leading investment banks have added proprietary discounted cash flow models and new acronyms. The most sophisticated DCF models used by financial analysts today are, in our opinion, 

• Credit Suisse’s Cash Flow Return on Investment (CFROI) model
• Morgan Stanley’s ModelWare
• UBS’s Value Creation Analysis Model (VCAM). 

潇洒晚年靠投资

将退休年龄，由55岁提高到60岁，已势在必行。提高退休年龄，是世界潮流，经济上轨道的国家早已实行，大马现在才跟上，实际上已嫌略迟。

紧跟着退休年龄的提高，提取全部公积金的年龄亦相应提高到60岁。工薪阶级的薪金，通常在55岁时已到顶薪，公积金的缴交额达到最高，加上累积公积金所赚的利息也最大，故由55至60岁的5年，公积金可增加20%，使上班族的黄金岁月过得较宽裕。

但只是“较宽裕”而已，还是不足以保障晚年生活。调查显示，公积金会员在55岁时提完公积金，有72%在3年内花光。其馀28%不是不花光，只是在3年后才花光而已。现代医药发达，除非患上绝症，要活到80岁并不难。

退休人士钱不够用

由55岁到80岁的25年，属黄金岁月。而最少有72%的乐龄人，要在钱不够用的窘境中，度过他们人生最后的22年。这是多么残酷的事实，多么痛苦的人生。大部分退休人士还是要靠儿女，或别人的资助，才能度过晚年。

换句话说，大部分退休人士，都无法做到财务自主，都面对钱不够用的窘境。没有财务自主的晚年，不可能是潇洒的晚年。黄金岁月也不可能是金光闪闪的岁月。有财务自主潇洒晚年，才有可能好梦成真。

退休后财务自主，潇洒地度晚年应成为每一个上班族终身奋斗的目标。从众多工薪阶级退休后，都得依靠亲人过活，说明了单靠薪金，无论如何节衣缩食，都无法达到财务自主。要财务自主须学投资

要达到财务自主，必须学习投资。投资就是以钱生钱，就是让别人为你赚钱。作为受薪人士，你已经把你的时间卖给雇主，你再也无权支配你的时间，所以你不能兼职。你只能靠“不劳而获”赚钱，那就是“投资”。

投资是让时间替你挣钱，或让别人为你赚钱，你在将“资金”“投”出去之后，什么都不必做，财富却与日俱增，使你在退休时财务自主，潇潇洒洒的度过你的黄金岁月。

工薪阶级最适合买产业

买产业是工薪阶级的最佳选择，除非买错地点、买错价格，投资产业失败者少之又少。交20%的头期，买一间屋子，只要涨价20%，就取得100%的回酬。借贷越高，回酬越高，一间50万令吉的屋子，如果头期只需5万令吉 (10%)，20年供完，如果每月租金足够摊还每月供款的话，20年后即使产业没有涨价，你也有了50万的财产了。所以，买屋应成为职场新鲜人的第一项投资。

股票简单易行须有智慧

股票是最简单易行的投资，但必须要有智慧。买股票就是参股做生意，你的成败决定于生意的成败，不是决定于股市的起落。只要你参股的公司，钱越赚越多，你的股票就一定会增值，又何必担心股价不起呢？

整天盯住股价，不理公司业务是否有进展，是舍本逐末。舍本逐末，使你的投资走向末日。所以，股票投资要成功，首先是要具备正确的投资概念－－投资于业务。有前途的企业，其股份（票）才有可能增值。投资者最常犯的错误，是以为“价值”可以无中生有，殊不知被吹胀的泡沫，破灭只是时间问题而已。

企业必须脚踏实地去经营，才能创造价值。股票要有价值，才能增值。惟有投资于能增值的股份，才能致富。能致富，才能财务自主，有财务自主晚年才能过得潇洒。投资增值，需要时间，所以投资越早开始越好。现在就开始投资吧！

投资赚钱靠“增值”。投资赚钱靠“增值”，增值需要时间。投资回酬与风险往往成正比，通常时间越长，风险越低，时间越短，风险越高。股票投资，每天抢进杀出，长期结算，赚钱的少之又少，非累积财富之道。

一个小心挑选的股票投资组合，持握10年，没有人会亏本。因此靠投资累积财富，长期是最佳途径。要长期，必须要有耐性。耐性是纪律的表现。许多人投资失败，是因为不守纪律，不守纪律是因为你的“情商”(EQ) 高过你的“智商”(IQ)－受情绪控制，而不是受理智控制。受情绪控制，你就无法克制你把金钱化在消费品上的冲动。

消费品只会贬值，不会增值。把钱化在只会贬值的消费品上，你就很难储蓄。而储蓄是累积资本的原始手段。没有储蓄就不会有资本，没有资本，就无法投资。无法投资就无法达到财务自主。

长期投资减低风险

投资必须长期的，一个最重要理由，除了减低风险，就是按照“复利”理论，较后期的回酬率比初期的回酬率高不知多少倍。后期3年所赚，可能高过前期的10年。故短期套利，是牺牲了后期庞大的回酬。

致富靠后期的庞大回酬，并非靠初期的低微回酬。投资一定要有先苦后甜的精神，“先苦”而不半途而废，靠耐性，耐性靠纪律，纪律靠控制情绪，控制情绪靠你自己的意志力。自救多福，此之谓也。投资的途径很多，买产业和股票是最普通，最易行的途径。最普通、最易行，却不保证所有人都成功。

成功靠增值。定期存款之所以不是好投资，是因为母金不会增值。增值是投资成功之钥。

有纪律储蓄才能增值

千里之行，起于跬步，财务自主是马拉松，要达到财务自主的终点，需由本身做起。第一步是克制你的消费欲，有纪律地储蓄－－每个月领到薪金后，先抽出20%，存入银行，其余的才花用。不要等到月尾才储蓄，因为不是每一个人都有守纪律的精神，花到月尾时可能已所剩无几，甚至出现负数。

你的公积金数目可观，是因为强迫缴纳。你如果要储蓄成功，最好的方法是强迫自己储蓄。先存后花就是强迫储蓄。

勿把钱留银行太久

强迫储蓄可以培养纪律，纪律可养成耐性，有耐性，投资才能长期坚持，长期坚持才能增值，增值是达到财务自主之钥。

不要把钱留在银行中太久，因为银行给你3.5%的利息，而通货膨胀率为6%，你每存一年，就亏了2.5%， 存得越久，亏得越多。

投资致富的人，多不胜数，却从来没见过靠利息收入而发达的人。你的金钱必须为你赚取高过通胀率的回酬，就好像投资回酬必须高过投资成本（借钱投资，利息就是成本）一样。

Commentary On Chapter 1

All of human unhappiness comes from one single thing: not knowing how to remain at rest in a room.   —Blaise Pascal

Graham’s definition of investing could not be clearer: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.” Note that investing, according to Graham, consists equally of three elements:

• you must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock;

• you must deliberately protect yourself against serious losses;

• you must aspire to “adequate,” not extraordinary, performance.

An investor calculates what a stock is worth, based on the value of its businesses. A speculator gambles that a stock will go up in price because somebody else will pay even more for it. 

As Graham once put it, investors judge “the market price by established standards of value,” while speculators “base [their] standards of value upon the market price.” For a speculator, the incessant stream of stock quotes is like oxygen; cut it off and he dies. For an investor, what Graham called “quotational” values matter much less. Graham urges you to invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price.

Like casino gambling or betting on the horses, speculating in the market can be exciting or even rewarding (if you happen to get lucky). But it’s the worst imaginable way to build your wealth. That’s because Wall Street, like Las Vegas or the racetrack, has calibrated the odds so that the house always prevails, in the end, against everyone who tries to beat the house at its own speculative game. On the other hand, investing is a unique kind of casino—one where you cannot lose in the end, so long as you play only by the rules that put the odds squarely in your favor. People who invest make money for themselves; people who speculate make money for their brokers. And that, in turn, is why Wall Street perennially downplays the durable virtues of investing and hypes the gaudy appeal of speculation.

People began believing that the test of an investment technique was simply whether it “worked.” If they beat the market over any period, no matter how dangerous or dumb their tactics, people boasted that they were “right.” But the intelligent investor has no interest in being temporarily right. To reach your long-term financial goals, you must be sustainably and reliably right. 

To see why temporarily high returns don’t prove anything, imagine that two places are 130 miles apart. If I observe the 65-mph speed limit, I can drive that distance in two hours. But if I drive 130 mph, I can get there in one hour. If I try this and survive, am I “right”? Should you be tempted to try it, too, because you hear me bragging that it “worked”? Flashy gimmicks for beating the market are much the same: In short streaks, so long as your luck holds out, they work. Over time, they will get you killed.

Commentary On the Introduction

If you have built castles in the air, your work need not be lost; that is where they should be. 

Now put the foundations under them.      —Henry David Thoreau, Walden

Notice that Graham announces from the start that this book will not tell you how to beat the market. No truthful book can. Instead, this book will teach you three powerful lessons:

• how you can minimize the odds of suffering irreversible losses;

• how you can maximize the chances of achieving sustainable gains;

• how you can control the self-defeating behavior that keeps most investors from reaching their full potential.

But no matter how careful you are, the price of your investments will go down from time to time. While no one can eliminate that risk, Graham will show you how to manage it—and how to get your fears under control.

ARE YOU INTELLIGENT INVESTOR? 

Now let’s answer a vitally important question. What exactly does Graham mean by an “intelligent” investor?  

Graham defines the term—and he makes it clear that this kind of intelligence has nothing to do with IQ or SAT scores. It simply means being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself. This kind of intelligence, explains Graham, “is a trait more of the character than of the brain“.

In short, if you’ve failed at investing so far, it’s not because you’re stupid. It’s because, like Sir Isaac Newton, you haven’t developed the emotional discipline that successful investing requires. In Chapter 8, Graham describes how to enhance your intelligence by harnessing your emotions and refusing to stoop to the market’s level of irrationality. There you can master his lesson that being an intelligent investor is more a matter of “character” than “brain.”

As Graham shows so brilliantly in Chapter 8, this is exactly backwards. The intelligent investor realizes that stocks become more risky, not less, as their prices rise—and less risky, not more, as their prices fall. The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely (so long as you keep enough cash on hand to meet your spending needs), you should welcome a bear market, since it puts stocks back on sale. 

So take heart: The death of the bull market is not the bad news everyone believes it to be. 

Thanks to the decline in stock prices, now is a considerably safer—and saner—time to be building wealth. Read on, and let Graham show you how.

PEOPLE ARE FUNNY

Sometimes, I have to hide a smile when I look at the antics of some people. Certain things they do or say, well, do not quite add up. Check out the following examples:

Some people say, “My life has changed 360 degrees” – to imply that they have undergone a total transformation and are totally different person now. Actually, a 360 degrees change in direction will bring them right back to their starting place.What they should have said is, “My life has changed 180 degrees”.

Some people say, “Aim for the moon. If you miss, you may still wind up in the stars.” I don’t know where they learnt their astronomy but aren’t the stars a lot further away than the moon? So, even if you missed the moon, there is no way you’ll wind up in the stars. You’re more likely to wind up back on earth!

Some people believe that an investment adviser is an expert in investments. They think he knows all there is to know about investments, and then some. They believe the investment adviser has their best interests at heart. Actually, the reason they are called “investment adviser” is that “speculation advisers” do not sell as many products!

Some people believe that a successful formula will bring in excellent results forever. They repeat the formula over and over again because it has been making money. So, even though the world and regulations have changed, they will continue to use the same formula. This partly explains why some people become ex-millionaires! They are stuck in a rut.

Some people rush to buys properties because the CEO of the housing developer told them that prices will soon rise. Don’t they realise that it is the CEO’s job to say that? After all, he is hired to sell as many properties as he can.

Some people think they can make money from options and futures and currencies when they already have a hard time making money from properties, which is actually the easiest, simplest and time-tested way to make money in Malaysia. Isn’t that a little like trying to beat a grandmaster at chess when you cannot even win at checkers?

Some people spend much time, effort and money to research a particular investment. The good news is all that research tells them, yes, the time is right for the investment. Unfortunately, for a variety of reasons, instead of investing ameaningful amount into the investment, they put in just a small amount of money – RM10,000, RM5,000 or perhaps even less. The problem with this is thatthe money is too little to be of any significance. For example, if they managed to get a 100% return on investment, which is superb and out-of-this-world return, their RM5,000 becomes RM10,000. While it is certainly a newsworthy performance, the extra RM5,000 will hardly change their financial situation. Had they invested RM100,000 or, even better, RM500,000, in return would have made a huge difference to their situation. This explains why some people never get rich even though they chose the right investment – their investment is too little.
Some people want to become rich but do not want to do anything different. Instead, they want to continue doing what they are currently doing, even though it is not bringing them the desired results. That’s like wanting to see the sunset but heading east to catch it! It just cannot happen!

Ten Value Drivers That Increase Sale Price of a Business

Business Value -- What Drives It?

A valuation is not about determining what a company is worth in the current owner's hands, it is about the company's transferable value. The purpose of this article is to help you evaluate your company through the eyes of a buyer. From that perspective we will ask you to focus on ten value drivers. Each driver is a characteristic of a business that either reduces the risk associated with owning the business or enhances the prospect that the business will grow significantly in the future. Simply put, the better your performance in these areas, the greater the selling price of your business. The likely result is that you will sell at the higher range of the multiples normally associated with your industry.

Value Driver #1: Stable and Predictable Cash Flow

Think of revenue and the bottom line cash flow of your business as the first introduction to a buyer. Revenue and cash flow is the number one attraction. A business with an established pattern of growth will bring a premium price when it is sold. The value associated with acquiring the available cash flow is directly related to risk. The lower the risk of losing that cash flow in a transfer of ownership, the higher the price will be to acquire it. If recurring revenues comprise a material portion of a company’s overall revenues, the recurring revenue stream can be valued at a higher level than the non-recurring revenues. Examples of recurring revenues are maintenance contracts, monthly support agreements, annual license agreements, warranties, subscriptions, or other revenue streams that are contractual and repeating in nature. Buyers are willing to pay the highest amount when their perception is that cash flow is predictable and will increase into the future.

Value Driver #2: Reliable Financial Information

Reliable financial records are not only a critical element of business management but also support the claim that a company is consistently profitable. In the purchase of a business, the buyer will perform some level of financial due diligence. If the buyer is not comfortable when reviewing the company’s past financial performance, there is no deal, or at best a reduced value for the company. If a buyer faces a seller of a business who asserts that the company has been making $1 million per year for the past three years and is projected to make at least that much in the future, the seller will be required to prove it. If the seller then produces past financial statements that are incorrect, insupportable, or incomplete, the buyer would most likely be gone. The lack of financial integrity is one of the most common hurdles encountered during the sale process.

Value Driver #3: Customer Diversity

A broad customer base in which no single client accounts for more than 5 to 10 percent of total sales helps to insulate a company from the loss of any single customer. It reduces the risk of serious cash flow issues if one or more customers do not stay under new ownership.

Value Driver #4: Human Capital / Quality of Workforce

Keep your talent, they are your business. Buyers look for situations where management and / or key employees want to stay for the long term. The quality of the workforce, including experience, expertise and depth of knowledge, is also considered. An in-place team that can provide continuity and assist in the growth of the business under new ownership is a valuable asset. If a company’s success is reliant on capable, well-trained employees – not the owner – it means the business will not be negatively impacted under new ownership. This reduction of risk will pay off with increased purchase price.

Value Driver #5: Growth Potential

When an owner can describe realistic opportunities for growth that specifically illustrate the reasons why cash flow and the business itself will grow after it is acquired, a higher value can be achieved. A documented growth plan demonstrates the viability of the company’s future and may identify opportunities that a buyer had not considered. Some areas to consider in developing a growth plan:

• Is your business in a growth industry?
• Are there additional markets that a new owner should pursue?
• What additional products could be delivered to existing customers?
• Where are the best profit margins realized and can they be expanded?
• Can your technology be licensed?
• Will demand for your product or service increase as population grows?
• How will enhanced marketing campaigns and sales efforts affect growth?
• Are there opportunities to grow through acquisition?
• Can growth be achieved by expanding territory or manufacturing capacity?

Value Driver #6: Operating Systems and Procedures

The establishment and documentation of standard business procedures and systems demonstrate that the business can be maintained profitably after the sale. Business systems include the computerized and manual procedures used in the business to generate its revenue and control expenses, as well as the methods used to track how customers are identified and how products or services are delivered. The following are examples of business systems that enhance business value.

• Personnel recruitment, training and retention
• Human resource management (an employee manual)
• New customer identification, solicitation, and acquisition
• Product or service development and improvement
• Inventory and fixed asset control
• Product or service quality control
• Customer, vendor and employee communication
• Selection and maintenance of vendor relationships
• Business performance reports for management

Value Driver #7: Facility and Equipment Condition

The business facilities and equipment should be well maintained to realize maximum value. A buyer will not pay a premium, and may very well discount an offer, for a disorganized warehouse, office or other building. Seeing disorganized or poorly maintained facilities and equipment may cause the buyer to perceive that other aspects or the business may be similarly disorganized (employee records, financial records, compliance records, etc.). Owners should ensure that facilities and equipment are organized and maintained in peak condition before beginning the sale process. Buyers will appreciate that their investment will not include major repairs and that all equipment and inventory will be easy to locate and identify. Lastly, are the facilities large enough and machinery sufficient to accommodate some level of modest sales growth? A buyer does not want to have to look for additional space or immediately invest in new equipment shortly after closing.

Value Driver #8: Goodwill

This value driver involves stability and consistency. Name recognition, customer awareness, history, ongoing operations, and reputation are all part of business goodwill and influence value. Even if the company does not have many hard assets, relationships are key. The fact that customers have been with the company for a period of time does matter. Brand recognition, service or product reliability, and high customer satisfaction are distinguishing factors that add value. This driver of goodwill should not be overlooked in a valuation because it is helps mitigate perceived risk.

Value Driver #9: Barriers to Competitive Entry

Features that give a business an advantage over its competitors, strengthen its strategic position, or that can be leveraged for future gain boost value and lessen perceived risk. Buyers will pay a premium for a niche that has barriers to competitive entry. One way to describe this Barrier Value Driver is to use Warren Buffet's term, "Business Moat." Buffet compares a castle's moat to the protection that a business needs to encroaching competitors. For instance, the wider the moat, the more easily a castle could be defended. A narrow moat did not offer much protection and allowed the castle to be breached. To Buffett, the castle is the business and the moat is the barrier that protects the business' competitive edge. The following are example barriers that widen the moat and hinder competitors from breaching the company’s castle.

• Copyrights
• Trademarks
• Patents
• Trade Secrets
• Developed Processes
• Proprietary Designs
• Proprietary Know-How
• Brand or Trade Names
• Engineering Drawings
• Customized Software Programs
• Step-by-Step Training Systems
• Customized or Proprietary Databases
• Published Articles or Industry Press
• Hard-to-get licenses, zoning, permits, or regulatory approvals
• Contracts with difficult-to-penetrate entities (government, for example)

Value Driver #10: Product Diversity

A narrow product set increases risk and drives down value. Diversity of revenue sources lowers the inherent risk of the business. Therefore, businesses with a healthy product mix, good gross profit diversification, or with products or services sold into multiple industries, receive a higher perceived value from prospective buyers.

Key Characteristics of Successful Business Owners

Some people are just born with it!

These are traits that successful business owners commonly share. Above all, however, business owners need to have strategic thinking skills, time management skills, and know the job.

No one can embody all these traits if they are part of the human species, but varying degrees of these characteristics is the stuff that success is made of.

• Decisiveness (ability to make decisions)
• Open-Mindedness / Flexible (willingness to change with the market as technology advances)
• Multitasking Ability
• Negotiation Skills
• Ability to Delegate
• Leadership Skills
• Innovative Abilities
• Problem Solving
• Energy
• Judgement
• Courage (risk taking)
• Vision
• Creativity Skills

Additional signature traits of successful business owners:

• Interpersonal motivation as well as self-motivation
• A pioneering spirit
• Self confidence
• Team-building abilities