Learn to invest with Buffett

Chapter 24

Chapter 4 Section 2 What are the factors that affect value investing

When value investors buy stocks in listed companies, they are essentially equivalent to owning part of a private company.Before buying stock, first evaluate the private business market value of the public company.To invest successfully, you don't need to know how big the market is, Modern Portfolio Theory, etc. You just need to know how to value a business and how to think about market prices.
--Warren Buffett
Value investment is based on a comprehensive and careful analysis of the fundamentals of the listed company's market environment, industry status, and intrinsic value, and quantifies the intrinsic value of listed assets through a certain value analysis model to determine a reasonable price expression. The process of comparing current market prices to dig out stocks or assets that are seriously undervalued by the market for timely and effective investment.To put it simply, it is to seek the return of stock value, estimate the price of investment stocks based on the development prospects, profitability and historical performance of listed companies, carry out profit-making operations of buying low and selling high, or hold them for a long time to share the benefits of asset appreciation.

Benjamin Graham, known as the father of securities analysis, pointed out in his book "Securities Analysis": "Value investment is an operation based on detailed analysis, capital security and satisfactory returns. It does not meet this A standard operation is speculation." Graham also pointed out: "The basic factors that determine the value of common stocks are the stock's dividend rate, its historical record, profitability, and assets and liabilities."

Value investment master Buffett is a practitioner of value investment theory. He pays more attention to the company's growth and long-term interests, and is willing to pay a reasonable price for it.Buffett summed up Graham's value concept as "buy items worth $0.5 at a price of $1".Graham revealed the core of value investing, and Buffett used his own practice to tell us how to invest. In 2003, Buffett invested in "PetroChina" stocks at an average price of 1.6 Hong Kong dollars in the Hong Kong stock market. Based on the current price of about 9 Hong Kong dollars, he has made tens of billions of profits. This is the best example.According to the principles described in the book "Securities Analysis", the stock value of listed companies is mainly composed of five factors, namely:

1. Dividend payout ratio: A reasonable dividend payout ratio reflects the company's good cash flow status and business prospects, and is also an important symbol of high-quality blue-chip stocks.The dividend payout ratio of high-quality assets should be continuous and stable, and should be higher than the deposit rate of the bank over the same period. Enterprise development and shareholder interests should be equal. For example: 4.37% for HSBC; 2.38% for Hutchison; 2.49% for China Mobile; %.If the dividend payout ratio is too low, it means that the company's business is not competitive, the interests of shareholders are not guaranteed, and the stock is not attractive.The unstable dividend rate and the sudden high dividend payout also reflect the company's lack of long-term plans or uncertain business prospects.

2. Profitability: reflects the company's overall operating conditions and profitability per share.The main indicators are the company's profit margin, net profit and earnings per share, the higher the indicator, the better.For a valuable company, its profitability should grow continuously and steadily, and the annual profit growth rate should be higher than the growth rate of the gross domestic product.

3. Asset value: It is mainly measured by the net asset value of listed companies (net assets = total assets - liabilities), which is the remaining part of the total asset value after excluding liabilities. It is the core value of assets and can reflect the operating capabilities and liabilities of the company's assets. structure.A reasonable debt ratio reflects the company's better asset structure and operating efficiency; a higher asset-liability ratio reflects the company's greater financial and operational risks.

4. Price-to-earnings ratio (P/E value): The ratio of the market price per share of common stock to the profit per share.There are many factors that affect the price-earnings ratio, including the company's profitability, stock price, industry attractiveness, market competitiveness, and market maturity.The high profit per share reflects the high profit return of market investment (price-earnings ratio or annual profit per share/price per share); if the market is relatively standardized and mature, the performance of the price-earnings ratio is relatively true and objective, that is, the expression of stock price to asset value is relatively reasonable, and vice versa If it is expressed irrationally, the bubble will be larger.At the same time, the price-earnings ratio also reflects the market's recognition of the company. If the company's business has industry monopoly, economic patents and strong competitiveness, the market is more attractive and can support a relatively high price-earnings ratio, that is, the stock price expression is higher.For example: as of the end of March 2006, the price-earnings ratio of HSBC was 3 times; the price-earnings ratio of China Mobile was 12.25 times.

5. Margin of safety: The gap between the stock price and the intrinsic value of the asset is called the "margin of safety".Intrinsic value refers to the discounted value of the cash flows that a company can generate over its lifetime.Short-term asset value, usually measured in terms of net asset value.When buying stocks, if the stock price is significantly lower than the net asset value per share, the risk is considered low; if it is lower than the calculated intrinsic value of the asset, the margin of safety is larger. When the stock price rises, you can get excess returns and expand investment income. And can avoid the risks arising from short-term fluctuations in the market.

(1) Annual stock return rate = (dividend of the year + closing price at the end of the year - closing price at the beginning of the year) / closing price at the beginning of the year × 100%
(2) Return rate of individual stocks = (dividend received + stock estimated income - stock purchase cost) / stock purchase cost × 100%
Investment motto:

Value investing focuses on the long-term growth of the company's interests and the continuation of its life cycle, making long-term investments to increase the value of shareholders' equity.The appreciation of shareholders' equity comes from the growth of operating profits. In the long run, the growth of stock prices should reflect the company's value prospects and operating profits; in the short term, stock prices will be affected by various factors (such as: interest rates, exchange rates, inflation rates , taxation system, balance of payments, savings structure, energy prices, political diplomacy and sudden major events) fluctuate.

(End of this chapter)