Wednesday, August 26, 2009

Readers' Questions

1. How do I determine the Discount Rate?

The best explanation on how to determine a discount rate can be found in Aswath Damodaran's book, The Dark Side of Valuation. But I don't get into too many details about the discount rate. I just use 10%. I simply want to get an idea of whether a stock is undervalued. I am not interested in being exact. I don't believe anyone can be exact.

2. What are some helpful websites for determining 5-year and 10-year projected earnings for a stock?

You can look at morningstar.com

3. How ofter is a discount to value greater than 40 percent? What is the track record of your valuation model?

The amount of discount varies based on the economy and particular securities. For example, during the current recession it is relatively easy to find companies trading at a 40% discount to value. But there are particular securities that enjoy even higher discounts.

As far as the track record, I don't think about it this way. The valuation model is no the answer to riches. It is just one of the tools to assist investors in valuing a stock. There are also other ways to value a company. For example, investors can look at the hard assets and estimate what they could be sold for if the company was liquidated. The valuation model works all the time. The question is whether investors are right about the assumptions. You can make any company be worth anything you want depending on the assumptions.

4. Will value investing become more popular as the economy moves into a prolong recession or mile depression?

I am not sure whether the popularity of value investing will increase, but what I know for sure is that when the economy deteriorates, investors are likely to oversell, sending stocks way below their values. This will provide opportunities to pick up good companies at great prices. Not every company will go out of business. I just watched a documentary about Coca-Cola and it showed that even during the Great Depression, the company was doing fine.

1 comment:

  1. Bank CD'S are now below 1% when was the last time that happened.

    ReplyDelete