Introduction to Shares and Value Investing

Introduction to Shares and Value Investing Presented by your education officers Mitheran and Yang Introduction to these presentations • The presentations are for your benefit! • Yang – personal development aspect, entrepreneurship, value investing • Mitheran – stock market concepts, hardcore finance Yang • 2nd Year BCom – actuarial, finance • Photoreading instructor – Master of Teaching • Interests: Metaphysical and esoteric knowledge, dancing, personal development, accelerated learning Mitheran • 3rd Year Bcom – Finance and Economics Introduction to Shares • Brought to you by Mitheran What exactly is a share?  A marketable security  Also represents an ownership interest in the company  Residual claim on the profits and assets of the company  Gives shareholders certain rights Why own shares?  Provides an income stream in the form of dividends  Also provides an additional return in the form of capital gains if the share price increases  Shares are an investment vehicle that allows you to further diversify your current investment portfolio  We’ll talk about diversification and the taxation implications of dividends and capital gains (or losses) at a later time GICS sectors The Global Industry Classification Standard consists of 10 sectors • • • • • • • • • Energy – Caltex, Origin Energy Materials – BHP Billiton, Rio Tinto Industrials – Toll Holdings, Qantas Consumer Discretionary – David Jones, Tabcorp, Ten Network Consumer Staples – Coles Group, Coca-Cola Amatil Health Care – Sigma Pharmaceuticals, CSL Limited Financials – Macquarie Bank, Commonwealth Bank Information Technology – Computershare, Veda Advantage Telecommunications Services – Telstra, Telecom Corporation of New Zeland • Utilities – AGL Energy, Energy Developments Indices • An index is a weighted average of a number of share prices • Indices are usually used as a performance indicator • All Ords: weighted average of the 500 largest companies • ASX/S&P 200: weighted average (by market capitalisation) of 200 of the most “investable” companies • Overseas indices: Dow Jones (New York) FTSE(London) Market Capitalisation Number of shares x price of shares Represents the market’s valuation of the net assets of a company Share prices • Actual value vs current market price • The real factors that influence share prices are supply and demand • Market participants are not always rational which leads to large deviations in the current market price from the share’s actual price What is the major determinant of share prices? EXPECTATIONS •Expectations affect supply and demand •If the market expects that share prices will increase then demand for that share will increase •If the market expects that share prices will fall then demand for that share will decrease and there will be an increase in the supply for that share Some examples of information that affect market prices Takeover announcements • Leads to an increase in the share price of the target company Lower dividend paid than previously announced • Generally leads to a decrease in the share price Ratios • EPS • P/E • Others we’ll look at later: ROE, NPAT, EBIT, EBITDA, PEG Earnings Per Share (EPS) Net Income- Dividends on PreferenceShares EPS  Number of shares • Usually the higher the better • It’s important to note that one shouldn’t use EPS to compare between companies as it’s unlikely that companies will have the same number of shares outstanding Why do we subtract dividends on preference shares? Price-Earnings Ratio (Multiple) Share Price P/E  EPS • The P/E ratio or multiple represents the amount investors are willing to pay for a dollar of future expected earnings • High P/E ratios usually imply that the market expects higher earnings in the future • P/E ratios are often used in combination with fundamental analysis to tell wether a company is overvalued or undervalued Reading trading data Accessing the share market • Advisory Brokers • Non-advisory brokers (online brokers) Brokers • Advisory brokers (or full service brokers) provide advice and research in addition to acting as a means of accessing the share market • As a result they tend to cost more than online brokers: typically starting from $120 per transaction Online brokers • Non-advisory brokers usually provide internet services and provide little (if any) research and advice • Online brokers charge as little as $20 per transaction Introduction to Value Investing • Brought to you by Yang A motivating example • A Macquarie Bank share is trading at $70.00 – is that cheap? • The stock market crashes and the price decreases to $64.00 Is that cheap? • What are we missing? • You’re speculating because you have no price comparison. Speculation • • • • Gambling Gut feel Path of least resistance – technical analysis You have no idea what the value of something is!!! • That’s risk my friend. Investing • • • • Research Independent valuations and points of view Point of reference = a comparison Market price and Intrinsic value Intrinsic value • Invent, construct a point of reference!! • Somehow! • Intrinsic value = function(great economics, great management, great future prospects) • The key to determine whether a stock is worth buying or not… find this function first! A simple rule • Market price < Intrinsic value => buy lots if it’s a great business!!! • Market price > Intrinsic value => don’t buy! • Some businesses are not worth valuing Solid Criterions • • • • “Purchase at a rational price a hard interest in a business that is easy to understand, with earnings to be materially higher in the next five, ten or twenty years.” -Warren Buffet Shares • A stake in a business!!! • Would you want to own all of it? • If the price goes down what would you do? Would you sell? • Great businesses – buy more!!!!! It’s a business • Risky • Do your homework and research • Stock prices are inflated because the market is irrational. • You should care about the intrinsic value. • Stock prices are not random. Convergence • Short run – Voting machine (expectations) • Price goes up – it doesn’t mean the performance is improving. • Irrationality prevails • Long run – Weighing machine => convergence of value with price!! Valuing a business • Economics, financial performance – ROE, profit margin, profit, little or no debt • Management – great leadership • Future prospects – macroeconomic perspective Return on Equity (Return on your money!!) • 20% ROE • Safety margin • $1 of retained earnings must equate to AT LEAST $1 of long term market value (market capitalisation) The best strategy • • • • • Find the intrinsic value of a business. Wait for the right opportunity. Buy lots! You need patience. Have a few great businesses rather than a few mediocre ones. In future presentations • • • • • • Dividends and Franking Diversification The risk-return principle Entrepreneurship Personal development aspects More value investing Questions