Posted by: donmihaihai | April 1, 2012

To pay for stock?

2002
NTA : 1.52
Low : 1.27 P/NTA : 0.84
High: 2.14 P/NTA : 1.41

2011
NTA : 4.09
Low : 7.02 P/NTA : 1.72
High: 12.18 P/NTA : 2.98

Total Dividends 2002 – 2011 = 3.22
2011 NTA plus total dividends = 7.31
Total annualised return = 19.07%

Stock price 31/12/11 = 9.30
Total Dividends 2002 – 2011 = 3.22
Total return(buy at 1.27) = 28.95%
Total return(buy at 2.14) = 21.69%

Let me do some magic

2002
NTA : 1.52
Low : 2.61 P/NTA : 1.72
High: 4.53 P/NTA : 2.98

2011
NTA : 4.09
Low : 3.44 P/NTA : 0.84
High: 5.77 P/NTA : 1.41

Total return base on NTA plus dividends is still the same

What about stock price plus dividends?
Stock price ((3.44 + 5.77)/2) = 4.61 (P/NTA: 1.13)
Total return(buy at 2.61) : 12.98%
Total return(buy at 4.53) : 6.27%

Let do another magic

2002
NTA : 1.52
Low : 2.61 P/NTA : 1.72
High: 4.53 P/NTA : 2.98

2011
NTA : 4.09
Low : 7.02 P/NTA: 1.72
High: 12.18 P/NTA: 2.98

Total return base on NTA plus dividends is still the same

What about stock price plus dividends?
Total return(buy and sell at same P/NTA : 1.72) : 16.40%
Total return(buy and sell at same P/NTA : 2.98) : 14.56%

What does the above say about Keppel Corp?
Keppel Corp was doing very well from 2002 to 2011
What does it say about price?
- If the company is good, it can save the investor ass even if investor paid a wrong price(not too high of course). Magic no. 1

- Paying at right price for right stock will be wonderful. What is the right price? It happened that stock price of Keppel Corp in whole year of 2002 was right!

- To pay a premium for a stock, the only way to earn good return is the stock must be selling at about the same premium at point of selling. And of course the company must be doing good.

Wrong price for wrong company?
Food Junction generated ROE of 23% to 39% from 2002 to 2007. And if you think paying 3XBV is cheap. What happened after that?

Pteris Global generated ROE of 20% to 37% from 2003 to 2007. And if you think paying 4XNBV is cheap. What happened after that?

Someone might say these are crap companies. But that is by looking back.

Then what to do? I know what I will do for myself. I know what it work for me. I have a simple suggestion but it will not work for many people.

Use a probability chart, outcome chart or whatever it suit you when even you decided to pay for a premium. Go through it and if end results show that favorable result can only happened due to one or two outcomes or small probability, then it is better not to pay for it.

These whole thing require a person not to be hype up on the stock. But telling that to a person who is going to pay a premium is as good as useless. I have done that and I know it.

I have another suggestion. Screen for stocks that are selling at say 3XBV just like we are looking at low valuation stock. And don’t touch them regardless how good they are.

One way to look at thing is to look at your portfolio. Look at the stock valuation, especially at the purchase price. And you should worry about being a hype investor if you have many purchased at a premium.

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Responses

  1. Good article with practical examples. You are good in analysis with financial ratio.


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