THE BEST AT THE PRICE

Prepared By: Rajan

Thakur
 CONTENT
The article tries to explain the
valuation of stocks.
• Paul Samuelson
• John Burr Williams: The Theory of
Investment Value
• Benjamin Graham
 INTRODUCTION
• How is the market?
• Is that stock still a buy?
• When should I sell?
• Paul Samuelson and his cohorts say that
stocks will sell for what they are worth. But
this assumption is vulnerable
• Because it holds only when a sizable
number of investors, with big sums at
play, know how to value stocks correctly.
• Most of the time, stocks are priced close to
what they are worth.
 John Burr Williams
The Theory of Investment
Value
• Published In 1938, the most rigorous and
influential method for determining intrinsic
value
• Investors are never convinced that they
are at their fair value. They always looked
for a better price.*
• Williams suggest that investors should
calculate the value of future flow of
dividends instead of hoping somebody to
buy the stock for higher price.
 John Burr Williams
The Theory of Investment
Value
• Ordinary financial formulas could be
used to calculate the value of
common stock by discounting the
future stream of Ddividends.
• The formula is :k − g
• D: Dividend
• k: Expected Return
• g: Growth Rate
 Explanations about the
formula
• A stock was worth the present value
of its future stream of dividends.
• Infinite dividend stream*
• k: the available return on alternative
and less risky assets + uncertainty
• Williams' formula works as long as
the interest rate is equal or greater
than the rate of growth. Otherwise,
the value becomes infinitely large.
 What Williams' Formula
Implies
• The less the difference between an
investor's target return and dividend
growth, the greater the stock value.
• Growth stocks are riskier than
companies with less exciting
prospects.
• A Foggy Cash Flow. Most
corporations do not make financial
projections that extend more than
three to five years. Even one year
projections are inaccurate.
• Another problem with stock value
theory is that the idea was borrowed
from bond and annuity formulas
• Microsoft
• Two Insurmountable Barriers:
• the future is unknowable
• and the company is not obligated to
pay anything to stock investors, even
if the business is profitable.
 John Graham:
Security Analysis and Value
Investing
• 2 books: “Security Analysis(1934)” and
“The intelligent Investor(1949)”
• He admitted that intrinsic value is not
necessarily a hard fact.
• It is elusive and an approximate value
would be enough.
• Intrinsic value: the value justified by the
facts, e.g. the assets, earnings, dividends,
definite prospects.*
• Graham didn’t seek to determine
exactly the intinsic value of a given
security.
• He determined a set of rules.
 Principles of Graham:
• Principle No. 1: Always Invest
With a Margin of Safety.
• Margin of Safety: A principle of
investing in which an investor only
purchases securities when the
market price is significantly below its
intrinsic value.
• Intrinsic Value: The actual value of a
company or an asset based on an
underlying perception of its true
value including all aspects of the
business, in terms of both tangible
and intangible factors.
• To Graham, big corporation assets
may have been valuable because of
their stable earning power or simply
because of their liquid cash value.
• Principle No. 2: Expect Volatility
and Profit From It
• You should only buy when the price
offered makes sense and sell when
the price becomes too high.
• Principle No. 3: Know What
Kind of Investor You Are
Active Vs. Passive Investor
Work=Return
 Other Principles of
Graham
1. Opt for Big Companies with Strong
Sales
2. Choose Companies that are Paying
Dividends
3. Seek Out Companies That Are in
Strong Financial Shape
4. Seek Companies with Sustainable
Earnings Growth
1. Know the business
2. Know who runs the business
3. Invest for profits
4. Have confidence