Homework
-----Original Message-----
From: Rxxxxxx @ aol.com <Rxxxxxx@aol.com>
To: "R C"
Date: June 05, 2000 8:07 PM
Subject: Intrinsic Values
Hello. My name is Lxxx Rxxxxxx, and I am a student at Bellevue University in Omaha, Nebraska. I found your web site very helpful but I have more questions. I am supposed to be giving a lecture on intrinsic values but it seems that there's a lot to be considered in this. I was wondering if you could possibly tell me what key ratios are looked at by investors. That way I could narrow my speech a little.
Thank you for your time,
Lxxx Rxxxxxx
[used with the knowledge of Lxxx Rxxxxxx]
From: "R C"
To: <Rxxxxxx@aol.com>
Subject: Re: Intrinsic Values
Date: Tue, 6 Jun 2000 07:22:15 -0500
Lxxx,
Yes, there is a lot to be considered in the evaluation of common stocks. The short answer is that the intrinsic value of any investment asset is what you can get out of it.
For common stock, intrinsic value is estimated from the discounted expected future cash flow to common stockholders' equity account or from discounted expected future cash dividends. All investing entails forecasting or expectations about the future. Long-term investors expect to at least maintain the purchasing power of their capital. An implicit or explicit forecast of future cash returns is involved.
The DCF Valuator models at www.numeraire.com/value_wizard/ provide valuation models for different company growth scenarios. The page of formulas and example calculations at www.numeraire.com/value_wizard/formulas.htm further explains the models.
Price is not value. Pricing is not valuation. Pricing models are not valuation models. Yet simplistic notions of *value* mistakenly assume that *price* ratios such as price-to-earnings (P/E), price-to-book value (P/B), or dividend-to-price aka dividend yield (D/P) can be used to identify so-called "value" stocks.
Screening is not valuation. Screening to select stocks using price ratios and similar superficial criteria can be misleading due to the double traps of false negatives and false positives as shown in the example at www.numeraire.com/screen.htm in the table.
Screening can focus research by reducing a large universe of investment opportunities to a more manageable number of candidates for further investigation and ultimately detailed valuation. For example, some investors seek only socially responsible investments (SRI) as they define them by diverse criteria.
When evaluating a common stock there are factors other than intrinsic value to consider including asset values and resource conversions. One such investment approach is outlined at www.numeraire.com/exchanges/approach.htm.
Hope this helps,
Bob Coleman
-----Original Message-----
From: Rxxxxxx @ aol.com <Rxxxxxx @ aol.com>
To: "R C"
Date: June 06, 2000 6:24 PM
Subject: Intrinsic Values
Bob Coleman
Thank you very much for the quick reply and useful information. Your site has been an absolute dream for me with my homework. It is greatly appreciated and I will let others know that you have this site.
Thank you once again,
Lxxx Rxxxxxx
[used with the knowledge of Lxxx Rxxxxxx]