| How to Let
Valuesoft Templates
Do the Number Crunching For You
Australian Market
Level 2 Template: Combining Valuesoft
Functions and Including Margins of Safety
There are over 30 functions in Valuesoft which
users combine in different ways to suit their own needs. The
following is an example that starts with a combination of
two of the functions shown in the Level 1 Templates, STRETD
and STAEGR. Next it uses new functions to calcuate growth
rates, margins of safety, and target prices. Here is a list
of the functions used in the template:
- STAEGR: to measure stability
- HGROWTH: to measure histroical growth
- ESAFETY: to apply an automatic margin of
safety to the forecast of growth
- PESAFETY: to apply an automatic margin of
safety to the forecast of the PE ratio
- STRETD: to calculate the expected average
return
- TARGD: to calculate the price to pay (the
"target" price) to get your minimum desired return
As we said in the introduction
to these templates, the most important activity of an investor
is to estimate with confidence the percentage return over
a specified holding period when buying stock in a company.
And you want to be able to do this based on numbers that you
can see and adjust such as the growth rate of earnings.
Because I am interested in medium to long term
investments (remember, Buffett's favorite investment period
is forever), I need to have dependable forecasts of earnings
for the next five years or more. However, for most companies
it is extremely difficult to be able to forecast earnings
with any confidence.
Most people rely on forecasts provided by the
various stock analysis firms. Unfortunately, many studies
show that their results are extremely unreliable. In contrats,
Valuesoft has two functions STAEGR and HGROWTH work together
to remove a lot of the guesswork out of making earnings forecasts
and the unreliabiulity of analyst forecasts.
Again we will use ARB Corporation as an example.
(ASX code: ARP). After having done an analysis of the company
(its products, competitors, and so on), you are ready to crunch
some numbers. (For an example of a USA company, click
here.)
Suppose you are interested in estimating the
percentage return on buying ARB now and holding it for 5 years. Also
you want to know the return under your margin of safety. You
will need some data. You can get data free from YahooFinance.
However, even though it was enough for a Level 1 analysis,
it is not quite enough for Level 2 More complete data is available
free for Australian residents from the online broker Commsec.
(You will need to register.) Alternatively you can get five
years of data from NineMSN
Investor.
For this example we will get the data from MSN
Money. The pages that you will need are:
Now all you do is type the numbers into a template
supplied with Valuesoft including your estimates of the PE
ratio and the growth of earnings. All the rest is done for
you. The final result will look like this:-
Data is typed in the white cells  ,
forecasts go in the cells  ,
and the Valuesoft results are displayed automatically in the
cells  .
Column E contains Return on Capital Or Return
on Equity if Return on Capital is not available). Both are
important measures of how well management is doing with the
money they have. Consistently above 15% is a desirable level.
Notice the high levels of STAEGR in the cells
C13 to D14. The chart also shows
the smooth growth of sales and earnings. These are the types
of companies I love. When they are purchased at the right
price you can get outstanding profits with as much safety
as bonds.
Amazing new functions that allow you
to automatically incorporate a margin of safety!
Benjamin Graham and Warren Buffett said that
the three most important words in investing are margin
of safety.
In this example I have added a margin of safety
by using the new ground-breaking functions PESAFETY and ESAFETY
in Valuesoft. Applying the function PESAFETY lowers the PE
ratio from the current level in cell I3 to a safety level
in cell I10. Depending on the relationship between the current
P/E ratio and historical P/E ratios, the size of the margin
of safety can be larger or smaller.
Similarly, we apply a margin of safety to the
estimated growth. The function ESAFETY lowers the growth estimate
from the historical level seen in cell D15 to the safety level
in cell I11). This lower level is based on the historical
growth rate of earnings (in cell D15), the historical growth
rate of sales (in cell C15), and the stability of earnings
over the past 5 years as measured by STAEGR (in cell D12).
Cell I7 uses STRETD to calculate the expected
annualized percentage profit assuming that dividends are reinvested.
This is under quite a strong margin of safety. It is equivalent
to saying that there is a very strong probability that I will
make at least this return over the next 5 years.
With Valuesoft you can find those stocks that
you can lock ensure a satisfactory return while at the same
time leaving open the possibility of a much higher return.
Target Prices
Another Valuesoft feature included in this template is the
use of the function TARGD. This calculates the target price,
or buying price, necessary to achieve your desired percentage
profit. In this case, a percentage profit of 12% (cell I6)
is asked for. The target price in shown in cell I8.
When you know exactly how much you are willing
to pay for a stock, often you get that temporary dip that
you are looking for. Setting target prices is a vital part
of the investment strategies used by Warren Buffett. He said
that he is willing to wait indefinitely to buy the stock he
wants at the price he is willing to pay.
Click here
to purchase the Valuesoft Investment System.
Click
here to read about the hidden desire of investors.
Level 1 Templates
Click here
These Level 1 and Level 2 templates are just
a taste of what is possible with Valuesoft. See the Contents
of the Manual for a complete list of the functions that come
with Valuesoft. |
