Thursday, December 21, 2006

Whom the Gods wish to destroy, they first praise highly

Ancient Greek has a saying, “Whom the Gods wish to destroy, they first praise highly”.

In the stock market, my saying is, “That which smart money wish to distribute, they will first push them up”.

A share has three values. There are: the market value; the net tangible asset value, and the intrinsic value. The first two values are easy to understand. Intrinsic value needs some explanation. Intrinsic value means the real value. What actually is the real value of a company?

To know the real value of a company, we have to take into consideration all the aspects of that company. First, it’s the management, its capability; reliability, integrity, honesty and its moral values must all be considered. Then it’s the earnings. Are the earnings sustainable? And what is the likely growth rate?

Net tangible assets and intangible assets, like goodwill, patents and monopoly must also be taken into the calculation. The nature of its business, its dividend policy and whether it has a high-entry barrier is also important and must be considered.

As it is, the intrinsic value is indeed very hard to calculate. I think ten accountants will come out with ten different answers. The important thing to remember is that earnings are the lifeblood of a company. It’s the future earnings per share (without the exceptional items) that matters. Keep this in mind and do your own calculation.

Because of overly optimism or overly pessimism, manipulation, rigging, insider trading and speculation, share prices can go up to great heights and down to incredibly low levels every now and then.

A smart investor or speculator is able to exploit these situations. Can you do it? If you can, someday you will be rich. If you can’t, better start learning now, so that someday, you too can do it and be rich.

Good luck and Merry Christmas.