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Published by Ian Tai Wealth Publications

Copyright 2017 by Ian Tai Wealth Publications

All rights reserved. No part of this publication may be reproduced in any

form or by any means, electronic, photocopying, recording or otherwise
without prior permission of Ian Tai Wealth Publications

Disclaimer:
This book contains the ideas & opinions of the author. It is intended for
education & illustration purposes. It is not intended to be a
recommendation to buy, hold or sell any securities discussed herein. The
author and publisher are not stockbrokers, registered investment advisors,
or substantial shareholders of any securities mentioned in the digital book.

Although we have made the best efforts to provide the most accurate &
up-to-date information, no warranty or guarantee is given for the the
accuracy, reliability, or completeness of the information provided. The
author and publisher disclaim any rewards and responsibilities for any gains
and losses, which may arise as a consequence, directly or indirectly, from
the application of any ideas, strategies, techniques and case studies
mentioned in the digital book.

The author and publisher do not guarantee any results or investment

returns based on the information contained herein. We suggest the
consultation of the relevant investment professional prior to embarking on
any investment plan.

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 TableofContents
Chapter1:
3 Principles of Intrinsic Value that Warren Buffett Pointed Out Clearly
which most of us have missed

Chapter2:
3 Criteria that a Stock must Fulfill first before calculating its Intrinsic Value

Chapter3:
8 Types of Stocks that are not Suitable to Calculate Intrinsic Value.

Chapter4:
4 Steps to Calculate a Stocks Intrinsic Value in 10 Minutes

Chapter5:
6 Limitations for using Intrinsic Value to Evaluate a stock investment deal

WebinarFAQ:
Answering Your Questions on Intrinsic Value

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 Chapter1
3PrinciplesofIntrinsicValue
thatWarrenBuffettPointedOutClearly
whichMostofUshaveMissed...

It is July 18, 2017.

As I write, Public Bank Bhd is trading at RM 20.36 a share. So,

a. Is this a good time to buy shares of Public Bank?

b. If I have shares of Public Bank, should I continue to hold onto it?
c. Or, should I sell them?

Before making a decision, savvy investors would first calculate the intrinsic
value of one share of Public Bank.

If the intrinsic value is above RM 20.36, investors would consider buying

shares of Public Bank as they are deemed undervalued. However, if the
intrinsic value is below RM 20.36, shares of Public Bank is viewed to be
overpriced. In this case, new investors would avoid investing in Public Bank.
Existing shareholders may consider selling its shares.

No. Intrinsic Value is View Action

1 Above Share Price Undervalued Buy

2 Below Share Price Overpriced Sell

So, what is intrinsic value?

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Personally, Ive done a bit of reading to find out what intrinsic value is.
According to the Annual Report 2016 of Berkshire Hathaway Inc, Ive
discovered the definition of intrinsic value given by Warren Buffett. Here is
how he puts it:

Intrinsic Value can be defined simply:

It is the discounted value of
the c ash that can be taken out of a business
during its remaininglife.

Source: Page 112 of Annual Report 2016 of Berkshire Hathaway Inc

Ive highlighted three key words: Discounted, Cash and Remaining Life.
They are the three key principles that are absolutely instrumental to the
definition of intrinsic value which, regrettably, most of us have them
missed. Let me elaborate further:

#1:Discounted

Today, money is worth more than money to be received tomorrow.

Thus, If I buy a stock today, Im investing todays money for the potential of
receiving more money in the future. The investment in this stock makes
sense only if the total future money that I would be receiving in todays
value exceeds the amount of investment that Im making today.

Question
How do I know the todays value of money that I would be receiving
tomorrow?

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Answer
Heres a great illustration. What is the difference between me receiving:

a. RM 10,000 today.
b. RM 10,000 in a years time.

For most Malaysians, we can choose to place money in a fixed deposit

account which pays 3% a year in interest income. The principal sum is
secured with zero fluctuation in value. Its almost risk-free.

Hence, to have RM 10,000 in a years time, I would need to place RM 9,709

in a fixed deposit account today. This means, having RM 9,709 today has
the same value of having RM 10,000 in a years time. In this case, the 3% is
known as the discount rate which is used to estimate the todays value of
money to be received in the future.

Money Today Rate Money in a Years Time

RM 9,709 3% RM 10,000

#2:Cash

Evidently, Warren Buffett places high regards to cash flow. Stocks that have
abundance in cash is able to fund growth projects and pay regular streams
of dividends to their shareholders.

Presently, there are devotees of Warren Buffett which use cash as a basis to
calculate intrinsic value. Some choose Operating Cash Flows while others
choose Free Cash Flows. In both instances, they would generate different
intrinsic value figures despite performing calculations for the same stock.

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In theory, I agree with the usage of cash. However, as I practise, Ive
discovered that it is limiting and not user-friendly.

For Operating Cash Flows, the formula used would exclude stocks that
have higher fluctuations in working capital. This includes local banks which
are well-capitalized. Meanwhile, the figures of a stocks Free Cash Flows is
rather subjective as there are multiple ways of calculating it.

Thus, Ive decided to cheat a little.

Personally, I use earnings as my basis for calculating a stocks intrinsic value.

Why? Firstly, figures of shareholders earnings are easily obtained. Secondly,
it is less complicated which allows me to obtain a fair intrinsic value figure
of a stock quicker.

Instead, I would assess a companys cash flow management and balance

sheet strength separately to ensure the stock that Im considering is
financially solid with abundance in cash reserves.

#3:RemainingLife

This emphasizes on stocks where their businesses are sustainable over the
long-term.

Obviously, there are companies like Frasers & Neave Ltd and Great Eastern
Holdings Ltd which have been in operations for more than 100 years.
Hence, some investors would project the future earnings or cash flows to be
received of a stock to its eternity or perpetuity.

Personally, I choose to be a little more conservative. Instead of treating

remaining life as Forever, I would just focus on a stocks income
generation over the next 10 years. After all, what is the present value of RM
100 to be received in 20 - 30 years from now?

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AsaResult...

Intrinsic value is an estimate rather than a precise figure.

Two people may look at the same stock and the same set of financial results.
But, they would inevitably come out with different intrinsic value figures of
the stock. The differences stem from how well investors comprehend and
incorporate these three key principles in their calculations.

In the following chapters, Ill continue to use Public Bank Bhd as my case
study to explain in great detail:

a. How to best use the calculation of intrinsic value?

b. The Good, Bad & Ugly of using the intrinsic value figures
c. How anyone can easily calculate the intrinsic value of a stock under
10 minutes?

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 Chapter2
3Criteriathat
aStockmustFulfillFirst
beforeCalculatingitsIntrinsicValue

Since February 2016, Ive uploaded a simple 15-minute video on how to

calculate intrinsic value of a stock in just 5 simple steps. As I write (July 19,
2017), the video has accumulated 24,390 views. If youve missed it, you may
click the link below to Watch the Video.

Link:
5 Steps to Calculate Intrinsic Value of a Stock

Screenshot from my YouTube Account

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Since then, Ive received hundreds of requests for my write-ups and
template to calculate intrinsic value. This includes questions relating to
some difficulty experienced by sincere investors in calculating intrinsic
value. Most of these difficulties arise from a lack of understanding on how
to best use the formula to perform the calculation of intrinsic value.

ItsNotforEveryStock

For a start, we need to realize that the calculation of intrinsic value is not
for every stock listed on the stock exchange. This means, there are stocks
where you cant use this formula to estimate their intrinsic value.

Basically, a stock needs to fulfill three simple criterias first before we can
use the formula to calculate its intrinsic value. They are:

#1:GrowProfitsConsistently-Past

The formula is meant for stocks that:

a. Have Long Years of History of Operations

b. Have Achieved Consistent Growth in Profits

If youve been following Bursaking.com.my, youll find that Ive been

stressing on finding stocks that grow profits consistently. Personally, it is a
mantra to how I begin assessing a stock investment deal.

The key word is Consistent. To be conservative, it is best used for stocks

that have built a track record of growing profits for the last 10 years. These
stocks are resilient and highly profitable in most, if not all, economic
situations. This includes when:

a. Economic is Booms and Economic Busts

b. Ringgit is High and Low against the US Dollar
c. Crude Oil is High and Low

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Question:
Why do some fail to calculate a meaningful intrinsic value figure for a
stock?

Heres my answer. Over time, I found that some have used this formula in
attempt to calculate the intrinsic value of stocks that:

a. Incurred, and still incurring losses

b. Are Cyclical in nature
c. Are Turnaround Cases
d. Have Inconsistent Profits
e. Made High Profits in Good Times & Low Profits in Bad Times.
f. Made Superbly High Profits over the last 2 Quarters
(Short-Sighted)

The issue is not with the formula.

Rather, this formula is specifically designed for long-term investors who

seek to build sustainable wealth from their portfolio conservatively. This
formula is designed to help these investors to avoid stocks that reported
poor financial results and thus, reducing the risk of making bad investment
mistakes.

Intrinsic Value is not for Speculators.

The proof is with Warren Buffett. Globally, savvy investors read the
writings of Warren Buffett in the annual reports of Berkshire Hathaway Inc.
Why? This is because millions around the world are interested to learn the
Secret Sauce to long-term success in the stock market.

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As I write, Berkshire Hathaway Inc is a stock that has made Compounded
Annual Growth Rate (CAGR) of 20.8% over 51 years from 1965 to 2016. Its
a remarkable achievement.

Here, Ill list down the 5 largest stock investment that Berkshire Hathaway
Inc made according to its market value as at December 31, 2016.

Figures in US$ Million

No. Stocks Cost Market Value

1 Wells Fargo & Company 12,730 27,555

2 The Coca-Cola Company 1,299 16,584

3 IBM Corporation 13,815 13,484

4 American Express Company 1,287 11,231

5 Apple Inc 6,747 7,093

Source: Annual Report 2016 of Berkshire Hathaway Inc

What is the common denominator that unites the 5 stocks above?

I believe, you get the picture. Thus, I submit to you that Warren Buffett
made his money from investing in highly profitable stocks, not speculating
in the stock market. If you are new to stock investing, it is better to start
assessing stocks that:

a. Grow Profits Consistently

b. Have a Clean, Simple, and Easily Readable Financial Reports

So, did Public Bank fulfill Criteria #1?

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Yes, it did. Evidently, Public Bank has increased its shareholders earnings
from RM 1.73 Billion in 2006 to RM 5.21 Billion in 2016. Over the 10-year
period, it has achieved consistent growth in profits.

Source: Annual Reports of Public Bank Bhd

How about Ann Joo?

Clearly, Ann Joo is not a candidate suitable to calculate intrinsic value.

Why? This is because it has inconsistent levels of earnings over the last 10
years and thus, is not compatible with the formula.

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 Source: Annual Reports of Ann Joo Resources Bhd

#2:AbundanceinCashFlows-Present

This formula is also meant for stocks that:

a. Generate Positive Cash Flows from Operations Consistently

b. Have Abundance in Cash Reserves
c. Have a Healthy Balance Sheet

Why?

This is because a stock that has good cash flow management is able to:

a. Remain in Business over the Long-Term

b. Be Resilient in Challenging Market Conditions.
c. Save Interest Costs from Borrowings.
d. Invest to Expand its Current Operations.
e. Pay Handsome Dividends to its Shareholders.

This criteria is important as the formula to calculate intrinsic value a ssumes

that a stock has the ability to grow profits consistently in the future.

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Evidently, stocks that deliver growth in profits consistently are ones that
have built a proven track record of growing profits consistently in the past
and has abundance in cash reserves and healthy balance sheet presently.

So, did Public Bank fulfill Criteria #2?

Yes, it did. Public Bank has increased its operating cash flows before
working capital changes from RM 3.05 Billion in 2006 to RM 7.03 Billion in
2016. As at March 31, 2017, Public Bank has reported to have RM 17.87
Billion in cash reserves.

Source: Annual Reports of Public Bank Bhd

How about Ann Joo?

Clearly, Ann Joo has reported ups and downs in cash flows from operations.
Thus, it failed to fulfill both Criteria #1 and #2.

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 Source: Annual Reports of Ann Joo Resources Bhd

#3:TangibleGrowthPlans-Future

The calculation of intrinsic value involves projection of income or cash to

be generated in the future.

Question:
How do we know whether a stock is able to make money in the future?

Rather, I choose to read and extract key information from a stocks annual
report, quarterly report, press releases, and investors presentations. These
materials contain many gems of information about how a stock intends to
make money in the future. As these information are well-documented,
theres little need for us to speculate the unknown.

So, whats Public Banks plan to sustain profits in the future?

Public Bank has revealed six major key performance targets for 2017:

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 Year 2016 Target 2016 Actual 2017 Target

Net Return on Equity > 15% 16.5% 14% - 15%

Total Capital Ratio > 13% 15.5% > 13%

Gross Impaired Loan Ratio < 1% 0.5% < 1%

Cost-to-Income Ratio < 33% 32.3% 33% - 34%

Group Loan Growth 8% - 9% 7.5% 6% - 7%

Group Deposit Growth 7% - 8% 2.9% 5% - 6%

Source: Annual Reports of Public Bank

In addition, Public Bank has revealed areas of strategic focus. This includes:

a. Interest Income
Focus Lending on Purchases of Residential and Non-Residential
Properties.

b. Non-Interest Income
Expand fee-based income such as unit trust funds, bancassurance,
card business, cash management services, remittance services and
trade finance. In addition, Public Bank intends to open 7 new
branches in Vietnam.

c. Profits Margins
Maintain cost of funding by securing higher retail and lower cost
deposits.

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As such, Public Bank has fulfilled all three criterias needed to calculate its
intrinsic value as it:

- Has Grown Profits Consistently

- Has Abundance in Cash Reserves
- Is Well-Capitalized.
- Has a Tangible Plan to Sustain Profit Growth in the future

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 Chapter3
8TypesofStocks
ThatarenotSuitableto
CalculateIntrinsicValue

Is the calculation of intrinsic value limited to only stocks that grow profits
consistently?

Yes.

Isnt it limiting? After all, arent there stocks that appreciated in prices
despite reporting mediocre financial results?

Yes, it is limiting.

And yes, there are stocks that have experienced increase in prices despite
reporting mediocre financial results.

If so, why do we limit ourselves to investing in stocks that grow profits

consistently?

This is because Ive discovered that stock prices tend to follow profits.

In most cases, stocks that are growing profits consistently would increase in
market value over the long-term. The exception applies to stocks that are
superbly overpriced as they are less attractive compared to other stocks that
are competitively priced. After all, we have over 900+ stocks to choose from
Bursa Malaysia.

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Meanwhile, the price increase for stocks that reported poor financial results
often does not last. These stocks are often traded by speculators, short-term
traders and anyone who intends to make a quick buck in the stock market.
Usually, these stocks are volatile as they lack capital from serious investors
who are risk-averse in nature to support demand for them in both good and
bad market situations.

So, who is this for?

The formula to calculate intrinsic value is purposefully rigid. It is catered to

investors who:

a. Are Conservative
This formula considers a stocks past track record, present and
future ability to grow profits consistently. It involves an all-rounded
and comprehensive assessment of a stocks capability to deliver
returns to investors.

b. Value Sustainability
This formula is best used for stocks that are resilient and are able to
make money in both the best and the worst possible market
conditions.

c. Wants Longevity
This formula assumes that an investor intends to hold onto his stock
investment without selling it. It encourages us to treat stockholdings
as part ownership of a business that we expect to gain from it
continually rather than an electronic code or paper where its prices
fluctuate on a daily basis.

Thus, this formula is intended to dismiss stocks that have poor financial
results and are overpriced. It encourages one to enhance profits and gains

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through acquiring stocks that have excellent financial results and are
undervalued.

Here, Ill list down eight types of stocks that are not suitable to calculate
intrinsic value.

#1:StocksthatincurredLosses

This is self-explanatory.

Source: Annual Reports of Berjaya Media Bhd

#2:StocksthathaveDecliningProfits

We need to have the earnings growth rate of a stock to calculate intrinsic

value. Often, the earnings growth rate is calculated from past shareholders
earnings reported over the last 10 years. This growth rate is used to project
the stocks future earnings as we assume that the stock will continue to
grow profits in the future.

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Thus, it is not possible to calculate the intrinsic value of a stock that reports
continuous decline in profits as it has negative earnings growth rate.

Source: Annual Reports of Star Media Group Bhd

#3:StocksthathaveUnpredictableProfits

This refers to stocks where their profits are up in a year and down in the
next. Its like making a friend who is unpredictable. Today, hes happy.
Tomorrow, hes not. Its quite burdensome as you couldnt predict his
current mood. Its the same for these stocks as you cant really tell how
much you are going to make in the following year.

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 Source: Annual Reports of Press Metal Bhd

#4:TurnaroundCases

Often, stocks in this category may not be bad investments. They are
suitable for any group of investors who are into stocks that are cyclical in
nature. But, long-term investors who seek to be extra-conservative may
dismiss them due to their lack of consistency in growing profits.

Source: Annual Reports of MISC Bhd

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#5:StocksthathaveNoRealGrowth

Let us take Shangri-La Hotels (M) Bhd as an example.

In 2006, Shangri-La Hotels (M) Bhd derived its main income from five
hotels and two investment properties. They include Shangri-La Hotel Kuala
Lumpur, Hotel Jen Penang (formerly known as Traders Hotel Penang),
Rasa Ria Resort, Golden Sands Resort, Rasa Sayang Resorts, UBN Tower
and UBN Apartments respectively.

By 2016, Shangri-La Hotels (M) Bhd continues to derive its income from
these properties. There is no major addition of new properties over the last
10 years. So, let us assume that it has no plans to acquire new hotels and
resorts over the next 10 years, how much do you think Shangri-La Hotels
(M) Bhd will be making in 2026?

I believe, you get the idea. The issue is not about profits, sustainability or
longevity. It is about limited growth prospects. Its growth is capped to the
occupancy rate, room rates, food & beverage sales, and other associated
income from the same five hotels and two investment properties.

Source: Annual Reports of Shangri-La Hotels (M) Bhd

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#6:StocksthatreportedSuperbPerformancesin1-2Years

Often, they create some excitement in the stock market. This is because
there are investors who are relatively short-sighted. It could mean two
things. Firstly, they focus only on the financials of the latest 1 - 2 years.
Secondly, they are motivated to buy these stocks as their prices have gone
up rapidly over the last 1 - 2 years.

Source: Annual Reports of IFCA MSC Bhd

Share Price of IFCA MSC Bhd

(2005 - 2017)

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 Source: Bursamarketplace.com

In this case, share price indeed has followed profits. However, the share
price increment is not sustainable. It tumbled after profits tumbled. What
went up quickly had came down quickly too. May this be a lesson for all of
us not to chase the next-big-jump in the stock market.

#7:StocksthatDependsonaFewCustomersforMainIncome

Here, the issue is sustainability. If a stock makes money from a few major
customers, what would happen if the stock loses them? How does it sustain
growth in income? Lets take a look at Globetronics Technology Bhd.

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 Source: Annual Reports of Globetronics Technology Bhd

Share Price of Globetronics Technology Bhd

(2008 - 2017)

Source: Bursamarketplace.com

In 2015, Globetronics Technology Bhd has derived 79% of its total revenues
from two major customers. In 2016, it received substantially lower orders
from its major customers, causing a huge plunge in sales and profits in that
financial year. This has caused stock prices to drop from RM 6.33 in
December 2015 to RM 2.82 in August 2016.

As I write (July 24, 2017), stock price has recovered back to RM 6.18 a share.

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So, should I buy Globetronics Technology Bhd? Nah. Ill give it a pass as its
trading at current P/E Ratio of 67.9. This is like investing RM 67.9 Million in
a business to get RM 1 Million a year. Its definitely not for me at the
moment.

#8:StocksthatChangeitsBusinessModel

This formula involves the assessment of a stocks ability to grow profits

consistently from its existing business operations. A stock that keeps
changing business models is dismissed. Regrettably, this formula would also
exclude stocks that have undertaken a merging & acquisition exercise and
stocks that have disposed their core businesses. In this case, C.I. Holdings
Bhd is an example.

Source: Annual Reports of C.I. Holdings Bhd

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 Chapter4
4Stepsto
CalculatetheIntrinsicValue
ofastockin10Minutes

Lets get back to Public Bank Bhd.

Before you begin, you may need the intrinsic value template that Ive built
to follow the four steps below.

Click Here:
Intrinsic Value Template

If you have failed to receive your copy, please feel free to drop me an email.
Ill be happy to send the copy to you.

Copy This Message:

Ian, I want my Intrinsic Value Template

Paste it Here:
Request Your Template from Ian

Step#1-
CompileShareholdersEarningsforthePast10Years

Basically, this step is a copy & paste job. You may obtain the figures of
Public Bank Bhds shareholders earnings from its annual reports.

Thus, you should get:

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 Screenshot of my Intrinsic Value Template

Step#2:
CalculateEarningsGrowthRate

This involves calculating the Compounded Annual Growth Rate (CAGR) of

Public Banks shareholders earnings. You need to input three things:

a. No. of Years
Usually, the standard practise is to calculate CAGR of a stocks
earnings over a ten-year period. In this case, it includes the period
from 2006 to 2016.

b. Start Value
This refers to Public Banks shareholders earnings in 2006. The
figure is RM 1.727 Billion.

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 c. End Value
This refers to Public Banks shareholders earnings in 2016. The
figure is RM 5.207 Billion.

Once youve placed these figures, you would discovered that Public Bank
has achieved CAGR of 11.67% a year in shareholders earnings over the last
10 years. This means, Public Bank has grown its shareholders earnings at a
rate of 11.67% per annum from 2006 to 2016.

CAGR=11.67%

Screenshot of my Intrinsic Value Template

Automatically, the template would project the future shareholders earnings

of Public Bank from 2017 to 2027. The projection assumes that Public Bank
will continue to grow its shareholders earnings at a rate of 11.67% a year
over the next ten years. Ive circled the projections in Blue.

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Step#3:
DetermineYourDiscountRate

As mentioned in Chapter 1, money today is worth more than money

tomorrow. Thus, money to be earned in the future must be discounted back
to reflect its current value today.

So, what figure should I put?

You can be experimental with this template. For a start, I would suggest one
of the following figures.

a. Fixed Deposit Rates - 3%

This is because, if I invest in a stock, I would lose my opportunity to
receive 3% in interest income from a fixed deposit account in any
local banks in Malaysia.

b. Flexi-Loans - 4.5%
If I invest in a stock, I would lose my opportunity to save up to 4.5%
in interest expenses as I could park my capital in a flexi-housing
loan to reduce my interest expenses on my mortgage.

c. REIT Portfolio - 6% or 7%
Today, it is possible to find REITs in Singapore that yield
approximately 6% - 7% a year in income distribution. I would use
6% or 7% in discount rate to compare the attractiveness of a stock
investment deal against REITs in Singapore. The same discount rate
can be applied if you are considering to withdraw money from your
EPF account to invest in a stock.

The intrinsic value of Public Bank estimated would be different based on

the choice of discount rates used.

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You may place your preferred discount rate in the light red box. The
present value of Public Banks intrinsic value is calculated automatically.
The result is bolded and circled in red.

Screenshot of my Intrinsic Value Template; discount rate = 3.0%

Based on the discount rates suggested above, the intrinsic value of Public
Bank is estimated to be:

No. Based on Discount Rate Intrinsic Value

1 FD Rates 3.0% RM 98.614 Billion

2 Flexi-Loans 4.5% RM 90.584 Billion

3 S-REITs 6.0% RM 83.452 Billion

The intrinsic value calculated is for 100% shareholdings of Public Bank. The
next step is to calculate the intrinsic value of one share of Public Bank.
Thus,

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Step#4:
FindOuttheStocksLatestNumberofShares

Again, this figure is easily obtained from Public Banks latest quarterly
report. The latest report is for Q1 2017. From which, Public Bank has
reported to issue 3.861 Billion in ordinary share.

Source: Q1 2017 of Public Bank

Once youve placed it in the light red box, the intrinsic value of one share
of Public Bank is automatically calculated.

Screenshot of my Intrinsic Value Template; discount rate = 3.0%

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Based on the discount rates suggested above, the intrinsic value of one share
Public Bank is estimated to be:

Discount Intrinsic Value Intrinsic Value

No. Based on Rate (100% of One Share
Shareholdings)

1 FD Rates 3.0% RM 98.614 Billion RM 25.54

2 Flexi-Loans 4.5% RM 90.584 Billion RM 23.46

3 S-REITs 6.0% RM 83.452 Billion RM 21.61

Finally...
ComparetheIntrinsicValueofOneSharewithitsCurrentPrice

Ive placed a link that directs you immediately to obtain the current stock
price of Public Bank. Click it and update the figure accordingly. As I write
(July 25, 2017), Public Bank is trading at RM 20.40 a share.

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 Screenshot of my Intrinsic Value Template; discount rate = 3.0%

Based on the discount rate of 3.0%, the intrinsic value of one share of Public
Bank is RM 25.54. It is higher than its current price of RM 20.40. As such,
Public Bank is viewed to be undervalued by 20.12%. Herere the calculation
for other discount rates:

Intrinsic Value Difference with

No. Discount Rate Of a Share Current Stock Price

1 3.0% RM 25.54 -20.12% (Undervalued)

2 4.5% RM 23.46 - 13.04% (Undervalued)

3 6.0% RM 21.61 -5.60% (Undervalued)

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 Chapter5
6Limitationsof
usingIntrinsicValueto
evaluateaStockInvestmentDeal

From Chapter 4, Public Bank is viewed to be undervalued. So, should I

jump right in now to buy shares of Public Bank?

Hold your horses!

Before you do, it is important for us to fully understand the assumptions

used and the limitations of using intrinsic value as a basis to make an
investment decision. It ensures that the calculation of intrinsic value is best
applied according to how it is intended to be utilized. To name a few, they
are:

Limit#1:
ItsnotforShort-TermTrading

Remember. The calculation of intrinsic value is for long-term investors who

intend to hold onto their investments indefinitely.

Without this revelation, some investors have tried to assess a stock

investment deal using a mixture of tools and indicators without
differentiating how they are intended to be utilized.

Some tools such as candlesticks, RSI, stochastics, and MACD are meant for
traders who intend to make trading gains over a shorter period of time. As a
result, it will result in contradicting results with some indicators pointing
Yes and some pointing No. At the end, these investors would be confused
as they are overwhelmed with a mixture of results produced.

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Thus, if you intend to trade, please use a combination of tools and
indicators which are suitable for trading. Meanwhile, if you intend to invest,
please use the right tools to help you make better investment decisions.
Especially if youre new to the stock market, its helpful to separate the two,
choose one and be a master of it.

Limit#2:
ItincludesStocksthathaveLowDividendYields

The formula to calculate intrinsic value is mainly used by Growth Investors

who intend to achieve capital appreciation from their stock portfolio over
the long-term. It has no consideration on dividend yields.

Chances are that youll have a boutique of stocks that grow profits
consistently but has chosen to adopt very different dividend policies. Some
stocks adopt a generous dividend policy and thus, reward their shareholders
with generous dividend payouts. Some stocks may choose to pay less
dividends so that they can retain more earnings for investment purposes.

As such, the overall dividend yield of your portfolio may be lower than a
Dividend Investor who is focused primarily on dividend yields over capital
appreciation.

Limit#3:
SharePricesmoveindependentlyfromIntrinsicValue

No. Scenario Indicates Action

1 Stock Price < Intrinsic Value Undervalued Buy

2 Stock Price > Intrinsic Value Overpriced Sell

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In general, investors buy shares if the stock price is below its intrinsic value.
They will consider selling shares if the stock price has moved above its
intrinsic value.

However, it is entirely possible that:

a. Stock prices to drop further despite being undervalued.

b. Stock prices to rise higher despite being overpriced.

Here, let us assess both situations with greater detail.

Scenario#1-
I bought a stock that is undervalued and its share price drop.
Should I buy more / hold / sell my shareholdings to cut losses?

Firstly, I would reassess the stocks fundamentals. This involves checking its
past profits, latest profits and its balance sheet. If the stock is fundamentally
solid, then, I would run through a series of bargain hunting tools. These
tools ensure that Im really buying the stock at a discount. Briefly, they
include:

a. P/E Ratio (Lower-end & Below 15 preferably)

b. P/B Ratio (Lower-end)
c. Dividend Yield (Minimum 3% but for me, I go for 5%)
d. SMA-Crossover Method (Preferably the Beginning of an Uptrend)
e. Check back my Intrinsic Value Calculation

If all of the above indicates that the stock investment deal is good, then, I
suppose it is a better deal as the stock is offered at a lower price. It is a great
opportunity for one to boost your stockholdings and your potential ROI per
share if the stock increases both in dividend payouts and share prices in the
future.

Bursaking.com.my
Personally, stock investing is not about you making one purchase and hope
to sell that purchase at a higher price. Instead, it involves a plan to stock-up
or accumulate the same good quality stocks at discounted prices over a
period of time and reap a Bigger Reward if they appreciated in prices in the
future. If their prices remain discounted, you should be compensated with
handsome dividend yields on a regular basis.

Scenario#2:
I bought a stock. Its stock price has appreciated and is now overvalued.
Should I buy more / hold / sell them to reap my investment reward?

First, if you are in this category, congratulations!

Again, investing is about buying low to sell high. Buying low enables you to
boost your ROI. Meanwhile, buying high decreases your overall ROI to your
stock portfolio. In most cases, Ill be in the position to sell instead of buying
since the rise in price makes the stock less appealing as an investment.

Since buying is out of the picture, the next question is, When do I sell?

Here, Ill rely more on the SMA-Crossover Method to guide my decision so

that I can sell my shares at reasonably high price. The SMA-Crossover
Method is catered for long-term investors to identify the current price trend
of a stock.

To put it simply, if the stock price remains on an uptrend, I would hold

onto my shares. However, if the stock price is shifting into a sideway or a
downtrend, I would consider selling my shares. As such, it is important for
us to understand how to use the SMA-Crossover Method effectively.

Ill share how you can tell whether:

a. A stock is moving on an uptrend.

b. A stock is moving on a downtrend.

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 c. How a stock is switching in price trend so that you can position
yourself correctly.

Maybanks Share Price

January 2016 - July 2017

Source: Bursamarketplace.com

Blue Line = Actual Stock Price

Black Line = SMA-40 Line (Tracks Short-Term Price Trend)
Green Line = SMA-100 Line (Tracks Long-Term Price Trend)

Observations:

1. Downtrend

a. At Point A, there was a crossover.

b. The Green moved above the Black Line.
c. All 3 lines: Blue, Black and Green lines sloped downwards.
d. Point A was the starting point of a downtrend in Maybank.

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 2. Uptrend

a. At Point B, there was another crossover.

b. The Black Line moved above the Green Line.
c. All 3 lines: Blue, Black and Green lines sloped upwards.
d. Point B was the starting point of an uptrend in Maybank.
e. Its the most ideal time to buy Maybanks shares.
f. One should strive to buy Maybanks shares at Point B and
not at Point C. Self-Explanatory.

Question:
Why dont we just invest in stocks based on
the SMA-Crossover Method if it is so good?

I use both fundamentals and technicals. I consider the past, the present and
the future. I use a combination of tools such as P/E Ratio, P/B Ratio, ROI,
Dividend Yields, Intrinsic Value Calculation and the SMA-Crossover
Method. Why?

This is because, I believe in risk management. Stock investing is about

maximizing returns with minimum risks. Its not about taking high risks to
achieve high returns. It is very possible for anyone to make above average
returns from stock investing consistently without taking unnecessary risks.
Most investors are extremely risk-averse by nature.

If you think, stock investing is a game of luck, perhaps, you may need to
think again. You cant build a stock portfolio that is sustainable based on
luck alone.

If you perceive, stock investing is a game of probability, perhaps, you are

confused between stock investing and stock trading. Stock investing is about
making profits from every investment made. Stock trading is a game of
probability. Stock traders measure their success based on winning ratios. If
they have a winning ratio of 60%, this means, they make 6 winning trades
out of 10 trades made. It also means that they have incurred 4 losing trades.

Bursaking.com.my
If youre into trading, perhaps, you may ask, Are you able to stomach losses
if you lose money from trading? If you cant and youre not willing to learn
how to trade, you may consider stock investing as an alternative. Its
simpler.

Limit#4:
IntrinsicValueisnotaPreciseFigure

Intrinsic value is an estimated figure. It is calculated with multiple

viewpoints and assumptions such as:

a. The Formula
The formula depicted in this book uses shareholders earnings as the
main basis to calculate intrinsic value. Some may choose operating
cash flows or free cash flows as other bases instead.

b. Period
The formula illustrated uses a period of 10 years. Some may use a
shorter period of 5 years. Meanwhile, there are others who uses
eternity as their basis to calculate intrinsic value.

c. Growth Rate
The formula illustrated uses the calculation of CAGR of a stocks
shareholders earnings. Some may choose to make an educated
guess on the appropriate growth rate of a stock.

d. Discount Rate
As explained in Chapter 4, the formula suggests multiple options for
discount rates. Different discount rates have resulted in different
figures of the intrinsic value of a stock.

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Therefore, two different individuals would come up with different intrinsic
value figures despite looking at the same stock which produced the same set
of financial reports.

As such, this explains why Bursaking.com.my doesnt code and build a

calculator on intrinsic value as it involves quite a handful of viewpoints and
assumptions. Rather, an excel template is sufficient and more flexible for
users to tweak the figures according to an individuals preference.

Limit#5:
ActualResultsofastockmayDifferfromProjections

In Chapter 4, the intrinsic value of Public Bank is calculated based on the

assumption that it will continue to grow its shareholders earnings at a rate
of 11.67% a year.

The actual shareholders earnings to be generated for financial year 2017,

2018 and 2019 onwards would most likely differ from what is being
projected. Such differences should not be a surprise to you.

Instead, we are more concerned whether the actual results generated is

close to the projected. As such, we can always revise our calculation of the
intrinsic value of Public Bank once a year when the financial report for 2017
is being released to reflect on the current investment climate and market
conditions.

Limit#6:
IntrinsicValuedoesntconsiderShort-TermFinancialResults

Similar to most tools and indicators available, the formula to calculate

intrinsic value has flaws and imperfections. One of them is having no
consideration for shorter-term financial results such as the latest quarterly
profits generated over the last 12 months.

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Some have chosen to abort the calculation of intrinsic value because of this
one flaw. Personally, I have a different perspective. Instead of an abortion,
the assessment for a stocks short-term financial results is done separately
from the calculation of intrinsic value.

If a stock has built a track record of growing profits consistently over the
past 10 years, then, it shouldnt have a problem sustaining growth in profits
over the last 12 months. If it fails this criteria, you may choose to dismiss
the opportunity to invest in that stock.

Let us take a look at Public Banks quarterly shareholders earnings

generated over the last 12 months.

Figures in RM Million
Period 2016 Q2 2016 Q3 2016 Q4 2017 Q1

Earnings 1,256.2 1,238.2 1,482.8 1,248.0

Over the last 12 months, Public Bank has sustained profits as it made RM
5.23 Billion in shareholders earnings. In this case, it passed the criteria of
both growing profits in the past and sustaining it in the present. As such,
you may calculate the intrinsic value of Public Bank.

Bursaking.com.my
 WebinarFAQ
AnsweringYourQuestionson
IntrinsicValue

Question1:
WhatisthebestwaytodetermineDiscountRate?

It depends. What would you do with your money if you dont invest in
stocks? For instance,

a. If you placed it in a local FD account, then, it is 3%.

b. If you placed it in a flexi-loan account, then, it is 4.5%.
c. If you placed it in a REIT, then, it is more or less 6%.
d. If you placed it in EPF, then, it is more or less 6%.

Question2:
WhatisthecriteriathatIusetodeterminethediscountratefor
bankingstocks?Arethesecriteriathesameforotherstocks?

There is no specific criteria that I use for bank stocks. Personally, I believe
the discount rate is applied to stocks across all sectors. I may use 6% - 7% as
Im receiving approximately 6% - 7% in dividend yields a year from my
current investment in REITs.

Question3:
Whatifthestockchosenhasrisingearningsbutcashflowisnegative?

Firstly, after compilation of over 900+ stocks, most stocks that grow profits
consistently have good cash flow management and a healthy balance sheet.

Why?

Bursaking.com.my
This is because, a stock is able to consistently fund its investment and
expansion activities if it is financially solid. This consistency would result in
consistent growth in profits. It is less probable (impossible) for a stock to
have extremely poor financial standing after many profitable years.

Secondly, it is important to assess the financials of a stock comprehensively.

This emcompasses its past, its present and its future plans. This enables you
to find financially solid stocks which are of quality and help you to avoid
making bad investments in stocks that have poor financial results.

Thirdly, back to your question, if the stock has poor cash flow management,
you may dismiss the stock as its not compatible with the formula of
calculating its intrinsic value. Why? This is because, a stock that has poor
cash flow management may not be able to finance its future growth plans
consistently.

Question4:
CanIusethisformulaforIPOs?

Most likely, nope.

You need to calculate the Compound Annual Growth Rate (CAGR) of a

stocks earnings so that you can make reasonable projections of its future
earnings. Thus, you need to have a stocks earnings figures for the past 10
years.

Question5:
Howaboutnewlylistedstocks?

In most cases, not really. This formula is best applied if a stock has been
listed for more than 5 years. You may find this formula limiting. The
limitation is intended to narrow down your search to stocks that have built
a proven track record of profits. Its a strategy for the conservative.

Bursaking.com.my
Question6:
Howaboutstocksthatareflatingrowthrateorhavelowgrowthrate?

If a stock has zero growth rate, then, theres no CAGR. Lets imagine. Youre
presenting a chance to receive RM 1 Million a year for the next 10 years.
Whats the value of RM 1 Million next year and RM 1 Million ten years later
in todays value?

If a stock has low growth rate, at least, you will have a CAGR. You may use
it to project future earnings. Its still applicable.

Question7:
Whatifastockhaslessthan10yearsintrackrecord?

For instance, Hartalega has nine years. You may calculate the CAGR for
Hartalega for the past nine years. I think, the range between five to ten
years is okay. Still, it is better to stick to ten years to be more conservative.

Question8:
Somepeoplesaythereisnorealbenefitsincollectingdividends.
Normally,stockpriceswoulddropaftertheex-date.Whatsmyviewon
it?

Firstly, to me, stock investing is about receiving recurring gains over the
long-term. So, it is best to have a longer term approach when assessing a
stocks investment potential. This means, I wont based my investment
decisions on one singular event.

Secondly, its also better to do due diligence on our personal investment

over o
pinions of others. Here, at Bursaking.com.my, my focus in on
compiling and extracting a ctual data of stocks listed in Malaysia. Facts are
proven. Opinions are not. I think, its more solid to base an investment
decision on facts than opinions.

Bursaking.com.my
Question9:
Mypalclaimedthattechnicalanalysisisusedtodetermineentryprice
andfundamentalanalysisisusedtodeterminequalityofastock.Isit
correct?

Yes, I believe so. Heres an add-on for technicals.

Firstly, there are hundreds of technical analysis tools that one can employ.
You may need to explore around and use a combination of right tools to
help you achieve your investment or trading objectives.

Secondly, if you are an investor, you may use technical tools like
SMA-Crossover Method to guide your investment decisions. It worked great
for me personally. However, if you intend to trade for short-term gains,
please use other trading tools which are more suitable.

All in all, please dont mix up tools meant for investing and trading. Youll
get confusing results.

Question10:
Foroutstandingshares,iftherearewarrants/ESOSissuedbythe
company,isitpossibletousethedilutednumberofsharesin
calculatingtheintrinsicvalueofastock?

Yes, you may. In this case, you should get an intrinsic value figure which is
lower than one if you use basic number of shares.

Question11:
Today,mydiscountrateis3%.Icomputetheintrinsicvalueofastock
andfoundittobeundervalued,thus,Iboughtsomeshares.

Bursaking.com.my
Whatif,twoyearslater,Iuseadifferentdiscountrate,letssay6%,
andfoundthesamestocktobeovervalued.DoIselltheseshares?

Heres a quote from Warren Buffett.

Intrinsic Value is an all-important concept

that offers the only logical approach
to evaluating the relative attractiveness of
investments and businesses.

This means,

a. If you use discount rate of 3%, then, you are evaluating the
attractiveness of the stock investment against placing your money in
a local FD account.

b. If you use discount rate of 6%, then, you are evaluating the
attractiveness of the stock investment against investing in something
that pays 6% in investment returns.

So, if the stock youve bought is overvalued after you use the discount rate
of 6%, this means, the investment that pays 6% in returns is more attractive
than the stock. You may choose to sell the stock and buy something that
pays 6% in returns.

Question12:
CanIdouble-upmydiscountrateforeachstoplossthatIplaced?For
instance,Iputastop-lossof8%forastockthatIintendtobuy.So,my
discountratefortocalculateastocksintrinsicvalueis16%.Should
thediscountratebedeterminedonastocksrespectiveindustry?

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First, we must understand the purpose of b
uying a stock. Let us say, we are
investors who intend to own good quality stocks and gain from these by
receiving dividends and long-term capital appreciation.

Second, we must understand the purpose for e mploying a tool. So, is

placing a stop-loss a strategy of an investor or a trader? From a traders
point of view, a drop in share price may be viewed as bad news. Thus, he
places a stop-loss. However, from an investors point of view, a drop in
share price may be viewed as good news. Thus, he may buy more to lower
his average cost per share as it is an opportunity to accumulate good shares
at cheaper price.

No. Stock Price No. of Shares Investment

1 RM 1.00 1,000 RM 1,000

2 RM 0.90 1,000 RM 900

Total Stockholdings 2,000 RM 1,900

Costs per Unit RM 0.95

If the stock pays RM 0.05 in dividends per share,

a. Initially, you have 1,000 shares of a stock. Thus, you receive RM 50

in dividends which works out to be 5% in dividend yields.

b. Now, you have 2,000 shares of a stock. Thus, you receive RM 100 in
dividends which works out to be 5.26% in dividend yields as youve
bought the same stock at lower prices.

Third, as such, it is best not to mix the two tools when assessing a stock as
they are meant for different purposes. Thats how most people become
confused. Thus, as mentioned, its better to focus solely on investing tools if
you are investing.

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Fourth, some investors may choose to employ the margin of safety when
evaluating a stock investing deal. This is for people who intend to be even
more conservative.

Here is how it works. For instance, a stocks intrinsic value is calculated to

be RM 10. The investor may choose to make further discount, lets say 20%,
from its intrinsic value calculated. Instead of RM 10, the investor would
based his investment decision on the stock at RM 8 a share. This means, if
the stock price is RM 9, the investor may not buy the stock as it doesnt
fulfill the margin of safety of 20% set.

So, heres another question. Whats the margin of safety should I put?

Again, this is subjective. It depends on your preference. There is no right or

wrong answers to it. Some may choose 10%, 20% or even 30%. It greatly
depends on your risk tolerance. If you are extremely conservative, you
might use 30% as your margin of safety.

So, back to your question. Can I use discount rate of 16%? No problem. Its
okay to go ahead and be experimental. Should discount rate be determined
based on a stocks industry? Personally, I dont do that. But, if one chooses
to have different discount rate for stocks of different industries, its not
wrong either. You may choose to do so. Really, there is no right or wrong
answers to discount rate. Ultimately, please use a discount rate that youre
comfortable with.

Question13:
Canintrinsicvaluecalculationbeusedforstocksthatimproved
financialresultsfromlossestoprofits?

Unfortunately, nope.

Its only catered for stocks that have built a proven track record of growing
profits consistently. Its for the conservative.

Bursaking.com.my
Question14:
Whydoyouuse10years?Ibelieveitistoolong.5yearsisenough.Bull
andbearcyclestendtohappenwithina10-yearperiod,thus,nullifying
theCAGR?

Firstly, the formula is based on the Remaining Life criterion stated by

Warren Buffett in his writings of the Annual Report 2016 of Berkshire
Hathaway Inc. The emphasis is on the sustainability of a business over the
long-term.

Secondly, why 10 years? This is because of discount rate. What is the value
of RM 100 in 50 years from now? I guess its not very much. Thus, there is
no point in trying to project future earnings to 50 years from today. So, I
believe 10 years is ideal as RM 100 in 10 years time is still worth something.

Thirdly, the formula to calculate intrinsic value is strictly for stocks that
grow profits consistently. Consistency refers to stocks that continue to
generate higher profits in:

- Good and Bad economic situation.

- Bulls and Bears
- Ringgit Up and Down against US Dollar
- Oil is High and Low

As such, the calculation of intrinsic value is not for one who attempts to
trade for short-term gain or to figure out the next boom or bust in the stock
market. This formula will eliminate stocks that are cyclical and have
produced inconsistent financial results over the last 10 years.

Question15:
WhydoIuse3%asadiscountrate?Itstoolow.Ibelieve,theinflation
rateis3.5%-4.5%.Wouldntthatbeabetterbenchmark?

Bursaking.com.my
Yes, the 3% is based on the current FD Rates offered by local banks in
Malaysia.

Personally, I use 6%. My friend, KC Lau would use 10% - 15%. Its up to the
individual investor. Thats why Ive built a template to allow you to play
around with it. Please use it or even amend it if you wish to best suit your
investment needs. There is no right or wrong answer to discount rates.

Question16:
ThenumberofsharesforPanasonicis60,746.Oddlotscannotbe
tradedonBursaMalaysia.

The exact figure is 60,746,000. There is no odd lots. The number of shares
listed in all stocks within the template are rounded to their nearest
thousands unless stated otherwise.

Question17:
Canweusecashflowfromoperationstocalculateintrinsicvalue
insteadofearnings?

Yes, you may.

Question18:
Iftheearningsarenotconsistentorcyclical,canweuseotherfigures
likecashflowinstead?

Usually, stocks that have good cash flow management are those that
produce consistent growth in earnings. If the earnings are not consistent, its
best not to perform the intrinsic value calculation for that particular stock.
The formula is meant for stocks that grow profits consistently.

Bursaking.com.my
Question19:
Theintrinsicvalueisbasicallytheprojectedearningsoverthenext10
years.Doesitmeanthatweshouldbuyandholdastockforatleast10
yearstoallowstockpricetoappreciatefromitscurrentpricetoits
intrinsicvalue?

The objective is to encourage investors to think long-term and ownership.

It doesnt say, in 10 years, the stock must and will appreciate from its
current price to its intrinsic value. Thats not realistic, unfortunately.

Remember. The calculation of intrinsic value involves multiple assumptions

and thus, is not a precise figure. Intrinsic value figures are estimates meant
to guide investors to make better investment decisions. It is entirely possible
for stock price to move independently away from your estimated intrinsic
value figure for a stock.

Question20:
WhydontBursaking.com.mycodeatemplatetocalculateintrinsic
value?

Firstly, the template is restricted to a few selected number of stocks.

Secondly, it is better to build one on a Google Excel Sheet. This is because,

individual investors have more flexibility in adjusting the formula to best
suit their investment objectives and preferences.

Thirdly, intrinsic value figures calculated are estimates. Bursaking.com.my is

solely focused on compiling and extracting actual data and information
sourced from documents which are publicly available.

Fourth, its free and I can freely amend it if any user screw up the template.
So, if you need me to adjust the template for you, you may attach it and
email the template to me. Ill assist you in anyway I can.

Bursaking.com.my
All in all, this digital book is attempted to be the ultimate guide on the
subject of intrinsic value for investors based in Malaysia and Singapore.
Hopefully, youve been blessed by it.

To your investment success,

IanTai
FounderofBursaking.com.my
andBursakingwebinar.com

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