thank you for your hard work on this. I am an absolute retard and do not udnerstand many things here - for the average and current bond yield you take what? US treasuries? And for P/E historical and current - this is broad market (SP500) P/E or THE stock P/E you analyze? Also, I am dumb which one is suggested fair value on the right side, Margin to P/E ? jeez, I am dumb. And what it means "final", final when ... Sorry, little bit lost, thanks.
That yield is used in the Benjamin Graham formula (see https://en.wikipedia.org/wiki/Benjamin_Graham_formula) and corresponds to the 10 year average AAA Corporate Bond yield, and the current Corporate Bond Yield.
The Historical PE is the SP500s, though if you have very good reasons, and are comparing purely in investments in a single specific sector with meaningful differences in historical PEs you might want to try it with the sector average PE. In general though, you should not touch this value unless under very specific circumstances where you're trying to directly compare 2 or more companies belonging to the same sector.
Investing isn't an exact science, and any of these values can be considered the "fair value". In general i tend to prefer the margin to PE method, however I also prefer it when every method is "in the green". Of course to the fair value you should apply a "Margin of safety" in order to avoid unecessary risk. This margin of safety depends on your risk tolerance, the business in question and other concerns that might exist. I would recommend at least 10% margin of safety, though I usually prefer 30%.
The "Final Price" corresponds to the expect stock price 10 years from now.
Thanks for the feedback!
I'll update the excel file to add in an "Average Value" that averages the long term returns and a "Safe Purchase Value" that includes the 30% discount(configurable Assumption).
Hello , thank you for detailed response Tiago. I will precise, if possible - so, for current Corporate Bond Yield - which one is that, where do you find it? AAA Corporate Bond Yield? (same for average for last 10 years, where do you get this?). This WILL change with time, of course, won't it? Or you suggest not to touch it, ever? Finally, still don't get which one is the estimated fair value of the stock - margin to P/E (which one, last year or long term average)? No, of course I know this is not science or any fixed do-it-yourself price evaluation = buy, no no:) I do my own estimations, just trying to understand this sheet etc (to compare with my own calculations). Apologies for lenghty questions, just curious, really.
In general you shouldn't need to change the assumptions often, maybe once a year if that. There is no need to be extremely precise and constantly up to date here. Keep it as consistent as you can.
There are multiple valuations, and you can use whichever one you feel is best. If you have no particular idea, I would suggest you use the new "Safe Purchase Value", which i added to the sheet after your feedback, as the maximum price to pay for a stock.
It's not perfect, but it's the average of the long term average valuations.
The new section where the "Safe Purchase Value" is is simply the average value of the valuations made. From that Value we remove the margin to safety to get the "Safe Purchase Value"
thank you for your hard work on this. I am an absolute retard and do not udnerstand many things here - for the average and current bond yield you take what? US treasuries? And for P/E historical and current - this is broad market (SP500) P/E or THE stock P/E you analyze? Also, I am dumb which one is suggested fair value on the right side, Margin to P/E ? jeez, I am dumb. And what it means "final", final when ... Sorry, little bit lost, thanks.
Hi!
Thanks for the questions!
That yield is used in the Benjamin Graham formula (see https://en.wikipedia.org/wiki/Benjamin_Graham_formula) and corresponds to the 10 year average AAA Corporate Bond yield, and the current Corporate Bond Yield.
The Historical PE is the SP500s, though if you have very good reasons, and are comparing purely in investments in a single specific sector with meaningful differences in historical PEs you might want to try it with the sector average PE. In general though, you should not touch this value unless under very specific circumstances where you're trying to directly compare 2 or more companies belonging to the same sector.
Investing isn't an exact science, and any of these values can be considered the "fair value". In general i tend to prefer the margin to PE method, however I also prefer it when every method is "in the green". Of course to the fair value you should apply a "Margin of safety" in order to avoid unecessary risk. This margin of safety depends on your risk tolerance, the business in question and other concerns that might exist. I would recommend at least 10% margin of safety, though I usually prefer 30%.
The "Final Price" corresponds to the expect stock price 10 years from now.
Thanks for the feedback!
I'll update the excel file to add in an "Average Value" that averages the long term returns and a "Safe Purchase Value" that includes the 30% discount(configurable Assumption).
Cheers!
Tiago
Hello , thank you for detailed response Tiago. I will precise, if possible - so, for current Corporate Bond Yield - which one is that, where do you find it? AAA Corporate Bond Yield? (same for average for last 10 years, where do you get this?). This WILL change with time, of course, won't it? Or you suggest not to touch it, ever? Finally, still don't get which one is the estimated fair value of the stock - margin to P/E (which one, last year or long term average)? No, of course I know this is not science or any fixed do-it-yourself price evaluation = buy, no no:) I do my own estimations, just trying to understand this sheet etc (to compare with my own calculations). Apologies for lenghty questions, just curious, really.
In general you shouldn't need to change the assumptions often, maybe once a year if that. There is no need to be extremely precise and constantly up to date here. Keep it as consistent as you can.
I got the corporate bond price (historical and current) from the Fed (https://fred.stlouisfed.org/series/HQMCB10YR).
There are multiple valuations, and you can use whichever one you feel is best. If you have no particular idea, I would suggest you use the new "Safe Purchase Value", which i added to the sheet after your feedback, as the maximum price to pay for a stock.
It's not perfect, but it's the average of the long term average valuations.
ok, thanks. But one more what is the new section vs Margin to PE? these figures are similar, but not the same
The new section where the "Safe Purchase Value" is is simply the average value of the valuations made. From that Value we remove the margin to safety to get the "Safe Purchase Value"
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