Intrinsic Value

{Edit - this thread split from here}

According to posters on this thread
http://www.somersoft.com/forums/showthread.php?t=62446
Rocky is not traveling well.

There are doubts about Townsville too
http://www.somersoft.com/forums/showthread.php?t=62300&highlight=Townsville

Jasa is not doing too well in Cairns
http://www.somersoft.com/forums/showthread.php?t=61688&highlight=Cairns

Stephen is having trouble renting in Clontarf
http://www.somersoft.com/forums/showthread.php?t=62459&highlight=clontarf

Neaka is also having trouble
http://www.somersoft.com/forums/showthread.php?t=62476&highlight=sunshine+coast

Urbanprospector says


And there are others.

Maybe it relates to the underlying INTRINSIC VALUE:D
Intrinsic value doesnt just apply to shares.

Basicaly intrinsic value is a search for the underlying 'value' of an asset without the hype, ie remove the popularity contest and try to figure out what the asset is really WORTH, not just what the popularity contest current votes its price should be.
 
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Maybe it relates to the underlying INTRINSIC VALUE:D
Intrinsic value doesnt just apply to shares.

Basicaly intrinsic value is a search for the underlying 'value' of an asset without the hype, ie remove the popularity contest and try to figure out what the asset is really WORTH, not just what the popularity contest current votes its price should be.
In your opinion how would one work out the intrinsic value of a property? Would love to see a demonstration displayed here of you valuing a random property currently for sale on real estate or domain.

You keep spouting the same lines like clockwork while providing no real depth in many of your posts :confused:
 
In your opinion how would one work out the intrinsic value of a property? Would love to see a demonstration displayed here of you valuing a random property currently for sale on real estate or domain.

You keep spouting the same lines like clockwork while providing no real depth in many of your posts :confused:

I'll have a go.
A few different methods could be used
1) the intrinsic value of a house 'should' be the Net present value of its future potential cash flows.
2) replacement cost less wear and tear

Although 2) doesn't help calculate the land value.

Land value is the most subjective, but credit availability is the major influence.

If there was absolutely NO credit available, the average block of land could be calculated as around 10% of the total liquid wealth in the economy divided by the amount of spare land available. In other words, not worth very much. You could say this is the "intrinsic value".

Add some credit into the equation and the value, or perhaps more accurately - the price, increases somewhat.

Add virtually unlimited credit, combined with a belief that the value can only increase and you get can bubbles.

Hence why asset prices increase depending on the availability of credit with interest rates playing a small part as well.
I guess knowing that there is no question that credit is going to tighten, forces me to be bearish on property.
 
In your opinion how would one work out the intrinsic value of a property? Would love to see a demonstration displayed here of you valuing a random property currently for sale on real estate or domain.

:confused:

Ahhh! yes......it used to be so simple.

Many years ago, and in not such a 'Lucky' country, it was simply a matter of working out what rent it would pay you above the current interest rate, and the factor in a few costs, typically 1.5% maintenance, and whatever relatively low rates you paid.

So, you could buy a property with a 10-20% deposit, say 60K, pay 8% interest on a mortgage (4800 per annum including money tied up), and rent it out for about 500-600 a month, to someone who wasn't settled enough, or in a position to buy yet.

Long term, capital gains were a hedge against inflation, sometime you lost, sometimes you won, but the rents were the underlying value, most hire companies don't hire goods out for a loss after all.

Of couse the complications of government intervention in the form of tax rorts etc have somehow clouded the basics, and I believe in a potentially dangerous way, so much so that the property markets of most of the rest of the world have very little relevance to what goes on here.

Relying on ever increasing capital gains smacks of a ponzi scheme to me, albeit one which has been in operation long enough to be the lifetime norm, and seems set to continue for a while.

That said, I know there are opportunities a plenty around the country, which would adhere more closely to 'intrinsic value', ie where rents represent a realistic return on your capital.
 
In your opinion how would one work out the intrinsic value of a property? Would love to see a demonstration displayed here of you valuing a random property currently for sale on real estate or domain.

You keep spouting the same lines like clockwork while providing no real depth in many of your posts :confused:

A focus on intrinsic value is a state of mind.

In regards to property
There is no precise way to place a value. Your idea of value and mine might be two completely different things (i am not talking speculative 'value' here).
In simple terms you might be more proficient than me in extracting value from a property, so you could place a higher intrinsic value than i could and still be right because of your greater expertise.

Over time the price will fluctuate around intrinsic value, sometimes above, sometimes below. So its easy with hindsight to see it, much harder to extrapolate into the future.
But as the future becomes hindsight the true value or intrinsic value will become clearer.

The key focus is always on value rather than price. This includes price of the inputs.
Using the original post, and for which i have NO IDEA ABOUT THE INTRINSIC VALUE, i have never looked at property outside of melbourne.
But factors to consider:
(a) could the rent have been pushed up because of tight supply, as supply increases the rent will move to a more 'normal' level.
(b) could the underlying intrinsic value of the land be lower. In times of tight supply the price moves up, but because the underlying intrinsic value of the land is lower (maybe due to large quanities of underutilised land), supply builds up.

With shares the story is a bit different.
Unless you have the ability to effect a takeover, the value of the share itself is fixed. A share is a share same as every other share in a specific company.

So there are two basic differentiating factors for shares:

(a) the return on the share
Different people will have different ideas as to the minimum acceptable return on the share. This will have the greatest impact on the valuation of the share (effectively the discount factor).

(b) the future return on the company upon which a share is part ownership
Which envolves fundamental analysis.
 
A focus on intrinsic value is a state of mind.

In regards to property
There is no precise way to place a value. Your idea of value and mine might be two completely different things (i am not talking speculative 'value' here).
In simple terms you might be more proficient than me in extracting value from a property, so you could place a higher intrinsic value than i could and still be right because of your greater expertise.

Over time the price will fluctuate around intrinsic value, sometimes above, sometimes below. So its easy with hindsight to see it, much harder to extrapolate into the future.
But as the future becomes hindsight the true value or intrinsic value will become clearer.

The key focus is always on value rather than price. This includes price of the inputs.
Using the original post, and for which i have NO IDEA ABOUT THE INTRINSIC VALUE, i have never looked at property outside of melbourne.
But factors to consider:
(a) could the rent have been pushed up because of tight supply, as supply increases the rent will move to a more 'normal' level.
(b) could the underlying intrinsic value of the land be lower. In times of tight supply the price moves up, but because the underlying intrinsic value of the land is lower (maybe due to large quanities of underutilised land), supply builds up.

With shares the story is a bit different.
Unless you have the ability to effect a takeover, the value of the share itself is fixed. A share is a share same as every other share in a specific company.

So there are two basic differentiating factors for shares:

(a) the return on the share
Different people will have different ideas as to the minimum acceptable return on the share. This will have the greatest impact on the valuation of the share (effectively the discount factor).

(b) the future return on the company upon which a share is part ownership
Which envolves fundamental analysis.

Wow, I'm more confused than ever. :confused:
Looks like its impossible to calculate the true intrinsic value unless you can predict the future and gauge all the likely macro and microeconomic influences that will affect the future earnings which will vary according to each persons IRR.

Might as well rely on the collective wisdom of the market to have done this better than one man ever could, and thereby assume the current price IS a close to the intrinsic value as anyone can predict.

In the meantime I'll rely on the fact that if yields are low, credit is cheap and plentiful, that the true value is a lot lower than current prices.
 
Depends on what the value add potential is

.................In the meantime I'll rely on the fact that if yields are low, credit is cheap and plentiful, that the true value is a lot lower than current prices.

You make a good point, however...........Depends on the asset class one is hunting for. This may be valid for less land rich IP's such as "one of many" variety be it apartments, villa/unit complexes and so on.

If, however there is value add potential to the franchise commodity (land) in an infill area, then I'll take the lower yield (despite what the perceived value is) as there will be upside to subdivide or at the very least put another box or two on the dirt and (to use a share/stock analogy) improve my dividends. :p

Whilst not entirely applicable, I consider the depreciation on new boxes a bit like franking credits :D
 
Wow, I'm more confused than ever. :confused:
Looks like its impossible to calculate the true intrinsic value unless you can predict the future and gauge all the likely macro and microeconomic influences that will affect the future earnings which will vary according to each persons IRR.

Yes its very hard to calculate EXACT intrinsic value. Thats why i prefer to go for a 'range'. To provide a margin of safety i then try to buy at a discount to my intrinsic value range.

But some things are easier to calculate the intrinsic value range than others.




Might as well rely on the collective wisdom of the market to have done this better than one man ever could, and thereby assume the current price IS a close to the intrinsic value as anyone can predict.

This is where i disagree strongly. How could the market move so much between 2007 to March 2009. I can tell you the intrinsic value didnt move to the same degree.

In the meantime I'll rely on the fact that if yields are low, credit is cheap and plentiful, that the true value is a lot lower than current prices.

Not necessarily, if you do this you are acting on the assumption that things remain the status quo. What happens if you buy when ylds are low, credit is cheap and plentiful, AND THEN CREDIT TIGHTENS.

If your purchase can remain at 'value' even after accounting for this, then its likely that you are buying closer to intrinsic value.
Remember intrinsic value has nothing to do with the current popularity of the asset. What is the impact that popularity + cheap and plentiful credit is having on the asset price.
 
For me i think the determination of whether someone is an investor or a trader the key determination to long term wealth creation.

If someone believes they are an investor then a focus on intrinsic value is of vital importance.

If someone believes they are a trader, then they must follow trading rules or 'guidelines' if you like. I dont do this so i dont have much to offer.

The fact that most people dont confront themselves as to whether they are essentially a trader or investor is why they GET THEMSELVES IN TROUBLE.

take the current thread about the property posts you highlighted.
Again are you investing or are you trading in property based on price trends.

If you are REALLY INVESTING, you should have a strategic position of your portfolio. What is the underlying rent, what is the debt position against the underlying or intrinsic value of the properties.

If you are actually trading in property (not necessarily flipping just riding the trend), then turbulence could be an indication that its time to cash up, the trend could be changing. The rules of trading or 'guidelines' start to kick in.

Bluecard made a comment in another post, once the major support line for the ASX was broken at 4500, he moved to cash. This makes sense from a trading position. Its the correct decision to make.

For myself as an investor i have to focus on my intrinsic value. I need to pay increased attention that my intrinsic values will hold, because this gives me the protection that over time my returns will be realised through the market waking up to the 'value'. When this will occur i dont know. And the biggest risk i face is that my intrinsic values are over stated.
 
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Quote:
In the meantime I'll rely on the fact that if yields are low, credit is cheap and plentiful, that the true value is a lot lower than current prices.

Not necessarily, if you do this you are acting on the assumption that things remain the status quo. What happens if you buy when ylds are low, credit is cheap and plentiful, AND THEN CREDIT TIGHTENS

Who would do this? Not me. If the true value is lower than the current price , I won't buy.

This is also because we are moving into a credit tightening cycle which is usually the point where credit induced exuberant prices move closer towards their true value, however that is determined.
 
A focus on intrinsic value is a state of mind.
In regards to property
There is no precise way to place a value. Your idea of value and mine might be two completely different things (i am not talking speculative 'value' here).
In simple terms you might be more proficient than me in extracting value from a property, so you could place a higher intrinsic value than i could and still be right because of your greater expertise.
Sorry, but this is wish washy rubbish and I don't see how this footloose way of investing would work given the environment we are in today. If someone worked with that system say straight after the 1929 crash thinking they were buying value, they could have spent the next 20+ years waiting for their investment to return to the price they purchased it at.
Over time the price will fluctuate around intrinsic value, sometimes above, sometimes below. So its easy with hindsight to see it, much harder to extrapolate into the future.
But as the future becomes hindsight the true value or intrinsic value will become clearer.
Using the original post, and for which i have NO IDEA ABOUT THE INTRINSIC VALUE, i have never looked at property outside of melbourne.
But factors to consider:
(a) could the rent have been pushed up because of tight supply, as supply increases the rent will move to a more 'normal' level.
(b) could the underlying intrinsic value of the land be lower. In times of tight supply the price moves up, but because the underlying intrinsic value of the land is lower (maybe due to large quanities of underutilised land), supply builds up.

Right, so you know the Melbourne market. Can you show us a specific example where you have intrinsically valued a property you have considered or perhaps one that you hold currently?
With shares the story is a bit different.
Unless you have the ability to effect a takeover, the value of the share itself is fixed. A share is a share same as every other share in a specific company.
So there are two basic differentiating factors for shares:
(a) the return on the share
Different people will have different ideas as to the minimum acceptable return on the share. This will have the greatest impact on the valuation of the share (effectively the discount factor).
(b) the future return on the company upon which a share is part ownership
Which envolves fundamental analysis.
Once again, no real content here. Can you list a company that you hold stock in and specifically show us how you came to it's intrinsic value?

Sorry for further off topic posts in your thread Sunfish :D
 
An interesting read here

Value Stocks and Dividends

It’s widely known that value stocks have outperformed growth stocks over the years. Less known is why this “value premium” has occurred. There are many theories that attempt to explain the recurring phenomenon but so far none have been conclusive. Recent studies by Research Affiliates (RA) find that dividends may be an important key to the mystery.

Value stocks have outperformed growth stocks in 4 out of 5 decades since the 1930s.

cont....
 
For me i think the determination of whether someone is an investor or a trader the key determination to long term wealth creation.

If someone believes they are an investor then a focus on intrinsic value is of vital importance.

If someone believes they are a trader, then they must follow trading rules or 'guidelines' if you like. I dont do this so i dont have much to offer.

The fact that most people dont confront themselves as to whether they are essentially a trader or investor is why they GET THEMSELVES IN TROUBLE.

take the current thread about the property posts you highlighted.
Again are you investing or are you trading in property based on price trends.

If you are REALLY INVESTING, you should have a strategic position of your portfolio. What is the underlying rent, what is the debt position against the underlying or intrinsic value of the properties.

If you are actually trading in property (not necessarily flipping just riding the trend), then turbulence could be an indication that its time to cash up, the trend could be changing. The rules of trading or 'guidelines' start to kick in.

Bluecard made a comment in another post, once the major support line for the ASX was broken at 4500, he moved to cash. This makes sense from a trading position. Its the correct decision to make.

For myself as an investor i have to focus on my intrinsic value. I need to pay increased attention that my intrinsic values will hold, because this gives me the protection that over time my returns will be realised through the market waking up to the 'value'. When this will occur i dont know. And the biggest risk i face is that my intrinsic values are over stated.

Some investors do both, and I think this is perhaps a sophisticated investor, trade and enjoy the immediate profits from timing the market, renovating, developing etc., and as a long term investor (buy and hold) researching areas for growth and then accessing equity. IMO it makes sense to develop skills to do both.

Whether you trade or hold monitoring the market is always cruical regardless.

I think it is also important to always review your portfolio for performance and have a strategy in place to manage this.
 
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Some investors do both, and I think this is perhaps a sophisticated investor, trade and enjoy the immediate profits from timing the market, renovating, developing etc., and as a long term investor (buy and hold) researching areas for growth and then accessing equity. IMO it makes sense to develop skills to do both.

Whether you trade or hold monitoring the market is always cruical regardless.

I think it is also important to always review your portfolio for performance and have a strategy in place to manage this.

And as every sub-market goes through its cycle, we go back to this essential 'thing'.

Let me tell you, out of a population of 100, 10 might be good investors, 10 might be good 'traders'.

However its not a mutually inclusive situation.

The number in the population who are both good traders and good investors might be 1 in a 100.

Therefore propability is already against the 'good investor' and 'good trader'.

Surely with odds stacked against the average, one should learn to specialise in one before one tries to speciailise in both.

By the way your 'Some investors do both, and I think this is perhaps a sophisticated investor, trade and enjoy the immediate profits from timing the market, renovating, developing etc., and as a long term investor (buy and hold) researching areas for growth and then accessing equity. IMO it makes sense to develop skills to do both'

is complete bullocks. Warren Buffet is surely a 'sophisticated' investor, yet he has stuck to his principle of investing (he has rifined it over the years).

One does not need to be a sophisticated 'person' to be a good investor/trader/both.

The terms are COMPLETELY mutual exclusive
 
in fact further to the above post,
Warren Buffett shows scorn, to those that think such thinking is necessary:

'Why is it that the rich rock up in their limo's to seek advice from those catching the subway to work' or words to that effect.
 
And as every sub-market goes through its cycle, we go back to this essential 'thing'.

Let me tell you, out of a population of 100, 10 might be good investors, 10 might be good 'traders'.

However its not a mutually inclusive situation.

The number in the population who are both good traders and good investors might be 1 in a 100.

Therefore propability is already against the 'good investor' and 'good trader'.

Surely with odds stacked against the average, one should learn to specialise in one before one tries to speciailise in both.

By the way your 'Some investors do both, and I think this is perhaps a sophisticated investor, trade and enjoy the immediate profits from timing the market, renovating, developing etc., and as a long term investor (buy and hold) researching areas for growth and then accessing equity. IMO it makes sense to develop skills to do both'

is complete bullocks. Warren Buffet is surely a 'sophisticated' investor, yet he has stuck to his principle of investing (he has rifined it over the years).

One does not need to be a sophisticated 'person' to be a good investor/trader/both.

The terms are COMPLETELY mutual exclusive


IV

There is no right or wrong and of course everyone should do whatever suits.

Trading requires more work and risk and for investors to step outside their comfort zone.

Whether it works for everyone, who knows, only way of finding out is jumping in.

MTR



MTR
 
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