From an email from a reader:
My name is YYY, an I am from Ecuador. I am the owner of ZZZ. ZZZ is a business that is focus on wholesaling construction machinery to the whole country. Before my business, I study and graduated from University of St. Thomas in Houston with a BA in Business administration and Finance. After graduating, I became a an admirer of value investing.
While doing some research of the the book “The Aggressive Contratian Investor” I run into your blog. Currently, I want to invest while I ran my business. I have read The Intelligent Investor, The snowball, The Essays of Warren Buffet, Financial Statement Analysis by Ben Graham and by Warren Buffet, Phil Fisher, Poor Chalie’s Almanack, etc. I just started reading Security Analysis 6th edition. However, with all this knowledge, I still feel that I dont know
“How to valuate a company”
I dont know if I should take MFA course in Austin University, or read a book, what to do whatsoever. Do you have any advice? What do I need to learn or research to be able to valuate business/analyze a security?
Dear friend, I have several answers for you.
1) You can learn how to value companies the way I did: start as an amateur, and compare and contrast companies. Build up knowledge over time. Pick an industry and get the data from a lot of companies. I remember when I did Trucking in 1994. That was fun for my kids to see all the trucks in the annual reports. I eventually bought one firm, MTL, and it doubled in a year, and got taken private. What was interesting was that company had a reputation for safety, quality, and doing things right.
2) You can read books by Aswath Damodaran. His books are overkill, in my opinion, but he gives the right theory, just with too many bells and whistles. Most good valuation work is simple. Focus on the big issues.
3) Rather than estimate the value of a company, look at the earnings yield of the company versus alternatives. Buy companies that offer good returns off of current market prices.
4) Compare the company and it peers on current valuations and past valuations versus earnings, EBITDA, free cash flow, etc.
5) Look at a history of prior M&A activity for public and private companies within that industry.
There are many ways to learn how to value companies, but I would encourage you to learn by doing. Have at it, and prosper.