1. The stock market is always right!
1.1. Academic opinions
In academic circles the following statement is popular: 'The stock market is always right'.
The argumentation runs as follows. All available information is translated into the effective price, new information is immediately processed.
All trading is effected on the stock exchange. More supply makes prices fall, more demand makes prices rise.
Therefore the current price always reflects the market equilibrium, given the laws of supply and demand.
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1.2. Practical ways of working
In practice nobody believes that the stock market is always right.
How else those violent and unforeseeable long period movements could be explained.
Why average price/earnings ratios or dividend returns in some countries/segments are unexplainably higher than in other countries/segments.
How could hedge funds and trading programs pretend making profits if there is always and everywhere a complete equilibrium.
Why is technical analysis so popular if the stock market is always in balance.
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1.3. Available information
An important reason why the stock market is never right, is the information problem.
There is a huge quantity of information available. More than anybody is able to absorb.
Also a fully coordinated thinking team absorbing all that information and interpret it consistently, is not conceivable. The information supplied always contains estimates, sometimes serious lacks and is quickly outdated. Frequently the available information is consciously guided and even manipulated in some cases. The interpretation of that information is partially subjective and sometimes just aiming at impact(analyst reports). Sentiments and 'underbelly' feelings play their role.
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1.4. Fundamental share analysis
Fundamental share analysis tries to break through that dilemma. That means consistent and in-depth analysis of all available information, supported by objective valuation models.
The outcome by share of those valuation models are subsequently compared with the stock exchange price or with similar companies.
Prudence is required with these comparisons. Undeniably the methodology, the valuation models and the information used may all contain possible defects.
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2. The stock market is always wrong!
2.1. Not any technique outperformes the index!
The irrationality of the stock exchange cannot be explained better then by the fact that innumerable techniques are applied daily by hundreds of thousands of people.
However, not any model or technique succeeds in outperforming the index consistently over many years.
Only in some segments and niches and then only temporarily enough profit can be made to outweigh the costs of getting small information advantages and leads.
This is only possible -provided no complete chaos is assumed-, when market parties, at least partial, show irrational behaviour.
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2.2. Not any investment consultant is always right!
Investment consultants are indispensable in order to translate efficiently the available business information to investors.
They should act as middlemen between the available information and the investor. Sometimes however they may pretend to have the better vision. With success some of them are even praised as gods.
Almost all have fallen of their pedestal after some years. This is because the traditional hobby-horses of a successful investment consultant after some time always results in immense losses in other times.
The stock market has a knack to behave always just that little bit different than previously assumed.
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2.3. Can investment funds beat the index?
Investment funds and mutuals are efficient ways to divide the expense of managing relevant information flows. However, with new funds, adapted time ranges, changing comparisons and definitions every fund always present their figures as advantageously as possible. A decent profit can even be made by comparing these figures as best as possible and distributing prices for the best figures. Some oracles seem to know the trick to present themselves always better than all colleagues. And yet at closer analysis it appears that it is very difficult to outperform the stock market and earning back the management expenses.
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2.4. Can a portfolio manager beat the index?
See the comments at investment funds.
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3. How to exploit the difference between price and value?
3.1. How to determine the difference value/price
To collect stock exchange price data, there are plenty suppliers and software on the market.
However there is not any product available on the market that converts all required information into company valuations and compares these valuations with quoted prices.
F-Valuation Software has solved this problem. All historical financial information as well as possible forecast figures is made available on the Internet by Finiconsult. This information is bought at trustworthy information suppliers. Also credit ratings by company are available and their participation in important indices can be included. Last but not least also the necessary data to determine the WACC or discount rate is made available by Finiconsult online.
To this end the risk premium based on the data of the stock exchange since 1900 is required.
The final product is supplied in the form of Excel workbooks containing valuation files. Each workbook or valuation file, provided with the correct assumptions, can be considered as a valuation template.
In that template only the historical financial information as well as the possibly available forecast figures must be filled in.
Several menu choices make it possible to import all these data automatically in a workbook in just one procedure. By using forecast formulas in this valuation template, for example the least squares method, the future cash-flow can be determined from 4 years history completed with the generally available 3 years forecast figures. During this procedure unlikely results are corrected with probability filters when necessary.
At the end of this entirely automatic procedure valuation results by company are generated.
It is also possible to save these valuation results and the underlying information and assumptions in separate workbooks with the name of the company and the extension .FIN. Thus individual forecast refinements can take place in a further stage. Of course this is much more labour-intensive.
In all these cases these valuation results are collected and analysed in a worksheet RESEARCH.
With this system regular calculations of value/price ratios have been made possible of all companies quoted on the stock exchanges of the UK, France, Germany, Belgium, USA and the Netherlands.
It is also possible to integrate new data or assumptions in the saved workbooks .FIN. Subsequently the new valuation results and value/price ratios will be reflected in the worksheet 'RESEARCH'.
These collected valuation data of all analysed companies can of course be sorted, filtered, exported and printed in all possible ways.
They can be also compared with an existing portfolio to be imported automatically or by hand. Also all possible Excel-formulas can be applied to enable different sort - or filter criteria.
These tools on investment research are exclusively available by way of a licence by country (7), by region (EURO, EEC, US) or in total.
The price of the licence depends on the available number of companies, the number of users by licence and the relation with the data supplier.
Only companies with at least 4 years history and also 4 years turnover, have been included. Quoted investment funds (such as venture capital or real estate) are excluded.
Given the quantity information a very fast computer (at least Pentium 4 or AMD 2500) with a large internal memory (> 20 GB) and a large and fast hard disk (> 200 GB rather) are an important requirement.
Depending on of the number of companies available under the licence, the system and the menu choice, the automatic procedure will take between 1/5 and 1/3 minutes by company.
A small country such as the Netherlands or Belgium requires therefore between 20 and 40 minutes.
With 10,000 companies this means between 33 and 56 hours and a split up could be considered with several computers working at the same time.
The final result is a workbook Excel with a worksheet 'RESEARCH' in which quite a number of data are shown by company such as price and different value calculations.
An average - to be set by the user- of those value calculations determines the value of a company.
In a separate column the value of the company is divided by its price.
Shares with the highest ratio value/price deserve a buy recommendation.
Shares with the lowest ratio value/price deserve a sell recommendation.
This way the software creates unique selections of shares with the largest sell - or buy potential.
That does not mean however that these buy - or sell recommendations can be followed blindly.
It is only the result of calculations based on assumptions introduced by the user and therefore objective and verifiable.
Always remember the following guide lines:
- A. At every buy - or sell decision it is desirable to understand also by content and facts why the forecasts presented in this software reflect correctly the historical trend and are plausible as to the future. Plausible means that forecasts should be in line with the estimation of the user of the market and market position of the company and the way in which the company is managed and how figures and expectations are presented.
- B. Time differences may well lead to serious errors. The information on which valuations are calculated comes necessarily from public sources. On average these sources lag 1 week up to 2 months behind initial publication before a new valuation and comparison is executed. Particularly in the publication season of financial figures, at financial reorganisations with IPO's and later unexpected adaptations of the financial figures and expectations, it should be taken into consideration to what extent the stock market has reacted already to new facts not yet processed in the supplied public figures. Under the disguise of a very high value/price ratio leading to a strong buy advice, a company may hide forced into an IPO by its bankers threatening to withdraw credit facilities due to recent information not yet processed in the public sources.
- C. Finally the clerical processing of the huge quantity of data by the data supplier remains human work. Although errors are very scarce, they cannot be entirely excluded. Should a user observe nevertheless such an error, then an e-mail with a request to repair is appreciated.
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3.2. Settings of main assumptions
In valuations the following main assumptions play an important role. Below you will find a list of the standard (user-determined) main assumptions:
- Discount Rate/Wacc! To determine a risk premium from 104 years online stock exchange history, the user himself may now use up to 7 conceivable methods. He can also determine the weight and the number of years in every method. Objectivity arises by the motivated WACC - recommendation that determines first automatically weight, number of years and risk free interest rate and afterwards the WACC or discount rate, depending on the capital structure of the company and the valuation method applied.
- Forecast assumptions! Assumptions may be determined now automatically and objective by well known standard statistical forecast techniques based on the four years of history. With unlikely outcomes, probability filters are applied automatically.
- Continuing value! The continuing value assumption may be calculated now automatically and objective in accordance with the motivated continuing value recommendation.
- Valuation methods! Some valuation experts and software producers show an almost naive enthusiasm for a specific valuation method. For this reason F-Valuation software determines always the results of all current valuation methods. Objectivity arises by the motivated recommendation concerning weighting dependent on the different valuation methods and the aim of the valuation.
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If you just want to valuate using only simple ratio's such as price/earnings, price/turnover, number of clients and so on, as some investors and investment consultants gladly do, then this software is totally unsuitable for you.
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3.3. Assessing plausibility yourself
Before making any buy - or sell decision, take your time to assess for yourself all computer forecasts with common sense. Pay special attention to the likelihood of trend ruptures making the results of the past unsuitable for predictions. Look into management (press) statements and their wording for indications that expectations on turnover, profit and so on are guided upwards.
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3.4. Buy or sell decisions
All buy - and sell decisions reflected in your current portfolio should be overhauled at least once a year.
The reliability of older forecasts decreases by new developments in the company and its business environment.
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3.5 Proven Investment Results
The example in Proven Investment Results
gives the 10 top shares with the highest value/price ratio middle of 2004.
The investment result has been determined based on the price a year later and then been compared with the index on that date.
Not any correction has been applied. It appears that even with this totally automatic approach, the return of this selection is well above the index.
By a critical reappraisal based on publicly know facts this return can be intensified considerably.
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4. Price, specifications and system requirements!
4.1. Product Specifications, versions
- 1. A national basic version: the national basic version
has all the power and flexible facilities in a national environment.
It does not however, allow to change the international settings as
mentioned under the international version.
- 2. An international version: this upgrade of the national basic
version allows changing all international settings.
These international settings allow conversions from £ into any currency
such as Euro, $ and introduces cross border tax differences. You may also
easily change language from USA English to for example UK English, German,
French, Dutch or Flemish. It allows also, last but not least, to change into the different
tax systems and valuation systems and habits of different countries.
FREE DEMO: Click HERE
- 3. An extended version: this upgrade of the international version
allows for users changing the model itself as if it were his own favoured Excel spreadsheet.
- 4. A research version: with this update of the international version,
the fundamental value by share can be automatically determined.
With a research licence, the fundamental value of all listed shares can even be
compared with the price of that share in one automated procedure in one or more countries.
This automatic selection of shares with the highest proportion value/price has proven to beat every index at length.
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4.2. Languages and countries
Supported languages are English, American, German, French and Dutch.
Supported countries are the UK, USA, Germany, France, Belgium, Netherlands.
4.3.System requirements
All versions and languages are available under Windows (98, 95,
00,XP, NT and 3.x) in Excel versions 5, 7, 8.10 and XP. All versions
of course are completely menu-driven independent from Excel and have context sensitive HELP. Processor capacity should be at a minimum P-2
level with memory space for Windows(16 MB) and 20 MB free disk.
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4.4. Prices (excluding VAT, US delivery free of VAT/Sales Tax)
The price of this unique software is only:
| Version |
Euro |
$ |
£ |
| Demo-CD |
25 |
30 |
20 |
| National |
299 |
399 |
199 |
| International |
399 |
499 |
278 |
| Extended |
1399 |
1599 |
977 |
All prices for one licence for standalone usage. Prices for network
licences or reselling purposes upon demand.
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5. Guarantees, service and free demo
5.1. Free demo
FREE DEMO Click HERE
A free demo of the international version may be downloaded from
the internetsite:
www.finiconsult.co.uk or www.finiconsult.us.
Compressed it is just over 3 MB, the full version uncompressed is over
10 MB. This demo disposes of all facilities of the international
version; it just does not calculate.
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5.2. Product Guarantees
Any defect will be repaired free of charge if reported in writing
within one year after sales to your supplier.
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5.3. Orders
Written orders, demo and further information at out internet site:
Site: www.finiconsult.co.uk, www.finiconsult.us or just www.finiconsult.com.
E-mail : info@finiconsult.co.uk or info@finiconsult.us
ORDER CLICK HERE
RESEARCH LICENCE OFFER
Office : address see below
| Country |
Address |
Phone/fax |
| UK |
42 Valiant House
Vicarage Crescent
London SW11 3LU |
tel:020-72284078
fax:020-72284078
|
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5.4. Product Service
Service includes 1 hour free telephone support from Finiconsult
both for technical problems and for content problems in the area of
valuation. Confidentiality is guaranteed.
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Copyright Finiconsult Ltd 1995-2006
Finiconsult is an independent consulting company working in the
field of corporate finance.
ORDER Click HERE
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FREE DEMO Click HERE
