Monday, February 20, 2012

Evaluating Stocks - Intrinsic Value

There are many methods to determine the intrinsic value of a stock.

This post is to outline the method i use.

The method i use is very simple.

I calculate the book value of a stock and discount all its future cash flows for the next 20 years.

The discounting rate i use is roughly the 20 year bond yield rate as the risk premium over the risk free rate of Singapore Bonds.

The output is to get a range of prices for each share.

The only twist I have devised is to use a monte carlo simulation for the future cash flows to account for future disasters / recessions.

The time to buy is when i have an adequate margin of safety, say around 25%.

The time to sell is when the stock price has climbed to nearly 2 times the calculated intrinsic value.

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