Preston and Stig's Intrinsic Value Course (FAQ)

Preston and I are both proud and excited to launch our new Intrinsic Value Course on TIPacademy today. It has taken us close to one year to create the outline, record the audio, and animate the videos. Based on the numerous emails, posts on the forum, and speaking to all of you at our live events we feel certain that this is the course that will guide you step-by-step to estimate the intrinsic value of any stock of your choice.

If you want to access the course page for more information, please follow this link: https://www.theinvestorspodcast.com/intrinsic-value-course/

As part of the course, Preston and I will be responding to any questions you might have to any of the 18 lessons including the intrinsic value calculator Excel spreadsheet, our checklist for systematic risk, and our checklist for competitive advantage.
Perhaps you would like to get feedback on your intrinsic value of a specific stock pick? Or perhaps you would like our view on the competitive advantage of a specific company? Please post any questions you might have below.
We look forward to the discussion!

Sincerely,
Preston and Stig
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Comments

  • I have a question. In this course do you learn when use Dcf method and when use technique of lesson 21 instead? Thanks.Daniele Scognamiglio
  • Hey Preston and Stig,
    I just bought the course, thanks for all the hard work. For the IRR model, it wont let me copy/paste the FCF (I can manually enter numbers) due to the spreadsheet requiring a password. Where do we find the password on our course site, or will you guys email this out?

    Thanks
    John
  • Hi John,

    Thank you for the kind words.

    We have removed the password from the sheet and you can re-download it.

    Thank you so much for your contribution to the TIP community!

    /Stig
  • DanieleInvesting,

    Yes, we learn an extension of what you learn in lesson 21 of Preston's course. https://www.theinvestorspodcast.com/warren-buffett-investment-strategy/

    We also introduce a new model that gives you a better overview of the certainty of the return you can expect from your stock pick.

    For instance, in lesson 21 you refer to, you need to estimate the growth rate. In our course, we go step-by-step into how you can assign a different percentage for different scenarios you can project for the future, and which returns that will give you.

    I hope this was helpful!

    -Stig
  • Thanks. I think that your work is wonderful. THANKS
  • I would like to hear of any insight about the moat of any kind of high growth stock...
  • DanieleInvesting,

    I'm happy we could help! Thanks for being a part of our TIP community!

    -Stig
  • Investor77,

    Great to be hearing from you again!

    We don't talk much about moat on high-growth stocks. If anything you'll hear in the course how little Preston is excited by Tesla when he does a valuation...haha...

    -Stig

  • Stig,
    Is there a screener you use for the EV/EBIT multiple to rank the stocks? I dont see it on the google stock screener. Or will this be up on TIP money after the site is ready? (when will TIP money likely be up?).

    Thanks!
  • Roldy,

    That is a great question. Yes, I use the screener on TIPmoney that filters all US stocks according to the EV/EBIT multiple. I recorded a section in module 4.5 where I show you how to use it. However, since then we decided to wait to launch TIPmoney, so I had to remove it temporarily.

    We're not entirely sure when TIPmoney is launched. We will shortly have a feed up on our front page with market data, however, we're still running tests on the various features of the web application, and wanted to make sure that we provide a great service from day one.

    Once TIPmoney is launched I will update the course will a tutorial.

    P.S. if you filter accordingly to the EV/EBIT multiple you'll see why Preston and I have been pitching GME and FCAU on the show. The filter is a great place to start.

    Thank you so much for your support! - And thank you for being a part of the TIPcommunity.

    -Stig
  • Hi Preston &Stig

    First of all thank for the awesome course! I have a question about the free cash flow that use in the intrinsic calculation, i did check the buffet course about the free cash flow subject but still unsure because it so unstable compare to the company earning. This is the company i trying to calculate the value
    http://financials.morningstar.com/ratios/r.html?t=KCE&region=THA&culture=en_US

    The Operating Cash Flow&net profit are grow stably but the free cash flow are so dependent on the Cap Spending that even some year it even go to negative and recent year it just sky high so my graph are all over the place? what should i do in this case ? Thank for the help!
  • I HAVE A QUESTION. I'AM ITALIAN AND THE COURSE IS IN ENGLISH LENGUAGE. SO, WITH THE FREE COURSE ABOUT W.BUFFET, YOU TUBE HELP ME WITH SUBTITLE,IN ADDITION TO THE FACT THAT THERE WERE TRANSCRIPTS. MY QUESTION IS : IS POSSIBLE FOR "INTRINSIC VALUE COURSE" TO USE YOU TUBE FOR SUBTITLE?AND ARE THERE TRANSCRIPTORS? THANK FOR YOUR TIME.
  • Paul,

    Great questions - and thank you for the kind words about the course.

    Free Cash Flow is the best number we can "calculate" to find the intrinsic value of a company. However, the very best number to use is what Buffett calls "Owners Earnings". The problems about that are that you can't calculate the number if anything you can only estimate it.

    It's your operating cash that you refer to minus the maintenance CapEx. In other words how much does it take to maintain the current cash flow of the company?

    The best example is TGT that Preston pitched at the last Mastermind meeting. https://www.theinvestorspodcast.com/tip155-mastermind-discussion-3q-2017-part-2/

    Next fiscal year the CapEx is expected to increase by 3B. It's hard to tell what the money is used for. Well, we know that they will be spent on IT and on building smaller format stores, but we don't know yet if it's just to maintain the current cash flow, or if we can actually expect result in growth.

    As you can likely tell, it's not the same as CapEx which is what you use to find Free Cash Flow. For that reason, we typically use FCF as the best proxy.

    I hope this helps.

    Thank you for watching our course!

    -Stig
  • DanieleInvesting,

    Unfortunately, we don't have subtitles on the course. The course is hosted on another platform than YouTube (to improve quality), and the drawback is that we can't offer subtitles.

    I do apologize for this.

    -Stig
  • Hi Stig,

    A follow up to the post above on Free Cash Flow.

    Does the course include a discussion on Owner Earnings (with examples from a 10k showing how it can be estimated)? It wasn't clear to me from your response what was in the course (or if the course shows an IV calculation based on the Free Cash Flow line from the Cash Flow statement + shareholder equity).

    Thanks,

    Nick
  • Nick W,

    Thanks for your question. The course is based on FCF and financial statements. However, we don't show this is the owner's earnings based on a 10K in a "how to calculate video." This is because as mention into the example of Target - it's not possible to do so.

    You do bring up a good point though because that calculation is what we all look for. The course shows which factors to include. We also show the expected yield of stocks, and how it can be estimated, but as with all models, it depends on your assumptions. The key is to understand the model and your inputs.

    Thanks!

    -Stig
  • Stig, thanks for your response. I'd love to see a 2nd course on IV that builds on your first, with case study intrinsic value calculations built around owner earnings.

    Thank you for the excellent resources you provide this community.

    -Nick
  • Hi Stig,

    I have two things to ask here:

    I am interested in chapter 3.6 Options Strategy in your Intrinsic Value Course. I would like to ask if it can be arranged for me to puchase a single chapter? I am interested in specifically on the application of options with Magic Formula.
    ___________________

    Equal weight portfolio problem with Magic Formula

    Mr Greenblatt suggested to build a 20 to 30 stocks portfolio, and to spread the acquisitions quarterly. So if the investor commits to buy 7 stocks per quarter, that works out to 28 stocks in a year and re-balance annually.However, it is impossible to equal weighted because of the spreading out of purchase quarterly. Have you come across this and what solutions have you seen regarding this?

    I have two ideas regarding this and being a retail investor with small portfolio, I prefer the second one. Please comment so we can all find out a better or more practical method to do this.

    Solution 1. to re-balance only within the group of 7 stocks. The stocks are sold and new stocks are bought according to the Magic Formula and they are equally weighted within the group. This is easy and straight forward to implement. Within the group it will be equally weighted but not among the groups. According to Mr O'saughnessy's research, monthly or quarterly re-balancing provides better returns and lower risk, specially with momentum. (ignoring the size/value of portfolio). So this way, the investor can achieve better returns but more cost and the full benefits of an equally weighted portfolio is less.

    Solution 2. Mr Greenblatt has confirmed that the Magic Formula stock picks continues to perform even when investors hold them for 2 or 3 years. So, what the investor needs to do is to wait for the last group to clock 1 year and then re-balance everything. Basically liquidate everything and start over. This is the opposite of solution 1 where the whole portfolio can maximize the benefits of an equally weighted portfolio, less cost but loses the extra return momentum gives with more frequent re-balancing.

    One additional thought for non-American investors who are not subjected to he capital gains tax, these investors can re-balance the whole portfolio as time pass if their portfolio is large enough and the benefits outweigh the costs.
  • Hey Stig

    Thanks for your response it was very helpful.
    I have a additional question about the TIP Value Multiple, since it very useful to sort out stock from cheap to expensive . The question is are there acceptable range for the TIP Value so that it can be use for a quick filter? (For example if it a PE ratio we often look at PE<15 )

    Thank
    Paul
  • Paul,

    The way the TIP value filter works is that it's a simple ranking. In other words, if the lowest multiple is 4, it starts with 4, and if you can't find anything cheaper than 5 that is when it starts.

    So how low should the number be before you want to invest? Well, it really depends on you. It should be as low as possible preferable, but you could also say that about P/E of course.

    I would say anything less than 5 is very interesting, but - again - it really depends on opportunity costs. Right now the stocks are so expensive that lower than 7-8 might be interesting, and then again you could argue that you just need to be patient for even lower numbers.

    I hope I responded to your question.

    -Stig
  • Vincent,

    I'm probably a really bad salesman, but I don't think the course is for you :)

    Quant strategies are as such the same. You follow the formula you believe most in. I would go for the TIP multiple, and you might go for the magic formula.

    I think the options strategy is more suitable for the individual stock picker because you have already made your own detailed assessment of the stock. The purpose of the magic formula (or another quant strategy) is not to do so.

    Unfortunately, I can't give you good feedback on the magic formula for the two solutions you suggest. Hopefully, another forum member can do so.

    I wish you the best of luck!

    -Stig
  • Hey Stig

    thank you for your response it was exactly what am looking for : )

    Paul
  • Hey Paul,

    You're welcome. I'm a huge believer in quant strategies to avoid human bias.

    The trick is rather which strategy to follow.

    I believe in Toby's strategy, the magic formula, Net-net, and others. But in investing it's hard which strategies that will continue working.
  • Hey Preston and Stig,
    Is it safe to say that this course would be helpful for small and large cap companies as well as private companies?
    I'm starting small, but I am contemplating working to acquire smaller private companies that fit within the value investing model such as solid return of cash, capable and solid management, and building a moat.

    Would your class be beneficial for this?

    I would think it would because the things that you and Preston teach to look for, metrics to use, etc would be applicable and helpful for understanding any type of business.

    Thanks for all of you guys time and effort to educate the public and give me a platform to learn and listen to others.

    Sam
  • @sampcoates

    Great question! Yes, I would say that it is as applicable to private companies as it is to public companies. Because when you value an asset, you discount the cash flows back to today. A private company with cash flows of $100 each year is just as much worth as a public company.

    This approach is universal (it's the estimation of the correct cash flows that is hard), and it's applicable to all assets. That is also why people find it so hard to value gold or bitcoin because they don't spin off cash.

    Thank you for your kind words and for supporting the TIP community Sam!

    -Stig
  • Hey Preston and Stig,

    I am new to the calculation of the Intrinsic Values of stocks and I would appreciate if you could help me out with this. I have tried to calculate the value of Berkshire Hathaway using the calculator of Buffetbooks, which gave me a result of $270617, and when I used The DCF Calculator, my results are a 6.24% return. Following I have also used the TIP Intrinsic Value Calculator (in accordance with the example shown in the video), my results show an IRR of 4.1%. This made me really confused. How do I put all these pieces of information together?
  • Thanks Stig!
  • Jialin,

    Good question. Let me see if I can break this down.

    1) The calculator on BuffettsBooks gave you the intrinsic value. The yield is a different number. You want to buy stocks below the intrinsic value, but your return is the yield. The more the stock is undervalued, the higher return/yield.

    2) The DCF and TIP calculator are slightly different. Said in another way, all calculators who aim to calculate the intrinsic value of a stock come up with different results because they are constructed slightly different. You need to use the calculator that makes the most sense to me. I like the TIP calculator because it gives me the three scenarios.

    Thank you for supporting the TIP Community!

    -Stig

  • Hello Stig,

    Can you please answer my questions mention below.

    1. Is the IRR or Expected Rate of Return percentage derived from the Intrinsic Value Calculation the amount you get every year or is it the total rate of return you get for the 5 years you calculated in the future cash flow? For example if I bought 1 stock at $50 and my IRR is 5% then does that mean my stock would cost $52.5 at the end of the first year or would that be at the end of 5 years?

    2. If I bought 5 stocks what amount of percentage should I invest in each stock? Would it be the same amount in each of the 5 stocks, such 20% of my total investment in each? How do you figure how much to invest in each stock from the total amount of money you plan to invest?

    3. Also, what do you mean by the "TIP calculator gives you three scenarios" I thought DCF calculator was more accurate to find a stocks's intrinsic Value?

    Thanks,
    Horacio
  • Hi Stig,

    One more question I forgot to ask. Say you buy a stock and somehow as time goes on you notice the free cash flow decreasing, how many years on average do you give the company until you decide to sell the stock and buy another stock because you realize the company will not be increasing its cash flows or might be in serious trouble? I understand a stock should be for the long run and depending on economic factors such as a recession or change in management you might need to wait a bit for a company's free cash flow to increase again, however how many years do you take into account to help you decide if you just need to sell the stock? Also, what are the things you look for in such scenario to help you decide whether or not it’s time to sell?

    Thanks,
    Horacio
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