Posted by kcchongnz > 2015-06-01 20:58 | Report Abuse

Posted by soojinhou > Jun 1, 2015 07:39 PM | Report Abuse
KC, very interesting that most people only want to read stuff to affirm their opinions, they simply cannot accept opposing opinions, no matter how good are the underlying reasons. Well, I think we both welcome opposing views, because groupthink is very dangerous in investment. Young man if you don't know what it is you should look it up because it almost triggered a nuclear holocaust in the Bay of Pigs incident. Always seek opposing views, you may have overlooked something and it may save you from very grave mistakes.

"groupthink is very dangerous in investment"

This is very very true. I once was invited to be a contributor of a private website three years ago. The participants there are very united. They give full "support" to shares promoting in the forum, practically hugging each other, cheering together for the share price to go up. They behave like a cult. Two shares which were promoted heavily were Asia Media and Smartag. There were a number of analysts promoting them too then. When I told them different stories after looking at their business, I was sort of like an enemy.

The adjusted price of Amedia was 11.5 sen, and Smartag about 23 sen then. Today they closed at 5 sen and 15.5 sen respectively.

Posted by bcllct > 2015-06-02 17:22 | Report Abuse

Most peoples will agree that the value of a company is equal to the present value of its distributable cash flows. Yet most peoples could not readily see that growth in earning could reduce value instead of increase value of a company.
I think this could largely due to peoples just simply equate earning as distributable cashflows as if all earning can be distributed out.
The fact is that almost all growth required additional capital, that is in the general case distributable cash flow is less than earning infact it equal earning -additional capital required for growth. To be able to explain this better let me use the following symbols, let;
V=present value, E=earning, aC=additional capital needed for growth,ROE=return on equity,r=cost of capital, g=growth rate
Then the present value formula is simply:
V=(E-aC)/(r-g), I think most peoples may simply omit subtracting aC(additional capital required for growth) from E, in which case present value is wrongly stated as V=E/(r-g) which give rise to the wrong conclusion that any g will inflate V as it reduces the denominator of the V equation.
Realising the correct equation is V=(E-aC)/(r-g) we can proceed to see why or how g can actually reduces V. To do that let us simplify and assume that a proportional increased of capital employed is required to fund growth e.g. a 10% growth required a 10% additional capital employed, then
V=(E-aC)/(r-g)=(E-g X C)/(r-g)=((ROE X C)-(g X C))/(r-g)=C x(ROE-g)/(r-g), where C= Equity employed
Restating again V= C X (ROE-g)/(r-g) less us discuss some of the different scenarios
1) if g=o, i.e. if there is no growth then V=C X ROE/r =E/r, this is the equation that most peoples are familiar. It is insightful to note that if ROE is equal to r i.e. if return of equity is equal to cost of capital then value is simply equal to the equity or capital put up by the shareholders, no more and no less. One can only expect to have a higher V if the return is higher than its cost, if ROE is less than r it can actually reduces the value of the equity committed in the first place i.e. value destruction. This equation reinforces why ROE is critical!
2)If ROE=r, V=C irrespective of any g, simply put no amount of growth will add value if ROE is just equal to r.
3) if ROE < r then higher g actually make V smaller, that is higher growth is worse if return on equity is less than cost of capital or as Kc puts it it destroyed value faster!
It is interesting to ponder what should be the appropriate scenario for VS valuation and that of Globetronic.

Posted by vsstaff > 2015-06-02 20:16 | Report Abuse

i dint said any body hater and loser, why u think so....hmmm.....