Arnold Bernhard. Assessment of listed shares

Arnold Bernhard. Assessment of listed shares

Long before Arnold Bernhard founded the "value bet online" iVafue Line, Ips.), This college graduate Williams was a reporter writing about plays, movies and nightclubs. Soon, however, his attention was attracted by the stock market craze 20s and he went to work in the office a well-known speculator Jesse Livermore. Livermore served as the model for the classic book of Edwin Lefevre's "Memories of the stock operator"). After working briefly at Livermore,he moved to the agency "Moody's Investors Service '(Moody's Investors Service) first to post analyst, and then clerk. In 1931, he lost his job, but once established, "Arnold Bernhard & Co." (Arnold Bernhard D Company).

The first issue of the review "value bet online Investment Survey '(Value Line Investment Survey), evaluates the stock of their intended movement in the market, was released in 1936. Like many other great investors, Bernhard wanted to do away with emotionalism - a lesson learned in 1929 when emotions raised very high. He watched helplessly as his mother has lost all the money from the insurance, the remainder after the death of her husband. She just refused to sell, despite the fact that one of its shares, "Citizen Service," dropped in price from 50 to 2 Building. apiece. "If a hundred-fold increase of all evil dishonest operators of the stock market all the time - wrote Bernhard - this is nothing compared to the devastation caused by misguided crowds, whose imagination knows no boundaries."

Bernhard admitted that "even if we agree that the stock price is only a matter of psychology, or, as Lord Keynes once said, 'the average person views on how to view the average person', we still have yet to recognize that there are factors over time form the psychology of the average person. What is surely creates the psychology. "Bernhard For this was a matter of finding the right buttons, or statistics that drive the stock price and the whole market. Two of these buttons are the company's work in the past, based on the trend growth of income and dividends and their stability, as well as what he calls "the potential to increase the value," based on the forecast earnings and dividends at three-year period. In "Assessment of listed shares," Bernhard develops these ideas and rejects some of the classic methods for determining the value of the shares.
At the time of this writing [1949] The Dow Jones industrial companies shares stands at 165. Share price, expressed in the average rate, in my opinion, is lower than their cost. The reader might agree that stocks are undervalued now, but obviously, most investors do not think so, If it were otherwise, the purchase would cause prices to rise to the point where the stock would no longer be underestimated. The question arises whether it is possible to determine objectively, and contrary to prevailing opinion, as far as the stock price should be different from what is. More and more, can be heard saying: "The type of stock is undervalued and overvalued or fully appreciated." When an analyst or investor says these words, he means that in his mind there is a standard of value, regardless of whether he determines that standard or not.

PRICES DIFFER FROM PRICES
The cost is often different from the price. Charles H. Dow, whose theory of price trends had a huge impact on Wall Street, said that every student of the market should "first of all know the cost."
Another well-known authority on stock prices Baron Rothschild said that to succeed in the stock market have to "buy stocks when they are cheap and sell them when they are expensive." It also meant the standard of value, although it did not define it. You can not buy something cheap and sell something dear, if you do not know what's cheap and what is expensive. This is a relative concept, and they should be related to some standard.

Cost - this is something that exists in the mind. It, therefore, equally difficult to determine how life itself. Throughout the economic history has never existed for determining the net economic value, has won universal acceptance. All the great economists have tried to determine the value - Aristotle, Adam Smith, Ricardo, Bohm-Bawerk, Jevons, Clark, and Pareto - but such a definition of value in economic terms, which would receive general acceptance, not.

You can not argue that the value of the shares - the equivalent of the cost. If this were so, discuss the problem of value at all would be a waste of time. The cost would be the price and the price - the cost, and it would be all you need to know. The classical definition of the cost of common stock considers the cost of common stock equal to the amount paid for it in the future of all dividends, discounted at the prevailing interest rate. It is hard to imagine how one could make exceptions to this theory of value. The only trouble with it is that it is unusable. Not suitable, because nobody knows what will be the sum of all future dividends. If it were possible to determine in advance the amount of dividends for the 20-year period, or any other term of the company, ordinary shares issued would not at all. Capital instead of asking to enter into a partnership would provide a risk contract with an indication of profit, which will be paid on the investment after a certain time and date when the capital will be returned from the depreciation reserve. The demand for equities would be low or zero.

The main reason for the existence of common stock in the fact that nobody knows or, presumably, can not know the total amount of dividends in the future. Consequently, the valuation of stock as the sum of its future dividends, discounted at an interest rate leads to the following, the cost of common stock remains a mystery.

But do not stop searching, even if we have no absolutely satisfactory definition of value, because it may be possible to determine a value within certain limits.

Up to now, proved that the cost - it is something other than price, and it (the cost) can not be specifically defined. Cost is something that exists only in people's minds. But the usual understanding of the value expressed in prices at the moment, we seem compelled to return to the premise, price and value - the same, since both are expressions of value, as it exists in the minds of buyers and sellers participating in the Open market. This argument, however, is not quite flawless. In logic, there is a gap that allows to construct almost the applicable standard of value. This gap is in the following fact: the people - the same people - do not always assign the shares of the same price, if the market price, "General Motors" in March 1938 is 30 and its cost is also equal to 30, according to all buyers and vendors participating in the open market, and if the October 1938 price "General Motors" was 50, and according to all buyers and sellers, can not we see this as the key to swing the price determinants of cost and value through price ? Recognizing that the cost can not be determined, we should take the verdict of the market as to the magnitude of the cost. This does not mean that the verdict of the market should be adopted in every moment. It is obvious that the market is changing her mind. What makes him do it?

CLASSIC DEFINITION OF IMPOSSIBLE
We reject the theory that the stock price - is the total amount of dividends to be paid during the period of its validity, not because it is theoretically wrong, but because it is not feasible. But common sense tells us that dividends are somehow connected with the price at which stock is sold, and hence its value,

We also know that dividends may be paid only out of profits, and profits are not always the same as dividends. Profits are often reinvested in the company and not paid out as dividends. Although dividends can be considered as a function of profit, they are not its equivalent. Therefore, we can assume that the profit itself in some way relies on the market, what should be the stock price.

Assets also have some weight. Numerous trials show that the book value of a weight at the hearings on the reorganization in order to determine the amount of capital available for distribution among the various claimants. There is also reason to believe that some relation to pricing is the inertia of thinking. If in a given year, "U.S. Steel" is sold at $ 100 zaaktsiyu, this number will affect the thinking of buyers and sellers, "U.S. Steel" and the next year, although other significant factors associated with the value has changed.

Repeat the argumentation nashy to date: the cost and price is not necessarily the same thing. However, the only determinant of value - a substance that can not be determined - this is the price. We find a gap in the logic of reasoning in the fact that prices are not always constant and that changes in certain variables such as income, dividends and assets associated with the corresponding price changes. If you could find that over a long period of time maintained some relationship between prices, on the one hand, and the variables of income, dividends and assets, on the other, then one could fairly conclude that in those moments, or even in years when market deviates from these long-supported relationships, such a distortion - a measure of inequality between price and value. You can say, when this level of income, assets and dividends will not be able to manage the price, which was at that level most of the time in the past, this is the period over-or underestimation. And we can logically do not use this measure as the definition of value, but as a description and a method for determining the direction in which the market price will probably move to correct, this is the nature of normal relations, the prevalence of which can be expected most of the time. However, we want to know how much time will be the view expressed in the price, all buyers and sellers participating in the free market. It is impossible to be absolutely sure that the variables of income, dividends and assets and determine the inertia of thinking is actually the views of buyers and sellers. But you can delatnekotorye assumptions and then test them mathematically, to see whether there is a correlation between changes in the variables of income, dividends and assets, and the inertia of thinking on the one hand and prices on the other. And if such a correlation is found, is whether this factor is high enough to be beyond the scope of possible explanations for the pure chance.

If the statistics had to correlate earnings, dividends, assets and the average price of the shares over the past few years (the average price over the last few years - one of the ways of the expression "thinking inertia"), he could have done this by calculating, known as correlation analysis with multiple variables. Rating 'value out online, "of which the reader may have heard - is a line that expresses this correlation. This line expressed the price that most of the time during the 20-year period for the market that determines the income, assets and dividends at different levels of experience.

If such a correlation in the past 20 years, the market can determine the specific values ??that can be set for each variable, one could reasonably determine the future value of the shares, expressed in market prices, provided that future earnings, dividends and assets of this action can be predicted with reasonable accuracy. It is impossible to assert with confidence that the future price will be consistent with normal capitalization of income and assets, as it has been for 20 years of experience. But we can say that the probability that the future price will match the long-term value of the cost is high enough to justify the effort and provide a basis for rational investment program.

Summary. In the absence of universally accepted definition of value, we must, for practical reasons, to go with the adoption of the premise that the cost ultimately equivalent price, but we can also say (based on the fact that the price at any given time does not always equal value) that there exists thing as a long-term assessment rates, which can differ from current estimates prices. We find that the place from year to year changes in prices can be significantly attributed to the high degree of corresponding changes in variables such as assets, earnings and dividends, as well as the inertia of thinking (behind the price). Hence, we conclude that the evolution of the standard value, based on the correlation between price changes and changes in the factors of cost, should (in case of detection) to allow us to predict probable future actions not with absolute certainty, but with a likely high enough to justify the assumption that the forecast practically applicable standard for the identification of areas or underestimate, not only for the stock market in general, but for the price of individual stocks.

It is recognized that the practicality of such a rating is dependent on the ability to predict with reasonable accuracy the level of income and dividends. Scope of this article can not discuss the methods by which this can be done, there is no evidence to prove that it can be done. This analysis at least demonstrates that the normal capitalization of income and assets can be defined in advance, and if the cap is normal, it is likely to be realized. Of course, remains an unavoidable risk inherent in forecasting future earnings and dividends, but the price that the market is likely to place a given level of income and dividends will no longer need to remain in the realm of bare assumptions. If this method of assessment is correct, it implies, shares, the most undervalued, according to this standard should be for a period of 6 to 18 months to prove themselves on the free market is best, regardless of market trend in general. This is, in fact, proven by experience the result. In other words, stocks, the most deeply undervalued, consequently, the most highly recommended as a class win in the market for shares, which as a class, deserve a lower recommendation, as well as those who deserve the second-preference recommendations bypass as the class of those who earned the third recommendation, and so on. In short, this method on the market can separate the sheep from the goats, according to the criterion of value. This does not mean that every action deserves the strongest recommendation, it would beat each stock, which gained the second-preference recommendation, but it can be argued that, as a group, the most highly recommended stocks gain (in a practical sense, the market) for shares held less favorable position regarding the purpose of mathematical standard of value, and this happens consistently, as evidenced by audited accounts.

The author believes that the differences between the actual market price and the standard of value, expressed in a rating "value bet online" can be a very large extent explain the concepts of market sentiment. One good tool to measure market sentiment - the ratio of stock returns to bond yields. If this is the average ratio of insert into the equation as the fifth independent variable, the correlations are almost perfect. (Coefficient of determination as high as 0.96, are rare, and nearly all of equation shares have R 'over 0.85.) All this seems to mean, at first glance, that if you are able to predict where they would Next year, stock market indexes and interest rates, you pretty accurately predict the where and the price will be a particular stock, if you can predict its profitability and dividends. In fact, however, this exercise more promising than it appears at first, because on the one hand, the ratio of return on stocks and bonds alone predicts better than nothing but stock market indexes, and secondly, even if it can not be predicted and the ratio returns of stocks and bonds, inserted into the correlation analysis with multiple variables, gives more accurate values ??of other variables - income, assets, dividends and price lag. Unpredictable variable (the ratio of return on stocks and bonds) can then be introduced as a constant, predictable prediction n variables in the equation can be made with greater assurance that they will show the true value of the shares, as the mood will be excluded.