Buying shares in many ways is just the same as buying any other product or service in life. When you go shopping you want to buy a bargain, right? We all love a bargain don’t we!
My fiancée, Cholpon, like many ladies enjoys shopping. She openly admits that the concept of retail therapy is true. She simply loves to shop and it is a form of meditation to her. It appeals to her sense of creativity and imagination. She’s really good at it. It takes her mind off of everyday life and any worries or concerns she may have. She has an eye for unusual, stand out items and bargains so Bicester Shopping Village, TK Max, outdoor markets, shop sales etc all really appeal to her.
So why wouldn’t you want to buy shares at a large discount too? The challenge is to find such shares and buy them when the stock market is neglecting them and they are unloved. Easier said than done, right?
Well it does take time, inclination and skill to do it yourself which is why the vast majority of private investors underperform the professionals, though the very best individual private investors outperform fund managers because they have none of their constraints and regulatory burdens. This means such investors are able to invest in a small portfolio of say, 10 shares and invest in smaller, higher risk companies on AIM (Alternative Investment Market).
We follow Warren Buffet’s methodology for assessing and valuing shares before we buy them. This involves projecting forward the company’s forecast profits for a pre-set number of years before discounting back to the net present value using the expected growth rate required by our fund. This then gives us the so-called intrinsic value of the company. You then compare the intrinsic value to the current value of the share which is measured by the price per share multiplied by the number of shares in issue. If the company’s value is higher than the intrinsic value, then it is over-priced. If, on the other hand, the intrinsic value is higher and, ideally, much higher than the company’s value then the share is under-priced.
The other really useful technique is to analyse a company’s free cashflow per share and compare it to the company’s annual profits or earnings per share. Free cashflow is the surplus cash from trading activities minus its capital expenditure. A company’s free cashflow per share should be similar to its earnings per share. If its earnings are consistently significantly higher than its free cashflow then that is a sign that the company may be manipulating its earnings to show higher profits than it is actually making. One of the greatest corporate scandals in history was a company called Enron, which crashed spectacularly a number of years ago after making seemingly high profits each year. However, a closer study of its accounts would have revealed that its earnings per share were consistently far higher than its free cashflow per share. A sure-fire warning sign if ever there was one.
So if you would like to benefit from investing in undervalued shares, why not get in touch? Contact us to find out how to invest in the CCM Intelligent Wealth Fund today. You know it makes sense.
