Value Investing in Asia

Chapter 8Three Simple Valuation Techniques to Live By

Price is what you pay, value is what you get.

— Warren Buffett

After doing our due diligence and once we are convinced of its merits, it is time for our next step: to arrive at an estimation of its value, or more commonly known as a valuation. Because, at the end of the day, investing in a good company at an inflated price can lead to disaster as well.

It is important to note here that we believe that valuation of a company should only come near the end of your analysis, rather than using it as a starting point. This is because, as investors, we should be thinking like a businessperson. And we should approach our analysis in as businesslike a way as possible; understanding the business and finding a business that we are optimistic about. Only when we are confident in the business that we want to invest in do we look at the price we want to buy it at – hence the need for valuation.

And when it comes to valuation, we like to emphasise that there is no “one price”. Valuations are like fingerprints, no two are the same. Why so? Because everyone thinks differently.

Valuation is about forecasting the future of the company. Therefore, investors have to make many assumptions when doing a valuation exercise. These assumptions, which are different for everyone, cause the variance in valuation between two investors. Although the commonly used formulas don't vary too much, the difference is your inputs. The Chinese have a saying, ...