Investor Heterogeneity And Behaviour To New Stocks – Valuation Method, Ranking, And Warren Buffet Share Valuation

Calculating value of the stock in accordance with the required rate of return from investment

Discuss about the Investor Heterogeneity And Behaviour To New Stocks.

The overall assessment focuses on identifying the most viable valuation method, which could be used by the investor in detecting the actual value of the stock. In addition, viability of the calculations such as dividend discount model, value of ordinary share and Warren Buffet valuation method is conducted to understand the significance of valuation method. Moreover, the Warren Buffet valuation method is evaluated to understand the implication of intrinsic value and how it might help in generating high level of returns from investment.

From the overall evaluation of the above table, the ranking is mainly based on the share valuations as per dividend discount model and current share price of the organisation. The highest difference in value that will be achieved by the valuation is ranked 1, while the reduction in the overall return is ranked accordingly. The valuation of P/E ratio relevantly indicates the price changes on the perception of future EPS, which is established by identifying he growth rate in EPS. In addition, from the overall calculation it could be identified that Link Group is understood to be the most viable investment opportunity, which could help in generating high level of returns from investment. Due to the low accuracy of EPS valuation the overall ranking is based on Dividend Discount Model. This ranking relevantly depicts desirability of investors to invest in the company based on the return that will be generated from future predicted price. The stock having highest loss from the theoretical derivation is ranked last, which is REA Group. This desirability factors indicates the willingness of the investors to invest in the company to generate high level of return from investment. In this context, Asness et al., (2015) stated that with the help of dividend discount model investors can identify the future price of stock, which could be used in making adequate investment decisions.

The risk-free rate and market return is calculated rom Bloomberg, while the dividends of each company are detected from their annual report. The market return is calculated for One year and All Ordinary Index of Australia is taken into consideration. DDM value is calculated as per the annual report of 2017 of each organisation.

From the valuation it could be identified that companies ranking from 1 to 5 can be used for investment purposes for improving the level of profits from investment. The first 5 ranked companies relevantly provide the highest rate of return from investment, which could be used for investment purposes and generate high rate of return from investment according to the dividend discount model. The overall recommendation is not based on P/E ratio, as the calculation does not project the accurate valuation of stock over period of time. Therefore, with the use of dividend discount model, ranking of the stock is conducted to identify the stock, which could generate highest return from investment. The main purpose of selecting Link Group, Commonwealth bank, Computershare Limited, Soul Pattinson (W.H), and Z Energy Limited Foreign Exempt NZX is to maximise the profits from investment, as share price of other stock will decline in future, as evaluated from the dividend discount model (Chandra, 2017).

Tanking the investment in order of desirability

Warren Buffet uses value investing as its trading measure for conducting relevant investments in the capital market and create an adequate portfolio. In addition, Warren Buffet uses the two-column valuation method for detecting the financial viability of relevant investments, which could generate higher rate of return. This valuation method was mainly identified by evaluating different level of returns, which could be generated from investment. This two-column valuation method would eventually help in understanding the level of share value by identifying their intrinsic value, while detecting its share value. The two-column measure relevantly uses the value of after tax net income to detect the intrinsic value of the current share price valuation of the organisation. Moreover, Warren Buffet model relevantly uses the sustainable growth rate to identify future profits of the stock and how it could improve the level of returns from investment. the use of earnings per share, book value per share and dividend per share for calculating the future price of the stock (Bowen, Rajgopal  & Venkatachalam, 2014).

In addition, Warren Buffet model relevantly utilises the overall intrinsic value by evaluating the net profits that is generated by the company, while identifying the changes in future share price. Moreover, the two-column valuation method used by Warren Buffet mainly allows the investor to identify the stock, which has future value and are traded lower than the book price. The investors mainly need to value performance of the organisation based on intrinsic value and sustainable growth value to identify the future performance of the organisation. The companies used in the assessment can be evaluated according to the Warren Buffet valuation model for deriving the actual value of stocks. In this context, Lu (2016) stated that with Warren Buffet model investor can identify stocks, which could generate high rate of return from investment by evaluating its intrinsic value.

Comparing the Warren Buffet’s approach to share valuation and share valuation methodology and recommending one approach for investment:      

The above table relevantly indicates the overall price of stock according to Warren Buffet model, Value of ordinary share and Dividend discount model. The above table relevantly compares the future price of the stock based on Dividend Discount Model, , Value of ordinary share and Warren Buffet valuation model. In addition, the calculation directly indicates that valuation done based on Warren Buffet valuation model provides a more justifiable price action of the stock in future, as comparted to the valuation conducted by Dividend Discount Model. The price fluctuation measured in Dividend Discount Model is relevantly high, as it is affected by dividends, required rate of return and growth rate, while the price depiction in Value of ordinary share is relevantly in growth rate basis. On the other hand, the Warren Buffet valuation model is only focussed on the intrinsic value and it discounts share price with the help of price-to-book value, earnings per share and dividends for identifying the sustainable share price value of the company over the period of time. The highest share value according to Warren Buffet valuation model is Commonwealth bank with a total value of $241.04, while the Dividend Discount Model valuation depicts a value of $ 78.96 and share price according to Value of ordinary share is $70.95. The difference in price valuation is due to investment methodology adopted by the valuation method. This price of Commonwealth bank has relevantly improved over time were the dividends increased with the EPS and price-to book value. However, the Dividend Discount Model was only able to evaluate the prices on the basis required rate of return and dividends. Li, Wang & Dong (2016) stated that the major vulnerabilities of CAPM model is its single measuring factor, which cannot comprehend the different level of factors affecting prices of the organisation.

Selecting the stock for investment and providing relevant reasons for the investment

In addition, the share valuation methodology of Warren Buffet is to value the stock on the basis of intrinsic value and price-to-book value. This relevantly allowed the investors to maximize the level of returns that could be generated form investment. In addition, the Warren Buffet model also evaluates EPS, dividend paid, high value and low value of the stock during the period for identifying the sustainable growth value of the stock, which could be obtained in future. On the other hand, the dividend discount model valuation directly focuses on the growth rate, CAPM rate of return and dividend provided by the organisation. This valuation is dependent on the required rate of return, which is provided by the CAPM results. The Dividend Discount Model focuses on deriving the price of stock based on dividends, required rate of return and growth (Hou, Xue & Zhang, 2015). The data such as EPS, DPS, BVPS is detected from Reuters, which provides viability data of the organisations. The data from 2017 to 2010 is taken into consideration for calculating the share price according to Warren Buffet Valuation Model.

There is significant different between the methodology of Dividend Discount Model, Value of ordinary share and Warren Buffet valuation method, as the valuation method use different set of input to derive the actual valuation of the stock. Therefore, from evaluation it could be identified that investors could benefit from value investing with the help of Warren Buffet Valuation Method, as it evaluates the performance based on intrinsic value.

Conclusion:

From the overall evaluation it could be identified that Warren Buffet valuation method is the most viable investing techniques, which could be used by investors in improving the level of returns from investment. In addition, the valuation also indicates that the using the Warren Buffet valuation method is essential, as it uses intrinsic value, EPS, dividends, and Price-to-book ratio for determining the actual valuation of the organisation. This method is not used by Dividend Discount Model and Value of Ordinary share model, while deriving share price valuation of the organisation. Hence, from the evaluation of above valuation it could be identified that Warren Buffet valuation method is the most viable investment option for investors.

Reference and Bibliography:

Asness, C. S., Frazzini, A., Israel, R., & Moskowitz, T. J. (2015). Fact, fiction, and value investing.

Asx.com.au. (2011). Asx.com.au. Retrieved 14 May 2018, from https://www.asx.com.au/asx/research/listedCompanies.do

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Bloomberg.com. (2018). Bloomberg.com. Retrieved 14 May 2018, from https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia

Bowen, R. M., Rajgopal, S., & Venkatachalam, M. (2014). Is Warren Buffett’s Commentary on Accounting, Governance, and Investing Practices Reflected in the Investment Decisions and Subsequent Influence of Berkshire Hathaway?. The Accounting Review, 89(5), 1609-1644.

Chandra, P. (2017). Investment analysis and portfolio management. McGraw-Hill Education.

Guragai, B., & Peabody, S. D. (2018). Demographic Factors Affecting US Households’ Investment in Stocks. International Journal of Economics and Finance, 10(4), 112.

Hou, K., Xue, C., & Zhang, L. (2015). Digesting anomalies: An investment approach. The Review of Financial Studies, 28(3), 650-705.

Li, Z., Wang, F., & Dong, X. (2016). Are all investment decisions to subscribe to new stocks mindless?: Investor heterogeneity and behavior in the process of subscribing to new stocks. China Journal of Accounting Research, 9(4), 283-304.

Lu, Y. (2016). Inside the Investments of Warren Buffett: Twenty Cases. Columbia University Press.

Rationalwalk.com. (2009). The Rational Walk. Retrieved 14 May 2018, from https://www.rationalwalk.com/?p=281

Reuters.com. (2018). Breaking News, Business News, Financial and Investing News & More | Reuters.co.uk. U.K.. Retrieved 14 May 2018, from https://www.reuters.com/

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