In value investing determing the true value of a COMPANY instead of a stock price is crucial.
This little indicator shows the "Intrinsic value" of the choosen stock meaning the value of the stock in 10 years time. Calculation is based on historical book value's average annual growth rate and dividends paid.
Since this is about long therm investing, use monthly charts.
"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.”
– Warren Buffett
One way to calculate that is by the growth in per share book value and dividends taken in the forseeable future (10 years) than discount it with the prevailing 10 year note's rate.
In the inputs you have to set 2 variables:
1. How many years back you have the first data for book value per share available?
2. What was the per share book value that year?
(Bookvalue is ploted in olive colour and you can get the oldest one if you move your cursor over the latest data on the left)
CAUTION! You have to reenter it for every stock you analyse as this is stock-specific data!
After setting the input data, you will see the "Intrinsic Value"'s pink curve ploted over the price chart.
If the price is well below the pink line, the company is undervalued and can be a possible applicant for long therm investment.
Margin of safety: when the current price is 50% below the intrinsic value that means a 10% yearly growth potential (100% growth in 10 years) or a 100% margin of safety.
I am a beginer in Pine so please excuse my coding...
If anybody knows hot to extract historical data from 15 years ago, please share it with me, so I can automate the whole calculation without inputs necessary.
1. I have added the "overlay" feature so the indicator loads right on your main pricechart =versus the previous version where separate indicator window started up)
2. I have entered a "fill" feature to graphicaly show the difference between the price and the intrinsic value. Shows the margin of safety with red fill.
Still working on improvements, so check back.
I have also developed already a version which extracts the book value automatically from the past but I want to work some more on it before publishing.
Thank you for your valid question!
The TVC:TNX shows the yield of the 10 years US Treasury Note.
Why do I use it to calculate the current intrinsic value of a company? Good question!
By definition of Warren Buffett, the intrinsic value of a company equals the amount of cash the company generates from now till eternity. This generated cash will then show up either in dividends paid to owners or growth in the equity of the company (aka book value per share) or -and mostly that is the case- a combination of both.
To keep the investment and the calculation safe I calculate for the foreseeable future meaning 10 years ahead. It would be easy to simply summarize the dividends paid over this 10 years plus calculate the growth in book value but than you would end up with a slightly unrealistic figure.
WHY?: the $1 dividend you collect -let’s say- 9 years from now (so in 2029) will not have the same $1 purchasing power than it has today. The problem is that you want to know today how much money the company generates in 10 years in today’s purchasing power value.
How can you calculate that? It is called discounting and that’s the purpose I use the 10 years treasury bond’s rate for. Having an almost 16% historical high in 1981 it made a huge difference in your calculations in those times. Right now, when the yield is sub 1% this does not have a significant effect on the calculation but who knows where the note’s yield will be going in the next coming years?
So using the 10 years note yield for discounting you know what is the today’s value of your future dividends and future book value growth over the 10 years timespan of your investment.
I hope this answers your question! Thank you for your valuable comment!