How to Value & Pick Shares

Order Kerni Wholbury and a waddery woman. And before we get started on She's on the Money podcast, I would like to acknowledge the traditional custodians of the land of which this podcast is recorded on a wondery country, acknowledging the elders, the ancestors and the next generation coming through as this podcast is about connecting, empowering, knowledge sharing and the storytelling of you to make a difference for today and lasting impact for tomorrow.

would be a really good precursor to today. Right, So if you haven't listened to that episode, I would recommend going back and having a listen to that because I feel like this is the next level. We're not talking about ETFs or managed funds or different product We're actually talking about what it means to assess an individual company. And I get asked this all the time, like how do I look at a share that I'm going to buy?

And it's like, okay, well, if you've gotten to the point where you've done your risk profile, and you've worked out what you want to invest in, and that investment strategy includes individual shares. How do you pick it?

recommend you go back to. But we're at a point in life, gee, where the community is saying, vee, we really want to know more about how to individually value stock and value a company, and that's what this episode is all about. Now we're in a bear market, terrifying but also really normal, Like the investment world and the investment markets have cycles and we're going through them. We've

sen this time and time again. Gee, We've been through market corrections, We've been through bear markets, and we've been through recessions before. It's not new. It's just so scary that I think people tend to jump up and down a little bit more than they need to, which puts you in a position where consumers and us like Basically, people who use the stock market to buy and sell trades, we lose a bit of confidence. So I think now is a really good time to start honing in and

focusing on it and going, yeah, you're right. The media is jumping up and down and making us really scared. But is this a bad thing? No, because shares could be on sale, you could get a really good deal. It could be a good time for you to start

your investment journey if you haven't before. So today we're talking about tips and tricks that day traders use, not necessarily tips and tricks I want you to necessarily use because you might turn around g and go all right, well, actually, after all that, that sounds like a lot of responsibility. I actually just want to go buy an ETF or I want to go and sign up to six Park and have a robo advice platform because that aligns to

my values. But I use these tips every single day when I am picking client portfolios, because I think a good precursor to this is I am not just a financial advisor. I am a direct share financial advisor, which not all financial advisors are. It's not a flex it's just part of your job of what you focus on. So my focus with my clients is often about creating comprehensive investment portfolios made up of direct shares that I then manage on their behalf. So a lot of my

clients don't have ETFs or managed funds. They actually have direct shares, and we have a platform of maybe eight to twelve different shares at any point in time. And I usually deal with I guess you could say high net wealth individuals, and I say that right here, G not so I can go, hey, G, I work with really rich people, Like, that's not it at all. I say that because did you hear the number I said before? Eight to twelve individual shares. That's what people with a

million dollar portfolio have. They're not picking thousands of companies. They're not picking hundreds of companies. They are making sure they have good diversification across the portfolio that makes sense to them. But I don't think it's as comprehensive as people think it's going to be, because I think if I put up a pole, I really should have done this.

Maybe we'll do this another time. But if I put up a pole on cheese on the money and said, how many different shares do you think someone with a million dollar portfolio would hold. I guarantee you people be like fifty one, one hundred and fifty because that's what they think diversification entails, when it's not actually the case. So I say this because I use these tips and tricks, but I also say this as a hey, you can

go and be an individual share trader. These are some tips and tricks that might help you along the way, but it doesn't necessarily mean you'll get instant diversification because to get good diversification you actually have to have a fair bit of money behind it if you're picking. So I think that's enough disclaimery. Stuff's good, that's good.

we're not talking about buying an after pay here. We're talking about buying one of the big four banks, and they're usually high dividend, so good dividend paying shares that don't have massive amounts of growth. Because if you're at that point where you have a million dollars in an investment portfolio, it's very likely that your tenacity to take on risk is very low because you don't want to

lose what you already have. It's about maintaining capital stability and about keeping cash in the bank, even if it means you're not chasing those you know, sexy twenty percent returns that some people are getting. My client's usually like the the AM's five percent, Like that's that's what it is, because we want to stay rich, like we don't want

to put that wealth at risk. So yeah, that's where we're at today, and I feel like it could get a little bit complex, and I do apologize, and I'll try my best.

level of complexity. Let's shorten it. SMP means the Standard and Pause and it's literally just the five hundred top tracking companies in the American market as listed on the US Exchange, and it's just tracking the average EBB and flow of that. And the SMP five hundred is used as a very normal index in our industry of how the market's performing, because like, what are the top five hundred companies doing? Like if it's up one percent, you're like, oh,

that's like one percent across five hundred companies. That must mean there's something pretty okay going on in the market. If it was down ten percent, you'd be like, wow, what's happening in the industry kind of vibes. So I feel like there's a lot of confusing acronyms, and as you know, I try to steer away from them because it's just not necessary, Like I don't need to use an acronym to make myself seem smarter so that you

don't feel educated. But it's important for you to be educated and know what these things are and when they're used and how they're used. And ebit is one of those things where I'm like, look, this is just what it's going to be called on a balance sheet. So if you're at a point in your investing journey where you're like, I'm gonna invest in individual shares, cool, You're probably gonna look at an annual report from a company and ebit will be on it. So I need you

to know what to look out for. But I also don't want you to think that they exist to make you feel overwhelmed or confused us because how many times I don't know about you, but I was on Tinder before I met Steve, and the amount of people that I would meet that would try and be like, oh, I'm an investor, I'm Maybe it's more of a reflection of the type of guy. I go, yeah, maybe Steve's not like that. It's okay, bank time. He's a different kind.

But like the banker types would always like use complex terminology and I'd be like, do you know what I do as a job?

by customers and the market and business analysts. We're not talking businesses that have just come out of nowhere. We're talking about those tried, true resources. We're talking about the big four banks G. We're talking about you know, things like Macquarie and West Farmers, businesses that have been in the Australian economy for a really long time. They might not be shares that are completely outperforming the market, but they're are tried and true and steady, like Telstra is

another blue chip stock. And the reason we say that these are blue chip stocks is one because they are literally just well known companies respected have good businesses behind them. Blue Chip is a term used in the financial services industry as a term that's kind of perceived as being safe havens due to their stability during times like now where you know, the markets might not be doing well. So those fancy tech stocks people are going to sell up.

But West Farmers what do they own? Their own Bunnings and they own Kmart and Target and those are all things that people still need during times of economic downturn. Banks, people still need Woolworths, people still need to go to the supermarket. So these are shares that are going to perform. I mean, they might be down, but they're going to still exist because they're basic human needs at the end

of the day. So you'll often see a lot more fluctuation in shares, like again, fancy tech stocks, where if people have money and they have a lot of confidence, they're like, oh, I'm buying all these after pay shares where are second the market turns, they're like, oh, better pull back on that, Whereas people are less likely to pull back on a Woolworths share because they're like, oh, pandemic toilet paper sales throw the roof. Does that make sense? Yeah, yeah, gotcha.

good cheap. They all have different business structures behind them and performance analytics and dividend yields and performance that drives their perception in the market as to what they're worth. So a good example of this is combank shares are really expensive. So today as of recording Combank shares and ninety one dollars and sixteen cents per share, you go, all right, no problems. But that is going to be built up of you know, their historical data, how well

they've done in the market. It's going to be built up of what their dividend payart is, so how much money you make from owning that share. It's going to be made up of you know, consumer demand and how much somebody wants that share and what their past performance was. So if I then said, well, it's a NAB share worth George, what would you say?

pay later options. Banks are doing different things. They all are different businesses. So you can't just go bank compared with bank and assume that that's going to be like a good deal, because if you look at it, go, oh my gosh, well, if Combank shares are ninety one dollars, it's a money win to buy NAB shares. Past performance over the last five years for a NAB share is actually down seven point four percent. You go, okay, no problems. Well what does that compare to this ninety one dollar

one This one's so much more expensive. Past performance on a combank share. If today it is ninety one dollars and nine cents, past performance actually up ten point nine two percent. Oh wow. So you go, all right, this clearly isn't apples with apples. When we start to get into it, and I'm not saying this to confuse you, I just don't want you lumping all banks in with one and going, oh, they must be equal. I've got a bank, because it actually becomes a little bit more

finicky than that. And we're having this conversation off air right before we started recording, and we're talking about how Combank shares over the last month have absolutely decreased, like they've gone over the last month down thirteen point five eight percent. And in the investment world, there's a lot of conversation about whether it's worth adding to your portfolio

at the moment. So when I go and talk to my stockbrokers, because as a financial advisor, I obviously pulled together a portfolio for my clients, but a lot of that happens because I'm having back and forth conversations with different stockbrokers and different research houses and understanding what that means and how to pull it together. And that seems to be a common topic at the moment. What's going

on with Combank? How does that work? Does that mean we should be adding it, should we be selling some of it? What does that mean for clients? So I think it's interesting, ge when you ask me a very clean question of like, all right, will you do just compare it to a like business that makes sense, Yeah, but unfortunately it's not as clean car as that.

feel like these words get really complex, really quickly. So essentially, intrinsic value is like the fundamental objective value of that object. Right, So the intrinsic value of a one dollar coin, what is it? G one dollar? So if you paid a dollar ten for a one dollar coin, are you undervaluing it or overvaluing it? Over over over over over, But you're overvaluing it because you're paying more than what that value of that asset is. Same for a two dollar coin, right,

So a two dollar coin is worth two dollars. If you want to paid two dollars fifty for that coin to get it in your possession, you've paid more than what it's worth. Because when the market settles down, and maybe I don't know, maybe you're a coin collector and you will want to jump down my throat. But this was a good example. But when the market comes down and there's heaps of two dollars coins out there, it's not going to be worth two dollars fifty anymore. It's

going to go back to what it's genuinely worth. Right, So fundamentally base value, it's base value. Fundamentally what is it worth? And fundamentals in the world of investment are really important to understand because they sit under market hype, they sit under what's going on, and that's what investment advisors are looking for. So, like I want in a perfect world, right, I want a client to come to me and be like they want to start an investment portfolio.

I've got this amount of money, and I go shopping for shares and I'm like, oh my god, all these companies are undervalued because they're intrinsic value is telling me I should be paying ten dollars a share for this, but they're asking eight dollars a share. This is a money win. So it's one of those things where it's not as confusing so intrinsic value, it's that innate internal value of just what that asset is worth. Does that make sense?

dollars fifty? Probably two dollars, But you're willing to pay a premium. Take t swift, she touched it, and more people want it, so the price is increased. Does that make sense? Making sense? Extrinsic value is how it's driven by the market, and intrinsic value is its genuine, fundamental base price.

slowing down and you haven't known why. And then later an annual report comes out and that business has not performed as well as you thought it would. So it's intrinsic value is not as much as you actually thought it would be. So it might not actually be undervalued. It's been deemed undervalued because of the research and information

that's available about it right now. Same thing happens when we find out a company's done something really cheeky or naughty or abused the situation or made use of something they shouldn't have made use of. When it comes out, they go, well, your intrinsic value is going to go down. Because intrinsic value is made up of things like, you know, the balance sheet and the profit and loss statement and

all those financial things, but it's also like brand reputation. Yeah, Like, if you look at Telstra, what's their brand reputation in the industry for service they provide when you compare it to any other phone carrier, right, Like, there's a reason their consumers are willing to pay more for that product. And it's not just about coverage, Like, guys, it's twenty twenty two coverage not that hard to sort out anymore. But people are still willing to pay more for that

service because they align it with quality. So intrinsic value is obviously those fundamental things. You've also got to have your hat on the right way and know that it's not just about the financial sometimes, gotcha, that makes sense.

they go hand in hand. But you will meet some financial advisors or some investment advisors or some economists that only subscribe to one of those schools of thought, and they'll be like, we are look at fundamental or we only like technical or whatever it is, because sometimes people

get really caught up in the semantics of it. Go figure, so we've got the intrinsic and the extrinsic and it kind of goes back to when I was doing my psych degree just way back when I feel like it was yesterday, the same time as being told that we've got a ten year reunion coming up. So what. But we spoke a lot about qualitative versus quantitative measurement and the different ways that you can measure things. So qualitative data is like that kind of more fluffier data gee.

So it's not necessarily a numerical value. Whereas if we talked about quantitative quantity, like the number associated with it, so it might be, you know, a scale of one to five, where do you sit on this? Most people were three. It is very fact based, whereas quantitative is like, well, how did the podcast make you feel? Or how did this business make you feel? And then we collect a whole heap of data and we actually just look for similarities in it. There's no hard and fast rule or

number associated with it. So there's like the soft and the hard, and from my perspective, we're making a good investment decision. We need to take both of these things into a consideration, right, Because I'm quite vocal not online, but just quite vocal in my everyday life about you know, the importance of ethical fashion. So if we looked at a company like Sheen right. They at their crux of it, they probably have really good financials. They probably are blowing

it out of the water. They are a fast fashion brand who have managed to capture a massive part of the market. They are churning out shitloads of clothes and content, and from their perspective, they're probably doing really well. Then you look at the quality of data on that and you go, but they're abusing the system. They aren't doing the right thing when it comes to child labor, they aren't doing the right thing when it comes to you know, the environment.

taken into consideration. But that is my take. You might be like, V love Sheen, and I'll be like, we're probably not friends, but that's okay, okay.

our system and our community. Like some people genuinely need access to clothing items that are at a kmart price point, like at the end of the day, that is what it is, and I think it's really beautiful that there is a level of quality there that they can be assured of so that they can get wear out of clothes if that's you know, that's aligned to their budget. What I don't like is the consumerism behind fast fashion, where it's like we're that top onees and throw it

away exactly. That's what we're crucifying when we talk about fast fashion, not about companies who are selling cheap clothes. Does that make sense?

So analysts then use stock charts to identify patterns which maybe will suggest future trends for stocks and shares and stuff like that. Also clarify stock and share same thing. I use them interchangeably. I much prefer the word share only because I feel like it's a little bit more Australian, whereas stock feels very stock.

know when I'm getting a good deal. I want to genuinely be able to explain that to my clients as well. I don't want to just say I know what I'm talking about, trust me, Like it's just it's not enough for.

of valuing a share. Yes, there's more. Do you need to know more at this point in your journey? Probably not, So we're just going to focus on getting these three right. So first things first, I know you are on the edge of your seat, Georgia.

or not. So the earnings per share, or what the industry calls the EPs, is the proportion of the company's profit allocated back to each individual share. To figure out a company's PE ratio, we need to do some really quick maths. We need to look at the company's earnings per share, which is really readily available in their annual report or their quarterly report, or it's usually on their website.

It's not a hard number to find. Then you divide the current price per share by the earnings per share to find your PE ratio. So if a company has a quote adjusted EPs figures or earnings per share figures, use these instead. Is they going to take into account any major expenses that were incurred during that period that

might affect the EPs. So for example, if they acquired a new factory, or they bought something really big or invested in a new database or something like that, that's an outlier, like that's not a common thing to happen each and every single year, so they might have an adjusted figure fit used so that you can still value

the company without absolutely blowing it out of border. So to run a quick example for you, if a company currently has a share price of one hundred bucks, so close to what Combank has, but like imagine if Combank got to one hundred, I think my group chat for financial advisors would go off. It would be a fleet. Anyway, company has a share price of one hundred dollars and an earnings per share of ten dollars as stated in its latest report. If we use the formula, the company's

pee ratio would then be ten. Pretty quick maths.

what does this mean? How does that work? But see how now we're into talking about a price per earning ratio, not a price per share George. So before I gave you the example and said, wow, twenty seven dollars for a NAB share but ninety one for a Combak share, and you go, well, that makes no sense. How do I pick? But then we introduce something like this price to earnings ratio and you go, oh, okay. So I would just take the share price and what it actually

paid and I'd get a score. And then the lower the score, the quote cheaper it is. So it doesn't actually matter that one's twenty seven dollars and one's ninety one. We kind of put them on a level playing field, and that's the way we do that. Does that make sense? Does make sense? Makes you go, oh, that's not as overwhelming. I don't have to go ones expensive or one's cheap.

You go, well, what is that twenty seven dollars returning if that's what we're paying for a NAB share, or what is that ninety one dollars returning for that combat share? Does that make sense? I hope I'm making sense. This is really hard. But gee, at the end of the day, there's no definitive what's quote good ratio when it comes to it, I can't be like, hey, a five is good and a ten's bad, Like that's not how it works.

So over the last forty years, that all ordinaries, which you've probably heard, like you know when you watch TV or when you were younger, you used to watch TV and your mom and dad had the new on there, like the all lords are up? Who are rah? The all odds? Yeah, the all odds. That's just an index. It just tracks the market. It's like the S and P five hundred.

the all odds. Okay, but if we look at the all odds over the last forty years, it's averaged a PE of about fifteen, which is sometimes seen as a broad threshold. Is kind of fair value to give you a bit of an indicator. Very good.

So the PEG ratio considers the company's earnings growth. So to figure this out, you need to find out the company's estimated earnings per share, which we talked about just before, which will be in the latest down your report or on the website, all really accessible if they are listed company. And then to calculate the PEG ratio, you use the PE that we just did and you divide by the

growth in earnings per share or the EPs. So I feel like this is getting really complicated, but I know you guys are following, and if not, just go back listen to it again. I'm lucky for you to have to listen to me more and more. But a good example of this is let's say the company has an EPs of eleven dollars over the next year as stated in its report. You go great, no problems, thank you. This is an increase of ten percent on its current EPs of ten dollars. Because we're using the same example

as we had before, so using the PEG formula. So the price to earnings growth formula of the PE, so the PE was ten as we spoke about before, and you divide it by the growth in EPs, which is ten percent. We then have a PEG ratio of a one. You go, he that makes absolutely no sense. But he out here, me out, sit down. Just like a PE ratio, the PEG ratio compares peer performance, so it's trying to

compare apples with apples. Again, there's no set PEG ratio that's considered to be like the gold standard, or this is like a by signal. If you get a PEG ratio of x, like bye bye bye. That's not how this works. These are all just ratios that we use, We write them down, we take them into consideration of

our larger piece of research. But fundamentalists, so people who are really subscribed to that school of like fundamental analysis, they might treat that share with a PEG ratio of less than one as an UNDERVAALP share, so they might go less than one undervalued over one overvalued one on par. Does that make sense? It does, So it doesn't necessarily mean it absolutely is or it absolutely isn't that.

makes sense, like price book, what's on its book? Let's have a look a little right, I'm going to put myself in the bin. We really do need that break. But a price book ratio is calculated by dividing the current share price by the stocks book value divided by the number of shares that have been issued. So the book value is worked out from the balance sheet as the total assets minus the total liabilities, and so liabilities

is costs. So you take what they own and then minus what they owe or what they have in costs, and then you get that number. So The balance sheet with these figures is super easy to locate if you're looking for it. It will be on the company's website, it will be in their annual report. It's a very large part of the report they are legally not allowed

to skip on. So to give you an example of that, because we love an example in this community, let's take an example of a company's market price being currently two dollars, and they have fifty million shares in the market, all issued out. They're all bought right, So the total assets are eighty million dollars. I'd love this business. I'm glad we did this example. So the total assets in this business at eighty million dollars, and then the total liabilities

in this business are twenty million dollars. That then equals a total book value of sixty million dollars. So the price book ratio is two dollars divided by the eighty minus twenty million dollars, rich is sixty divided by fifty million dollars, which equals one point seven. And I know you didn't follow that, so you've just got to trust

me that the PB ratio is one point seven. But basically the closer the PB ratio is to one or below the greater the perceived value of the stock, and the PB or the price book ratio is used more often for more mature companies, so like it's for the older hens in the share market that don't have as

much growth, so they say it's for limited growth. But at the same time, I feel like, you look at a bank, right, They're not going to triple in value overnight, But are they a good, solid, steady steed that's maybe going to win the race. Maybe that's where we would look at a price ratio. You wouldn't really look at a price book ratio again for a company like after Pay. I used this example a lot, and I've really needed

to check myself recently on it. It's not because I don't like after pay, which I don't for the community, but it's because the community so recently had been talking about buying and selling after pay shares and it was so topical, and I feel like it's a trendy share that people buy. So people were buying Tesla, or they're

buying after pay, or they're buying Apple or whatever. But my example of after pay is used a fair bit because it's pebe ratio wouldn't be indicative of what it is like after pay is such an interesting company where you go commercially that makes a lot of sense. Is it putting the community in the best possible position? Absolutely not. But when you look at it's PB ratios, is it actually turning a profit?

these three things make a lot of sense. And I'm actually quite a visual learner, so I need to see how it plays out and see what does this mean and where does this plug in and what does that look like? And for me, that's how I learned. But we all learn really differently, and I think that the main thing here is that nobody is going to pick that up after me explaining it to you once, especially

when you can't contextualize it. So it's once you start you're in investment journey and you start looking at it and you go, oh, this makes sense, like this is where this goes. That's when you start to comprehend it properly. Amazing.

you can buy portions of shares. So if you thought, hey, be I really want to own combat, but I don't have ninety one dollars to do that, you can actually purchase a portion of that share instead of the whole deal, which I think is really nice to get exposure to an asset that you might really love. Not recommending that share at all, That was just an example. They have access as well to a number of different platforms other platforms in the industry. I mean, our community has been

talking a lot recently about Self Wealth and Superhero. Obviously those are more direct. When we talk about investing platforms, we're not talking about platforms like Rays or Spaceship or even six Park, which is a robo advice platform, because none of those enabled you to invest directly. So if you were looking to invest directly, what you'd be looking for is a DIY platform, and the things I'd be taking into consideration is just really, is this aligned to

my values? Is this aligned to how much I want to pay for a platform? And you can find all of that information out on those websites for those companies, but at the end of the day, completely up to you what you pick, just as long as they are legit, my friends incredible.

I feel not sad today. Yeah, but it's easier to absorb in smaller bits and to be honest, the feedback I've heard from people who are listening to the investing episodes is that they listen to it a couple of times just for it to really sink in. So I feel like that's a good idea. Yeah, geniuses, that's so.

nine a FOSL two three six five two three. We will see you on Friday, guys.