RUDI FILAPEK-VANDYCK | What is the PE Ratio?
One of the most used investment tools available is the Price-Earnings (PE) ratio. It causes so much confusion among investors who like to treat it as a one size fits all instrument to find "value" in the share market.
According to Rudi Filapek-Vandyck, there is no such thing as a simple universal measure to decide which stocks represent attractive "value" and which ones are "overvalued".
Growth stocks do not trade on a low PE, unless there is something fundamentally wrong with the business.
Infrastructure assets are valued against bond yields, so PE plays no role whatsoever.
Then there is your typical commodities producer - highly leveraged to the swings in prices through different stages of the cycle - that turns the whole concept of buying low and selling high on its head.
Here's a link to the blog post that this episode was based on.
What Is the P/E Ratio?
"The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple. P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time." Investopedia
“The price earnings ratio is literally the future profits that investors pay in today's share price. So what you do as an investor is you divide the profitability of a company by the number of shares that are outstanding, so becomes earnings per share. And that gives you a low number on all occasions. And then you divide the current share price by that number. And that gives you something between, let's say for the sake of argument between three and 85.”
Editor Rudi Filapek-Vandyck founded FNArena in June 2002, having successfully built up an online financial news service in the Netherlands. His active career extends beyond three decades, including as publisher of printed magazines and investigative reporter.
Rudi is a popular market analyst whose straight-shooting, common sense analysis and outside-the-box thinking has gathered a loyal following throughout Australia. He’s a regular commentator on Sky Business and a consultant to boutique investment firms. Rudi regularly travels around the country to share his insights and analysis live on stage with investors. He is the architect of the All-Weather Performers concept, providing regular updates for paying subscribers at FNArena.
Rudi wrote “Make Risk Your Friend. Finding All-Weather Performers in the Australian Share Market”, parts 1 & 2, which are exclusively available for paying members at FNArena. In 2015 FNArena published his eBook “Change. Investing in a Low Growth World”, available at Amazon and other major online distributors.
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. If Twitter is your thing you can follow Rudi's robust commentary @Filapek.
“Dividends come out of cash. And that's why you should pay attention to dividends as well, because you can't fake cash. Somehow you need to pay that one out. Earnings you can fake, you can pull forward, you can, you can postpone, you can take below the line, above the line and cetera, cetera. But in gross terms, PE Ratios have been around for more than a hundred years. But they became very, very popular over the past three decades, I think. And, and for some reason over time, and you see that a lot of investors doing that, they are simply using it as a standalone number.”
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Shares for Beginners.
I often make comparisons just with daily life to just make it easy to understand. If I would come to you and they say like, I've bought something for $12 at the supermarket, it was extremely cheap. And you would think like, Well, what has he bought, man? How do I know whether $12 is cheap? Yeah. And it's, and it's exactly the same in the share market, Man. I've bought something at a PE or Full in the number and, and I go like, Oh, Bargain. And you go like, Well, what was it? I mean, it's not the PE itself that shows it to you.
Good day and welcome back to Shares for Beginners. I'm Phil Muscatello. How do investors measure the value of a company on an apples to apples basis? How much are investors willing to pay for a company? Like everything in investing that starts out simple and gets complicated very, very quickly. To try and clear the air without muddying the waters. I'm joined by Rudi Filapek-Vandyke from FNArena. G'day Rudi. Hey,
Good to be here.
Thank you very much. Finally, And, and as you were saying before we went on air, you like to be invited. Everyone else hassles to come on this podcast, but not you very shy.
Rudi (1m 7s):
Ah, I wouldn't, I wouldn't say shy, but the first part is correct.
Phil (1m 10s):
So as editor Rudi founded FNArena in June 2002, having successfully built up an online financial news service in the Netherlands, his active career extends beyond three decades, including as publisher of printed magazines, printed magazines. That's a I know a thing from the past, isn't
Rudi (1m 28s):
It? I mean, I almost feel like I'm grandpa now. Yes,
Phil (1m 31s):
Yes. And you were an investigative reporter as well.
Rudi (1m 35s):
Yes. I once upon a time thought that news is what you have to be, what has to be found. Yeah. Not, not, not not taken from press releases,
Phil (1m 45s):
But because that's what journalism is these days, isn't, it's just so much of it's reprinting press releases.
Rudi (1m 49s):
Absolutely. And, and there's a, there's a multiple of reasons why that is, but, and, and no, surprisingly we see decline of the importance of of, of regular, what people call mainstream media. And the emergence of social media hasn't helped either.
Phil (2m 5s):
So I think it's just podcasters these days that are doing the investigations, aren't they?
Rudi (2m 10s):
Well, luckily we still have some investigative journalists here and there, and, and they do, they do do good work. We should all appreciate that.
Phil (2m 18s):
Okay. Today we've decided to get together to discuss the PE ratio. And this is based on a recent article that you wrote in your newsletter, and it's titled, PEs: the tool that both enlightens and confuses.
Rudi (2m 31s):
Yes. Yes. It's the PE ratio after three decades in finance. There's very little that surprises me, but one thing that does surprise me on occasion is that one of the tools that is being widely used, like just about everyone use it one way or another. And it's, it is used in so many wrong ways. And, and, and also even, even I have to have to add here, even many of the professionals are using it in ways that sometimes I'm literally scratching my head and I always feel the the need to, to correct them when I'm in, in a TV studio or radio studio.
Rudi (3m 12s):
And on occasion I do, and I can see how embarrassed they are. And of course, since I'm on Twitter, there was a, there's a regular verbal fight going on. The irony is, and this is one of the, the points i I was making in that article from this week is one of the ironies is, is that it all sounds very simple. I mean, and, and nobody would disagree with the fact that if you want to be a successful investor, you buy assets at a low price. And, and you might if you choose to sell them when they're, when they're overvalued. The irony is that's not reflected in a low PE versus a high PE. There's a lot more to it that a lot more context required.
Rudi (3m 55s):
And one of my favorite comparisons is like, you can, you can probably hear from my accent. I grew up in Belgium and be a we learn French at school. And one of my favorite observations is that investing is actually a little bit like learning French. The teacher teaches you the rules. And then there's so many exceptions to every rule that if you don't know the exceptions, you actually can't speak French. And that's a little bit like investing as well. Like yes, we, the, the, the price earnings ratio can, can be a very handy, and it's, it's readily available tool, but there are so many, there's so many, so much context needed.
Rudi (4m 36s):
There's so much, there are so many exceptions to the rules that if you simply use it as a a one size fits all, you're gonna be desperately disappointed. And, and if you, if you are successful, it'll be more luck and than art.
Phil (4m 53s):
So what is the standard definition of a PE ratio? Let's go back to the basics. Yes.
Rudi (4m 57s):
Let's, let's go back to the basics for people who are maybe not necessarily familiar with it. So the price earnings ratio is literally the future profits that investors pay in today's share price. So what you do as an investor is you, you divide the, the profitability of a company by the number of shares that are outstanding, so becomes earnings per share. And that's, that gives you a, a, a low number on, on, on all occasions. And, and then you divide the current share price by that number. And that gives you something between, let's say for the sake of argument between three and 85.
Rudi (5m 38s):
Now, the common perception is that 85 is very expensive and three is extremely cheap. But that's not always the case. And I'm gonna actually say in, in most cases that that's probably incorrect.
Phil (5m 51s):
And some people think that the earnings are the dividends, but it's not the dividends, is it? Yeah. What are
Rudi (5m 56s):
The earnings? And and that's also good that you point that out. Yeah, Yeah. One of the, like with everything, there are many traps and, and, and, and obfuscations happening. And, and if you talk to any accountant, he or she will tell you that profits, earnings, that's by all means, that's an accountancy outcome. So that's one, one of the traps is of, of b is simply relying on what the company purposes. And that may not necessarily be reflective of its underlying business that is part of the context that you need. But just in general, what you do is it's not dividends. Dividends are a separate tool. And I personally, I pay attention to dividends.
Rudi (6m 37s):
Cause dividends come out of cash unless the company takes on more debt. But okay, again, context, but dividends come out of cash. And that's why you should pay attention to, to dividends as well, because you can't fake cash. Somehow you need to pay that one out. Earnings you can fake, you can pull forward, you can, you can postpone, you can take below the line, above the line and cetera, cetera. But in gross terms, PE Ratios have been around for, for, for more than a hundred years. But they became very, very popular over the past three decades, I think. And, and for some reason over time, and you see that a lot of investors doing that. They, they are simply using it as a, as a standalone number.
Rudi (7m 19s):
And low PE is good, high PE is not good, and that's incorrect.
Phil (7m 25s):
So what are we looking at when you go into your brokerage platform and you, it tells you what the PE ratio of company is. What is it they're actually showing you? It's based on previous figures. The last
Rudi (7m 37s):
That that's, that's also a very important one. Yes. So traditionally what we do as investors, we look at last year's profits and we, we calculate the PE on the base of that one. Now, I happen to believe that that's also incorrect because financial markets are forward looking. So the service I provide with FNArena is we always, I actually refuse to add the backward looking PE ratios on my website. I, I want investors to look forward. Now the criticism is always, but those forecasts are incorrect. True forecast are as rubbery as you can make them just listen to any weatherman on any on any day.
Rudi (8m 20s):
But you can't fix the malleability of forecasts by looking in the past because the past is, is not gonna show you the future. I mean, it's that simple. And, and the easy as example to illustrate that with is, and this is also how financial markets constantly look forward and why the PE ratio can be very confusing. See, in 2020, all, all the profits would take a big dive because we are going into, into lockdowns, People can't go to work, people get, get ill, we, we can't spend, et cetera, cetera. So pretty much most of the, the companies in in Australia and and globally have a big dive in their, in their profitability.
Rudi (9m 1s):
At that point in time. A lot of people get confused because the average PE ratio both here in the United States actually shoots up and very, very high. So the PE ratio is very, very high. The immediate commentary you will find across the globe is markets in the bubble. Whether that's the case or not is debatable, but you can't tell from the PE ratio. Cause the PE ratio has to be extraordinary high cause the profits are falling off a cliff. And unless you think that those profits falling off a cliff will remain that low, then PEs are too high. You know what I mean? Or too low I should say. So they, they go be shoot up on the expectation that once we get through the pandemic profits will, will normalize and therefore the PE ratio will basically correct by itself.
Rudi (9m 50s):
That's how it works. So this is example number one, but if you look at the other context, you joined absolute wrong conclusion, right? And this is what you regularly see with, with, with, with companies is that if the market is anticipating that growth will recover from a very low level, it will place companies on a high pe. Because if you placed on a low pe, that means you've given up essentially. And this is why for example, a, a stock that is, has been sold off. It's, it's it's lowly priced and then the PE is very low. It actually means the market is giving up. The market is telling you this company is not going to recover. Know, I mean now the market is not always a hundred percent correct, but in those cases, and there are quite a few examples in the past, I would be not very confident in going against the market.
Rudi (10m 42s):
I mean, in those cases, the market more often than not has really figured it out. Right? And we have some examples from the recent years. I mean our member probably one or one of the examples over the past decade was Slater and Gordon, we also had a company called Paper Links. And our member, I mean all the people getting excited about paper links, or Slater and Gordon when the PE was very low and the share price had come down a lot. And you can just watch from the sidelines and telling people, listen, you, you are making a big mistake here by thinking that the low PE at the low share price is, is an excellent buy. And as it ultimately turned out, there's no paper links anymore.
Rudi (11m 24s):
And Slater and Gordon ultimately lost, Listen to this one lost 96% from from its peak, right? And this is why people go wrong, right? By automatically assuming it's a low PE, she price has come awful lot. I am sitting on a bargain here. Why is nobody buying this? Because you are the joker in the game now. So it should be, this is counterintuitive, but it should be that the share price that falls as for examples we've seen, seen recent years, the likes for example, over Blackmores. When Blackmores came off from $200 to something in the 80, $90 range, it had a high PE and you see a lot of people saying like, it's not cheap enough.
Rudi (12m 5s):
Right? Well that's a misunderstanding of how PEs work, right? Probably the better, the better example is, is BHPI mean the irony is that BHP at the moment, I believe for memory is trading around a PE of 12. That is relatively high for commodity producer. But then BHP is one of the largest companies in the world and it, it has quite a suite of products to, to rely on. Maybe a better example would be Fortescue, which predominantly is one designer at the moment. Fortescue is trading on a PE of nine and a half. That seems like, ooh, that's, that's not not quite high.
Rudi (12m 45s):
Yeah. But the nine and a half quickly becomes seven next year. And that gives you indication that analysts actually forecasting that iron ore will not remain at last year or this year's price level. And that will translate all else being equal in in less profits for Fortescue. So the true PE is actually seven and seven is not a great PE to, it can still go lower. By the way, cPo producers at the moment are trading on very low fees. They're probably more like five. And five means because we have peak coal prices, five means the market is pretty much convinced that the current exceptionally conditions for that sector, it's not gonna last
Phil (13m 29s):
Because that the pay would go up if people were buying and the price was going up. Yes, exactly. That's, that's even like with White Haven for example. Yes.
Rudi (13m 39s):
Phil (13m 40s):
Haven acting like a stunk as we say on Twitter.
Rudi (13m 42s):
Well the thing is it works very well in hindsight, PE don't give you any sense of timing. So the fact that White Haven is trading on let's say five times next year's profits, it doesn't mean it can't go to three, which basically means the share price will just go higher. Yes. But what is at some point will happen is that the coal price will drop and then if you then extrapolate the following coal price in the share price, then the B automatically goes up a lot. Some people might have to get their head around this, but in terms of practical examples, between the middle of 2015 and and early 2016, that was a terrible time for the local banks and for the resources stocks.
Rudi (14m 23s):
And by 2016, the PE of the sector in general had risen above 20. As it turns out that that was the moment to buy resources stocks, that was the, the highest PE for the sector in more than a decade. The share prices were low. Yeah. But the profit forecasts were even lower. So the basically the, the prices for commodities had to reach the bottom basically and had had fallen a lot over that period. And if that happens, then the P becomes really, really high, which is the time you buy them. Because at another time, if you go back to 2008 for example, PE will a lot lower.
Rudi (15m 7s):
And that's why at the point in time you, you didn't wanna buy BHP at 50 bucks, but you may wanna buy that 13. And the irony is when it was 13, which was was was in that period on some forecasts, I remember on consensus forecast for BHP specific, the PE had risen to 80 80 0. And I always remember on Macquarie's forecast it actually match matched 100. All right. And it's, and I do remember because I pay, nobody knows anything, do they? I do. Exactly. I do pay attention to those things. Yeah. And that gives you, again, an example, like one of my favorite stocks in the market is, is is a stock like, like CSL.
Rudi (15m 47s):
And people would would say like, you can't possibly buy CSL at the PE of 30, which is around where this is now, but they should have bought BHP at 100 or at 80, right? And that's the irony. And again, a PE needs context. Just to give another example where PE can be, can be very handy, is when you compare companies in the same sector. Cause you see this is where also come to the exceptions in learning French. Not every sector is trading on the same pe I mean banks for example, until recently, banks would never trade higher than a PE of 15, only CBA Commonwealth Bank on occasion, which is as high as 18.
Rudi (16m 29s):
The other banks never get that high. That's because PEs for banks actually don't really, and also because banks are leveraged business models. I mean they, they could possibly never trade on a, on a 30 or 40. The CSL does. Now coming back to to, to a company like healthcare, Healthcare stocks, Australia, we, we have some of, some of the world's best Resmed Cochlear, you could potentially add Sonic Healthcare, definitely CSL. Now they trade. If you look at, if you look at with exception now of Sonic, which again explains the dynamic that's specific for so Sonic at this point in time. But the likes of of Resmed Cochlear CSL, I, the market is not, there's a lot of intelligence in markets.
Rudi (17m 15s):
Yeah, I had a look at Resmed and CSL recently. If you go two years out, then both are trading on a PE of 27. That's probably not a coincidence. Mean the market's figured it out. They have similar dynamics and, and two years ahead, they're pretty much trading on, on 27, 27 more expensive than three or five for a coal producer. Probably not. You have to see it in, in the sector and in the context. Now, why are the likes of resmed and, and CSL trading on, on let's say 27 2 years out is because the profit trajectory for both companies is, is relatively reliable.
Rudi (17m 58s):
I wouldn't say stable cause not stable cause it's growing. But it's very dependable, very forecastable, very reliable. Yes, there are variations, yes, bad things can happen, but both grow independently of the economy. We are going towards a recession. I mean that is almost a given. Even if the recession doesn't show up in the local GDP figures, it'll show up internationally, right? Global growth next year is predicted to fall below 3%. That is usually a time when bad things happen. And so we should be prepared for bad things. Usually what happens is if we are preparing for bad things, then the likes of RES and CSL become in focus with investors because those companies are, are rather unlikely to issue a heavy profit warning, which you have more chance of happening with with this small cap technologies stock or a highly leveraged bank or, or a small cap retailer.
Rudi (18m 55s):
Cause if consumers close their wallets, then what do you do? Right? You can, you have to discount and that means you, you make less profits. And that all those factors are ultimately translated in, into different PEs for different sectors.
Phil (19m 10s):
Okay. I just wanted to unpick, there's a couple of things to unpick there. So I just wanted to, the PE ratio or the PE metric actually works a little bit better if it's only applied within a a sector.
Rudi (19m 23s):
Phil (19m 24s):
So you can't use it to say, you know, work out the relative value of a BHP and a CSL because they're in different Exactly,
Rudi (19m 31s):
Yes. And that's less number one, which a lot of investors have yet to understand and yet, yet to incorporate. I i I often make comparisons just with daily life to just make it easy to understand. If I would come to you and they say like, I've bought something for $12 at the supermarket, it was extremely cheap. And you would think like, well what has he bought? How do I know whether $12 is cheap? Yeah. And it's, and it's exactly the same in the share market mean I've bought something at a PE of fill in the number. Yeah. And I go like, oh bargain. You go like, well what was it? I mean, it's not the PE itself that shows it to you. Yeah. And also if I, if I go to a to a to a car shop and I go like, well what do you have?
Rudi (20m 13s):
And if they say to me like, Well I have a car from eight $1, I go like, Yeah, probably not, probably that doesn't have wheels or anything or the engine is gone. Right. Or it's really old because you, you realize $800 is nothing. Yeah. The same question you should ask in the share market. Yeah. If you find with the exception of commodity stocks, which which might be a peak prices, but if you find a financial or an industrial stock, if you find at a very exceptionally low pe papering sleigh and Gordon, you should really start asking questions. Yeah. It's not a great bargain. Yeah. It's Paul be very problematic. The other thing is if that, if, if one of the car dealers offers me a Ferrari for $150,000, it sounds a lot, but it's a bargain.
Rudi (20m 56s):
Like who buys a Ferrari for $150,000? You know, the only problems cause is I don't have a lazy $150,000 somewhere. But it gives you an idea that the number itself doesn't give you the full picture. It needs context.
Phil (21m 9s):
And also implicit in what you're talking about is one of the questions which I didn't get around to asking though. And that's the difference between a trailing and a forward PE ratio. That that's what you're talking about when you, that's what I looking, looking backwards
Rudi (21m 21s):
And looking, looking forward.
Phil (21m 23s):
Yes. So where do the forward estimates come from?
Rudi (21m 25s):
Well, they come from analysts forecast essentially. And, and one of the things we do with FNarena, we, we combine the analyst forecast and, and we create a consensus of
Phil (21m 34s):
What's, what's an analyst.
Rudi (21m 35s):
Well, most stock brokers have have analysts, which on occasion they pay a lot of money. And these guys are supposedly very good with numbers. And, and, and if they're experienced enough, they, they learn their, their industry. And, and often, like for example, in the US in particular also in Australia, we, we, we often have people from the industry. For example, you might have XX mining engineers for example, that are now mining companies.
Phil (22m 5s):
My, my last guest in fact was mining become a mining.
Rudi (22m 9s):
So that's the kind of, and they, they basically, their job is to analyze companies and to decide which companies is, is looking good and which companies looking not that good. I mean, we're not the only ones in the world doing that. I mean Bloomberg, Reuters, Thompson Reuters these days, they all, they all do it. And and that gives you an idea about mean the forecast. I mean,
Phil (22m 29s):
And, and then there's a consensus as well.
Rudi (22m 31s):
You're looking yes, you build a consensus, although you, although you have outliers of course, because a forecast by one analyst is, is just that mean. And, and then even that, it doesn't mean that the consensus always correct, but just like the weatherman, it gives you, it gives you an idea. If if the weatherman says we're gonna have two weeks of pouring rain, if it's 10 days, if it's seven days, I mean he's wrong. Yeah. But it might still have been a good idea to have umbrella with you. Right. And it's the same in the share market. I mean, if they say this is gonna happen and it's not quite correct, which usually is the case, the direction of often is, is, is is equally important know, mean. It's good to know that a company that has a few bad years ahead of itself or even one bad year or whether it's it's, it's just, it's just an ongoing strong growth story.
Rudi (23m 21s):
Right. And by no means saying that investors should always ignore the past. I mean I'm, I'm one of the people who often pays a lot of attention to the past cuz the past, the history of a company can give you some good ideas about what that company is about. Its track record, how does it usually perform and all of that. It also shows you how cyclical companies are. And, and if you see these huge swings in, in, in company profits, well that gives you an idea what type of company you, you are, you are investing in or you're
Phil (23m 52s):
Looking at and what and what kind of economic conditions that happened in Exactly as
Rudi (23m 56s):
Well. Exactly. And for example, I mentioned earlier that because we have so much tightening by central bankers this year and high inflation interruption, et cetera, it doesn't take much before we have a global recession next year. Which again, if you're looking forward, that should all else bring equal be showing up in the forward forecast. The problem at this point in the cycle is that that's not the case because neither economists, neither analysts have an idea how to price that in, how to project that, how what did that means for, for companies. So as an investor, that's the context that you have around today's valuations and price earnings ratio.
Rudi (24m 37s):
So the obvious thing to conclude here is that the forecast for let's say a Resmed or a CSL should be all else being equal, much more reliable than for Orica or Fortescue metals or even for, for ANZ bank. And that also translates in why some stocks at particular points in the cycle become by default more attractive because man, less chance of a very bad experience basically. But the irony is that once you come out of the recession and the market starts looking forward again, then it's often the shittiest companies that perform the best because they're probably sold down the most.
Rudi (25m 20s):
And if we do get economic recovery out of the depths of the recession, then they usually stand to benefit the most. And the irony then is that they are probably trading at that point in time on the high pe which again confuses know, I mean, how can this be a good buyer's, a high pe Well it's because there's a recovery most likely around the corner. And that's being reflected in the PE
Phil (25m 45s):
Is is that what's known as a defensive stock When you look at say a CSL or a healthcare stock, is that part of that overall umbrella that we say defensive? Yes. When we are battening down the hatches for it is very possible downward future moves.
Rudi (25m 59s):
It is, and it, it is part of my journey in discovering y PEs were not working the way that everyone made me believe that they were. Because this is always not, not the first downturn, not the first bear market. We are encountering in the share market. And I remember in previous times when people were saying CSLs defensive and I literally questioned, I said like, well how can it be defensive if it's trading on a PE of 38 or something along those lines, You know what I mean? Shouldn't it be online or 12 Yeah. As a defensive stock. And that is I think, the logical conclusion you at first draw because that's what sort of the general consensus tells you.
Rudi (26m 40s):
I mean like in in times of, of economic duress until you start investigating and and you learn that's not how it works essentially. I mean the iron in Australia is that the index essentially hasn't moved since 2012. We briefly superseded the, the peak from, from late 2007. So it has been a little bit of a lost decade in Australia. And the irony is that the gains in the index that have been made over that period, they've all been made by high PE stocks. Yeah. The likes of a Goodman group. Macquarie Group CSL
Phil (27m 17s):
West has so many value investing funds under performing for you. You always warning about what's around the corner.
Rudi (27m 25s):
Phil (27m 26s):
Or playing it safely.
Rudi (27m 26s):
And it's, and it's also, there's also big argument to be made that what worked very well in in previous decades is not necessarily working today. Things have changed so much economy has changed, the
Phil (27m 38s):
Rudi (27m 38s):
Technology has changed. The composition of the share market has changed. And most importantly, right, a lot of value investors are very stuck in old ways. And for example, the intelligent investor, Benjamin Graham, he literally writes that he doubts whether forecast by Wall Street analysts at a lot of value. But he does say unless they change in, in the future and is dead a long time. And I think since then the sector has become a lot more sophisticated. One of, one of the examples I couldn't point out for that is
Phil (28m 11s):
Yes, you you brought a, a random access paper-based device a lot today.
Rudi (28m 16s):
The other book I have yet to encounter a great investor who doesn't read and I read a lot, I read books but also read a lot of research as well, which makes me learn lot. One of the pleasant surprises I came across recently and I, and I've, I've mentioned the book this, this, this week in my, in my story. Cause I still wanna do a book review, but time is not always on my hands. So this book is called The Little Book of Valuation and the subtitle is How to Value a Company Pick Stock and Profit. And the author is, as with Aswath Damodoran, I think I'm pronouncing it correctly now. He's a professor in the United States and he is repeatedly the best expert or the highest regarded expert on company valuations of our lifetime here in our time.
Rudi (29m 5s):
Apparently he's, he's a terrible stock picker, but he knows his thing. So what what made me realize, which I subconsciously had concluded myself, is that it's not just a difference in sectors. There's actually an argument he makes in this book. It's the different phases of a company's development that require a different way of, of valuing them essentially. So you have startup up companies, you have companies that move to the, to the next phase. Ultimately they become more mature and then start paying dividends and all of that. And they have a steady client base and then there's, there's a final phase which the decline. I mean, and one of the things he worries about in the book and he warns about is that when companies go and decline, you often see that translating into a low PE ratio cuz the market is telling you that company is, is on the way out.
Rudi (29m 59s):
Now those processes can sometimes take a long time. And again, by then buying a low stock means Leigh and go for example, not Leigh and go goes bankrupt, but there's there's a lot of energy not no longer in the company. And you have them in the US of course as well. I mean, General Electric would be one of those big examples. I mean the big technology companies from the nineties, I mean they're rarely featured today. IBM is a great example. They on many occasions look relatively cheap if you only look at e ratio. But they're dogs, they don't perform and it's not like they pay great dividends either. So there's more to it, there's a lot more to it than even than I practice.
Rudi (30m 41s):
And it also made me realize that you have to be a little bit of a freak to, to constantly put your nose into the numbers and figure out which sector or which company. Then in that sector, in the particular phase it is of its own development, how to value that. The other thing which on companies and even analysts constantly struggle with is the difference between companies. And you see that in Australia as well. So I I call that the, the premium. Some, some companies, they're always trade the premium. And I've made those comparisons in the past often. For example, REA Group always trades at the premium in comparison to domain. So which ones that REA Oh yeah, okay.
Rudi (31m 22s):
In comparison to Domain. And the result is that often people go, Oh, by domain, bio domain, huh? I go, No, no, you buy REA. Yeah. And in the banks, the best example is the banking sector locally. Right. Ever since I came to Australia more than 20 years ago, people have constantly been complaining that CBAs too, too expensive quotation marks. Right? And that premium has never disappeared with exception of the depths of the, of the gfc. And, and after that it quickly returns. And, and I can, I can tell from, cause that's one of the things we do. We, we monitor analysts on a daily basis and analysts are on many occasions struggling with the fact that why is CBA so much higher value than the other banks?
Rudi (32m 8s):
And, and always the, the kneejerk responses by any, that, by Westpac, by National Australia Bank, sometimes even by Bank of Queensland, by Suncor, by Bendigo and Adelaide Bank, on most occasions, the the so called catch up by the, by the cheaper banks. A it can sometimes take a long time. Secondly, it only works temporarily because I've actually done the numbers on a number of occasions. If you have a longer term view than the irony is that the bank that offers you the highest premium, so basically the highest PE and the lowest yield, because it's it's trade on, on the premium valuation, it gives you the better returns.
Rudi (32m 50s):
All else being equal cba, when there's a crisis, it falls less. And in the good times it gains more than all the other banks. So again, there's the irony that you have to understand why some companies trade at a premium, essentially. Why is FerrarN worth more than a Volvo? Right? And man, it
Phil (33m 11s):
Is being half Italian. I can tell you straight away why exactly.
Rudi (33m 15s):
And the same principle isn't the share market.
Phil (33m 17s):
Okay, Rudy, so tell listeners about F Arena and how they can get in touch with you and especially your Twitter profile as a fellow. I'm always going about the Twitter's my favorite of social media platform, which a lot
Rudi (33m 29s):
People can understand. I like to challenge people sometimes on Twitter and, and, and still the up a little bit and low and hype just could be one of them. But FN Arena, that's the sort of f from Freddy and the n from Nelly, you could argue it stands for financial news, but we just thought like FN mean, it's something that that just stands out a little bit on its own. It doesn't tell you what it is, but we build a business around making the world of the experts more transparent. And we started off by, by collating all the information from the major stock brokers and we made it available. And over time we, we create a lot of services around that. We do our own calculations, we write stories, we, I do my own analysis on top of that because we've been doing it for such a long time.
Rudi (34m 16s):
We, we have our own data again, that gives us another tool to analyze the markets and cetera. We are probably one of the few services in Australia that's truly independent. So we have no, no tie with any of the media companies, no investment banks, et cetera. And we are probably also one of the few that's very fearless in what we do. Very truly independent. And again, I know I'm talking my own book here, we're probably also one of the few that had, that combines a lot of the experts with a lot of the retail investors. And I often joke to retail investors telling them, you know, your stock broke is probably using us and it's probably using us to give you advice or the financial planner or the fund manager.
Rudi (35m 1s):
Know what I mean? Because they're all in there. Right. And that's because we, I think we're, we're relatively cheap price level and, and we offer a lot. We like a vcr. There's so much that some people are just being discouraged by, by the, just the sheer amount that we offer.
Phil (35m 17s):
Yep. I've already got the daily emails, haven't it? One or two a day.
Rudi (35m 21s):
Yes, it's a lot. But we've been doing it for, for a very long time now. We've come I think we've become quite good at it. And, and most importantly, and that's what, that's also one of the things that people really like about us. We're not pushing anything. I mean, I don't personally, I don't care how many, many shares you buy, how many cares, how many shares you sell. I'm simply passing on insights, information, data. And our biggest thing is education mean high. Pe lope will be one of them. But there's so much more to learn about share markets and, and instead of giving people a fish, I think is better to teach them how to fish. Cause then they can invest every day.
Phil (36m 0s):
Rudi Filapek-Vandyck, thank you very much for joining me.
Rudi (36m 3s):
Phil (36m 4s):
If you found this podcast helpful, please tell a friend, especially if it's someone who needs to start thinking about investing for their future, you'll be helping them and helping me to keep their show on the road.
Chloe (36m 14s):
Shares for beginners is for information and educational purposes only. It isn't financial advice and you shouldn't buy or sell any investments based on what you've heard here. Any opinion or commentary is the view of the speaker only not shares for beginners. This podcast doesn't replace professional advice regarding your personal financial needs, circumstances, or current situation.
Phil (36m 33s):
And thank you for listening to my podcast.
Shares for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Shares for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation