I had a friend drop by the other day wanting to talk about model price. A summary of the conversation went like this.
An Open Mind!
Friend – I don’t get model price. What are you trying to achieve with this purple line?
ModelPriceGuy (MPG) – Our Model Price calculation is our assessment of what the stock in question is worth or fair market value. Everyday we collect data such as changes in market price, earnings estimates, interest rates and other variables. Once a daily sweep of data is complete at the end of the day, we run and compute model price every single trading day. When the computer run is complete, around 6:30 pm EST, a new dash is placed on the chart and model price number is posted.
Friend – Can you give me an example?
ModelPriceGuy (MPG) – Sure, let’s take earnings estimates. We use consensus earnings estimates for the calculation of model price. Analysts’ estimates are in flux all the time as news of the day gets disseminated to investors. Most market participates don’t even realize this fact. So we collect this data automatically on a daily basis and use this data for our calculations. Some changes in estimates can be large so investors using model price can literally see the impact such revisions have.
Friend – Can this really be true? What about intangibles like management?
ModelPriceGuy (MPG) – Simply stated good management usually has good numbers over a period of time. Good management not only runs their business but also can increase the valuation of their business through model price. Certainly one could interview and listen to what management has to say however what I’m suggesting is the numbers should drive the story for investors not the story itself.
Friend – What! You don’t read the business press?
ModelPriceGuy (MPG) – That’s right, we try not to. This only confuses us to a certain point. In our experience most investors lose money in the market because of stories. Every stock has a story and it’s hard to sell a position once the individual has spent so much time learning “the story” and they go down with the ship, if you will. So forget the stories and look at the fundamentals. It’s the fundamentals of the business that makes you money not the story.
Friend – Are you telling me this simplistic looking purple line contains all the fundamental information I need to know about a stock I’m interested in investing in?
ModelPriceGuy (MPG) – In a word, yes! Not only do we calculate model price everyday but also we show you a history of model price over a period of years. Is model price going up, down or sideways. This is valuable information. All successful long term investing is about compounding. On our constructed charts we use a logarithmic scale so you can see compounding model price with your own eyes.
Friend – Sounds like a bore fest! I’m looking for excitement.
ModelPriceGuy (MPG) – Then look elsewhere. Most big cap companies compound 5 to 8% percent a year. Investors can achieve this return only if they buy at model price and model price grows in the future. Again, most investors purchase equities at a premium to model price reducing their compounding returns significantly, if not negatively. The big advantage individual investors have is buying companies at a discount to model price. Want to be richer than Warren Buffet? Buy a large company (S&P 100 size) at a big discount to model price on a company growing 5 to 8% compounded and never sell, simple. (Coca-Cola is an excellent example of this point) This happens when big companies stumble or a major equity correction occurs like in 2008.
Friend – O.K. I hear you. Let me look at these model price charts with new eyes focusing on this model price (purple) line. However, I want to come back next week to discuss these parallel lines. What do you call them, EBV lines?