Investing and intrinsic value

One of the things that being a part of the technology industry comes with is the awareness that there’s a lot of money in technology. Almost everyone knows of someone working in a startup or making money off of technology companies. Personally, I’ve invested small amounts (up to $1,000NZD) into NZ tech companies here and there. These have resulted in some gains, some losses. Overall, not much either way (probably would be about “even” if I kept track of things).

One thing that always did bother me was that I had no idea how to calculate the “fair price” (also called “intrinsic value”) of a company that isn’t paying any dividends. (I “roughly” knew how to work out the value of a company that was paying dividends).

A few months ago, I heard about Hatch Investments and that they allow you to buy US stocks directly from NZ (ASB only let you buy NZX and ASX listed stocks and Sharsies didn’t have US stocks, but apparently this is coming).

After signing up to Hatch I first just bought some Index funds, figuring it was a low risk way to see how it all works. The way it works is roughly:

  • Transfer NZD to Hatch bank account
  • Wait a (working) day or two for the money to get converted to USD and made available in your account (not sure whether they take a cut here)
  • Money is there to invest!

Then, at some point I started wondering about individual companies, but still had my doubts as to how to actually work out the “value”. With this question on my mind, I read through one of the Hatch articles, where they profiled a NZ investor by the name of Tom Botica. This led me to check out his Youtube video explaining his method of working out intrinsic value. Going through it, the method made a lot of sense to me, in that I could understand it and couldn’t see any obvious problems with it (it does come with caveats that it doesn’t apply to stocks not from well established, large capitalization companies).

So, armed with a spreadsheet, I was kicked into action by the crash around March 20th, triggered by the COVID-19 virus. I set about working out the intrinsic value for Amazon and Google stocks. Lo and behold, they were under priced and I bought some.

Will this bet pay off? I don’t know. In the short time since then (about six weeks?) a lot of people have started pointing out that the market recovery is not logical and that it resembles a “dead cat” bounce. This is probably true. What will the world look like in a year or two? Who knows.

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