I just received an interesting email from Dennis with regards to the discussion of HDB prices being reasonable or unreasonable.
The property director that said new HDB being 15% less than re-sale = reasonable pricing reminds me so much of how people confuse price and value.
Price = what you pay
Value = what you get vs what you pay
Like most financial consultants, he is just using a present price to benchmark what he deems is cheap. In stock pricing, most analysts use peer comparison to benchmark value and hence their flimsy buy, sell, hold calls.
My simple take on valuation is: What sort of reasonable cash flows can you expect out of that asset over its lifespan, taking into account all necessary capital expenditure to maintain that asset? Hence rentals (net of expenses, taxes, upkeep, ect) and company cash flows (net of maint. capex and I also count A&P expenses as capex) can now be used to quantify value. Dividend yield is not a good gauge,in my opinion. Reason is the sustainablity over a span of time. Even the business trusts, shipping trusts and REITs have shown the folly of that approach. Some even take away more cash from you than they have given since IPO! Just count how much they take in rights issue alone.
With this approach, one can now determine a reasonable price to pay for an asset after taking into account a suitable degree of margin of safety. And if you can do that, no need to stare blindly at stock prices to determine whether it is cheap or not. A stack of annual reports + IPO prospectus and calculator will suffice. And that should be the aim of every investor to be able to determine what an asset is worth.
So people, I do not buy the approach of historical pricing as a benchmark to realistic valuation. It is just a lazy approach without rational thinking.
Happy investing but tread with caution.
