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“There is no formula to figure (intrinsic value) out. You have to know the business (whose stock you are considering buying)” - Warren Buffet
Over the strategic long-term there is no more important or more potent force driving the markets than the true worth of a company as based on its underlying fundamentals - intrinsic value. ? What defines it? How is it calculated? Is there one true measurement for intrinsic value, and when will the intrinsic value be recognised? The vast majority of "value" approaches are based upon a standard discount cash flow (DCF) model (i.e. Constant growth models, two-stage models (Supernormal Growth), three stage models, and so on.). Each of these models attempt to calculate the intrinsic value of the stock by calculating the Present Value of a stream of "cash" that is expected to be generated by the business (from Dividends). Accordingly, valuation of an asset or stock requires estimating both the expected cash flows and the discount rate (% return). This is no mean feat! Ultimately this process is intended to reveal the intrinsic value or true value of a stock. The value the proponents of these methods claim that this is all that rational investors should pay for the stock.  To us, it seems that these financial estimation models seem to be more about confirming consensus opinion than offering any prescience. So we consulted Dr. Price, a professor of Mathematics, and leading international authority on the investment strategies of Warren Buffett. Dr Price was equally incredulous and says “All I can say is that it is hard to believe that such simplistic and unreliable material is still taught in universities and promoted by stock analysts”.
According to Dr. Price there are two fatal weaknesses of any DCF model: The first is that; DCF models are unstable--small changes in the input values can lead to such large changes in the output, that almost any number can be obtained. This instability is compounded by the fact that the input variables are impossible to estimate with any degree of accuracy. For example, the entry for the final growth rate requires that you estimate the growth rate of the cash not for another ten years, or even twenty years, but out to infinity! This paractice persists, despite large studies showing that analyst forecasts for earnings over five years are no better than random.The second fatal weakness is that just because some model says it is generating something called intrinsic value does not mean that it is providing anything that really is "intrinsic value". And it certainly does not mean that it is giving something useful for investors. For example, just because a stock is undervalued (by some model or other) does not mean that it won't stay undervalued. This is quite different from saying that if a company has a strong economic performance, then eventually the market will acknowledge this by increased stock prices. When to buy?
As engineers we always seek an empirical answer to the world around us; we seek
In doing so we have found an area whereby applying telecommunications “digital signal processing” to the time series of market data we are able to better detect the onset of cyclic and/or trending conditions. By simply shifting our perspective from time into the frequency domain enables a superior series of processing techniques and tools, these techniques literally re-invent technical analysis. One could say they are the next generation of technical analysis. What’s more, these techniques can be applied to existing technical analysis tools to improve their capability, or to derive new, enhanced-performance indicators. “What can these techniques do?” They remove noise; provide reliable signals, predict trajectories and detect the onset of cycle phases. As a consequence they enable you to predict market turning points, trajectories, trends or cycles and breakouts in time series data like stock prices in a timely fashion so profitable trades can be entered! What’s innovative is that they can do it with zero lag! That’s right, with zero lag! Imagine the edge that would give you in the market!
Our approach draws from the engineering field of digital signal processing: real time analysis used in the fields of geophysical engineering, ballistics used to plot missile trajectories, and telecommunications signal processing and speech filtering as might be used on your mobile phone handset! So, armed with this applied science discipline we can enhance and improve the good indicators used in technical analysis for entering and exiting trades, and turn them into great indicators. We haven’t the space to detail the mathematics behind these techniques here, but you can call it Rocket Science. Named in homage to John Ehlers book “ Rocket Science for Traders”. John Ehlers (a communications engineer) has developed a number of indicator combinations which allow the investeor to make timely market entry and exit decisions. |
What to Buy?
provable outcomes, with hypotheses which can be tested using real world data. At Investech, we wanted to find an area where the significant discipline of engineering, more specifically, telecommunications signal analysis and its mathematics, can be applied to market performance. After all, price and market movements are just signals! 
