In value investing determing the true value of a COMPANY instead of a stock price is crucial.
This little indicator shows the "Intrinsic value" of the choosen stock meaning the value of the stock in 10 years time. Calculation is based on historical book value's average annual growth rate and dividends paid.
Since this is about long therm investing, use monthly charts.
"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.”
– Warren Buffett
One way to calculate that is by the growth in per share book value and dividends taken in the forseeable future (10 years) than discount it with the prevailing 10 year note's rate.
In the inputs you have to set 2 variables:
1. How many years back you have the first data for book value per share available?
2. What was the per share book value that year?
(Bookvalue is ploted in olive colour and you can get the oldest one if you move your cursor over the latest data on the left)
CAUTION! You have to reenter it for every stock you analyse as this is stock-specific data!
After setting the input data, you will see the "Intrinsic Value"'s pink curve ploted over the price chart.
If the price is well below the pink line, the company is undervalued and can be a possible applicant for long therm investment.
Margin of safety: when the current price is 50% below the intrinsic value that means a 10% yearly growth potential (100% growth in 10 years) or a 100% margin of safety.
I am a beginer in Pine so please excuse my coding...
If anybody knows hot to extract historical data from 15 years ago, please share it with me, so I can automate the whole calculation without inputs necessary.
1. I have added the "overlay" feature so the indicator loads right on your main pricechart =versus the previous version where separate indicator window started up)
2. I have entered a "fill" feature to graphicaly show the difference between the price and the intrinsic value. Shows the margin of safety with red fill.
Still working on improvements, so check back.
In true TradingView spirit, the author of this script has published it open-source, so traders can understand and verify it. Cheers to the author! You may use it for free, but reuse of this code in a publication is governed by House Rules. You can favorite it to use it on a chart.
Here is what I wrote in the discription:
// In the inputs you have to set 2 variables:
// 1. How many years back you have the first data for book value per share available?
// 2. What was the per share book value that year?
// (Bookvalue is ploted in olive colour and you can get the oldest one if you move your cursor over the latest data on the left)
// CAUTION! You have to reenter it for every stock you analyse as this is stock-specific data!
Both of those datas can be retrieved from the charts themselves.
1. As for the number of years for which the book value is available, you should trace the book value (brown line on the chart) back all the way to the date when it starts. In the case of JPM in the chart I used for example, it would be 1st of December, 2005. For easy calculation, you can use 2005. Since this is year 2020 right now, you can substract 2005 from 2020 and so you will end up a 15 years data series for the book value history. That 15 will be your first input data.
In case you are reviewing a stock which has a book value history shorter than that, let's say which starts at 15th of March, 2010, than you substract 2010 from 2020 and end up a 10 year long book value history and that 10 will be your first input and so on.
2. How to find the value of the book value on the first year? You can trace the book value (brown line on the chart) back all the way to the date when it starts. In the case of JPM in the chart I used for example, it would be 1st of December, 2005. When you move your coursor over that point you can read the exact book value on the top left corner of the chart, right next to the "Intrinsic value calculator" title. The book value data will be the 3rd number from the left, also printed in brown colour. In this case it prints the value 30,71. This will be your second input.
I hope this answers your question and helps you using this intrinsic value calculator.
Thank you for your contribution!
I have also developed already a version which extracts the book value automatically from the past but I want to work some more on it before publishing.
To extract the book value from the past
bv_old = bv(years*252)
replace "(" and ")" with box brackets
The problem is not as simple as that... Most of the IPOs where in different times. One stock can have a hsitory of a houndred years another only five. So what you have to find is the first occurance of the bookvalue whenever it is available.
However correct it might be, your calculation would not work as it calculates with daily candles while this script is written for monthly candles so you should only multiply by 12 * years but would still not be the
solution and would not find the very first book value amount.
GOOD NEWS is that in the mean time I advanced in Pine script coding and found a number of techniques and functions I can use to upgrade this tool. I am testing the latest version and will post it so all can use and benefit from it. Finding and seting the initial value for Book value is not a problem anymore but that's just the tip of the iceberg: an incredible tool is about to come out of this little idea experiment.
Thank you again for your input and the will to help!