She's On The Money - How to Value & Pick Shares

Episode Date: August 2, 2022

On today's episode we unpack the acronyms; from P/E, PEG and P/B ratios, to Fundamental and Technical analyses we go headlong into ways to help you value and pick shares!This year our Money Diaries are being brought to you by the legends at Shopback! Check them out at https://app.shopback.com/aus/partner/SOTM and you'll get a cashback bonus when you sign up!Acknowledgement of Country By Natarsha Bamblett aka Queen Acknowledgements.The advice shared on She’s on The Money is general in nature and does not consider your individual circumstances. She’s on The Money exists purely for educational purposes and should not be relied upon to make an investment or financial decision. Victoria Devine and She's On The Money are Authorised Representatives of Infocus Securities Australia Proprietary Limited ABN 47 097 797 049 AFSL - AFSL 236523.See omnystudio.com/listener for privacy information.

Hello, my name is Natasha Nabanunga-Bamblett. I'm a proud Yorta Yorta, Kernai, Wolperi and Awadjeri woman. And before we get started on She's on the Money podcast, I would like to acknowledge the traditional custodians of the land of which this podcast is recorded on Awadjeri country, acknowledging the elders, the ancestors and the next generation coming through. As this podcast is about connecting, empowering, knowledge sharing and the storytelling of you to make a difference for today and lasting impact for tomorrow. Let's get into it. She's on the money. She's on the money.

Hello and welcome to She's On The Money, the podcast for millennials who want financial freedom. My name is Georgia King and joining me as she does each and every week is Victoria Devine. V, how are we? You lucky duck. I am so good because to be really honest, we are recording two episodes this week. We just did one. We had a lunch break and now we're doing this one, which I'm really excited about, but I'm really good because we just had a like panko crusted eggplant banh mi. Mouthwatering. If you've never had that, you're missing out. You are missing out. So we're feeling energized is what we're trying to say. And we are so ready to talk about shares

and EBIT ratings and what a PE ratio is. But let's go back to the investment series that we did a couple of months ago. It was ages ago. I feel like it was only two months ago, but I feel like it would have been like six months ago. But in saying that, we do lots of investing content, so I'm not surprised that I'm confused. But we looked at the difference between different types of investing platforms. And I feel like that would be a really good precursor to today, right? So if you haven't listened to that episode, I would recommend going back and having a listen to that because I feel like this is the next level. We're not talking about ETFs or managed funds or different product. We're actually talking about what it means to assess an individual company. And I get asked

this all the time, like, how do I look at a share that I'm going to buy? And it's like, okay, well, if you've gotten to the point where you've done your risk profile and you've worked out what you want to invest in and that investment strategy includes individual shares how do you pick it like what happens if you log on to sharesies and you're trying to pick shares like how do you do that so that's what this is about today if you're new to being a share trader you might be like whoa whoa whoa hold back like this is not my thing we did do a four-part investment series which I would absolutely recommend you go back to but we're at a point in life gee where the community is saying V, we really want to know more about how to individually value a stock and value a company.

And that's what this episode is all about. Now we're in a bear market, terrifying, but also really normal. Like the investment world and the investment markets have cycles and we're going through them. We've seen this time and time again. Gee, we've been through market corrections. We've been through bear markets and we've been through recessions before. It's not new. It's just so scary that I think people tend to jump up and down a little bit more than they need to, which puts you in a position where consumers and us, like basically people who use the stock market to buy and sell trades, we lose a bit of confidence. So I think now is a really good time to start honing in and focusing on it and going, yeah, you're right. The media is jumping

up and down and making us really scared. But is this a bad thing? No, because shares could be on sale. You could get a really good deal. It could be a good time for you to start your investment journey if you haven't before. So today we're talking about tips and tricks that day traders use, not necessarily tips and tricks I want you to necessarily use because you might turn around and go, all right, well, actually, after all that, that sounds like a lot of responsibility. I actually just want to go buy an ETF or I want to go and sign up to Sixpack and have a robo advice platform because that aligns to my values. But I use these tips every single day when I am picking client portfolios because I think a good precursor to this is I am not just a financial

advisor. I am a direct share financial advisor, which not all financial advisors are. It's not a flex. It's just part of your job of what you focus on. So my focus with my clients is often about creating comprehensive investment portfolios made up of direct shares that I then manage on their behalf. So a lot of my clients don't have ETFs or managed funds. They actually have direct shares and we have a platform of maybe eight to 12 different shares at any point in time. and I usually deal with I guess you could say high net wealth individuals and I say that right here G not so I can go hey G I work with really rich people like that's not it at all I say that because did you hear the number I said before 8 to 12 individual shares that's what people with

a million dollar portfolio have they're not picking thousands of companies they're not picking hundreds of companies they are making sure they have good diversification across the portfolio that makes sense to them, but I don't think it's as comprehensive as people think it's going to be. Because I think if I put up a poll, I really should have done this. Maybe we'll do this another time. But if I put up a poll on She's On The Money and said, how many different shares do you think someone with a million dollar portfolio would hold? I guarantee you people be like 50, 100, 150, because that's what they think diversification entails when it's not actually the case. So I say this because I use these tips and tricks, but I also say this as

a, hey, you can go and be an individual share trader. These are some tips and tricks that might help you along the way, but it doesn't necessarily mean you'll get instant diversification because to get good diversification, you actually have to have a fair bit of money behind it if you're picking. So I think that's enough disclaimer-y stuff. That's good. That's good. You ready? I definitely am one of the people that would have said 50 to 80. Because it makes sense, right? Because I think we look at ETFs and managed funds and when we talk about funds and indexes, I'll say things like, oh yeah, Jay, the S&P 300. And you'll be like, oh, that makes sense. That's the 300 top companies. But when you get into the nitty gritty

of it, a lot of more high net wealth clients actually have less shares, but more of them. And it just depends on what they are. They're usually more blue chip stocks. So we're not talking about buying an afterpay here. We're talking about buying one of the big four banks And they're usually high dividend, so good dividend paying shares that don't have massive amounts of growth. Because if you're at that point where you have a million dollars in an investment portfolio, it's very likely that your tenacity to take on risk is very low because you don't want to lose what you already have. It's about maintaining capital stability and about keeping cash in the bank. Even if it means you're not chasing those, you know, sexy 20% returns that

some people are getting. My clients are usually like, Vee, the aim's 5%. Like that's what it is because we want to stay rich. Like we don't want to put that wealth at risk. So yeah, that's where we're at today. And I feel like it could get a little bit complex and I do apologize and I'll try my best as always. We'll talk slowly. We'll break it down. On the complex note, Vee, there are a lot of acronyms in today's episode. You just said S&P 300. You said ETF. At the top, you were like EP trader or something like that. PE ratio, that's what I meant to say. Why so many acronyms in the finance world? Because, gee, there's a technical reason and the reason I believe it exists. So we'll start with the reason I believe that exists. And I

believe that exists because mediocre middle-aged white men want to make it seem more confusing for young women to get into the investment market. So they'll be like, oh, did you see the S&P 500 today? It's up 1.06%, which it is today. Great. But like then if I said to you, well, actually that is unnecessary. Like we just don't need this added level of complexity. Let's shorten it. S&P means the standard and pause. And it's literally just the 500 top tracking companies in the American market as listed on the US exchange. And it's just tracking the average ebb and flow of that. And the S&P 500 is used as a very normal index in our industry of how the market's performing. Because it's like, what are the top 500 companies doing?

like if it's up 1%, you're like, oh, that's like 1% across 500 companies. That must mean there's something pretty okay going on in the market. If it was down 10%, you'd be like, wow, what's happening in the industry kind of vibes. So I feel like there's a lot of confusing acronyms. And as you know, I try to steer away from them because it's just not necessary. Like I don't need to use an acronym to make myself seem smarter so that you don't feel educated, but it's important for you to be educated and know what these things are and when they're used and how they're used. And EBIT is one of those things where I'm like, look, this is just what it's going to be called on a balance sheet. So if you're at a point in your investing journey where you're like,

I'm going to invest in individual shares, cool, you're probably going to look at an annual report from a company and EBIT will be on it. So I need you to know what to look out for. But I also don't want you to think that they exist to make you feel overwhelmed or confused because how many times, I don't know about you but I was on tinder before I met Steve and the amount of people that I would meet that would try and be like oh I'm an investor I'm this I'm that maybe it's more of a reflection of the type of guy I go for maybe Steve's not like that it's okay banker types he's a different kind but like the banker types would always like use complex terminology and I'd be like do you know what I do as a job yeah okay no problems yeah I think it's a signal of a smarter person to use

simpler language that's much more accessible. You always talk about starting a journey of investment when you're ready for it and not being influenced by other factors, not trying to time the market and so on. Why should I value shares before I buy them and not just jump in if I feel like I'm ready or if the prices are down? Because as much as we can't time the market and we shouldn't be trying to time the market, because again, I'd be really, really rich, we don't want to be overpaying for shares that are driven by hype. We don't want to be in a situation where you're ready to invest and you're like, you know what I want to do? I want to get some blue chip shares, G. And when I say blue chip, blue chip shares are companies that are really well known

and highly respected. So it's by customers and the market and business analysts. We're not talking businesses that have just come out of nowhere. We're talking about those tried true resources. We're talking about the big four banks, G. We're talking about, you know, things like Macquarie and West Farmers, businesses that have been in the Australian economy for a really long time. They might not be shares that are completely outperforming the market, but they're a tried and true and steady, like Telstra is another blue chip stock. And the reason we say that these are blue chip stocks is one, because they are literally just well-known companies, respected, have good businesses behind them. Blue chip is a term used in the financial services

industry as a term that's kind of perceived as being safe havens due to their stability during like times like now where, you know, the markets might not be doing as well. So those fancy tech stocks people are going to sell up. But Westfarmers, what do they own? They own Bunnings and they own Kmart and Target. And those are all things that people still need during times of economic downturn. Banks, people still need. Woolworths, people still need to go to the supermarket. So these are shares that are going to perform. I mean, they might be down, but they're going to still exist because they're basic human needs at the end of the day. So you'll often see a lot more fluctuation in shares like, again, fancy tech stocks, where if people have money

and they have a lot of confidence, they're like, oh, I'm buying all these after pay shares. Second the market turns, they're like, oh, better pull back on that. Whereas people are less likely to pull back on a Woolworths share because they're like, oh, pandemic, toilet paper sales, throw the does that make sense yeah yeah gotcha so would you say it's the like the best way to value a company's worth would be to compare toilet paper they sell no would it be to compare it to a company that's similar and see how their stock is yeah you absolutely can and that's why I find it so interesting talking about share prices because the share prices across the big four banks are quite significantly different you would assume big four bank right very similar share price but

that's actually not the case at all. So it's not like comparing apples with apples where you go bank, good, cheap. They all have different business structures behind them and performance analytics and dividend yields and performance that drives their perception in the market as to what they're worth. So a good example of this is CommBank shares are really expensive. So today, as of recording, CommBank shares are $91.16 per share. You go, all right, no problems. But that is going to be built up of, you know, their historical data, how well they've done in the market. It's going to be built up of what their dividend payout is. So how much money you make from owning that share. It's going to be made up of, you know, consumer demand and how much somebody wants that

share and what their past performance was. So if I then said, well, what's a NAB share worth, George, what would you say? You'd assume similar, right? So a NAB share is $27.58. Much cheaper. Exactly. So are we saying that one bank's better than the other? No. Do they both have the government guarantee of $250,000 for everybody? Yes, they do. Do they all have similar business practices? At the crux of it, yes and no. But they all have different marketing strategies. Like banks now are bringing out different afterpay options or buy now pay later options. Banks are doing different things. They all are different businesses. So you can't just go bank compared with bank and assume that that's going to be like a good deal. Because if

you look at it and go, oh my gosh, well, if CommBank shares are $91, it's a money win to buy NAB shares. Yeah. Past performance over the last five years for a NAB share is actually down 7.4%. You go, okay, no problems. Well, what does that compare to this $91 one? This one's so much more expensive. Past performance on a CommBank share, if today it is $91.09, past performance it's actually up 10.92%. So you go, all right, this clearly isn't apples with apples when we start to get into it. And I'm not saying this to confuse you. I just don't want you lumping all banks in with one and going, oh, they must be equal. I've got a bank because it actually becomes a little bit more finicky than that. And we're having this conversation off air right

before we started recording. And we're talking about how CommBank shares over the last month have absolutely decreased. Like they've gone over the last month down 13.58%. And in the investment world, there's a lot of conversation about whether it's worth adding to your portfolio at the moment. So when I go and talk to my stockbrokers, because as a financial advisor, I obviously pull together a portfolio for my clients. But a lot of that happens because I'm having back and forth conversations with different stockbrokers and different research houses and understanding what that means and how to pull it together. And that seems to be a common topic at the moment. What's going on with CommBank? How does that work? Does that mean we should be adding it?

should we be selling some of it? What does that mean for clients? So I think it's interesting, G, when you ask me a very clean question of like, all right, well, you just compare it to a like business. That makes sense. But unfortunately, it's not as clean cut as that. So basic question from me, V, surprise, surprise, but I think it's probably a good place to start before we get into the thick of things. What's an undervalued share versus an overvalued share? So, and this gets confusing because I'm going to talk about intrinsic and extrinsic value here. So an overvalued asset is an investment that's trading for more money than what its intrinsic value is. And an undervalued share is a financial term for referring to a security or any other type

of investment that's selling in a market for a price that's presumed to be below the investment's true intrinsic value. So when we talk about intrinsic and extrinsic, I feel like these words get really complex really quickly. So essentially, intrinsic value is like the fundamental objective value of that object, right? So the intrinsic value of a $1 coin, what is it, G? $1. So if you paid $1.10 for a $1 coin, are you undervaluing it or overvaluing it? Over, over, over, over, over. But you're overvaluing it because you're paying more than what that value of that asset is. Same for a $2 coin, right? So a $2 coin is worth $2. If you went and paid $2.50 for that coin to get it in your possession, you've paid more than what it's worth

because when the market settles down and maybe, I don't know, maybe you're a coin collector and you want to jump down my throat, but this was a good example. But when the market comes down and there's heaps of $2 coins out there, it's not going to be worth $2.50 anymore. It's going to go back to what it's genuinely worth. Right. So fundamentally. Like it's base value. It's base value. Fundamentally, what is it worth? And fundamentals in the world of investment are really important to understand because they sit under market hype. They sit under what's going on and that's what investment advisors are looking for. So like I want in a perfect world, right? I want a client to come to me and be like, they want to start an investment portfolio. I've got

this amount of money and I go shopping for shares and I'm like, oh my God, all these companies are undervalued because their intrinsic value is telling me I should be paying $10 a share for this. But they're asking $8 a share. This is a money win. So it's one of those things where it's not as confusing. So intrinsic value, it's that innate internal value of just what that asset is worth. Does that make sense? It does make sense. And am I right in thinking this is Warren Buffett's investing strategy. He buys the undervalued shares, right? Yeah, he likes the underdog. To contrast that though, the opposite is called an extrinsic value. So intrinsic, internal, extrinsic, external. An extrinsic value is the difference between the

market price of an option and its premium. So often if we're talking about the extrinsic value of a share, well, that's that $2 coin that was once touched by Taylor Swift. So therefore you guys are paying $2.50 for it. Is that asset actually worth $2 or is it worth $2.50? Probably $2. But you're willing to pay a premium because T-Swift, she touched it. And more people want it. More people want it. So the price is up. So the price has increased. Does that make sense? It's making sense. Extrinsic value is how it's driven by the market and intrinsic value is its genuine fundamental base price. So is it always safe then to buy an undervalued stock? That sounds like the right way to go. Sounds like a really good way. Warren's doing it. But what makes it

undervalued? So how do you actually know that that's a good deal or not? You might go, all right, well, it's a blue chip stock. It's undervalued. Oh, what a money win. And then you find out that you didn't know something that you needed to know to make that decision and you already purchased those shares. For example, you might purchase shares and think it's a great money win, but the market's been really slowing down and you haven't known why. And then later an annual report comes out and that business has not performed as well as you thought it would. So its intrinsic value is not as much as you actually thought it would be. So it might not actually be undervalued. It's been deemed undervalued because of the research and information

that's available about it right now. Same thing happens when we find out a company's done something really cheeky or naughty or abused a situation or made use of something they shouldn't have made use of. When it comes out, they go, well, your intrinsic value is going to go down because intrinsic value is made up of things like, you know, the balance sheet and the profit and loss statement and all those financial things. But it's also like brand reputation. Like if you look at Telstra, what's their brand reputation in the industry for service they provide when you compare it to any other phone carrier, right? Like there's a reason their consumers are willing to pay more for that product. And it's not just about coverage. Like guys, it's 2022. Coverage, not that hard to

thought out anymore. But people are still willing to pay more for that service because they align it with quality. So intrinsic value is obviously those fundamental things, but you've also got to have your hat on the right way and know that it's not just about the financials sometimes. Gotcha. Does that make sense? It does make sense. Otherwise we'd all just be buying Kohl's home brand everything, wouldn't we? Yeah, exactly right. V, so on that, how do you actually analyze the market though? Like,

how do you know what's undervalued and what's overvalued? Where, like, where do we begin? Are you ready? Are you ready? All right. So there's two schools of thought on this. When it comes down to it, there's technical and fundamental analysis. And what did I teach you before? Fundamental is intrinsically valued. Nice. And technical sits more on the extrinsically valued side of things. Investors and financial advisors and traders use both of these to research and work out what stock price is and from my perspective as a financial advisor I think that they go hand in hand but you will meet some financial advisors or some investment advisors or some economists that only subscribe to one of those schools of thought and they'll be like we

only look at fundamental or we only like technical or whatever it is because sometimes people get really caught up in the semantics of it go figure so we've got the intrinsic and the extrinsic and it kind of goes back to when I was doing my psych degree. This was way back when. I feel like it was yesterday, the same time as being told that we've got a 10-year reunion coming up. So what? But we spoke a lot about qualitative versus quantitative measurement and the different ways that you can measure things. So qualitative data is like that kind of more fluffier data, gee. So it's not necessarily a numerical value. Whereas if we talked about quantitative, quantity, like the number associated with it. So it might be, you know, a scale of one to five. Where do you sit

on this? Most people were three. It is very fact based. Whereas quantitative is like, well, how did the podcast make you feel? Or how did this business make you feel? And then we collect a whole heap of data and we actually just look for similarities in it. There's no hard and fast rule or number associated with it so there's like the soft and the hard and from my perspective when making a good investment decision we need to take both of these things into consideration right because I'm quite vocal not online but just quite vocal in my everyday life about you know the importance of ethical fashion so if we looked at a company like Sheen right they at the crux of it they probably have really good financials they probably are blowing it out of the water they are a fast

fashion brand who have managed to capture a massive part of the market they are churning out shit loads of clothes and content and from their perspective they're probably doing really well then you look at the quality of data on that and you go but they're abusing their system they aren't doing the right thing when it comes to child labor they aren't doing the right thing when it comes to you know the environment yeah so for me to make a good decision as to whether G King on tour should be buying that as a share. I don't want to just look at their financials. I want to look at the holistic picture. And I think that when it comes to looking at shares and putting something in your portfolio, I think everybody should be doing that, not just because of your values, but because

values often drive economies. And I think that that should be really taken into consideration. But that is my take. You might be like, V, love Sheen. And I'll be like, we're probably not friends, but that's okay. Okay. In terms of valuing... Have you ever bought something on jean? No. Yeah, for good reason. Definitely not. You're a nag-nada kind of gal. I just can't see you buying fast fashion jean kink. But I mean, I understand why people do, but I think it's something that we're really turning away from as a society, which is brilliant because it's a huge hindrance. I agree. And I think that's maybe a really good point for me to just drop in there. I'm not actually against fast fashion. I think that there is a place for it. I'm not actually

against fast fashion in the way you think that I might be because I think that accessibility is really important and I think that if you're starting to crucify people just for buying cheaply there's something fundamentally wrong with our economy and our system and our community like some people genuinely need access to clothing items that are at a Kmart price point like at the end of the day that is what it is and I think it's really beautiful that there is a level of quality there that they can be assured of so that they can get wear out of clothes if that's, you know, that's aligned to their budget. What I don't like is the consumerism behind fast fashion where it's like wear that top once and throw it away. That's what we're crucifying when we talk

about fast fashion, not about companies who are selling cheap clothes. Does that make sense? A hundred percent. A hundred percent. Back to finance. So yes, we've got fundamental analysis fee and we've got technical analysis. Tell me a little bit more about technical analysis. I know you don't mean that. I know you're just like looking at it going, V mentioned this, I probably should follow up because people are interested. On behalf of the listeners. Thank you. You are so kind. So technical analysis is all that like stats and algorithms that analyze the share price movement over time to find out the underlying market trends or what we call market

sentiment based on the number of people that are buying and selling that stock. So, you know, if it's really popular, it might be worth more, not necessarily because the business is doing better, but because everybody's talking about afterpay. Does that make sense? Yeah. So analysts then use stock charts to identify patterns, which maybe will suggest future trends for stocks and shares and stuff like that. Also clarify stock and share, same thing. I use them interchangeably. I much prefer the word share only because I feel like it's a little bit more Australian, whereas stock feels very, yeah, I just feel like it's got like a mansplaining vibe to it. So I often shy away from it. But the core assumption is that all known fundamentals from

fundamental analysis are already factored into price and thus there's no need to pay close attention to them. I don't particularly subscribe to that. You know how I said before, some people will like poo-poo fundamental and be like, it's a waste of time. I just don't think it is. I just want to know what's going on. I want to know when I'm getting a good deal. I want to genuinely be able to explain that to my clients as well. I don't want to just say, I know what I'm talking about. Trust me. Like it's just, it's not enough for me. Okay, perfect. I feel like I grasped what a technical analysis is. Thank you so much, V. I think we should press pause here, go to a little break, and then on the other side, we are going to dive into exactly how we can value stocks,

how to make sense of all of that. We're going to talk about P ratios, the pig ratio. We're going to talk about the price book ratio, which is the PB ratio, which is not a PB and jelly sandwich, which is kind of disappointing a little bit, but there's so much fun to come. Don't go anywhere, guys. All right, straight back into it, VD. Tell me how on earth do I begin to value a share? Seems overwhelming. Okay, so let's strip it back. There are three different ways that you're able to put a value or a relative value on a share. So the first is the PE ratio. That is the price to earnings ratio. The second is the price to earning growth ratio, the PEG. And then the third is the price book ratio. There are going to be, if you Google it, a million different ways to value

a share. But in the industry, in Australia, these are the most common or the top three most common ways of valuing a share. Yes, there's more. Do you need to know more at this point in your journey? Probably not. So we're just going to focus on getting these three right. So first things first, I know you are on the edge of your seat, Georgia King. Price earnings ratio, what is it? PE ratio. PE ratio.

So it looks at a company's recent or forecasted, so recent or predicted earnings per share. So against what the current market price of the share is. And it has a look at that and says, is what we are predicting they are worth in the future actually similar to the current market price of what people are paying for this share? and sometimes that'll be really low or sometimes that'll be really high, but that ratio gives people a really good indicator of whether it's a good deal or not. So the earnings per share or what the industry calls the EPS is the proportion of the company's profit allocated back to each individual share. To figure out a company's PE ratio, we need to do some really quick maths.

We need to look at the company's earnings per share, which is really readily available in like their annual report or their quarterly report, or it's usually on their website, it's not a hard number to find. Then you divide the current price per share by the earnings per share to find your PE ratio. So if a company has a quote adjusted EPS figures or earnings per share figures, use these instead as they're going to take into account any like major expenses that were incurred during that period that might affect the EPS. So for example, if they acquired a new factory or they bought something really big or invested in a new database or something like that, that's an outlier. Like that's not a common thing to happen each and every single year. So they

might like have an adjusted figure for you to use so that you can still value the company without absolutely blowing it out of the water. So to run a quick example for you, if a company currently has a share price of a hundred bucks, so close to what ComBank has, but like imagine if ComBank got to a hundred. I think my group chat for financial advisors would go off. It would be complete. Anyway, company has a share price of $100 and an earnings per share of $10 as stated in its latest report. If we use the formula, the company's PE ratio would then be 10. Pretty quick maths. Pretty quick maths. I feel like it was so confusing. Guys, it's a podcast. We'll do a whole blog post on this and it will be in the blog post because it's in front of me. We've already done

the work. We will share it with you. But the PE ratio works best when comparing apples with apples. So most investors would argue that a share price with a lower PE ratio compared to its peers is cheaper and could be undervalued. So that's a way of having a look at it and going, what does this mean? How does that work? But see how now we're into talking about a price per earning ratio and not a price per share, George. So before I gave you the example and said, wow, $27 for a NAB share, but 91 for a ComBank share. And you go, well, that makes no sense. How do I pick? But then we introduce something like this price to earnings ratio and you go, oh, okay. So I would just take the share price and what it actually paid and I'd get a score.

And then the lower the score, the quote cheaper it is. So it doesn't actually matter that one's $27 and one's 91. one we kind of put them on a level playing field and that's the way we do that. Does that make sense? It does make sense. Makes you go oh that's not as overwhelming I don't have to go one's expensive and one's cheap. Yeah. You go well what is that $27 returning if that's what we're paying for a nab share or what is that $91 returning for that combat share? Does that make sense? Yeah. I hope I'm making sense this is really hard but gee at the end of the day there's no definitive what's quote good ratio when it comes to it I can't be like hey a five's good and a ten's bad

like that's not how it works. So over the last 40 years, they're all ordinaries, which you've probably heard, like, you know, when you watch TV or when you were younger, you used to watch TV and your mum and dad had the news on. They're like, they're all odds, rah, rah, rah. They're all ordinaries. Oh, all odds. Yeah, they're all odds. That's just an index. It just tracks the market. It's like the S&P 500. Sure. Okay. But the Australian version. It's like the Australian version. It's a way of tracking shares in Australia and seeing what the average price of the share market's looking like so that they can say, oh my God, well,

the all odds are down, which means the share market across the board is a bit down, not nabs up and com banks down. Nobody can conceptualize that. We need one common measure. And in Australia, we use the all odds. But if we look at the all odds over the last 40 years, it's averaged a PE of about 15, which is sometimes seen as a broad threshold as kind of fair value to give you a bit of an indicator. Very good. I'm going to keep an eye out for the all odds when the news is on. I know exactly what that is. Yes. Yes, I will. Check you out, you educated queen. Exactly right. Now we have the PEG ratio and the price book ratio to get to. So let's start with PEG. Tell me about that. All right. So the PEG ratio or the price earnings to growth ratio. So it's taking

that first ratio and building off it. So before we had the PE, so the price earnings, now it's the PE to growth, which is comparing its price earnings to growth. Does that make sense? I feel Like it was obvious if you really think about it, but no one's going to really think about it. They just look at it and go PEG ratio, what the hell? So the PEG ratio considers a company's earnings growth. So to figure this out, you need to find out the company's estimated earnings per share, which we talked about just before, which will be in the latest annual report or on the website,

all really accessible if they are listed company. And then to calculate the PEG ratio, you use the PE that we just did and you divide by the growth in earnings per share or the EPS. So I feel like this is getting really complicated, but I know you guys are following and if not, just go back, listen to it again. I'm lucky for you to have to listen to me more and more. But a good example of this is let's say the company has an EPS of $11 over the next year as stated in its report. You go, great, no problems. Thank you. This is an increase of 10% on its current EPS of $10 because we're using the same example as we had before. So using the PEG formula, so the price to earnings growth formula of the PE, so the PE

was 10, as we spoke about before, and you divide it by the growth in EPS, which is 10%, we then have a PEG ratio of one. You go, hey, that makes absolutely no sense. But hear me out, hear me out, sit down. Just like a PE ratio, the PEG ratio compares peer performance. So it's trying to compare apples with apples. Again, there's no set PEG ratio that's considered to be like the gold standard or this is like a buy signal if you get a peg ratio of x like buy buy buy that's not how this works these are all just ratios that we use we write them down we take them into consideration of our larger piece of research but fundamentalists so people who are really subscribed to that school of like fundamental analysis they might treat that share with a peg ratio of less than one as

an undervalued share so they might go less than one undervalued over one overvalued one on par Does that make sense? It does make sense. So it doesn't necessarily mean it absolutely is or it absolutely isn't, but it's an indicator. It's an indicator, sure. It's an indicator. We have a little look at it.

Bea, I really thought PEG was going to be more fun than that. I'm not going to lie to you. Well, you have more fun. Okay, don't worry. It took me back to year 11 maths. Anyway, let's move on. Is that what you were doing in year 11 maths? Let's move on to the final method of valuing a stock, the price book ratio.

Tell me all about it in 20 seconds or less. PB ratio, I always think of peanut butter and jelly. I don't know why I'm not even American. I don't even eat peanut butter and jelly sandwiches. Had them one time. Terrible. Why would you mix those two things together? But I really do like the price book ratio. So the price book ratio gives us a little bit of a snapshot of company's value according to the book value of assets on its balance sheet. So it kind of makes sense. Like price book, what's on its book? Let's have a look. A little rhyme. I'm going to put myself in the bin. We really do need that break. But a price book ratio is calculated by dividing the

current share price by the stock's book value divided by the number of shares that have been issued. So the book value is worked out from the balance sheet as the total assets minus the total liabilities. And so liabilities is costs. So you take what they own and then minus what they owe or what they have in costs, and then you get that number. So the balance sheet with these figures is super easy to locate. If you're looking for it, it will be on the company's website. It will be in their annual report. It's a very large part of the report. They are legally not allowed to skip on. So to give you an example of that, because we love an example in this community, let's take an example of a company's market price being currently $2 and they have 50 million

shares in the market all issued out. They're all bought, right? So the total assets are $80 million. I'd love this business. I'm glad we did this example. So the total assets in this business are $80 million. And then the total liabilities in this business are $20 million. That then equals a total book value of $60 million. So the price book ratio is $2 divided by that 80 minus $20 million, which is 60 divided by $50 million, which equals 1.7. And I know you didn't follow that. So you've just got to trust me that the PB ratio is 1.7. But basically, the closer the PB ratio is to one or below, the greater the perceived value of the stock. And the PB or the price book ratio are used more often for more mature companies. So like it's for the older hens in the share market

that don't have as much growth. So they say it's for limited growth. But at the same time, I feel like you look at a bank, right? They're not going to triple in value overnight, but are they a good, solid, steady steed that's maybe going to win the race? Maybe. That's where we would look at a price book ratio. You wouldn't really look at a price book ratio, again, for a company like Afterpay. I use this example a lot and I've really needed to check myself recently on it. It's not because I don't like Afterpay, which I don't for the community, but it's because the community so recently had been talking about buying and selling Afterpay shares and it was so topical and I feel like it's a trendy share that people buy. So people are buying Tesla or they're

buying Afterpay or they're buying Apple or whatever. But my example of Afterpay is used a fair bit because its PB ratio wouldn't be indicative of what it is. Like Afterpay is such an interesting company where you go commercially, that makes a lot of sense. Is it putting the community in the best possible position? Absolutely not. But when you look at its PB ratios, is it actually turning a profit? No, but people are still buying into it and still loving it. So I really like using it as an example because of the hype that was surrounded it. We should go to a break because I think you guys are so sick of that. But to summarize, that was my PE ratio, my PEG ratio, and my price book ratio explained. There'll be a blog on it. Okay. So I feel like I'm getting it. Price book ratio,

I get it. PEG, I get it. You get PEG? Price earnings, I get it. I get it all. Do you actually? No, but I will re-listen to this episode and I'm sure I will get there. I feel like these things feel really overwhelming when you first hear them and you're like, holy moly. But then after a few times and a few miles over, you're like, yeah, all right, I can get my head around that. I don't expect anyone to get that on the first time because I remember evening in accounting class when I was learning this for the very first time, I was like, whoa, I'm never going

to get there. But now I'm like, okay, these three things make a lot of sense and I'm actually quite a visual learner. So I need to see how it plays out and say, what does this mean? And where does this plug in? And what does that look like? And for me, that's how I learn, but we all learn really differently. And I think that the main thing here is that nobody is going to pick that up after me explaining it to you once, especially when you can't contextualize it. So it's once you start your investment journey and you start looking at it and you go, oh, this makes sense. Like this is where this goes. That's when you start to comprehend it properly. Amazing. So for people who have really

vibes with this chat, V, and they're feeling confident and ready to invest, which platforms would you suggest they use to get cracking? Look, I can't recommend specific platforms because that would be wildly inappropriate of me, but our community has a number of different platforms that they love. Obviously, you guys are obsessed with Sharesies, which is really nice. They are classified, I guess, as a mid-level DIY platform, so you can go on and buy shares. But the thing that you guys seem to really like about them is that you can buy portions of shares. So if you thought, hey, I really want to own CommBank, but I don't have $91 to do that, you can actually purchase a portion of that share instead of the whole deal, which I think

is really nice to get exposure to an asset that you might really love. Not recommending that share at all. That was just an example. They have access as well to a number of different platforms, other platforms in the industry. I mean, our community has been talking a lot recently about self-wealth and superhero. obviously those are more direct. When we talk about investing platforms, we're not talking about platforms like Raise or Spaceship or even Sixpark, which is a robo-advice platform, because none of those enable you to invest directly. So if you were looking to invest

directly, what you'd be looking for is a DIY platform. And the things I'd be taking into consideration is just really, is this aligned to my values? Is this aligned to how much I want to pay for a platform and you can find all of that information out on those websites for those companies. But at the end of the day, completely up to you what you pick just as long as they are legit, my friends. Incredible. Remember as well, as we flagged at the top of the episode, guys, we have done many an episode on investing. So have a scroll back and you'll find everything from what micro-investing is to how to use entry-level platforms, so on and so forth. That's a really good place to start. We are going to wrap today's episode here. We were

going to talk about ebits and ebitda, as they say. So we are actually now going to make that a completely new episode. So keep an eye on your feed for that one. It'll be dropping not too far away. Guys, George has decided after recording this episode and only half of the episode that she's like, nah, mate, this is too much. It's dense. Victoria Devine, you are cancelled and you are dense. So you guys just get the ratios in the first one and we'll extend it out over a few other episodes because I feel like that's, you're right, George. It's enough for today. Yeah, but it's easier to absorb in smaller bits and to be honest the feedback i've heard from people who are listening to the investing episodes is that they listen to it a couple of times just for it

to really sink in so i feel like that's a good idea yeah geniuses let's do that i know i know boring but important stuff get it done because we did talk about investment yes exactly the advice shared on she's on the money is general in nature and does not consider your individual circumstances she's on the money exists purely for educational purposes and should not be relied upon to make an investment or financial decision and we promise victoria divine and she's on the money are authorized representatives of in focus securities australia proprietary limited abn 4709-779-7049 afsl 236-523 we will see you on friday guys see you soon guys