Value Investing Made Easy For Newbies

VALUE
INVESTING
MADE EASY
FOR
NEWBIES
A Basic Value Investing
Guide in the Philippine
Stock Market for
Beginners
The Investing Engineer PH
Value Investing Made Easy For Newbies
Table of Contents
Introduction .................................................4
Why Should You Read This Book .......................6
Your Stock Market Journey Awaits .....................7
Why Should You Even Bother to Invest in the
Stock Market?............................................8
How Can Compound Interest Make You Rich? .. 10
4 Important Things You Should First Do Before
You Start Investing in the Stock Market ........... 12
How Much Money Should You Invest in the Stock
Market? ................................................. 15
Introduction to Value Investing ........................ 18
2 Basic Value Investing Principles That Most
Investors Neglect...................................... 21
How to Look at Stocks the Right Way? ........... 22
How Does a Business Work? ........................ 23
How to Determine the Right Price? ............... 29
Stock Price vs. Companys Value .................. 32
Copyright www.investingengineer.com
All Rights Reserved 2016

How to Value Stocks Using the Price to Earnings
Valuation Method ........................................ 35
How to Find the Intrinsic Value? ................... 36
What is a Discount Rate? ............................ 37
Using a Margin of Safety ............................. 40
How to Value a Stock Using Return on Equity
Valuation Method ........................................ 42
How to Use Return on Equity to Value a Stock? 44
What Does Warren Buffetts Durable Competitive
Advantage Mean? ......................................... 48
2 Powerful Resources That Will Improve Your Stock
Market Gains .............................................. 51
Invest by Using the Strategic Averaging Method . 52
Find Undervalued Stocks by Getting Professional
Stock Advice on PinoyInvestor ..................... 53
My Final Message ......................................... 55
Glossary of Terms ........................................ 56
E-book Disclaimer ....................................... 72
Introduction
Hi! Im Mark, an Electrical Engineer by profession
and the creator of the Philippine Value Investing Blog
www.investingengineer.com!
When I first started investing, it took me a while to
learn the most common mistakes and failures that
every investor makes.
Learning from the mistakes and experiences of others
has led me to understand what Value Investing is all
about.
Most investors fail to realize the importance of a
value-based approach strategy once they start making
huge losses.
These mistakes came simply because most of them
lack the ability to make accurate estimates of the
stocks intrinsic values.
When I started, I dont have any idea how to make
stock valuations. No one taught me what to do and I
had to figure this out on my own.

Eventually, after reading a lot of books about Value
Investing, I learned what to do and started investing
based on my own analysis.
After I started learning the basics, I applied these
principles and the right mindset in my investment
decisions.
I invested heavily during the 2015 market selloff
which started on the 2nd week of August. During
those times, the PSEI tanked but that didnt stop me
from continuing my investing activities.
After a year, I managed to make a 20% return. I
realized that a value-based approach strategy really
pays off.
I hope that the basic techniques that I will teach in this
e-book will help you consistently earn above average
returns in the stock market.
Happy investing!
Mark
The Investing Engineer PH
www.investingengineer.com
Why Should You Read This Book

Value Investing is a pretty cool thing to do especially
if you love crunching numbers.
If youre pretty confused and overwhelmed of the
plethora of information out there, then this e-book is
right for you.
This e-book aims to teach you how to invest using a
value-based approach strategy. I have transformed
many of the complex ideas Ive learned from all the
value investing resources out there into a simple and
easy to understand e-book thats easy for a beginner
to comprehend.
I hope that youll learn a lot from this e-book and I
hope that it will serve you well.
Thank you and good luck!
Your Stock Market Journey Awaits

Before anything else, let me ask you some questions
before reading further in this e-book.
How much money can you invest? Investing in
the stock market requires capital. Be sure you can
afford to invest by looking closely at your personal
financial situation.
How much emergency cash do you have in your bank
account? Are you clear of bad debt? These are the
questions you need to answer before moving on.
How much risk are you willing to tolerate?
How much risk are you comfortable taking on? A
large loss to a small investor has a much larger impact
than the same amount to a wealthy investor with deep
pockets.
Do you naturally enjoy taking chances, or do you tend
to be more risk adverse? Its essential to success to
know your comfort zone.
What are your financial objectives? Are you
interested in investing to maintain capital or to get the
highest return in the shortest amount of time?

Consider the amount of time, money, and risk
associated with each scenario.
Lastly, do you have what it takes to be a stock
market investor? Investing in the stock market
requires a lot of learning and the ability to apply it in
the real world.
If after considering these questions you are still
interested in investing in the stock market, then
congratulations on choosing one of the most
rewarding ways in building wealth.
Why Should You Even Bother to Invest

in the Stock Market?
Did you know that investing in stocks is one of the
most effective ways to build wealth and be financially
free? But the sad part is that a lot of Filipinos put off
investing in their lives.
They come up with all sorts of excuses. Some say,
Why should I invest? Investing is risky. I would
rather put my money in the bank than invest in
volatile markets.

Others will say, Stocks are boring and take too much
time! Id rather spend my money elsewhere.
Let me tell you that those people saying these things
are totally neglecting their future. Let me explain
why.
One of the things that we need to understand why we
should invest our money is Inflation.
Inflation is the rate at which the purchasing power of
your money falls by if not invested.
So what does this mean?
It simply means that a 100 peso bill way back in the
1970s is worth P12.85 only today assuming a 5%
annual inflation rate.
What do you think will happen if you didnt invest
that one hundred pesos and you just simply stashed it
in your treasure vault and waited forty five years to
spend it?
Correct!
Inflation will eat up your moneys purchasing power.
10

But what if you saved your money in a bank? Yes you
can do that and its a very safe and secure thing to do.
But relying on the banks interest rate returns will not
keep up with the rate of inflation.
If you keep your money in the bank, your money will
lose purchasing power as time goes by.
In reality, instead of saving money, we actually lose
money.
How Can Compound Interest Make You

Rich?
Some people just dont want to invest because they
think investing takes too much time.
These people dont have the patience to wait for their
money to grow.
These people dont know how to harness
compound interest.
The reality is that if you dont invest your money
today, youll be working for money all your life.
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Would it be fun if instead of working for money,
money will be the one working for you?
Investing in stocks is like planting a money tree. As
time passes, the tree will grow and produce money.
The money will grow into more money. Money will
now start working for you. Soon, youll become
financially free.
Let me tell you that the sooner you start investing, the
more money you can make through compound
interest.
Lets look at this example:
Lets say at age 20, you started saving P5,000 a month
and continue to do so until you retire at age 65. At an
interest rate of 10%, you will retire with almost
P47,500,000.
If you start investing at age 30 with the same amount
and interest rate, youd retire with only P17,900,000.
If you started to invest at age 30 and wanted to have
P47,500,000 by age 65, you must save about P13,250
12

a month instead of only P5,000 if you started at age
20.
Now think about this, would you rather save money
in the bank which gives you 1% to 2% annual returns
or would you rather invest your money in an
investment vehicle that will yield 10% annual returns?
If you ask me, Ill go with the 10% annual returns!
Unless you need your money sometime in the not-sofuture, keeping your money in your bank is a wiser
decision.
4 Important Things You Should First Do

Before You Start Investing in the Stock
Market
There are things that you should first check before
you start investing in stocks and one of it is financial
stability.
To determine if you are financially stable, you should
check for these four important things:
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1. How much money do you have in your bank
account in case of emergency situations?
2. Do you have insurance for protection?
3. How much bad debts do you have?
4. How much money can you put into your
investments?
Having money that is readily accessible in case of an
emergency is one of the things that are neglected by
most Filipinos when it comes to stability.
What do you think will happen if you prioritize
investing instead of building up an emergency fund? If
you start to invest now without money currently
saved for emergencies, you might risk pulling out
your money in a falling market and lose money just to
cope up with the immediate emergency.
What if you were laid off from your job or you get
hospitalized and your medical bills pile up? Do you
see what Im telling you? Thats why its important to
have a readily accessible emergency fund to provide
you with a peace of mind.
Some experts believe that you should save at least 3 to
6 months of salary for this fund. You should keep
14

building this fund because the higher your emergency
fund is, the safer youll feel.
Now, what if you fell ill with sickness or you got
yourself in a serious accident? If you have insurance, it
will protect your hard earned saving and investments
from all those medical bills and liabilities to pay.
No one would want all of their hard earned money
only to be taken away by such unforeseen events.
Insurance provides you with the peace of mind to live
a quality and less stress life so make sure to get one if
you dont have any.
Now, if you already have an emergency fund and
insurance, its also necessary to settle all your bad
debts.
Bad debts are those debts from credit cards, personal
loans and other debts that make you lose money
overtime. This is the most important thing and should
be your top priority.
If you have bad debts, I suggest you settle ALL of
them first. Plan a debt-repayment strategy and make
15

sure to follow it. It may take years before you all
settle them.
When youre now debt free, then you can now start
to invest.
How Much Money Should You Invest in

the Stock Market?
The question now is how much money can you afford
to invest each month? This is a relative question
considering that we have different income brackets.
Some of us earn big while some of us just make ends
meet.
To determine how much money we can invest, we
should first make a budget to give us an overview on
our spending habits.
Right now, I want you to memorize the phrase below
and stick it with your mind. Read this phrase loud and
clear 10x:
PAY YOURSELF FIRST
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What does this phrase mean?
Paying yourself first is the only sure fire thing to make
a budget plan work because by paying yourself first, it
forces you live off whats left in your salary and thus
prevents you from making impulsive purchases.
How does paying yourself first really work? Let me
show you an example.
Juan received his salary amounting to P10,000. To
pay himself first, he decides that every time he
receives his salary, he would automatically deduct
20% of it. That would be P2,000.
Now, Juan must learn to make budget plan on the
P8,000 that is left.
How does Juan do it?
He now decides that he would no longer indulge in
expensive coffee sessions.
He would also cancel his gym membership.
He also started to ride jeepneys instead a taxi cab to
go to work.
17

He also cut down his cell phone prepaid expenses and
started using those free text and call promos.
He keeps doing it until his next salary.
Guess what happened? He manages to plan a budget,
cut off unnecessary spending and was able to save
P2,000.
If he didnt plan about it, he would just keep doing
what hes doing and would not be able to save. Thats
the power of paying yourself first.
Im not saying that you should live a super frugal life
to the point of sacrificing ones enjoyment. Your
budget should allow you to enjoy life at the same time
doesnt compromise your savings and investments
which should be your topmost priority.
If you already done all the four things above. Youre
now ready to invest in the Philippine Stock Market.
I will teach you one of the most effective ways to
build wealth in the stock market that is, Value
Investing.
18
Introduction to Value Investing

Value Investing is an investing strategy wherein you
seek and buy stocks that trade below its intrinsic value
and have a huge upside potential.
To quickly understand this definition, Ill introduce
you to Juan. Juan is a value investor. He only invests
in undervalued businesses that have high growth.
One day, he saw a business named Pedros Buko
Stand listed in the Philippine Stock Exchange. He
wanted to know if the business is undervalued so he
went on to the companys website and downloaded
the financial statements.
He started studying them digging out all the vital
information he could find.
Based on the financials, he found out that the
companys stock is worth P10 per share. Now, he
looked at the stocks market price and saw that its
trading at around P5 per share.
He realized that this is a bargain. He knows that the
business is doing great and earnings are increasing
year on year.
19

So he decided to buy 10,000 shares worth P50,000
(lets exclude taxes and commissions for now to
simplify the math). After a year, the stock rose to P15
per share.
After seeing this, Juan realized that the stock is now
overvalued and decided to sell his position making
him P150,000 including the initial P50,000 he initially
invested.
Pablo on the other hand, has also P50,000 that hes
willing to invest. Unlike Juan, he saw this other
business, Marias Isaw Stand. He also found out
that the value of the business is P10 per share and the
stock is trading at P5; same as Pedros Buko Stand.
He decided to buy 10,000 shares just like what Juan
did. But after the 1st half of the year, the stock fell to
P2.50 per share.
Although this was the case, Pablo didnt panic. Pablo
thinks that if he liked the stock at P5, he should like it
even more at P2.50. So instead of cutting losses, he
bought another 10,000 shares worth P25,000
bringing his total investment up to P75,000.
20

This purchase lowered his average price to P3.75 per
share but increased his shares to 20,000. Pablo
believes that the business is strong, stable and that the
stock will rise back. And he was right!
After a year, the stock now trades at P15 per share.
Upon seeing this, Pablo thought that the business is
now overvalued so he sold his shares making
P300,000 including his initial investment of P75,000.
This is what Value Investing is all about. You buy
stocks that you believe that is less than its true worth
then wait a couple of years for the market to realize
that value so that youll make money from it.
Value Investing is pretty simple right? You really
dont need an extensive background on finance and
you dont need to study charts all day long.
What youll need to be successful in this strategy is a
lot of patience, money and willingness to learn the
very basic principles and fundamental concepts which
I will discuss in the next section.
21
2 Basic Value Investing Principles That

Most Investors Neglect
Value Investing revolves around into two distinct
principles;
1. Find high quality companies.
2. Buy them at bargain prices.
Value investing is simple but why isnt everyone doing
it? The reason is that it requires patience, hard work,
discipline and the right mindset.
Value Investing is therefore not for everyone.
While other investing strategies are based on
speculation, Value Investing is based on common
sense.
Benjamin Graham, the Father of Value Investing,
explained the Value Investing framework in detail in
his book The Intelligent Investor and Security
Analysis. Graham pointed out that stock prices often
divert significantly from the actual fundamental value
of the underlying business.
22

Graham believed that buying stocks of quality
businesses when they are undervalued with respect to
their fundamental value allows someone to make a
good return on investment on a lower risk.
Graham taught all of his investment principles to his
student, Warren Buffett who then used this
knowledge to amass a fortune of no less than $65B
making him the third richest person in the world.
How to Look at Stocks the Right Way?

What most investors fail to realize is that when you
buy a stock, you are simply buying a portion of the
business itself.
Most investors look at stocks as numbers that move
up and down on a ticker screen. This gives the
impression that price is the only thing thats reliable
when analyzing a stock.
This is not the right thing to do if you want to be a
successful Value Investor.
23

You must look at stocks like a tiny piece of a
business.
If you look at a stock as a tiny part of a business, you
can therefore say that the performance of the business
is closely tied to the performance of your investment.
It follows that to analyze the attractiveness of the
stock, you should not look at the price of the stock
but instead look how much money the business is
actually making.
How Does a Business Work?

Let me explain this simple concept in detail.
Mina wants to start a Halo-Halo business. Lets call
this business Minas Halo-Halo Stand.
But Mina doesnt want to get physically involved in
the day-to-day operations of the business so he hires
Jason to run it for her.
Jasons job is to make sure to sell a lot of Halo-Halo
every day, monitor and replenish inventories, account
24

all the income and expenses, keep the store clean and
orderly and all other things required to ensure the
smooth operations of the business. So the business
opened and operations started.
On the first day, a customer bought a glass of HaloHalo for P50.
This is what we call Revenue.
To make a glass of Halo-Halo, Mina needs crushed
ice, milk, sugar and a lot of toppings which costs
around P10.
This expense is what we call Cost of Revenue.
Some books call this Cost of Sales or Cost of
Goods Sold.
Besides the cost of revenue, Mina needs to pay Jasons
salary. She also needs to pay rent for the shops
location. Theres also the utility bills that needs to be
paid.
So for every glass of Halo-Halo, Mina pays P5 to Jason
and P10 for the rent and P5 for the utility bills for a
total of P20.
25

This is what we call Operating Expenses.
So lets recap. Mina made P50 revenue. Subtract the
cost of revenue from the revenue and we get P40
Gross Profit. Subtract the operating expenses worth
from the gross profit and we get an Operating
Income of P20.
Let us also not forget that Mina needs to pay her
taxes. Im going to assume that she pays P10 taxes for
every glass of Halo-Halo she sells.
Doing the math we arrive at a Net Income of P10.
This is the number that we see at the bottom of an
Income Statement.
From here, Mina has two choices. She can choose to
pay herself a Dividend of P5 and the other half to be
reinvested back into the business as Retained
Earnings to buy more inventories, hire more people
or improve the shop; or she can reinvest all the
earnings back into the company to speed up the
growth of her business.
26

Now, lets assume that for one year, her business
made P100,000. She decides to pay herself a nice
P50,000 of dividends.
The other half, she then puts back into the business.
So lets see what happens to the business Balance
Sheet.
The balance sheet consists of all the Total Assets and
the Total Liabilities of the business. Subtracting the
two, you get the Equity of the business.
To understand this in the simplest way as possible,
consider this example.
Minas Halo-Halo business has total assets of
P100,000. This consists of the following below;
Cash
Halo-Halo Stand
Refrigerator
Inventories
Total Assets
P5,000
P65,000
P20,000
P10,000
P100,000
Minas business has a bank account and that account

contains the P5,000 cash. Lets assume that the HaloHalo stand and the refrigerator are worth P65,000
27

and P20,000 respectively. Then she keeps an
inventory worth P10,000. Adding all that up, we get
the total assets amounting to P100,000.
Her business has total liabilities of P80,000 which
consists of the following;
Halo-Halo Stand
Refrigerator
Salary
Total Liabilities
P55,000
P15,000
P10,000
P80,000
Mina took out a loan to buy the Halo-Halo stand.

From what we see here, it seems that Mina has only
paid P10,000 out of the P65,000 which explains why
the liability is listed at P55,000.
Same is true with the refrigerator. She has only paid
out P5,000 out of the P20,000 loans. She also hasnt
paid Jason yet his salary amounting to P10,000.
Adding all that up, we get the total liabilities
amounting to P80,000.
Subtracting both of these figures, we get the total
equity of the business which is P20,000.
28

So what do all these figures mean? You can see that
the business is making P100,000 a year in profits but
the equity in the business is only P20,000.
If Mina fails to find a buyer and decides to liquidate
her business, she would only get P20,000.
Why? Its because she has to sell all her assets to pay
all her debts.
Now think about this, if she decides to sell her
business to you that earns P100,000 a year but is only
worth P20,000 in equity at P250,000, would you buy
it?
Before you answer that question, lets go back to
again to Mina. She said that she will reinvest the other
half of the earnings back into the business. She decides
to pay her loans and keep some of the cash. Her
balance sheet would now look like this
Cash
Halo-Halo Stand
Refrigerator
Inventories
Total Assets
P15,000
P65,000
P20,000
P10,000
P110,000
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Halo-Halo Stand
Refrigerator
Salary
Total Liabilities
P25,000
P5,000
P10,000
P40,000
Total Equity
P70,000
So what we have here is that she paid her loans

amounting to P30,000 for the Halo-Halo stand and
P10,000 for the refrigerator bringing down her
liabilities to P40,000.
She also added P10,000 to her business bank account
bringing up her assets at P110, 000.
Her equity now is worth P70,000 compared to the
previous P40,000.
Now she again decides to sell her business but this
time, shes selling it for P500,000. Would you buy it?
How to Determine the Right Price?

At this point, you now know that her business makes
P100,000 a year with P70,000 of equity in it.
Assuming the business has little to no risk, how much
30

are you willing to pay for it assuming that you dont
need to do anything just like what Mina is doing?
Are you willing to buy it for P250,000? What about
P500,000? How about P1,000,000?
This is where everything starts to become confusing.
But dont worry. Ill explain it in detail below.
Based on the income, if you buy the company at
P250,000, you would expect a one year return of
40%.
If you buy it at P500,000, you would expect a return
of 20%.
And when you buy it at P1,000,000, you would
expect a return of 10%.
Based on equity, if you buy the company at P250,
000, you risk losing P180,000 if the company
becomes unprofitable and liquidates.
If you buy it at P500,000, you risk losing P430,000.
If you buy it at P1,000,000, you risk losing P930,000.
31

If youll notice, the higher you buy the company, the
lower your expected returns will become and the
riskier it gets. It will also take a longer time to make a
return on investment.
In the first example, it would take you 2 years to
gain back your initial investment. In the second
example it increased to 5 years. In the third example,
it will take you 10 years.
Now what does this tells us? If you overpay for the
business, your returns diminishes, risk of losing
money becomes higher and it will take you a longer
time to gain back your initial investment.
In conclusion, the price you pay for the business
determines how much money you are willing to
make, the amount of risk you are willing to take and
the time it will take to get back your initial
investment.
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Stock Price vs. Companys Value

Mina has decided to sell her company for P500,000.
But the problem is that shes having a hard time
selling it to just one person.
Although thats the case, she knows that there are a
lot of buyers out there that are willing to buy her
business but dont have the full amount upfront. In
order to solve this problem, she decided to split her
company into 100,000 small pieces.
These small chunks of her business are what we call
Shares of Stock.
These 100,000 shares are what we call Shares
Outstanding.
Mina values her business at P500,000. If you divide it
by 100,000 shares, youll get P5 per share.
We call this the Market Price. This means that if
you buy one share of her business, it will cost you P5.
Buy all the shares and itll cost you P500,000.
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The best way to understand this is to look at that one
share as a miniature sized business. Think of it as a
tiny Minas Halo-Halo Stand that sells tiny glasses of
Halo-Halo to tiny people to make tiny little profits.
If you divide the net income to the number of shares
outstanding (P100,000 / 100,000 shares), youll get
P1 per share.
We call this the Earnings Per Share (EPS).
Now lets take a look at the equity of the business.
Awhile ago, we determined that Minas business has
P70,000 worth of equity in it. If you divide that
equity into the number of shares outstanding
(P70,000 / 100,000 shares), youll get P0.70 per
share.
We call this the Book Value Per Share (BVPS).
As you can see from here, the market price is directly
proportional to one share of stock. If you own the
whole business, you own all the P100,000 earnings
and P70,000 worth of equity.
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If you only own 1 share of Minas business, you own a
tiny P1 of the earnings and P0.70 book value of the
business.
This is the fundamental concept of why buying a stock
is the same as buying a business. By knowing how
much a company is worth, youll know how much a
stock is worth because all of these things are
proportional to each other.
In the next chapter, Ill discus some simple techniques
on how to value stocks so that you can now start
making educated estimates.
Keep in mind that there is no magic formula in
calculating intrinsic values. With that said, lets
proceed.
35
How to Value Stocks Using the Price

to Earnings Valuation Method
The P/E Ratio is one of the most used ratios in
finding undervalued stocks. To get the P/E ratio, all
you have to do is to divide the market price of the
stock to the recent earnings per share or EPS. Heres
an example.
Ayala Land Inc. (ALI) is trading at P40.60 per share.
The recent EPS is P1.20. To get the P/E ratio, we
divide P40.60 to P1.20.
P/E Ratio = P40.60/P1.20
P/E Ratio = 33.83
This number represents the amount of money you

need to spend to make P1 of profit one year later. In
ALIs case, its P33.83.
Lets take another example. This time, its
Megaworld Corp. (MEG).
MEG is trading at P5.06 per share and the recent EPS
is P0.32. The P/E ratio is computed at 15.81.
36

If you compare the two, youll see that MEG sounds
like a more attractive investment than ALI. You only
need to pay P15.81 per P1 of profit in MEG
compared to ALI which will cost you more than
double the amount.
It is clear in these examples that the lower the P/E
ratio, the cheaper the company sound.
Since MEG is a more attractive investment between
the two, lets find out its intrinsic value.
How to Find the Intrinsic Value?

The first thing we need to do is to get the average
historical P/E ratio of MEG for the last 5 years.
From my research, I found out that MEG averaged at
around 11.42.
We also need to find out the latest EPS in the four
most recent quarters. This is also called EPS
(Trailing Twelve Months) or EPS (TTM). The
EPS (TTM) of MEG is 0.33.
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The last thing we need is the growth rate at which
MEG is expected to grow its profits in the next five
years. I found this to be 15.24% by taking the 5-yr.
average net income growth. You can also use the 5yr. annual compounding growth rate. Its all up to
you what you want to use.
Now that we have all the data, the formula to find the
future value (FV) of the stock is;
Future Value = EPS x (1+% Growth)^5 x P/E
We put in the values;
FV = 0.33 x (1+0.1524) ^5 x 11.42
FV = P7.66
The future value of MEG is computed at P7.66 per

share five years from now. What we want is to find
out what the stock is worth today, not five years from
now. To do that, we need to use a Discount Rate.
What is a Discount Rate?

Always remember this; the value of your money today
is higher than the value of that same amount of money
38

in the future because if youll invest it today, it will
earn an interest.
This interest is what we call the discount rate.
We use this rate to calculate how much the future
value is worth in todays money.
This is the trickiest part because the discount rate that
youre going to use in this scenario will determine
your estimated intrinsic value.
To demonstrate, lets try to use the 5-yr. return on
government bond rates. Right now, the return is at
2.818%.
The formula to calculate the intrinsic value is shown
below;
Intrinsic Value = Future Value / (1+ % Disc.
rate) ^5
Computing for MEGs the intrinsic value, we get;
Intrinsic value = P7.66 / (1+0.02818) ^5
Intrinsic value = P6.67
39

According to this calculation, if we choose a minimum
rate of return equal to that of a 5- yr. government
bond, then the stock is worth P6.67 today.
Now what if we use a higher discount rate? Lets
assume a 10% discount rate which is almost equal to
the historical long-term return of the stock market.
Calculating, we get;
Intrinsic value = P7.66 / (1+0.1) ^5
Intrinsic value = P4.76
At a 10% discount rate, we get an intrinsic value of

P4.76.
I want to point out that when computing for the
intrinsic value, the value will depend on how much
money you want to earn every year.
So if you want to make 15% rate of return every year,
then use a 15% discount rate.
40
Using a Margin of Safety

Finding the intrinsic value is not an exact science.
Sometimes, we can commit errors along the way.
To make room for this, well introduce the concept of
Margin of Safety as popularized by Benjamin
Graham, the Father of Value Investing.
In the previous example the growth rate used is
15.24%. Now lets assume a safety margin of 25%.
Note that it doesnt have to be always 25%. Its up to
you how much risk you are willing to reduce.
In the example above, we can arrive at a conservative
growth rate of 11.43% as shown below;
Growth rate = 0.1524 x (1 0.25)
Growth rate = 11.43%
Using the new growth rate, we arrive at a future value

of P6.47. And when we calculate the intrinsic value
using a 10% discount rate, we get a value of P4.02.
Right now, MEGs market price is P5.06 per share.
Based on our intrinsic value calculations within a 5-yr.
41

period, MEG is no longer undervalued so we leave it
for now and look for other stocks in the market.
The P/E valuation method is the most straightforward
and easiest way of calculating a stocks intrinsic value.
This method is perfect for beginners so right now, I
want you to take out a piece of paper and try to
compute the intrinsic values of your investments to
find out if you have bought them cheap or at an
expensive price.
42
How to Value a Stock Using Return

on Equity Valuation Method
To understand Return on Equity (ROE) a little
better, let me demonstrate why ROE is one of the
most important metrics to understand to determine a
companys profitability.
Lets go back to my previous example, Minas HaloHalo Stand business. Her business has earnings of P1
per share and a book value of P0.70 per share.
Assuming her business continued to operate for
another year, she again will earn P1 per share
assuming theres no increase of sales.
If she decides to not pay herself a dividend and instead
reinvest all that money back into the business (buy
new equipment, buy a larger stand, buy her own
land), her book value will increase to P1.70 per share
or a substantial 147% growth!
Now, Im going to introduce another business for the
purpose of comparison. Lets call this business
Trinas Ice Cream Shop.
43

Trinas business also earns P1 per share but the book
value of her business is P50 per share. So after a year,
she decided to reinvest all of her earnings back into
the business.
Trinas book value has now increased to P51 per share
or a 2% growth.
Heres what I want you to understand. Both of these
businesses made the same amount of money but their
ROEs differ within a mile. Mina made a 147% return
while Trina only made 2%.
So what does this mean as a value investor? Assuming
both companies trade at premium to their book value,
if we bought 100,000 shares of Minas business at a
market price of P0.70 per share for a total of
P70,000, our investment is now worth P172,900 or a
147% growth!
Compare that to Trinas business. If we bought 1,400
shares at P50 per share for a total of P70,000, our
investment would just gain 2% or worth P71,400.
So heres what you need to remember. A business
that consistently shows high returns on equity is a
44

business that knows exactly how to reinvest their
earnings to make more money.
A business that shows poor returns means that the
business is doing a bad job of reinvesting their capital.
Now that we defined what return on equity is and
how important it is in identifying good businesses, its
time to learn how we can use this metric to value a
stock.
How to Use Return on Equity to Value a

Stock?
In order to use this method of valuation, we need to
gather all the data needed. For this demonstration,
well again try to valuate Megaworld Corporation
(MEG).
We need the following data below;
1.
2.
3.
4.
5-yr. Average ROE

5-yr. Average Dividend Payout Ratio
Recent book value per share
5-yr. Average P/E ratio
45

5. Discount rate
I calculated the average ROE of MEG for the last five
years. As of this writing, I found it out to be 12.22%.
The Dividend Payout Ratio for the last 5 years is
11.12%. The recent book value is 3.67. The 5-yr.
average P/E ratio is calculated to be at 9.19. And
lastly, well use a 10% discount rate in this example.
Now that we have all the data needed, well now
construct the ROE model. Ive shown below the
calculated 10-yr. projections.
46

To demonstrate how this is done, we first get the
recent book value of MEG which is 3.67.
From that value, we derive the EPS by multiplying
3.67 to the average ROE.
The Dividend Per Share (DPS) is calculated by
multiplying the EPS and the dividend payout ratio.
In the first row, we calculated the values of EPS and
DPS to be P0.45 and P0.05 respectively.
On the second row, the BVPS, EPS and DPS from the
first row (3.67 + 0.45 + 0.05) is added and entered
in the second row in the BVPS column (4.17).
We continue to do this calculation up to the 10th year.
On the 10th year, the earnings are now at P1.60 per
share. We then also take the sum of all the dividends
paid which is P1.12 per share.
To calculate the projected price, we multiply the 10th
year EPS to the average P/E ratio.
Projected Price = 1.60 x 9.19
Projected Price = 14.70
47

Add P14.70 to the sum of all dividends and we get a
total gain of P15.82.
Now, what we need to do is to get the Intrinsic Value
by using the 10% discount rate. Well use the
calculated projected price.
Intrinsic Value = 14.70 / (1 + 0.10) ^10
Intrinsic value = 5.66
MEG trades at P5.06 per share as of this writing. So

based on our calculations, MEG is now undervalued.
Based on ROE valuation, we can now buy the stock.
48
What Does Warren Buffetts Durable

Competitive Advantage Mean?
Im a fan of this investment philosophy by Warren
Buffett. This is one of the things I follow because its
really just common sense but not everyone is aware of
this.
According to Buffett, a business with a Durable
Competitive Advantage (DCA) has these
following characteristics;
Sell a product or a service that is a basic

necessity.
Is in an industry with very little competition.
Sell a unique product that doesn't change
much.
Provides a unique service that's difficult to
replicate.
Are a low-cost buyer and seller of products
the public constantly needs.
Spends very little or none at all on Research
and Development.
49

If you find a business with these characteristics, the
next thing to do is to validate that by digging into the
companys financial statements.
Here are 10 things you need to check in the financial
statements to qualify a business DCA;
High return on equity
High return on invested capital

Increasing historical earnings
Little to no debt (except for financial
companies)
Competitive product or service
No organized labor groups
Product or service increase along with
inflation
Low operational costs

Business buys back its shares
Retained earnings are used efficiently thus
adding value to the business and therefore
increases the market value.
Buffett said that a business with a DCA is a cash cow.

Thats why in my blog, www.investingengineer.com,
50

I do valuations and stock reviews using financial
statements to find these hidden gems in the Philippine
Stock Market.
You can read more about how Buffett identifies these
types of businesses by reading books and articles about
this topic on the Internet.
Now, if you find an interesting company that you
think has a DCA, then use the P/E and ROE valuation
methods I taught in this book to identify the best price
to buy the stock.
51
2 Powerful Resources That Will

Improve Your Stock Market Gains
If youre looking for a place where you can find
reliable and up-to-date information on your stock
investments, these 2 resources that Ive been using
will surely get the job done.
I recommend these services because I personally use
them in my stock investing decisions and I find them
useful and rewarding.
The first resource where I get a lot of financial advice
in stocks, entrepreneurship and proper mind setting is
the Truly Rich Club Bro. Bo Sanchez.
The second resource I use is PinoyInvestor. This is
where I get a lot of buy and sell recommendations
through stock reports.
Ill discuss them briefly on the next section.
52
Invest by Using the Strategic Averaging

Method
Investing in stocks is really confusing and
overwhelming thats why people make bad
investment decisions.
But if youre a member of the Truly Rich Club, it will
make your investing life easier and more enjoyable.
The Truly Rich Club of Bro. Bo Sanchez follows a
specific strategy called the Strategic Averaging
Method.
Its a strategy born out of value investing principles.
All you have to do is follow the recommendations in
the SAM Stocks Table and the Stock Alerts inside
the club and let compounding do the rest!
You can take advantage of this strategy by joining the
Truly Rich Club now. You can learn more about it by
clicking the link below.
LINK: VISIT THE TRULY RICH CLUB
53
Find Undervalued Stocks by Getting

Professional Stock Advice on
PinoyInvestor
Looking for EXPERT advice on what undervalued
stocks to buy and tips on when to sell is hard and
downright expensive nowadays.
But what if I tell you that theres a service wherein
you can get 24/7 expert advice from several
brokerage firms who have been investing and profiting
in the stock market for many years now for as low as
P399 a month?
This is what PinoyInvestor is all about.
I encourage you to try and become a FREE member
to get access to the free stock reports.
The reports contain a lot of information such as buy
and sell recommendations which are very important
to effectively maximize possible gains.
If you want to have FULL access to the most up-todate reports, sign-up as a PREMIUM member today.
54

You can learn more about PinoyInvestor by clicking
the link below.
LINK: VISIT PINOYINVESTOR
Take note that if you join using my affiliate links on

these two websites, I will earn a small commission if
you decide to make a purchase.
I recommend these services not because of the small
commissions that Ill make but because they are very
helpful in my stock investing journey, and I have good
experience with them.
Please dont spend your hard-earned money on these
services unless you think you really need the guidance
of Truly Rich Club and PinoyInvestor to achieve your
financial goals.
If you need help in signing up with these websites,
you may send me an email at
admin@investingengineer.com and Ill gladly assist
you the best I could.
55
My Final Message
Ive explained in this book the definition of what
Value Investing is all about and how you can value
stocks using two basic methods; the P/E Ratio model
and the Return on Equity model.
Ive also discussed briefly how Warren Buffett finds
companies worthy to invest by looking at a companys
Durable Competitive Advantage.
These methods require a lot of different assumptions
and therefore, are not perfect. But knowing these
kinds of calculations will give you trust and
confidence in making investment decisions. Just dont
forget that investing is more common sense than
elegant mathematics. Dont heavily rely on the figures
that youll get but instead, use them to justify whats
really happening in the real world.
Thank you for the time reading this e-book. If you like
it, please share it to people who you think will benefit
from it.
Happy investing!
56
Glossary of Terms
Note: All definitions are taken from www.investopedia.com.
Value Investing is an investment strategy where

stocks are selected that trade for less than their
intrinsic values. Value investors actively seek stocks
they believe the market has undervalued. Investors
who use this strategy believe the market overreacts to
good and bad news, resulting in stock price
movements that do not correspond with a company's
long-term fundamentals, giving an opportunity to
profit when the price is deflated.
Revenue is the amount of money that a company
actually receives during a specific period, including
discounts and deductions for returned merchandise. It
is the "top line" or "gross income" figure from which
costs are subtracted to determine net income.
The Cost of Revenue is the total cost of
manufacturing and delivering a product or service.
Cost of revenue information is found in a company's
income statement, and is designed to represent the
direct costs associated with the goods and services the
company provides. Cost of revenue is different from
57

cost of goods sold (COGS) because it includes costs
outside of production, such as distribution and
marketing.
Cost of Goods Sold (COGS) are the direct costs
attributable to the production of the goods sold by a
company. This amount includes the cost of the
materials used in creating the good along with the
direct labor costs used to produce the good. It
excludes indirect expenses such as distribution costs
and sales force costs. COGS appear on the income
statement and can be deducted from revenue to
calculate a company's gross margin. Also referred to
as "Cost of Sales.
An Operating Expense is an expense a business
incurs through its normal business operations. Often
abbreviated as OPEX, operating expenses include
rent, equipment, inventory costs, marketing, payroll,
insurance and funds allocated toward research and
development. One of the typical responsibilities that
management must contend with is determining how
low operating expenses can be reduced without
significantly affecting a firm's ability to compete with
its competitors.
58

Gross Profit is a company's total revenue (equivalent
to total sales) minus the cost of goods sold. Gross
profit is the profit a company makes after deducting
the costs associated with making and selling its
products, or the costs associated with providing its
services.
Operating Income is an accounting figure that
measures the amount of profit realized from a
business's operations, after deducting operating
expenses such as cost of goods sold (COGS), wages
and depreciation. Operating income takes a
company's gross income, which is equivalent to
revenue minus COGS, and subtracts all operating
expenses and depreciation. A business's operating
expenses are costs incurred from operating activities
and include items such as office supplies, heat and
electricity.
Net Income (NI) is a company's total earnings (or
profit); net income is calculated by taking revenues
and subtracting the costs of doing business such as
depreciation, interest, taxes and other expenses. This
number appears on a company's income statement and
is an important measure of how profitable the
59

company is over a period of time. Net income also
refers to an individual's income after taking taxes and
deductions into account.
An Income Statement is a financial statement that
reports a company's financial performance over a
specific accounting period. Financial performance is
assessed by giving a summary of how the business
incurs its revenues and expenses through both
operating and non-operating activities. It also shows
the net profit or loss incurred over a specific
accounting period.
A Dividend is a distribution of a portion of a
company's earnings, decided by the board of
directors, to a class of its shareholders. Dividends can
be issued as cash payments, as shares of stock, or
other property.
Retained Earnings refer to the percentage of net
earnings not paid out as dividends, but retained by the
company to be reinvested in its core business, or to
pay debt. It is recorded under shareholders' equity on
the balance sheet. The formula calculates retained
earnings by adding net income to, or subtracting any
60

net losses from, beginning retained earnings, and
subtracting any dividends paid to shareholders.
A Balance Sheet is a financial statement that
summarizes a company's assets, liabilities and
shareholders' equity at a specific point in time. These
three balance sheet segments give investors an idea as
to what the company owns and owes, as well as the
amount invested by shareholders.
An Asset is a resource with economic value that an
individual, corporation or country owns or controls
with the expectation that it will provide future
benefit. Assets are reported on a company's balance
sheet, and they are bought or created to increase the
value of a firm or benefit the firm's operations. An
asset can be thought of as something that in the future
can generate cash flow, reduce expenses, improve
sales, regardless of whether it's a company's
manufacturing equipment or a patent on a particular
technology.
A Liability is a company's financial debt or
obligations that arise during the course of its business
operations. Liabilities are settled over time through
61

the transfer of economic benefits including money,
goods or services. Recorded on the right side of the
balance sheet, liabilities include loans, accounts
payable, mortgages, deferred revenues and accrued
expenses.
Equity is the value of an asset less the value of all
liabilities on that asset.
A Stock is a share in the ownership of a company.
Stock represents a claim on the company's assets and
earnings. As you acquire more stock, your ownership
stake in the company becomes greater. Whether you
say shares, equity, or stock, it all means the same
thing.
Outstanding Shares refer to a company's stock
currently held by all its shareholders, including share
blocks held by institutional investors and restricted
shares owned by the companys officers and insiders.
Outstanding shares are shown on a companys balance
sheet under the heading Capital Stock. The number
of outstanding shares is used in calculating key metrics
such as a companys market capitalization, as well as
62

its earnings per share (EPS) and cash flow per share
(CFPS).
The Market Price is the current price at which an
asset or service can be bought or sold. Economic
theory contends that the market price converges at a
point where the forces of supply and demand meet.
Shocks to either the supply side and/or demand side
can cause the market price for a good or service to be
re-evaluated.
Earnings per Share (EPS) is the portion of a
company's profit allocated to each outstanding share
of common stock. Earnings per share serve as an
indicator of a company's profitability.
Book Value of Equity per Share (BVPS) is a ratio
that divides common equity value by the number of
common stock shares outstanding. The book value of
equity per share is one factor that investors can use to
determine whether a stock price is undervalued. If a
business can increase its BVPS, investors may view the
stock as more valuable, and the stock price increases.
63

The Price-Earnings Ratio (P/E Ratio) is the ratio
for valuing a company that measures its current share
price relative to its per-share earnings.
The Future Value (FV) is the value of a current asset
at a specified date in the future based on an assumed
rate of growth over time.
The Intrinsic Value is the actual value of a company
or an asset based on an underlying perception of its
true value including all aspects of the business, in
terms of both tangible and intangible factors. This
value may or may not be the same as the current
market value. Additionally, intrinsic value is primarily
used in options pricing to indicate the amount an
option is in the money.
Margin of Safety is a principle of investing in which
an investor only purchases securities when the market
price is significantly below its intrinsic value. In other
words, when market price is significantly below your
estimation of the intrinsic value, the difference is the
margin of safety. This difference allows an investment
to be made with minimal downside risk.
64

Return on Equity (ROE) is the amount of net
income returned as a percentage of shareholders
equity. Return on equity measures a corporation's
profitability by revealing how much profit a company
generates with the money shareholders have invested.
The Dividend Payout Ratio is the percentage of
earnings paid to shareholders in dividends.
Dividend per Share (DPS) is the sum of declared
dividends issued by a company for every ordinary
share outstanding. Dividend per share (DPS) is the
total dividends paid out by a business, including
interim dividends, divided by the number of
outstanding ordinary shares issued. A company's DPS
is usually derived using the dividend paid in the most
recent quarter, which is also used to calculate the
dividend yield.
Competitive Advantages are conditions that allow
a company or country to produce a good or service at
a lower price or in a more desirable fashion for
customers. These conditions allow the productive
entity to generate more sales or superior margins than
its competition. Competitive advantages are
65

attributed to a variety of factors, including cost
structure, brand, and quality of product offerings,
distribution network, intellectual property and
customer support.
Return on Invested Capital is a calculation used
to assess a company's efficiency at allocating the
capital under its control to profitable investments.
Return on invested capital gives a sense of how well a
company is using its money to generate returns.
Comparing a company's return on capital (ROIC)
with its weighted average cost of capital (WACC)
reveals whether invested capital is being used
effectively.
66
Thank you for reading!

Visit www.investingengineer.com
and be sure to subscribe to the
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posts straight to your inbox.
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LINK: The Investing Engineer PH
67
E-book Disclaimer
(1)
Introduction
This disclaimer governs the use of this e-book. By

using this e-book, you accept this disclaimer in full.
(2)
No advice
The e-book contains information about investing in

the Philippine Stock Market. The information is not
advice, and should not be treated as such.
You must not rely on the information in the e-book as
an alternative to financial advice from an appropriately
qualified professional. If you have any specific
questions about any financial matter, you should
consult an appropriately qualified professional.
(3)
No representations or warranties
To the maximum extent permitted by applicable law

and subject to section 5 below, we exclude all
representations, warranties, undertakings and
guarantees relating to the e-book.
68

Without prejudice to the generality of the foregoing
paragraph, we do not represent, warrant, undertake
or guarantee:
(4)
that the information in the e-book is correct,

accurate, complete or non-misleading;
that the use of the guidance in the e-book

will lead to any particular outcome or result;
or
In particular, that by using the guidance in

the e-book you will make money in the stock
market.
Limitations and exclusions of liability
The limitations and exclusions of liability set out in

this section and elsewhere in this disclaimer: are
subject to section 5 below; and govern all liabilities
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