a long, long reply to jbeardy!!!

Hi Jbeardy.

Sorry for not getting back to you sooner. I've sold down my 'trading' stock in WBC for the time being, so I haven't bothered to read this thread for a few days. I still hold some for future growth and I will get back into them if their price meets my targets. If they go higher, so be it. (As I said before, there are so many shares out there and you must remember that you are never forced to buy them.)

A few things that might help you appreciate the true value of a share... not its price. (Price hardly ever reflects value).

ROE (Return on equity) - This is the percentage return on the money the company has/uses. A ROE of 20% may indicate good value, the higher the better. A ROE of say 4%, will mean that you might as well leave your money in the bank.

P/E (Price per earnings) - If you divide the share price by the earnings per share you get the p/e ratio. A p/e ratio between 10-14 is historically the average for a long-term business. Good companies with ROE of 20% and above will have a premium attached to them and their P/E will be higher BUT be careful, as this is attached to price, it is an arbitrary figure. (I only use it as I guide to see if I'm buying something at reasonable value.)

Let's look at Westpac on current figures with a share price (SP) of $21.07.

2011 earnings where $2.02.

Their current P/E is currently: 21.07/2.02 = 10.4
Their 2012 expected P/E is: $21.07/2.15 = 9.8
Their 2013 expected P/E is: $21.07/2.25 = 9.4

NOTE: VALUE IS GENERALLY DETERMINED ON FUTURE PROSPECTS!!!
(How long into the future is determined by current economic climates... A strong economy might see you looking 2 or more years, a weak economy might see you looking at only 6 months.)

Now what the P/E is basically telling you is that in 9-10 years, the bank will have made back all the capital that you put into it (excluding tax advantages, etc.)


WBC's ROE for the last few years has been:
2007 - 21.7%
2008 - 21.3%
2009 - 9.95%
2010 - 15.4%
2011 - 15.1%

This gives you a guide of what the company is doing. Even though it only made 9.95% on its equity in 2009, it certainly beat the bank interest!!! But the price might have been too high??? Lets see...

In 2009, it made $1.23 and its SP was at one stage $28.43.
This gives a p/e ratio of $28.43/$1.23 = 23!!!
Warning bells should have been sounding.

Problem is, these figures are often retrospective and the trick is to understand the company's future prospects and the economy's future prospects, and then you can determine a price range that you feel comfortable with.

Btw, be careful of statements saying that companies have made 'Record revenue'. It doesn't mean much at all. Record profits is what you are after with ROE's consistently high.

Also be careful of companies with high dividend yields and high p/e... If the company is in trouble it might have yields and p/e that are high, as both these values are determined using that arbitrary figure of 'price' again!

ROE's are also great when you are comparing two similar companies, such as banks!!!

Now if you look into TA, you will learn better entry and exit points. Also the figures are readily available from your on-line broker.

I hope all this helps.

Good luck!


Ps - It's a lot to take in at once. Read it and sleep on it and then read it again later. And ask!!! The only stupid question is the one that is not asked. There are multiple of experts on this site that I'm sure a more than willing to offer you advice. (Just don't buy anything unless you are comfortable with it and have set your own price range, including the price at which you will sell it at.)