Thanx for the reply Spekulatius. Commenting on the investment strategy and criteria used by other investors often engenders something of a ‘retaliatory’ response. That’s why I usually preface my comments with "What you and others do with your investment capital, and the criteria you use, is entirely your own business." Needless to say, it’s good to read that, however you personally approach the stock market, you are generally garnering profits and not incurring much in the way of losses. The proof of the pudding, as they say, is in the eating !!
My primary intention for writing what I did in 22845, and in 22847, was to comment on another Investment Strategy and to back it up with actual performance numbers. Maybe it would assist others by way of them asking questions of their own systems in terms of separating winners from losers.
Is the system "error proof" ? Well, firstly, as I mentioned previously, it’s not my system. It first saw the light of day in my friend, Dr.Karl Posel’s first book, 'Winning On The JSE'. The author holds the highest level of academic qualification, viz. D.Sc. and Ph.D, and also has over 30 years experience in stock market investment. I mention these two aspects because, in my opinion, such individuals :-
1) Generally value their reputations and are very circumspect when it comes to putting anything into print which they cannot support and substantiate.
2) In those 30 years he has seen and evaluated many different approaches to stock investment and has concluded that a mathematical and rational analysis of a company’s Financial Fundamentals is primarily the way to go.
Speaking for myself, I have yet to lose money on a stock purchase that satisfied the 9 criteria (or Laws as he described them. Several have since been modified) that appeared in "Winning ...", as well as 3 further criteria that we have determined since then. I mentioned 8 in 22845 because those ones refer, specifically, to the contents of a company’s Financial Statements.
You stated, "From my experience, no such method exists." Well ... who of us can say that we have experienced all that life, and stock market analysis, has to offer ??!! {:-)
With regard to ‘inhonest’ (maybe that should be ‘dishonest’) management. Yes, there certainly have been examples of that in recent times. But, in our opinion and experience, QUALITY companies, earning above average returns for their shareholders, don’t usually have anything to hide. This is generally evident in the content and manner in which they present their Financial Results. After all, you can fool all of the people some of the time, but you cannot fool all of them forever, and eventually any bad reporting will become evident. Needless to say, it’s important to also consider the quality of the management of the company you are investing in. This, after all, is one of the most important considerations of the "Sage of Omaha" before he buys into any company.
You ask for "more specifics". Unfortunately it would not be fair to those who have commercially obtained this information, both from me and from the writings of Dr. Posel.
However, for what you may consider it to be worth, I will indicate which aspects, both within and without, a company’s financial statements, we would consider. Most of the items are formulated into ratios, and targets are set which a company has to meet or exceed. QUALITY companies, that provide ongoing value to their shareholders, have no problem in generally satisfying these requirements. The converse is the case for poor performers. We generally only purchase or sell our shares after a company publishes its financial statements because that’s when you know most about a company’s financial status. If, at that stage, a company no longer satisfies our criteria, we sell it. We would also sell if a better opportunity presented itself. In this regard, it would be interesting to know why you sold TWIN "early" as you stated. Was there an adverse change in its Financial Fundamentals, or did you find a better prospect ? If it was neither, then, in our opinion, there was no reason to offload it and lose out on future profit.
We concentrate, primarily, on analysing individual companies, and don’t put too much emphasis on which sector is weak or strong, what "the Dow", "SP500" or any other Index is doing. Personally, I fail to see what the average performance of 30 large cap stocks of "the Dow" has to do with the ongoing performance of, for example, a stock such as HANS or PDX. And criteria such as "Market Sentiment" is, in our opinion, a rather nebulous and un-quantifiable consideration.
We prefer not to invest in Resource based companies, Banks and Financial Institutions. That still leaves over 8000 companies to choose from on the US stock markets.
With regard to Industrial Companies, we look at and utilise ..
TURNOVER
EBITDA
NET FINANCE COST
PROFIT BEFORE TAXATION
NET INCOME
LONG TERM DEBT
CAPITAL EMPLOYED
EPS
DPS
DIVIDEND COVER
DIVIDEND YIELD
P/E
MONEY MARKET INTEREST RATE
INDIVIDUAL’S AVERAGE TAX RATE
We are not fans or proponents of ‘Free Cash Flow’, Price/Book, Price/Sales, Price/(Anything Else, except Earnings).
One could say it’s a process that concentrates, primarily, on the "internal dynamics" of an INDIVIDUAL company’s Financial Statements. After all, it’s a company one is investing in, not a Sector or Overall Index.
Best wishes with your investments in 2006. |
