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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: IndependentValue who wrote (55734)	7/25/2015 11:58:21 PM
From: Shane M	Read Replies (1) \| Respond to of 78704

re: Regarding your own preference for "better" companies, how do you define better when selecting investments? Do you use an ROIC measure or do you have other metrics you find useful? I like to consider the Buffett ratio which I call ROUNTA - Return on Unleveraged Net Tangible Assets. IV, I use an aggregation of alot of the measures. ROA, ROE, ROIC (conceptually I like ROIC quite a bit), Gross Profit/Assets, Return on Marginal Equity, Return on Retained Earnings - looking at both longer term and shorter term time frames for some of the measures. (looking at both long and shorter time frames is important imho - single year figures can be particularly deceptive). Also include Piotroski F Score, Mohanram's G score - they're both powerful predictors w/ quality components. All the measures get aggregated into a percentile compared to industry and sector where I can, and aggregated into a single score/ranking. It's very much a quantitative exercise. I prefer this approach because individual measures can sometimes be deceptive, while the aggregation of many measures is less likely to be so. There are different philosophies on this, but it's what I do. There are probably other measures you could include, but that's the core of what I use. I looked up ROUNTA and it sounds like a reasonable measure to throw in the mix if you feel the intangibles don't contribute to returns. I'm looking through one of the spreadsheets I use as I type this and I also have an adjustment to prefer lower levels of leverage/debt compared to industry/sector - because when things blow up I don't want to have to worry as much about survivability. There's also an adjustment to prefer both earnings stability and earnings growth. So the quality measure incorporates that too. For what I do, all of the quality boils down to a single index for the factor, which I use in a magic formula way - looking for stocks w/ a nice blend of factors w/ combinations of value, quality, momentum, size, liquidity, volatility, or any other factor you might prefer. I might look at value+quality (basis of magic formula approach). Or value+momentum. Or small stocks w/ quality. etc. Alot of the ideas are based on academic papers that find pricing anomalies w/ various factors, so it's just a way to generate stocks with characteristics that should have odds in their favor. If I had the guts I'd just do a pure quantitative investing approach, but instead I use the results as a list to sometimes select from - which can defeat the benefits of a quantitative approach to start with.