Rrrrrrrrr = see appendix
Principle #1: Assets productivity
a) Only invest in wealth creating businesses.
An investor should always invest in businesses that are creating value. In Europe we consider that 60% of businesses are not creating any value and 40% in USA.
b) ROE (~ ROA) > wealth creation objective
The return on equity has to be atleast equal to the return on asset.
c) Invest in businesses that have low debt, zero if possible.
Meaning that we need to invest in businesses that are not dependant of banks and other interest rates. Having no debts allows companies to be independent and self-financing. Also note that having a big gap between the ROE and ROA can indicate a debt.
Principle #2: Business growtha) No growth = no value
Only invest in businesses generating substantial operational and earnings growth.
The higher the PER level the riskier the bet, you bet that you will earn most of your earnings in the future.
c) eps > REV > ROE (~ ROA) > wealth creation objective
With this criterion we have eliminated 95% of European companies and 85% ofAmerican.
Principle #3: Capital invested
a) Stock market prices are not reliable estimators of intrinsic value
In fact the informational content of the stock market price are worthless to estimate an intrinsic value of a share. To evaluate the true price of the share we use:
(PEG = Price earnings Growth)
With the peg we can estimate if the price of a share israther high or low:
PEG ratio is:
≥1: price is high
≤1 Price is low
≥1,5Price is expensive
≤0,5 Price is inexpensive
≥2 Price is extremely expensive
≤0.2 Price is extremely low
It’s best to avoid high PEG’s and when possible try to buy share’s with a PEG ratio lower than0,6.
b) Notion of value gap.
How to asses pessimistically the short term appreciating potential of a company?
We will use the value gap to do so:
VG = [MRQ(EPS) x 4 x TTM(PER)] – Price per Share
I.E.: Crox: June 07 with an EPS growth of 0.58
0.58x4x47.73 = 111
With a current price of 67, the Value gap will be as following:
111-67= 44 ( 44/67=0.66(66% is the value GAP
The highest the value gap the best, we should always have a significant positive rate.
c) Notion of estimated value Gap
We can also estimate the future value gap.
www.investor.com(stocks(research wizard(price target(estimated price target.
Principle #4: Focused diversification
a) Diversification is a protection against ignoranceDiversification has nothing to do with technology diversifation, sectors diversification nor country diversification. The best way to diversify your portfolio is to have assets that have a negative correlation (negative correlation in EPS is best). It’s also best not to over diversify your portfolio; you should assess 10-20% of your portfolio to each investment.
The beta is a statisticalmeasure of the tendency of the price of the share to fluctuate as the underline market.
HIGH beta stock: means that the company’s share price usually overreact to a market fluctuation.
LOW beta stock: means that the company’s share price usually under react to a market fluctuation.
The company Crox has a beta of 2.48; it means that if the market goes up 1% Crox shouldstatistically go up 2.48%.
The company Citybank has a beta of 0.76; it means that if the market goes down 1%, Citybank should go down by 0.76%.
Principle #5: Urge to decide
a) It’s much more important to sell well than to buy well
It’s far more important to know when it’s time to sell than to buy. We have the tools to anticipate the market evolution.
b) MACD analysis....