Investment 7 principles

1233 mots 5 pages
The Seven Principles

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 at least 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 growth

a) No growth = no value Only invest in businesses generating substantial operational and earnings growth.

b) PER 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% of American.

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 is rather 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 than

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