One of my mistakes is that I regularly forget that everyday, new readers subscribe to Old School Value. When I write, I still think of the early days when 50 or so people read this blog.
Now that there are over 7,600 readers and new subscribers each day, I want to highlight five popular articles from the past 90 days that you may have missed out on.
Click on the headings to read the full articles.
With the growing influence of securities analyst recommendations and the proliferation of financial bloggers, there is good reason to question their usefulness. Although probably not a surprise to anyone, I think it’s worth some discussion: Just because I invest in a particular stock does not mean you should invest in the same one, or vice versa. There are just too many outside factors to consider: allocation, personal conviction, available capital, time horizons, investment philosophy, circle of competence, etc. But this does not discredit the stock analysis write-ups and recommendations of financial bloggers. In fact, financial bloggers can be a great resource for your portfolio . . . if you approach them skeptically.
So without further ado, 5 reasons to doubt my analysis…
I don’t know about you, but I never get tired of hearing about Warren Buffett. He’s central to the value investor community, and there’s good reason for that. He merged Fisher’s growth investing with Graham’s margin of safety. Also from Graham, he adopted the “Mr. Market” approach to thinking about the stock market. Finally, Munger brought the final touches to Buffett’s investing: a resolute determination to invest in only wonderful companies even if they have to be bought at fair prices.
One of the key points I understood as I studied investments was the importance of understanding accounting and more importantly, understanding the financial statements.
In my opinion, it is the most critical aspect of investing, after all, accounting is the language of business and a lot can be determined by analyzing the numbers alone.
E.g. you can confirm whether management is doing a good job of running the business by analyzing the ROE or CROIC, or whether management is being overly optimistic when margin trends show that the business is actually deteriorating.
There are many books that teach you accounting, but the more important lesson is to understand how it relates to investing.
Here are the factors that make up the valuation model.
1. Earnings growth rate
2. Dividend yield
3. Business risk
4. Financial risk
5. and earnings visibility
The quick explanation is that the valuation starts with the current PE and then points are added or subtracted from the original to come up with an adjusted PE value.
I’ll show you how I’ve quantified each of the above points and how everything is put together to come up with a valuation.
Here are the ratios, in no particular order, that I like to check in order to get a good all round picture of a company.
- Price to Book Value (P/B)
- Free Cash Flow to Sales (FCF/Sales)
- Cash Return on Invested Capital (CROIC)
- Enterprise Value to Free Cash Flow (EV/FCF)
- Total Debt/Equity, Long Term Debt/Equity & Short Term Debt/Equity