Month: December 2020

Value Investing – Business Ratios (Lesson 12)

Business ratios are used to compare similar companies within the same industry. RULE #1: DO NOT USE BUSINESS RATIOS TO COMPARE COMPANIES AGAINST EACH OTHER IF THEY ARE IN DIFFERENT INDUSTRIES.

Business ratios are not perfect, they have their respective flaws and it is important for value investors to understand the algorithms used with business ratios. It is also important to note that business ratios can be easily manipulated and result in misleading outcomes. More importantly, business ratios only reflect current information and not long-term trends. Think of business ratios as comparable to a doctor acquiring your vitals upon your medical visit. The vitals only reflect the ‘then and now’ status of your medical condition. They do not reflect your lifetime nor trending condition. 

In effect, business ratios have a purpose, although limited. They are the best tools to compare similar companies within the same industry and typically the same market capitalization tier. Thus, a second rule to use with rule number one above; RULE #2: USE BUSINESS RATIOS TO COMPARE SIMILAR MARKET CAPITALIZATION COMPANIES WITHIN THE SAME INDUSTRY.

Because business ratios can be easily manipulated, it is important that users of business ratios have a full understanding of their respective formulas. RULE #3: BUSINESS RATIOS ARE NOT AN ABSOLUTE RESULT. They are merely indicators and that is all they are good for when interpreting their results. 

Even with the above limitations, business ratios are beneficial to investors as they are the best method of comparing existing or potential investments. Their results are not perfect, but they can indeed provide adequate confidence when making pertinent decisions about a companies current financial status. 

Value Investing – Key Performance Indicators (Lesson 11)

All of us use indicators everyday to help us manage our lives. These indicators assist us with making good decisions. This same concept exists with stock investments. There are several different indicators related to stock. Most of them are financial in nature and often summed up via business ratios. However, many of the top companies provide additional indicators. One of these additional groups of indicators are ‘key performance’ markers. In effect, they are production based bits of information that assist value investors in developing and validating a good buy/sell model for that particular company.

Performance indicators are different for each industry. For the value investor, understanding the respective industry along with their systems, processes and critical points are essential when evaluating the current stock price along with market reactions. It is important for the value investor to understand not only the quantitative results of performance, but the standard of performance to measure the actual outcome against. In most cases, performance indicators exist with sales, production, and marketing/advertising. The key to success is to incorporate all these different data points and create an impact factor with the company’s stock price.

The end goal of monitoring performance is to determine if the buy/sell model requires any update. It is a simple ‘Yes’ or ‘No’ decision. When creating a trend line of data, it is best to look at as much history as possible, the author suggests no less than five years; preferably the trend line should be greater than seven years. Analytical standards place more emphasis on recent outcomes in comparison against the more historical results. Value investors take a more conservative approach and use the average of the trend line to determine the ‘Yes’ or ‘No’ model update. The reasoning is simple, short-term results or near-term expectations should have little bearing on overall historical performance and the corresponding buy and sell triggers for a particular stock. Just because the recent performance is either elevated or depressed doesn’t indicate an ongoing trend. Recent performance may have been hampered or enhanced due to environmental or unusual conditions. Basing one’s decision on the most recent results is speculative and not a sound investment concept. Using the overall average is superior as it eliminates speculation.

Value Investment Fund Status Week 9 – No Change

During the week ending December 25, 2020, the Value Investment Fund expanded 1.6%. Whereas the DOW reported a slight uptick of .04%. The lack of action by the President to sign the relief bill passed by Congress greatly affected the markets as a whole. Both the S&P 500 and the 1500 Composite Index only marginally decreased, about .2% each.

Value Investment Fund Status Week 8 – Patience

Patience is essential with value investing. It is difficult because it just can’t get here soon enough. However, the models will prevail and the returns on the investment will be lucrative. Be patient.

With the REIT Pool of investments, the model indicates that it will take about 10 months to reap an excellent reward; it has only been 2 months so far. Thus, patience is necessary even if the fund has some setbacks in the interim. Economic power will prevail and the REIT investments will do very well and well outperform the DOW, S&P and all other indices.

Value Investing – Financial Statements (Lesson 10)

To comprehend financial information, first the member must understand their general purpose and how they are prepared. The first section of this lesson introduces financial statements and their two primary purposes. In addition, pertinent issues are introduced that a company must endure to finally present a well prepared set of reports. Next, each of the five major types of financial statements are introduced. Most companies present a core set of five that include a 1) balance sheet, 2) income statement, 3) cash flows statement, 4) statement of retained earnings, and 5) a set of notes to clarify the four other statements. Some go further and present industry and highly customized financial reports. These are covered in Phase Two of this program along with the Pool’s information center that members have access to on this website. Finally, this lesson covers the importance of a few key bits of information and how these critical financial values impact the respective buy/sell models value investors develop.

Many stock market investors are not familiar with financial reports; they rely on accountants to provide the results in laymen’s terms in order to make decisions. This program is designed to build the confidence of non-accountant types to not only understand financial reports but to appreciate and ultimately, eagerly await their arrival each quarter. Again, Phase Two of this program goes in-depth about financial statements and how to interpret the information.

This lesson utilizes the financial reports as presented for the year 2019 from the Coca-Cola company. Coke is a DOW company and is considered one of the best stocks to own if you can purchase the stock at a good price. Coke is a dividend based purchase and often buyers purchase Coca-Cola stock to hold and receive dividends.

Value Investment Fund Status Week 7 – Tough Week

During the week ending December 12, 2020, the Value Investment Fund retracted 4.26%. Whereas the DOW only reported a decrease of .6%. The lack of action in Congress greatly affected the REIT Pool as its value decreased 6.25%. Inaction to support the economy overall affects confidence in the ability of tenants to pay their respective rents. Since the REIT Pool is strictly traditional apartment style real estate, this pool felt the brunt of this political mess.

Sold PUTS Norfolk Southern Railroad

With options, an owner of stock fears a sudden steep drop in price and thus they may purchase an option called a ‘PUT’ to force someone to buy the stock at a preset price. The key for the owner of a PUT is to set a floor price for their existing stock position. A seller of a PUT desires to own the stock at a certain price if it can get there.

Value Investing – Principle #4: Patience (Lesson 9)

This lesson isn’t about emphasizing patience, it is about understanding how patience actually creates financial wealth in the market. Unlike day trading which is not much more than gambling, value investing is about earning good returns on one’s investment. The decision models built will never create instantaneous wealth, they are simply designed to take advantage of a good portion of the market price extremes that stocks experience. The first part of this lesson introduces the reader to certain terms used with cycles. It explores cycles with two areas of nature, sound and ocean waves. The next part of this lesson explains how the market as a whole experiences ups and downs just like wave patterns. These cycles, just like sound and ocean waves have a reasonable correlation to predictability. The next section takes this cycling effect into the industry level of the market. What is commonly called the ‘Pool’ of investments with value investing. This cycling of value continues into the respective investments. These first four sections introduce the overall concept of cycling with stock prices.

With the concept of cycling, this lesson then introduces how a value investor captures maximum return on an investment by smartly setting the respective buy and sell points. There are some drawbacks to this concept, if the cycle is extended, the overall return on the investment decreases. This is covered in the fifth section below. What is really important to remember is that even though there may be an extended cycle period, it doesn’t mean the value investor lost money; it just simply means the overall return on the investment fund will be less than anticipated. Thus, in some years, your fund may experience only 10% overall growth whereas in some other years, it may experience 35 to 40% growth. The key is the long-term approach to value investing. What accumulates wealth is patience, a lifetime of patience.

Value Investing – Principle #3: Financial Analysis (Lesson 8)

Financial analysis is the basis to set up a predictable and reasonable market price for the respective stock. This becomes the sell price point or what is often referred to in this series of lessons as the recovery point. If all three forces (economic, industry and company level) are performing reasonably, then the stock price for the company will recover to this sell point within a short period of time. Therefore, it is important for value investors to understand the importance of having knowledge about financial analysis.

Financial analysis is an assessment of a company’s performance in the form of dollars. The goal is to establish a trend line of financial accomplishments. It is safe to assume that the historical results can predict future results with accuracy. Again, large corporations are money generating machines; it will take several adverse actions to slow down or diminish the ability to earn profits.

Financial analysis starts with gathering research data, specifically annual and the most recent quarterly financial reports. With this information, certain data is loaded into a spreadsheet so that ratios can be determined. With the spreadsheet data, trends are tracked and from there, summarized. This summary of pertinent outcomes assist the value investor with determining the most likely outcomes for the next several quarters. Take note, value investors are not as interested in extended time frames as this methodology is designed to determine an expected recovery value for the stock in the short-term. Value investors are not interested in holding to collect dividends, there are interested in the buy low, sell high tenet of business. Thus, long-term expectations are irrelevant.

Other key information is extracted from the quarterly and annual reports to confirm trends, validate business ratios and finally, determine the expected market recovery price.

Value Investment Fund Status Week 6 – 3.2X Dow Jones Industrial Average

Value Investment Fund Status Week 6 – 3.2X DOW Jones Industrial Average During the week ending December 5, 2020, the Value Investment Fund reports a 3.88% gain in one week. Whereas the DOW only reported a 1.2% gain. Thus, as happened multiple times this year to date for the fund and during Year One of …

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