My questrade account finally got activated and picked 4 stocks that all had strong buy ratings and beta over 2.0 and 30-day correlation pairs less than 0.2. I been following some stocks this way for about 1 month (google finance) and they yielded about 10% for the month. Too bad my acct just got acctivated and i missed on past-month returns. I am new to all this and just wondering how a beginner should choose his stocks. BTW. I find looking at the market from time to time is a nice way to take a study break.
all my money is invested in blow and hookers…
No longer allowed to trade my account as part of my employment requirements. Sounds like my methodology was pretty different from yours - mainly focused on fundamental analysis, with value being the primary driver of a purchase. -Businesses that use (and need) little leverage on the balance sheet. Most of the stocks I pick are heavily out-of-favor; I want a nice cash balance or at least little debt service required until they get out of the woods. -Understandable business model. If I can’t explain the assets the company has at their disposal, the competitive landscape, the price drivers, and possible catalysts for the stock to recover, then I either don’t understand the stock or the business well enough. -Solid earnings power throughout all phases of the business cycle, with my analysis going back perhaps 5 or more years. I’d prefer not to see operating losses (though accounting losses don’t bother me much). -Management’s interests aligned with shareowners. No dual-class share structures, no massively insider boards, no pay schemes that are so badly-out-of-line with results that I hate the management when I finish reading the proxy. -Little goodwill on the balance sheet. Most acquisitions are value-eroding in my opinion - it’s not that the combined businesses never work well together, it’s just that management pays a high price for businesses. If there is lots of goodwill on the balance sheet, the post-acquisition operating results had better be dynamite. -A price that suggests I’m getting the business cheaply. This can be price/cashflow, price/book, price/normalized earnings, or others. The business should be cheap on an absolute basis - comparing the price i’m paying for the company relative to the sector or the market tends to skew thinking. It helps if the company has lots of hard assets or easier-to-value assets and few off-balance sheet liabilities; then you can sort of figure out “OK, I’m paying $X for a business that generates $Y on average, and every $1 of my purchase is getting $Z worth of assets…”. -Historically, limited share dilution/use of options. Nothing is crappier than being right on all of your analysis and then finding out management is going to raise cash by diluting the existing stockholders to hell.
What kind of valuation models do you guys use to determine intrinsic values? I use a really basic FCF version, just trying to get an idea of what others do.
pimpineasy Wrote: ------------------------------------------------------- > all my money is invested in blow and > hookers… I would’ve gone with hookers and blow. But hey, thats like saying you like as-completed basis over per-contract method.
I match stock symbols with my former girlfriends’ initials. If no exact match, I use their bra size as a wild card letter until I find a buy signal. A commercial version of my VBA function is going to available soon.
you guys rock!
LOL Inner Evil Voice Wrote: ------------------------------------------------------- > I match stock symbols with my former girlfriends’ > initials. If no exact match, I use their bra size > as a wild card letter until I find a buy signal. > > A commercial version of my VBA function is going > to available soon.
SSF - Seems like a very reasonable approach. I had a couple thoughts and wanted to see what your experience has been. 1) How often do you find stocks like this? It seems companies are getting more complicated and less transparent, and this might be a difficult find. Have you found this to be more like a diamond in the rough or do you relax your criteria in order to accept a fairly large sample of companies? 2) I like the idea of not letting relative comparisons skew your thinking, but how do you deal with situations in which everything is potentially overvalued? Do you continue to monitor and evaluate portfolio companies or do you force yourself to take on new companies knowing they may potentially be overvalued on an absolute basis? Thanks for your input.
…and to answer the original question: Paul Jr. the Octopus.
I go for the blind fold trick, cover your eyes open the markets section of the FT and just see where your finger lands, after a few try’s you have a fine little portfolio
supersadface Wrote: ------------------------------------------------------- > No longer allowed to trade my account as part of > my employment requirements. Sounds like my > methodology was pretty different from yours - > mainly focused on fundamental analysis, with value > being the primary driver of a purchase. > > -Businesses that use (and need) little leverage on > the balance sheet. Most of the stocks I pick are > heavily out-of-favor; I want a nice cash balance > or at least little debt service required until > they get out of the woods. > > -Understandable business model. If I can’t > explain the assets the company has at their > disposal, the competitive landscape, the price > drivers, and possible catalysts for the stock to > recover, then I either don’t understand the stock > or the business well enough. > > -Solid earnings power throughout all phases of the > business cycle, with my analysis going back > perhaps 5 or more years. I’d prefer not to see > operating losses (though accounting losses don’t > bother me much). > > -Management’s interests aligned with shareowners. > No dual-class share structures, no massively > insider boards, no pay schemes that are so > badly-out-of-line with results that I hate the > management when I finish reading the proxy. > > -Little goodwill on the balance sheet. Most > acquisitions are value-eroding in my opinion - > it’s not that the combined businesses never work > well together, it’s just that management pays a > high price for businesses. If there is lots of > goodwill on the balance sheet, the > post-acquisition operating results had better be > dynamite. > > -A price that suggests I’m getting the business > cheaply. This can be price/cashflow, price/book, > price/normalized earnings, or others. The > business should be cheap on an absolute basis - > comparing the price i’m paying for the company > relative to the sector or the market tends to skew > thinking. It helps if the company has lots of > hard assets or easier-to-value assets and few > off-balance sheet liabilities; then you can sort > of figure out “OK, I’m paying $X for a business > that generates $Y on average, and every $1 of my > purchase is getting $Z worth of assets…”. > > -Historically, limited share dilution/use of > options. Nothing is crappier than being right on > all of your analysis and then finding out > management is going to raise cash by diluting the > existing stockholders to hell. Boom
LPoulin133 Wrote: ------------------------------------------------------- > SSF - Seems like a very reasonable approach. I > had a couple thoughts and wanted to see what your > experience has been. > > 1) How often do you find stocks like this? It > seems companies are getting more complicated and > less transparent, and this might be a difficult > find. Have you found this to be more like a > diamond in the rough or do you relax your criteria > in order to accept a fairly large sample of > companies? Depends on the time I’m looking. In late '08 and early '09, I wish, wish, wish I had more money at my disposal - there were way too many great companies at great prices. I would say in the high dozens, maybe hundreds of good companies that were cheap almost based on any metric I wanted to use. Now, not so much. As I said, I’m value-oriented, so I’m OK with going long periods without buying anything. To make profitable investments, you first need money to invest; that means not frittering away capital by trading excessively and taking swings at stocks that seem “good enough”. I believe in running a focused portfolio (20-40 positions seems like more than enough to keep track of for a person smart enough to sit for the CFA exams, and 10-20 is probably more realistic) and keeping turnover low - maybe 25 to 33% turnover in a given year, implying a 3-4 yr holding period. I do not relax my criteria much, no. Occasionally I would relax/adjust my screening criteria if my normal screens aren’t turning up much to look at, but in terms of making a purchase, I want to figure that I’m getting the business at half or two thirds of what it’d be worth in a “normal” business environment, meaning the economy, sector, and business are all humming along at a pretty normal pace, without some huge storm cloud on the horizon. I realize my personal investing methodology wouldn’t work if you’re running an institutional portfolio where you’re required to be 80%+ invested or something in your asset class, but remember, gentlemen, no one’s calling strikes on you if you don’t invest your personal money because you’re not seeing compelling valuations. > 2) I like the idea of not letting relative > comparisons skew your thinking, but how do you > deal with situations in which everything is > potentially overvalued? You don’t invest. Seriously. Again, no one’s calling strikes on us for not swinging, fellas. If you play poker, think of it as getting a run of bad cards. There will be nights where you sit down at the table and get 2-7 offsuit, followed by T-4 offsuit, followed by 2-5 suited, etc. Just a complete run of crappy starting hands. You’ll know in your heart of hearts that if you play them, over the long term, you will lose. It’s very hard to resist the urge though, when you see the moron next to you playing 34-offsuit and then raking a huge pot in when he flops a straight. By the same token, it’s hard not to invest when you see colleagues, friends, family, etc. talking about how they just made a killing buying [whatever]. Resist the urge. Wait for great starting cards, and when you get them, be aggressive with them. Ditto investments - wait until you feel very certain that the odds are in your favor and you understand the investment potential and risks, and then put real money in it. > Do you continue to monitor and evaluate portfolio companies or do you > force yourself to take on new companies knowing > they may potentially be overvalued on an absolute > basis? The former. Do your due diligence and then just set your findings aside, and keep one eye on the price and results of the companies. Plenty of companies will turn up on my screening radar as they’re beginning a very bad stretch of performance, and the price will only get better. It helps to have a stack of companies that you already know a bit about, and you can watch as they decline in price and see how the business holds up.
Thanks for clear describing your case, very interesting.
Inner Evil Voice Wrote: ------------------------------------------------------- > I match stock symbols with my former girlfriends’ > initials. If no exact match, I use their bra size > as a wild card letter until I find a buy signal. > > A commercial version of my VBA function is going > to available soon. You’re not telling everyone your super secret selection method. Various encounter you’ve had as well. Tickers: MFF, MFFF, MFM, FFM, MFD (Male Female Donkey), MFD.B (Voting Class).
> You don’t invest. Seriously. Again, no one’s calling strikes on us for not swinging, fellas. This really does depend on who your client base is. It’s like the mortgage bubble, or the tech bubble. Many investors will leave you if you are not beating the market. If the market is overvalued and you stay in cash, many investors will think you are crazy and pull their money. You’re not just not beating the market, it’s beating you (often by a lot). And even if it’s your own money, your spouse may think you’re crazy too. I’m not saying that under these conditions, not investing when things are massively overvalued isn’t a sensible thing, but given that periods of overvaluation can go on for a loong time and no one really seems to know why they get overvalued means that it’s very hard to do this in practice, and even harder to do it as a business decision. “When the music’s playing, you gotta keep dancing.” So, depending on who you are, there can be people calling strikes for not swinging.
bchadwick Wrote: ------------------------------------------------------- > Depending on who you are, there can be people > calling strikes for not swinging. Bchadwick- Good post, nice to hear your thoughts (though I’d rather hear how you invest!). A few clarifying points. Again, I’m assuming we’re talking about investing for one’s self, where there are zero explicit penalties for keeping money in cash (though yes, there is opportunity cost). 1) Every method of investing has its pitfalls. For value investors, by far, one of the biggest pitfalls is sticking to your principals and not buying as the market goes up, up, and away. The old adage I’ve heard is that value investors are prone to making “sins of omission” (not investing) as opposed to “sins of commission” (investing in crap companies, buying in at crap prices, or both). The gains missed out on by value investors in up markets - especially roaring bull markets - can be substantial. However, I am more comfortable committing this error than I am with investing at prices I’m not very sure represent good bargains. “Omission” errors make your relative performance very weak over a time period; “commission” errors could represent permanent loss of a portion of your investing funds. 2) As far as “even your spouse might think you’re crazy”, you’ve touched on a bit of a different topic; namely, the fact that one’s significant other or family might have wildly differing views on what prudent investing looks like. I’m not married, so I can’t comment as to that specific scenario. I guess I’d have to just hope that my future spouse would hold the same views as I do as far as “which error would we rather make” with our money. If your spouse had very different views on the topic, I can see that stressing the marriage (the same way a frugal type would probably have difficulties if they married a spendthrift). -SSF
SSF, that seems like a pretty sensible approach. It looks like we basically agree, just that we were thinking about different contexts. As for me, I really don’t pick stocks. I am an ETF investor, or futures for larger accounts. I use a tactical asset allocation approach that is basically trend following and uses volatility weighting on the portfolio construction side. I don’t incorporate correlation as effectively as I’d like to, but I also find that correlation varies so much that it almost makes sense to treat is as a stochastic term (though I don’t treat it in a highly quantitative way, i.e. no stochastic calculus). I’m not afraid to hold substantial quantities of cash if there is no apparent trend. The assets that are included are basically indexes for the major asset classes. I’ll then use qualitative analyses to see if we should be breaking down major asset classes into sub asset classes and then after some quantitative attempts to get at value, I’ll put attractive candidates on a watch list and see if they have momentum in the expected direction. It’s an interesting question about what to do with a value investment with momentum in the wrong direction. I never want to acquire anything that looks undervalued and still going lower. Value + Positive Momentum is really the juicy point, but there might be some value in short-term trend following for something that is still going lower. I have a few ideas about how to mix valuation and momentum but haven’t had the time to work them out in detail yet. So basically it ends up being a kind of core-satellite portfolio structure, with the core being an evolving TAA system (or maybe a DAA system, given that a lot of it has to do with adapting to changing volatiles) and satellites being medium-term opportunities (like emerging markets vs developed markets, Europe vs US, etc.). My business partner uses a similar approach and adds very short term (c. 1 week) tactical trades to take advantage of what he sees as short-term mispricings in various assets, generally driven by short-term supply and demand imbalances and/or the fact that information does take some time to diffuse across markets. He’s good at it, and I think it makes a lot of sense from a portfolio construction point of view, but I personally don’t have the experience to do that very well, and am hoping to learn from him. I actually would like to work on some stock screening strategies, but haven’t really gotten around to it yet. I just don’t think that digging into financial statements and calculating free cash flow figures by hand is going to be a good use of my time, because - in addition to it being incredibly tedious and boring - there are just too many well funded people with access to better data and thousands of analysts competing with me. My brain may be better than a lot of them, but I still can’t compete with the scale resources that those guys have, and shouldn’t expect to. So for stock picking I am left with databases of other analysts’ estimates, and I’m just not sure if I really understand how that data is produced and massaged, and I wonder if I’ll be producing anything that someone else hasn’t already tried data-mining the heck out of. With the country and sector analysis, however, I feel I have a more restricted universe, and my previous academic life equips me to analyze them well, so that’s the main reason I gravitate to Macro and GTAA approaches and use ETFs or futures.
bchad - To your point, trend following/value are similar approaches and your concern about entry (‘buying the dip’ in this case as opposed to buying HH) is the key. IMO, the way to look at it is to consider volatility as a secondary condition to price for entry (have no evidence to show this helps much of anything, just my 2c) into the trade - or maybe entry is a portfolio of two trades with the second a vol trade of your choice (which you allude to).