Value & Growth Investing Criteria

[Tysonboss1]

I always check that the company I am about to do fundamental research on has low debt before proceeding. This is of high importance to me.

If a company has high debt I will probably avoid putting it through my fundamental analysis filters.

High debt is not always a thing to avoid without further investigation. Even Benjamin graham points out in his book the intelligent Investor there are certain types of companies that operate at high levels of debt to equity that will still be sound investments and often provide the most stable income streams.

 

[kermit345]

The following is a list of roughly how I rank metrics when i'm looking at a company:

1) Return on Equity
2) Debt to Equity
3) Margin of Safety (Current)
4) Annual IV Growth
5) Earnings Growth
6) Liquidity
7) Margin of Safety (Forecast)

Thats the basic list of what I look at in a company and its financials to see if it looks like a good business to be entering into. Obviously the Margin of Safety isn't exactly a busines related metric, however i rate it highly in my decision making process, as a business trading well above its valuation typically isn't worth investigating much further anyway, unless your inputs are incorrect.

I believe its also important not to complicate the process by having too many ratios and equations which your trying to investigate all at the one time to make a decision. Chances are not all of the ratios will make the company look like a superstar, and if it does, i'd be surprised if its not trading above its valuation. Another component that I haven't listed as it isn't finance based, is placing a premium or discount based on management. Great management will often lead to a growing business, poor management may detract from a good underling business, so management are an important part of the overall picture.

Hope that helps.

 

[InvisbleInvestor]

No. I'm not a fundamental investor.

That shouldn't stop you from considering other methods of choosing a business to invest in. Unless your fundamental approach has helped you beat the market consistently over a long period of time, if so, then carry on.

Everyone else seems to be rolling in similar criteria to myself and really, as value investors, I find that quite ordinary. Several metrics may change but the fundamentals (not to be confused with the prior paragraph which was in a prior context) don't change radically.

In actual fact however, one of the first things I do when hearing about a 'cheap' stock recommended by others is compare the share price to a rough measure of intrinsic value and if it seems worth to pursue, will peruse further.

 

[Julia]

Quote Originally Posted by Julia View Post
No. I'm not a fundamental investor.

That shouldn't stop you from considering other methods of choosing a business to invest in. Unless your fundamental approach has helped you beat the market consistently over a long period of time, if so, then carry on.

Well, my goodness. Thank you so much for your sage advice! I'll attribute the somewhat extraordinary tone of your comment to naivete.
You don't even appear to appreciate how contradictory are your remarks.

I have clearly stated that I am not a fundamental investor. Then you say "unless your fundamental approach has helped you beat the market......." etc.
When I don't take a fundamental approach, no such approach has allowed me to consistently beat the market.

You don't even seem to be aware that an alternative to fundamental investing is trend following/simple technical approach.

Further you kindly suggest that if my approach (which you clearly have no idea about) has helped me consistently beat the market, then I should "carry on".
Thank you so much. I will do exactly that.

 

[InvisbleInvestor]

Well, my goodness. Thank you so much for your sage advice! I'll attribute the somewhat extraordinary tone of your comment to naivete.
You don't even appear to appreciate how contradictory are your remarks.

I have clearly stated that I am not a fundamental investor. Then you say "unless your fundamental approach has helped you beat the market......." etc.
When I don't take a fundamental approach, no such approach has allowed me to consistently beat the market.

You don't even seem to be aware that an alternative to fundamental investing is trend following/simple technical approach.

Further you kindly suggest that if my approach (which you clearly have no idea about) has helped me consistently beat the market, then I should "carry on".
Thank you so much. I will do exactly that.

Erm, beg your pardon, I obviously misread your post. Apologies.

 

[Julia]

Erm, beg your pardon, I obviously misread your post. Apologies.

OK, no worries.

 

[Intrinsic Value]

OK, no worries.

What do you see the benefits of technical investing are over value investing?

And isn't technical investing riskier than value investing? Technical investing also sounds like a lot more work than value investing?

 

[robusta]

What do you see the benefits of technical investing are over value investing?

And isn't technical investing riskier than value investing? Technical investing also sounds like a lot more work than value investing?

Trend following is a fairly easy concept to grasp and execute. You should make your own judgement as to the risk of each approach. As for me i am most comfortable with value investing with no stop losses.

 

[Julia]

What do you see the benefits of technical investing are over value investing?

If you do a search for "Technical vs Fundamental Analysis" on this forum you will find several threads, most of which are many pages long and cover a variety of approaches.
Here is just one:
https://www.aussiestockforums.com/f...3548&highlight=technical+fundamental+analysis

And isn't technical investing riskier than value investing? Technical investing also sounds like a lot more work than value investing?

Depends on your personal preference. I don't think a simple trend following approach is as risky as holding some 'undervalued' share as its SP drops, or buying such a company when it's in a clear downtrend. Yet this is what many fundamental investors do.
For an easy to understand read on a technical approach, maybe spend about $30 through the ASF bookshop, and buy Stan Weinstein's "Secrets for Profiting in Bull and Bear Markets". This has stood the test of time. When I first read it, it was like a light bulb being switched on.

Trend following is a fairly easy concept to grasp and execute.

Indeed it is. No need to make it complicated. Essentially buy into an uptrend and sell in a downtrend. Protect your capital.

 

[Boggo]

Depends on your personal preference. I don't think a simple trend following approach is as risky as holding some 'undervalued' share as its SP drops, or buying such a company when it's in a clear downtrend. Yet this is what many fundamental investors do.

Indeed it is. No need to make it complicated. Essentially buy into an uptrend and sell in a downtrend. Protect your capital.

Exactly Julia. There is a discussion elsewhere on this site about Michael Covel's book.
For anyone who wants to be in the market to make money I would suggest that you get that book and if nothing else just read chapter 1.
If you want to talk over dinner about how you are a Telstra or Qantas etc investor then disregard the rest of my post.

Most of the new "investors" on here tend to gravitate towards the mum and dad type stocks, the TLS, QAN, LEI, WOW, WBC, WES, CBA etc etc stocks.
These are the ones they see on the CH9 market report or some such nonsense where they seem to think that there are less than a dozen stocks in existence in Australia.

What seems to happen is that they read the weekend broker recommendations, dive in and then realise that the stock is going down. They then start doing a bit of research, stumble on to sites like this one, think that everybody else is in the same boat and start telling anyone who is interested why they have "bought another small parcel" as it is great value at this price because I read it in a report on Yahoo and expect that to turn it around.

Up to a point this process is understandable, you are in the 90% group though and that is the losing group. The trick now is how fast you can recognise this and work out how to get yourself into the 10% winning group.
You won't do it by adding to a losing position, listening to/reading broker etc recommendations or trying to justify your situation to people who have been where you are now.
Where have I recently heard "It doesn't matter that you're wrong, only how long you stay wrong" ?

An exercise... (I could supply dozens of similiar examples)
Without looking it up, how many people reading this can tell me if they have heard of SUL, what is company's name, what do they do and when was the last time you heard/saw it being referred to in the media ( I bet it was very recently).
Clue - you see their ads every time you turn on the tv.

Why the heck would you want to get involved with and then hold on to stocks such as the group I mentioned earlier. If you say it is for the dividend then you are not taking the stock price into account.

Below is SUL vs TLS over the same period, which one would you want to be holding ? (and SUL pays a dividend too !).

(click to expand)

 

[skip9]

I think to get the most out of investing its wise to use a combination of both Fundamental and Technical Analysis. Each has their positives, each has their negatives but used in combination then there are particular tools that become valuable to the investor. If you can find a fundamentally sound stock and use technical analysis to find entry and exit points, rise and falls then isn't that the best way to look at it... My thoughts anyway..

 

[skip9]

Boggo - Most value investors would realise TLS is a junk stock.

 

[Boggo]

I think to get the most out of investing its wise to use a combination of both Fundamental and Technical Analysis. Each has their positives, each has their negatives but used in combination then there are particular tools that become valuable to the investor. If you can find a fundamentally sound stock and use technical analysis to find entry and exit points, rise and falls then isn't that the best way to look at it... My thoughts anyway..

That's exactly what I did prior to the GFC etc, a combination of using StockDoctor for creating a value list and then technical analysis for entry and locking in profits in parallel with Elliott Wave to provide the big picture.
StockDoctor highlighted stocks such as JBH, and MND etc in their early stages and then it was just a case of knowing when to lock in profits and knowing when to re-enter the next run.
(My SMSF currently has had the SD subscription on hold for a few years now until the dust settles)

Boggo - Most value investors would realise TLS is a junk stock.

Value being the operative word there skip.

 

[Julia]

Boggo, great explanation.

Intrinsic Value: I always remember a post by Bunyip some years ago which made so much sense. Have just searched it out and quote it below. Read it, think about it, and I suspect you'll start to get what a simple trend following approach can achieve.

It doesn't have to be either/or......there's no reason that both types of analysis can't be combined.
However, what most fundamentalists can't seem to comprehend is that technical analysis is actually a form of fundamental analysis.

Technical analysts believe 'THE TREND IS YOUR FRIEND'. Accordingly, they begin their analysis by identifying the trend of the stock or financial instrument in question.

Look at charts of big uptrenders of the past, e.g. GUD, BHP, WPL.
You could have comprehensively researched these companies to find out that their fundamentals were positive.
Alternatively you could have applied the most basic concept in technical analysis - TREND IDENTIFICATION - by simply looking at their charts and recognising that they'd recently begun a powerful new uptrend. And having recognised this powerful new uptrend, you could have put two and two together and realised that new uptrends are caused by the collective positive views of thousands of traders and investors, most of whom will have based their opinions on fundamental research.
A stock powering upward on the chart is a visual representation of investors and traders scrambling over each other to get a piece of the action, even if it means paying increasingly higher prices.
They do this because they believe the fundamentals to be positive.

Conversely, if a chart shows that a stock is sinking like the Titanic, it's a visual representation of investors and traders dumping the stock because they know something negative about the fundamentals.
Pull up charts of companies that went broke....PAS, HIH, SGW, ION. Their charts were heading south with a vengeance long before they went out of business.
Did you really need to fundamentally research those companies to find out they were in trouble?
Or could you have got that information simply by looking at their charts for five seconds? I'm sure you know the answer.

Regarding your comment about the risks of investing in a company that's on the brink of insolvency, consider this.....
If a company is in dire straits and is close to insolvency, do you think that maybe, just maybe, the research analysts might be well aware of this?
And that this information just might be known to the investment community?
And that investors, knowing this information, might be dumping the stock en masse, causing its price chart to be strongly downtrending?
No technical analyst worth his salt is going to buy a stock whose chart is strongly downtrending.
Technical analysts believe 'the trend is your friend'. Accordingly, they trade with the trend, not against it.

Finally, let me give you a couple of quotes.
The first comes from John Murphy, author of 'The Visual Investor', resident technical analyst on stockcharts.com, and considered one of the worlds foremost technical analysts................

"Chartists are cheaters. Why? Because charting is a shortcut form of fundamental analysis. It enables a chartist to analyse a stock or industry without doing all the work of the fundamental analyst. How does it do that? Simply by telling the analyst whether a stocks fundamentals are bullish or bearish by the direction its price is moving.
If the market perceives the fundamentals are bullish, the stock will be rewaded with higher prices."

The second quote is from Marty Schwartz, a man who made squillions on Wall Street and is featured in the book 'Pit Bull'..........................

"I always laugh at people who say they've never met a rich technician.
I love that! It's such an arrogant, nonsensical approach. I used fundamentals for nine years but got rich as a technical analyst".

I guess Marty Schwartz would have got a good laugh at the expense of Renee Rivkin, who was fond of saying "I've never met a rich chartist".
Rivkin, an avowed fundamentalist, was recommending PAS as a buy while one of my mates who owned PAS was dumping the stock as soon as it began downtrending.
Rivkin continued recommending PAS as a buy while it plunged towards oblivion.


Bunyip

 

[robusta]

I think to get the most out of investing its wise to use a combination of both Fundamental and Technical Analysis. Each has their positives, each has their negatives but used in combination then there are particular tools that become valuable to the investor. If you can find a fundamentally sound stock and use technical analysis to find entry and exit points, rise and falls then isn't that the best way to look at it... My thoughts anyway..

Different strokes for different folks!

For me I would be horrified if capital gains were incured during every correction because a chart said to sell (or stop losses kicked in)

I have a view that the companies in my portfolio will be worth materially more in 5-10 years time. Why would I sell when the price falls? (due to macro factors) I prefer to buy more in these times.

I suspect you'll start to get what a simple trend following approach can achieve.

I am glad you have done well with a trend approach Julia but I know it does not suit my personality. I would have trouble with the discipline of when to get enter and exit without a understanding of the intrinsic value of the security.

 

[Boggo]

I would have trouble with the discipline of when to get enter and exit without a understanding of the intrinsic value of the security.

Let the market tell you robusta.
The difficult bit is narrowing the field from over 1900 stocks to a couple of hundred with upside potential.
Using the ASX 300 or similiar is ok to a point, the real meat was when they were on way to there, ideally you are looking for the new ASX 300 entrants.
(I have to give fundamental credit where it is due and say that this is where I have found that StockDoctor did really excel)

This extract from Bunyip's post that Julia has quoted sums it up, its no more complicated than this...

The first comes from John Murphy, author of 'The Visual Investor', resident technical analyst on stockcharts.com, and considered one of the worlds foremost technical analysts................

"Chartists are cheaters. Why? Because charting is a shortcut form of fundamental analysis. It enables a chartist to analyse a stock or industry without doing all the work of the fundamental analyst. How does it do that? Simply by telling the analyst whether a stocks fundamentals are bullish or bearish by the direction its price is moving.
If the market perceives the fundamentals are bullish, the stock will be rewarded with higher prices."

 

[Ves]

Thank you for the technical perspective Boggo & Julia. I will read both of the books that you have mentioned. Whilst as a beginner I have been influenced by fundamental analysis firstly, I think having knowledge of trends (ie trend trading) will add balance and better entry points to my stock selections.

The comment about "technical analysis being a short cut to fundamental analysis" is a good one. You cannot expect to know any more than the market as a small time investor. It is often not what you know, but what you do not know.

 

[Julia]

Different strokes for different folks!

For me I would be horrified if capital gains were incured during every correction because a chart said to sell (or stop losses kicked in)

That's a reasonable point. The idea, however, is to always have protecting your profits and capital as a first priority. The tax should not unduly influence you in this main priority. Imo, of course.

I have a view that the companies in my portfolio will be worth materially more in 5-10 years time. Why would I sell when the price falls? (due to macro factors) I prefer to buy more in these times.

This has been well and truly covered elsewhere. Whilst I understand what you're saying, you're still putting your capital at risk by holding through a clear downtrend.
No one is suggesting you sell everytime there's a minor dip, but rather to have a simple understanding of how to recognise trends so that you don't get trapped into losing not only your profits but some of your capital.

I am glad you have done well with a trend approach Julia but I know it does not suit my personality. I would have trouble with the discipline of when to get enter and exit without a understanding of the intrinsic value of the security.

Perhaps consider that, despite your most painstaking fundamental analysis, if market sentiment is against that stock you so like, that's all that matters.

Thank you for the technical perspective Boggo & Julia. I will read both of the books that you have mentioned. Whilst as a beginner I have been influenced by fundamental analysis firstly, I think having knowledge of trends (ie trend trading) will add balance and better entry points to my stock selections.

The comment about "technical analysis being a short cut to fundamental analysis" is a good one. You cannot expect to know any more than the market as a small time investor. It is often not what you know, but what you do not know.

Ves, I may be wrong but I have the impression most people approach the market from a fundamental point of view. I know I did. But I've mentioned earlier the 'light bulb moment' when I read Weinstein's book. My whole approach changed and my profitability increased exponentially.

However, I'm not at all trying to persuade anyone from an approach with which they feel comfortable and which is working for them. I've just noticed recently that some new members of ASF seem to focus on FA as essentially the only approach which may not be entirely in their best interests.

Ves, get back to us when you've read Stan Weinstein's book. Best of luck.

 

[Wysiwyg]

but rather to have a simple understanding of how to recognise trends so that you don't get trapped into losing not only your profits but some of your capital.

Being an investment orientated thread that would mean a secular upward trend being a capital growth criteria. I think robusta does experience or assumes fundamentally sound companies will maintain a secular upward trend with bearish market conditions providing an opportunity to buy for less. Mind you some charting knowledge could enhance these discount buying opportunities.

 

[robusta]

Let the market tell you robusta.
The difficult bit is narrowing the field from over 1900 stocks to a couple of hundred with upside potential.

This is the easy bit for me, out of those 1900 plus stocks, I have identified about 60 I am happy investing in, the only trick is waiting for the right price.

The right price normally comes along during crashes and corrections.

Using the ASX 300 or similiar is ok to a point, the real meat was when they were on way to there, ideally you are looking for the new ASX 300 entrants.
(I have to give fundamental credit where it is due and say that this is where I have found that StockDoctor did really excel)

Have to agree with you there my two largest holdings are MCE and FGE, held for over a year and been in the ASX300 for a couple of months.

This extract from Bunyip's post that Julia has quoted sums it up, its no more complicated than this...

The first comes from John Murphy, author of 'The Visual Investor', resident technical analyst on stockcharts.com, and considered one of the worlds foremost technical analysts................

"Chartists are cheaters. Why? Because charting is a shortcut form of fundamental analysis. It enables a chartist to analyse a stock or industry without doing all the work of the fundamental analyst. How does it do that? Simply by telling the analyst whether a stocks fundamentals are bullish or bearish by the direction its price is moving.
If the market perceives the fundamentals are bullish, the stock will be rewarded with higher prices."

Sorry but I dont get this, it may work the majority of the time but how many times have we seen things like dotcom bubble, ABC learning, GFC...., and many more cases of over exuberance followed by depression.