Value Investing/Trading
“Over the past few years I switched solely to value investing/trading + 50% of my capital in income investing. I’ve moved from mostly long/short trading and wild horses won’t make me change my mind now. Graham & Dodds, Buffet, Lynch, Slater, O’Shaughnessy, O’Niel, Zweig, Greenblat, Fisher, Goldsmith, Rothschild…all value investors. Most compelling for me was after studying the maths of O’Shaughnessy over 45 years of statistics. Low PSR + high relative strength massively stacks the odds in your favour before you even look at other fundamentals and technicals. The value investor will be waiting to pounce on your oversold retailers when the time is right. Charts, technical analysis and cashflow growth will signal the reversal often before it actually happens to the price”
“I can recommend “Picking Winning Shares” by Mick Pavey. The first half of the book is fairly basics fundamentals & technical analysis but chapters 10-18 could easily have been written by me because the author combines I do and gives lots of examples on stocks I have traded (RGD, WCC, ETO, GLT, CNE).”
Henry
Valuations are most attractive when the markets are gloomy and bleak. Thus, it is suggested to buy when the market is cheap in order to stack the odds in your favour. If considering buying into individual companies, bigger price-to-earnings ratios could be a warning sign, since it indicates that an enterprise is already highly rated by investors and thus vulnerable to a change in sentiment.
Value investors also look at book value. They believe that you shouldn’t pay more than 1.5 times a stock’s book value, which is typically the net asset value of the company. Warren Buffett is a renowned value investor. The only other variable is earnings growth – if a stock has consecutive years of earnings growth then typically it is considered a good stable stock.
Cashflow is also a useful indicator as it allows us to check how much money is actually going into and out of the company.
Of course learning to spot opportunities when they arise can be very profitable. For those investing in large FTSE 100 stocks, the time to buy is usually when the market is relatively low. Many of the constituents will have an attractive yield. Likewise, the time to sell could be when there is a profit for the investor and yields seem relatively low.
As Benjamin Graham once said ‘In the short run the stock market is a voting machine, but in the long run it is a weighing machine’ By this Graham means that in the short-term market fads might dictate for a while but in the long term earnings and cashflow must be delivered if a company is to sustain or increase its market valuation. In the dot-com boom technology shares leapt up only to crash and remain trading at very low valuations for most of the decade. Likewise banks were considered to be great enterprises just before the credit crisis hit in 2007. Mining stocks are now suffering as costs increase while price fall amid fears of another recession.
If a company is unable to generate cash its cannot remain sustainable as a business in the long term, let alone pay dividends. And if a company isn’t viable it cannot keep coming to shareholders for more money. Cashflow is a result of acceptable returns on sales and good profits, which represents a competitive advantage an enterprise is nurturing (say technological or strong brand..etc) giving the company pricing power.