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Secondly, he declares that he does not use a computer. Not even a calculator. He is able to do without these standard aids since, as many people have attested, he has a prodigious memory. There are numerous examples of him being able to recall obscure facts about the companies that he has investigated, and their competitors, many years later.
It seems that he has read, and memorized, a huge amount of the material in the filing cabinets. In the end, he is not looking for investments that are, with a little luck, likely to be slightly better than average. He wants them to be great investments by a large margin. Even fewer have the resources to collect and index tens of thousands of documents on thousands of companies.
This is one of the main reasons why I developed Conscious Investor—to overcome these problems. Implementation using Conscious Investor Conscious Investor has built into it a range of key criteria used by Warren Buffett to make his selections. Either looking at the market as a whole, or sector by sector, you can instantly scan through ten years of corporate data on every Australian stock, around 6, USA stocks and 3, Canadian stocks to locate companies that satisfy these criteria at different levels.
It is the value of the home less the amount owed to the bank. The same is true of a business. Its equity is the total assets minus all the liabilities. You can think of this as the money locked up in the business. It is a measure of how much money management has to run the business. Another measure of the money available to management is the capital of the business.
This is its equity plus the long-term debt of the company. Clearly the success of any business is going to depend on how well management uses its equity and its capital. This is commonly measured by two ratios called return on equity and return on capital. Putting it simply, these are defined as the earnings of the company divided by equity and by capital. Many companies consistently lose money year after year. Others have very low values for these ratios. In other words, management is struggling to make a profitable use of what it has.
Clearly, these are not the sort of companies that we should think of as quality investments. If management is only making a few percent on the money that it has, then over time this is all you can expect to make if you purchase shares in the company. It makes sense. If you want a healthy return on any shares that you purchase, at the very least you need to select companies with management that is making a healthy return on the money that they have.
Implementation using Conscious Investor Conscious Investor saves you hours of time by instantly screening through thousands of companies isolating those with the sound business qualities of high return on equity, high return on capital and low debt. Faced with these massive numbers and the associated deluge of information, investors get drawn to what I call glitter stocks.
These are stocks that have some attention grabbing activity such as high trading volume, extreme movements in the price whether up or down, or when the stocks are in the news. Even with the best of intentions, it is hard to look at these stocks in a clear and objective manner compared to the remaining stocks. Warren Buffett was so aware of this that he moved from New York back to his home town, Omaha, Nebraska.
I used to feel, when I worked back in New York, that there were more stimuli just hitting me all the time… It may lead to crazy behavior after a while. A research study by Brad Barber and Terrence Odean of the University of California demonstrates very clearly the penalty to be paid by getting drawn into glitter stocks. They found that, on average, individual investors tended to invest in glitter stocks more than professionals.
Secondly, they found that by doing this they underperformed the market by anything from around 2. Buffett has long understood this. The time to get interested is when no one else is. In seconds you can scan through thousands of stocks to find those that satisfy proven objective criteria for great companies selling at profitable prices.
He particularly likes to use baseball with references to Ted Williams, the former record holder for the Boston Red Sox. A few years ago Buffett said We try to exert a Ted Williams kind of discipline. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball.
In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors. When we apply this to investing the message is clear. Wait until everything is in your favour. Nothing makes you buy any particular stock at any particular time. To be able to do this effectively we need to master three steps. These are the stocks with the highest chance of being successful and making you money year after year.
The first step to master is to be able to recognize a home-run stock. As we have seen, they are not glitter stocks that have appeared on the front cover of an investment magazine or recommended by a popular share market commentator. Nor are they stocks that have a trader price pattern of breakouts, double bottoms, or candle-stick trend reversals. The second is to know what to do when a home-run stock comes along. The extreme exponent of only holding a small number of stocks was Phil Fisher.
For Fisher, anything over six was too many. The more stocks you hold, the more likely your returns will be average and the more time you will have to spend keeping track of the stocks in your portfolio.
The third step concerns knowledge and confidence. You need the knowledge to know approximately how often a home run stock comes along. On the other hand, if they are set too low then, well, they are unlikely to give you the outcome that you desire. You also need to have the confidence to wait. Firstly, it instantly scans thousands of stocks to find those that meet criteria for them to be home-run stocks.
With Conscious Investor you get the knowledge and the confidence to be able to judge just what criteria you should set to put together a portfolio of home-run stocks. Secret 7: Calculate how much money you will make, not whether the stock is undervalued or overvalued according to some academic model.
Most ask whether the stock is undervalued or overvalued. The problem with this is that there is no way of properly determining whether a stock is, in fact, undervalued or overvalued. There are various academic models for calculating what is called the intrinsic value of a stock. From my extensive experience as a research mathematician all these models, referred to as discount cash flow models, are fatally flawed.
There are four areas that bring them down. They are theoretical, contradictory, unstable and untestable. These problems are a rather technical to explain fully so I will only give the general ideas behind them. Just because some theoretical formula labels a stock as undervalued does not mean that you are going to make money from it.
For example, perhaps the price will stay at that level. The models are contradictory since different values are obtained depending on which of the many variations of the models that you use. They are unstable since insignificantly small changes in the input variables lead to changes of percent or more in the intrinsic value. This means that in instead of the models being objective, they can lead to almost any output that is desired.
And finally the models are impractical because they are untestable. Some of the input variables require verification over an infinite number of years. For example, forecasts of growth rates have to be made over not just five or ten years, but extending out forever. In Conscious Investor we take a completely new approach. Under reasonable conditions am I likely to make 5 percent or 10 percent or 15 percent or more per year?
Of course, Buffett achieves a much higher return that this. The point is that he aims at a minimum level of 10 percent—his bottom line. By locking this in but leaving open the possibility for higher returns, he achieves his remarkable results. Implementation using Conscious Investor Conscious Investor has proprietary tools to enable you to enable you to achieve the goal of calculating expected return.
First of all, it has a proprietary tool for measuring the projected profit from an investment. This is measured as a projected return per year. Secondly, this can be done under a precisely controlled margin of safety. You can put in your margin of safety as a worst-case scenario.
Thirdly, it has another proprietary tool for setting target prices so that you know precisely what price you need to pay to get your desired return. These simple-to-use tools represent a major breakthrough in evaluating the profitability of stock investments. Not only do they allow you to evaluate individual investments but, because of the focus on return, you can immediately compare different investments.
Simply choose the one with the highest return calculation. These tools also allow you to know when to sell by checking whether a new stock has a higher return calculation that one that you may be holding. Secret 8: Remove the weeds and water the flowers — not the other way around F OR MANY IT is worse than having a tooth pulled to sell a stock for a price lower than what they paid for it.
Peter Lynch and later Warren Buffett referred to this as watering the weeds and pulling up the flowers. They are examples of what I call investor diseases. The disease of holding on to your losers I call get-evenitis. The disease of selling winners I call consolidatus profitus. Just how wide-spread these diseases are follows from a large-scale study carried out by Terrance Odean of the University of California in Davis.
In the opposite direction, the study showed that the losers in their portfolio tended to continue to underperform. It was really the case that once a loser, always a loser. Overall he found that people would have been better to sell their losers and keep their winners. Instead, they did the opposite, namely keep their losers and sell their winners. Suppose two simple changes were made: the investors sold their losers and held on to their winners.
On average, the study showed that their average annual performance would have gone up by almost five percent per year. The difference between the two strategies is even more marked when taxes are taken into account. When you claim a loss you are getting a tax rebate and so you want this as early as possible. In contrast, with a profit you are paying tax so you want to delay this as long as possible.
But, as we just learned, the average investor tends to take profits early and losses late ending up on the wrong side of the taxman. This gives us confirmation of secret number eight: Remove the weeds and water the flowers — not the other way around Of course, this is an oversimplification. There are times when it is better to keep a stock when the price has gone down. In fact, it may well make sense to buy more. At other times, it is better to sell a stock after it has gone up.
Each case has to be treated on its own merits. This leads to the question. Just when should you sell? A large survey carried out by the Australian Stock Exchange showed that investors found it much harder to know when to sell than when to buy. Similar results were found in a survey of nearly investors that I carried out.
Almost 50 percent said that they either regularly worry or constantly worry about when to sell their stocks. The general rule which is full of common sense is: Sell only when you can be very confident that you can do significantly better with your money in another stock. The problem is to be able to determine when this is the case. Implementation using Conscious Investor My system Conscious Investor has proprietary tools that readily solve the problem just described.
It enables you to calculate just what return you can expect under your chosen margin of safety, it becomes very easy to compare investments. A typical case might be that under a best case scenario a stock that you hold will give a profit of 8 percent per year over the next 5 years whereas under a worst case scenario another stock would have a return of 12 percent.
Hence it becomes a straightforward decision to take your money out of the first stock and put it into the second. This certainly applies to investing. Most of the time decisions are made based on either hope and wishful thinking or on abstract academic theories. Fortunately investing is an area that responds well to becoming more conscious of what we are doing and why. The whole direction of Conscious Investor is to place your investing, and hence your financial future, on a firm basis of sensible and knowledgeable investing.
Yet there is another part of being a conscious investor and this is to invest in companies with products and services that you support and believe in. When you become conscious of why you want to invest in a particular company, then risk can be substantially reduced. Investing this way helps to eliminate many of the unknowns whether psychological, emotional or material.
As those who have been to an annual meeting of Berkshire Hathaway will know, Buffett gets great pleasure from using and talking about the products and services of the companies that he invests in or owns. When you do this investing becomes easier and more fun. Also you will become a more astute investor since you are picking up signals about the economics of companies long before they show up in its financial statements.
Implementation using Conscious Investor Putting it in a nutshell, my investing system, Conscious Investor, puts the consciousness back into investing. Instead of being a football kicked around by the confusing claims by the media and financial companies, Conscious Investor will help put you back in control of your money. You become conscious of what you are doing and why. There is something more. It is a living investment philosophy, instead of just a software tool.
When I understand something I want to convert it into practical applications and I want to share it as widely as possible. This is how Conscious Investor got started. At first I developed it for my own investing. And you saw earlier how successful this has been. Then once I had tested it to my own satisfaction, I wanted to put it into a form that everyone can use and benefit from. The experience of our Conscious Investor subscribers from around the world shows just how successful the Conscious Investor team and I have been.
In a recent survey almost 80 percent said that within just two months they were satisfied or very satisfied with Conscious Investor. The first was to understand how Buffett invests. The second was to develop a system that allows any investor to implement these strategies successfully. He tested them thoroughly with his own investing, through bull and bear markets alike. When John used the tools he found remarkable success.
In contrast, when he used the standard methods, the results were mixed. Of course this process of trial and error itself is often an important part of the process of learning to invest successfully. I listened to tips. That was like seeing the light. He has published four books and over 60 papers on mathematics, physics and finance, and has taught generations of fund managers throughout a year career in financial mathematics.
In spite of his broad market expertise, it has always been the ideas of Buffett — that most financial professionals admire but fail to emulate — that have captivated John. To listen to Professor Price describing how he got started with Conscious Investor, click here or go to www.
And I always said no. And I still believe that. At the same time, I did not feel right ignoring the many valued subscribers who asked me to develop this model portfolio. They argued that the purpose of revealing my portfolio was not so they could copy blindly my picks. Rather so they could learn through action, instead of theory.
Shorten the success curve through real world investments. Being a Professor, I certainly could not argue with that logic. So I have added a Model Portfolio. These stocks are not speculative stocks but rather solid performers that our members can buy with confidence, and hold year-in, year-out to allow the compounding of returns.
This is a list of quality companies with business attributes could well place them in the Model Portfolio except for one thing: their prices are still a little too high. Every now and then day to day market fluctuations cause their prices to drop to profitable buying levels. Focus, concentrating on a few, even systematically at-risk investments provided they are local risks e.
What has that profession found about it? However, we find that the alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. The finding of 1. The point is that while risk taking boosted performance, there is no doubt that a deliberate strategy was at work.
Whether this talent is strategic or tactical matters more for how sustainable and vulnerable this investment performance will be in the future. Even if adjustments are made on them, they still may not reflect the institutional practices that prevail where they are used e. Unlike replicability which is partly a function of the ingenuity of investment managers in finding appropriate substitutes, vulnerability has more to do with structural factors that can upset many of the norms that investors use to judge the intrinsic risks and values of investments.
A grasp of meta-accounting is crucial; inflation, currency depreciations, systemic financial crises, market anomalies wreak havoc on financials in ways that simple accounting adjustments do not deal with. Investment Horizon. Undiversified, Small Portfolio. Concentrating a small portfolio exposes it to unacceptably large risks c. Rate of Return too Low. Comparative Inefficiency. The size of his portfolio sets a limit to how much efficiency can be attained e.
The implication of that idea is that he would do better to invest in more suitable alternative investments, eschewing its suggestions on earning high yields by avoiding excessive fees, over-diversifying and overcoming limitations to his analysis and execution skills. We highlight below some of the notable information contained in the edition of this document: a. Breakup Valuation.
BH has become the modern day holdout of the conglomerate style of business that dominated the late 50s-early 60s. Nothing indicates this more than its reliance on scale and internal transactions ostensibly for reasons of cost economy and synergy. But as Coase showed over a decade ago, these transactions economies make economic sense only to the extent that external dynamics of the components remain stable or at least change with reasonable consistency relative to each other.
Dividends and Cost of Capital. It is a safe bet that these WB-idiosyncratic policies will reverse quickly once he departs from the scene. Capital vs. Operational Management. They hint that the portfolio is getting less dependent on financial tactics and more on operational heft. Whether this talent is strategic or tactical matters more for how sustainable and vulnerable this investment performance will become in the future.
Its main ideas are grouped around five topics: a.
BLACKMOON CRYPTO WHITEPAPER
He studies everything possible about the business, becomes an expert in that field and works with the management rather than against them. In fact, often his first act on buying shares in any company is to grant the managers his proxy vote for his shares to assure them that he has no intention to try and move the company away from its core values. Buffett champions the value investment strategy, and puts no credence in day to day movements in share prices, the impact of the economic mood overall or any other external factors.
He maintains a long-term perspective at all times, and never loses sight of the underlying value of a business. Never follow the day to day fluctuations of the stock market. The market only exists to make it easier to buy and sell, not to set values. Keep an eye on the market only for someone who is willing to sell a stock at a not-to-be-missed price.
Buy a business, not its stock. Treat a stock purchase as if you were buying the entire business, using the following tenets: Business Tenets 1. Is the business simple and understandable from your perspective as an investor? Does the business have a consistent operating history? Does the business have favourable long-term prospects. Management Tenets 1. Is management rational? Is management candid with its shareholders? Financial Tenets 1. Focus on return on equity, not earnings per share.
Calculate "Owner Earnings". Search for companies with high profit margins. What is the value of the business? Can the business currently be purchased at a significant discount to its value? Manage a portfolio of businesses. Intelligent investing means having the priorities of a business owner focused on long-term value rather than a stock trader focused on short-term gains and losses. The Warren Buffett Way - Page 2 - 1. Ben Graham and Philip Fisher. Buffett graduated from the University of Nebraska.
Graham also emphasized that following the short-term At the age of 25 in , Buffett started an investment fluctuations of the stock market is pointless, and that stock partnership. He had seven limited partners who contributed positions should be long term. The limited From Fisher, Buffett added an appreciation for the effect that partners received 6-percent interest per year and percent of management can have on the value of any business, and that the profits generated above this level.
Buffett was paid the other diversification increases rather than reduces risk as it becomes percent. Over the next 13 years, this partnership impossible to closely watch all the eggs in too many different compounded investments at an annual rate of In baskets.
Supporting Ideas Warren Buffett used his capital to purchase a controlling interest 1. This company merged with Graham is widely considered as the first professional Hathaway Manufacturing, and also bought interests in two financial analyst.
He was was invested in stocks and bonds to have the funds available for financially ruined by the crash and had to rebuild his payment of claims. During the s, Bershire bought three more insurance To Graham, the distinction between an investment and a companies and started another five. Berkshire owns a number of other varied satisfactory return. Operations not meeting those companies which generate good returns on equity without using requirements are speculative.
Similarly, the concept of a satisfactory Warren Buffett and his wife now own around percent of the return whether dividend income or stock price appreciation stock of Berkshire-Hathaway. He works as Chief Executive of is also subjective. Many Graham described three approaches to investing in common of his employees who manage different parts of the company stocks: earn much more.
The Cross-Section Approach. Today, it is worth more of the market. The Anticipation Approach. Berkshire pays no dividends but reinvests all money earnt. Short-Term Selectivity. Therefore, shareholders look to a capital gain in the value of their This is the investment in companies which have the most stock. Over the past years, this is volatile and superficial, this is the dominant approach Berkshire has grown at an compound rate of Growth Stocks These are companies whose sales and earnings are expected to grow at a rate above those of the average business.
The trick is to buy stock in any company whose products were at an early stage of their life cycle, when profits and revenues were just about to take off. The difficulty here is in accurately forecasting rates of growth. The Warren Buffett Way - Page 3 - 3.
Margin of Safety Approach always tried to garner an accurate picture of relative Invest only in companies which have a large margin between strengths and weaknesses by his research. In a downturn, that company is Fisher suggested it was better to hold stock in a few most likely to ride out a recession well.
Applying this concept outstanding companies than a large number of average to a stock, buy shares only in a company for which the share companies. He always invested within his own circle of price is below its intrinsic value as determined by assets, competence - that is, with companies he understood and felt earnings, dividends and future prospects.
Graham strongly advocated the margin of safety approach with investment in common stock of growth companies. His 3. His is a very that approach. Therefore, Graham suggested that identifying patient investment strategy based on the value of the business.
It is hard or real assets plus the future Supporting Ideas value of the earnings those assets will produce. There is a large difference between investing in a particular Graham advocated two approaches to buying shares: stock and trying to predict the direction of the general market. In spite of technology, it is still people that make markets. Focus only on low price-to-earnings ratio stocks. Investor sentiment has the largest influence over short-term These stocks will generally be out of favour with market market direction and stability.
However, the long-term value sentiment. The market inefficiency, created by emotions, of a stock is ultimately determined by the economic progress generates valuable opportunities for the rational investor. Philip Fisher 2. The Mr. Market Allegory. Author of Common Stocks And Uncommon Profits, Fisher Imagine you are the owner of a small business in partnership was a stockbroker who set up in business just after the with Mr.
Every day, Mr. Market quotes you a price at crash. While the business is sound and makes good and profits over the years at rates greater than the industry progress, Mr. He classified these types of companies as: mood he is in. Fortunate and able. When he is in an upbeat mood, his price is exceptionally high. Companies which work aggressively to create larger markets Conversely, strike him on a bad day and he is very for their products, and are in a position to benefit from events pessimistic and quotes an unusually low price.
If you were in business with Mr. Market and you tried to take 2. Fortunate because they were able. Rather, it is Mr. It is disastrous if you fall under his influence. He also looked at A successful stock market investor should put aside the profit margins and accounting controls. Fisher believed emotional whirlwind Mr. Market unleashes on the general marginal companies never succeeded over the long run.
He market every day and exercise sound business judgement. Investors must be financially and psychologically prepared their competitive advantage and strengthening their market to deal with the everyday market fluctuations. Unless you can position.
If a company expanded succeed. Price declines are a welcome way to add more shares to your expanding its capital base, Fisher thought that augered well portfolio at a lower price. As long as your are investing in a for the future. He saw as a good sign any 5. The management should also have an ability to businesses on the strength of a rumour, Buffett buys and develop good working relations throughout the company.
His approach is always to wait each company. For a start we provide a Watch List of quality companies in Australia and North America with analyses of their businesses and check lists of their features including their economic moats.
Thirdly, we provide regular twelve page analyses of key companies in Australia and North America. Conscious Investor also provides the ability to scan thousands of companies to locate those with superior financial characteristics as described by Warren Buffett. In fact, the above two graphs of the same company, ARB Corporation. This is an Australian company that manufactures and supplies equipment for off-road and four-wheel drive vehicles around the world.
The first chart depicts the closing prices while the second chart displays the earnings per share over the same period. When we locate such companies, we are well on the way to finding quality investments. It is these that drive the share price. Focusing on the short-term aspects of a company including both business and price fluctuations is foolish as Buffett has said. Buffett has said that even for the best of companies, you can still pay too much. Implementation using Conscious Investor There are two key features of the growth in sales and earnings: the rate of growth and the stability of the growth.
Conscious Investor provides proprietary tools to measure both of these for thousands of companies. In a matter of seconds you can hone in on companies with the desirable features of high and stable growth. When you put together a portfolio of such companies, then your growth in wealth follows automatically. But there is more. A second feature of Conscious Investor is a proprietary tool to help locate those special buying opportunities when there is a temporary drop in the price even while sales and earnings are moving ahead.
Another high-performance outcome from using these tools in Conscious Investor is that you can make forecasts of earnings with five times the accuracy of analysts. You can see the report at: www. The exciting thing about value long-term investing is that, time and time again, you outperform the market in the short term as well as in the long-term.
It is such a thrill to see the market pick up stocks that you have bought. When Chris Stavrou, the founder of the New York asset management firm, Stavrou Partners, visited the offices he reported seeing hundreds of file drawers full of reports on thousands of companies. Two things stand out. Firstly, Buffett said that the reports were mainly annual and quarterly reports. In other words, material that is available to everyone.
Secondly, he declares that he does not use a computer. Not even a calculator. He is able to do without these standard aids since, as many people have attested, he has a prodigious memory. There are numerous examples of him being able to recall obscure facts about the companies that he has investigated, and their competitors, many years later.
It seems that he has read, and memorized, a huge amount of the material in the filing cabinets. In the end, he is not looking for investments that are, with a little luck, likely to be slightly better than average. He wants them to be great investments by a large margin. Even fewer have the resources to collect and index tens of thousands of documents on thousands of companies. This is one of the main reasons why I developed Conscious Investor—to overcome these problems.
Implementation using Conscious Investor Conscious Investor has built into it a range of key criteria used by Warren Buffett to make his selections. Either looking at the market as a whole, or sector by sector, you can instantly scan through ten years of corporate data on every Australian stock, around 6, USA stocks and 3, Canadian stocks to locate companies that satisfy these criteria at different levels.
It is the value of the home less the amount owed to the bank. The same is true of a business. Its equity is the total assets minus all the liabilities. You can think of this as the money locked up in the business. It is a measure of how much money management has to run the business. Another measure of the money available to management is the capital of the business.
This is its equity plus the long-term debt of the company. Clearly the success of any business is going to depend on how well management uses its equity and its capital. This is commonly measured by two ratios called return on equity and return on capital.
Putting it simply, these are defined as the earnings of the company divided by equity and by capital. Many companies consistently lose money year after year. Others have very low values for these ratios. In other words, management is struggling to make a profitable use of what it has.
Clearly, these are not the sort of companies that we should think of as quality investments. If management is only making a few percent on the money that it has, then over time this is all you can expect to make if you purchase shares in the company. It makes sense. If you want a healthy return on any shares that you purchase, at the very least you need to select companies with management that is making a healthy return on the money that they have. Implementation using Conscious Investor Conscious Investor saves you hours of time by instantly screening through thousands of companies isolating those with the sound business qualities of high return on equity, high return on capital and low debt.
Faced with these massive numbers and the associated deluge of information, investors get drawn to what I call glitter stocks. These are stocks that have some attention grabbing activity such as high trading volume, extreme movements in the price whether up or down, or when the stocks are in the news. Even with the best of intentions, it is hard to look at these stocks in a clear and objective manner compared to the remaining stocks.
Warren Buffett was so aware of this that he moved from New York back to his home town, Omaha, Nebraska. I used to feel, when I worked back in New York, that there were more stimuli just hitting me all the time… It may lead to crazy behavior after a while. A research study by Brad Barber and Terrence Odean of the University of California demonstrates very clearly the penalty to be paid by getting drawn into glitter stocks.
They found that, on average, individual investors tended to invest in glitter stocks more than professionals. Secondly, they found that by doing this they underperformed the market by anything from around 2. Buffett has long understood this. The time to get interested is when no one else is. In seconds you can scan through thousands of stocks to find those that satisfy proven objective criteria for great companies selling at profitable prices.
He particularly likes to use baseball with references to Ted Williams, the former record holder for the Boston Red Sox. A few years ago Buffett said We try to exert a Ted Williams kind of discipline. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball.
In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors. When we apply this to investing the message is clear. Wait until everything is in your favour. Nothing makes you buy any particular stock at any particular time. To be able to do this effectively we need to master three steps. These are the stocks with the highest chance of being successful and making you money year after year.
The first step to master is to be able to recognize a home-run stock. As we have seen, they are not glitter stocks that have appeared on the front cover of an investment magazine or recommended by a popular share market commentator. Nor are they stocks that have a trader price pattern of breakouts, double bottoms, or candle-stick trend reversals. The second is to know what to do when a home-run stock comes along.
The extreme exponent of only holding a small number of stocks was Phil Fisher. For Fisher, anything over six was too many. The more stocks you hold, the more likely your returns will be average and the more time you will have to spend keeping track of the stocks in your portfolio. The third step concerns knowledge and confidence. You need the knowledge to know approximately how often a home run stock comes along.
On the other hand, if they are set too low then, well, they are unlikely to give you the outcome that you desire. You also need to have the confidence to wait. Firstly, it instantly scans thousands of stocks to find those that meet criteria for them to be home-run stocks. With Conscious Investor you get the knowledge and the confidence to be able to judge just what criteria you should set to put together a portfolio of home-run stocks.
Secret 7: Calculate how much money you will make, not whether the stock is undervalued or overvalued according to some academic model. Most ask whether the stock is undervalued or overvalued. The problem with this is that there is no way of properly determining whether a stock is, in fact, undervalued or overvalued. There are various academic models for calculating what is called the intrinsic value of a stock. From my extensive experience as a research mathematician all these models, referred to as discount cash flow models, are fatally flawed.
There are four areas that bring them down. They are theoretical, contradictory, unstable and untestable. These problems are a rather technical to explain fully so I will only give the general ideas behind them. Just because some theoretical formula labels a stock as undervalued does not mean that you are going to make money from it.
For example, perhaps the price will stay at that level. The models are contradictory since different values are obtained depending on which of the many variations of the models that you use. They are unstable since insignificantly small changes in the input variables lead to changes of percent or more in the intrinsic value. This means that in instead of the models being objective, they can lead to almost any output that is desired.
And finally the models are impractical because they are untestable. Some of the input variables require verification over an infinite number of years. For example, forecasts of growth rates have to be made over not just five or ten years, but extending out forever.
In Conscious Investor we take a completely new approach. Under reasonable conditions am I likely to make 5 percent or 10 percent or 15 percent or more per year? Of course, Buffett achieves a much higher return that this. The point is that he aims at a minimum level of 10 percent—his bottom line. By locking this in but leaving open the possibility for higher returns, he achieves his remarkable results. Implementation using Conscious Investor Conscious Investor has proprietary tools to enable you to enable you to achieve the goal of calculating expected return.
First of all, it has a proprietary tool for measuring the projected profit from an investment. This is measured as a projected return per year. Secondly, this can be done under a precisely controlled margin of safety. You can put in your margin of safety as a worst-case scenario. Thirdly, it has another proprietary tool for setting target prices so that you know precisely what price you need to pay to get your desired return.
These simple-to-use tools represent a major breakthrough in evaluating the profitability of stock investments. Not only do they allow you to evaluate individual investments but, because of the focus on return, you can immediately compare different investments.
Simply choose the one with the highest return calculation. These tools also allow you to know when to sell by checking whether a new stock has a higher return calculation that one that you may be holding. Secret 8: Remove the weeds and water the flowers — not the other way around F OR MANY IT is worse than having a tooth pulled to sell a stock for a price lower than what they paid for it.
Peter Lynch and later Warren Buffett referred to this as watering the weeds and pulling up the flowers. They are examples of what I call investor diseases. The disease of holding on to your losers I call get-evenitis. The disease of selling winners I call consolidatus profitus. Just how wide-spread these diseases are follows from a large-scale study carried out by Terrance Odean of the University of California in Davis.
In the opposite direction, the study showed that the losers in their portfolio tended to continue to underperform. It was really the case that once a loser, always a loser. Overall he found that people would have been better to sell their losers and keep their winners.
Instead, they did the opposite, namely keep their losers and sell their winners. Suppose two simple changes were made: the investors sold their losers and held on to their winners. On average, the study showed that their average annual performance would have gone up by almost five percent per year.
The difference between the two strategies is even more marked when taxes are taken into account. When you claim a loss you are getting a tax rebate and so you want this as early as possible. In contrast, with a profit you are paying tax so you want to delay this as long as possible. But, as we just learned, the average investor tends to take profits early and losses late ending up on the wrong side of the taxman.
This gives us confirmation of secret number eight: Remove the weeds and water the flowers — not the other way around Of course, this is an oversimplification. There are times when it is better to keep a stock when the price has gone down. In fact, it may well make sense to buy more.
At other times, it is better to sell a stock after it has gone up. Each case has to be treated on its own merits. This leads to the question. Just when should you sell? A large survey carried out by the Australian Stock Exchange showed that investors found it much harder to know when to sell than when to buy.
Similar results were found in a survey of nearly investors that I carried out. Almost 50 percent said that they either regularly worry or constantly worry about when to sell their stocks. The general rule which is full of common sense is: Sell only when you can be very confident that you can do significantly better with your money in another stock.
The problem is to be able to determine when this is the case. Implementation using Conscious Investor My system Conscious Investor has proprietary tools that readily solve the problem just described. It enables you to calculate just what return you can expect under your chosen margin of safety, it becomes very easy to compare investments. A typical case might be that under a best case scenario a stock that you hold will give a profit of 8 percent per year over the next 5 years whereas under a worst case scenario another stock would have a return of 12 percent.
Hence it becomes a straightforward decision to take your money out of the first stock and put it into the second. This certainly applies to investing. Most of the time decisions are made based on either hope and wishful thinking or on abstract academic theories.
Fortunately investing is an area that responds well to becoming more conscious of what we are doing and why. The whole direction of Conscious Investor is to place your investing, and hence your financial future, on a firm basis of sensible and knowledgeable investing. Yet there is another part of being a conscious investor and this is to invest in companies with products and services that you support and believe in.
When you become conscious of why you want to invest in a particular company, then risk can be substantially reduced. Investing this way helps to eliminate many of the unknowns whether psychological, emotional or material. As those who have been to an annual meeting of Berkshire Hathaway will know, Buffett gets great pleasure from using and talking about the products and services of the companies that he invests in or owns.
When you do this investing becomes easier and more fun. Also you will become a more astute investor since you are picking up signals about the economics of companies long before they show up in its financial statements. Implementation using Conscious Investor Putting it in a nutshell, my investing system, Conscious Investor, puts the consciousness back into investing. Instead of being a football kicked around by the confusing claims by the media and financial companies, Conscious Investor will help put you back in control of your money.
You become conscious of what you are doing and why. There is something more. It is a living investment philosophy, instead of just a software tool. When I understand something I want to convert it into practical applications and I want to share it as widely as possible.
This is how Conscious Investor got started. At first I developed it for my own investing. And you saw earlier how successful this has been. Then once I had tested it to my own satisfaction, I wanted to put it into a form that everyone can use and benefit from.
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