AAAMP Value Blog
A Value Investing Blog
Slow and Steady Wins the Race
Asset Allocation by Age has experienced various amounts of popularity through different time periods. Financial planners and Wall Street have joined together over the years to promote rules of thumb and products such as target date funds that have produced mediocre...
Recognizing the differences between saving, investing, and gambling will help you compartmentalize each, and avoid common mistakes. It’s an easy mistake because not enough people think it through, and the terms are used interchangeably in our culture. Keeping saving, investing, and gambling three separate activities in your mind and in your account structure will help you be more successful managing your money and growing your wealth.
Free Cash Flow determines whether a company has sufficient cash resources to meet the goals of the entity and its’ stakeholders (debt reduction, dividends, stock buybacks, acquisitions, etc.).
Free Cash Flow Yield determines if the stock price provides good value for the amount of free cash flow being generated.
Over diversification is a serious and common mistake that decreases investment returns disproportionately to the benefits received.
There are 3 main types of investors today; each with their own characteristics and results: The buy high sell low investor, the index investor (passive management), and the value investor.
Buy and Hold is considered by many to be the holy grail of investing. Its current popularity has become a cult-like strategy that draws criticism to its critics and disdain towards those who dare speak out against the beloved investing strategy.
So buy and hold works….until it doesn’t. People will quote all kinds of statistics “proving” that buy and hold works. Its the trend of our day. This is nothing new. Bull markets make buy and hold look good. Bear markets make buy and hold look bad.
The Gross Profitability Ratio is gaining credibility in value investing circles because it provides valuable and predictive qualitative analysis when combined with valuation metrics. Some analysts argue it is the single best qualitative metric with which to compare multiple stocks (particularly within the same industry) that have already been determined to be bargains.
The quotes from the Book of Value by Anurag Sharma are investment gems that include deep “second-level thinking”.
Careful and rigorous analysis helps investors resist the temptation to do foolish things. Good investors are capitalists — they invest on the basis of sound data and analysis, with an eye for what could go wrong.
Dividend Coverage Ratios allow analysts to evaluate the safety of a company’s dividend. Many investors concentrate on the dividend yield but don’t give sufficient attention to the safety of that dividend.
In the long run companies must create enough cash flow to pay expenses, invest in the future (capital expenditures), service their debt (if any), and return money to shareholders.
Dividend yield is the annual dividend per share of a company compared to the price of the stock expressed as percentage. In other words it tells you the percentage dividend return the stock owner receives on the current price of a stock.
The dividend yield has historically provided approximately one-half of long term total stock market returns to investors. It’s a little less than one-half for those who take their dividend and little over one-half for those who reinvest their dividends.
Dividend Payout Ratios provide us valuable information on how much money a company is returning to shareholders and their ability to pay and increase the dividend. One of these ratios is far superior to the other.
The Dividend Payout Ratio and the Cash Dividend Payout Ratio are compared to find out which is better at providing pertinent information to differentiate between various dividend paying companies.
Operating Earnings Yield is a profitability and valuation ratio; one of my favorite for company stock analysis. This metric provides valuable information about a company’s profitability and how much you are paying for those profits via the stock price.
Treasury Inflation Protected Securities (TIPS) provide benefits that are unavailable with any other investment. We’re going to explore how TIPS work, their benefits, and when it makes sense to buy and hold them in a portfolio.
Net Financial Debt and its ratios are an effective and efficient metric when analyzing companies. These metrics are more important than ever because of the corporate trend to leave cash overseas and borrow domestically.
The balance sheet is the foundation from which a company operates its business. A company’s liquidity and the leverage used play a big role in the success or failure of a business. Net Financial Debt is a critical metric for investment analysis.
Asset Allocation is where investors make their biggest investing mistakes. Portfolio volatility is lowered by combining low or negatively correlated assets.
The purpose of estimating intrinsic value is to take advantage of mis-priced assets. Don’t get discouraged because you feel it’s difficult to determine the intrinsic value of a stock. It is not a science! It is the variables that make up your estimated intrinsic value that are more important than an exact intrinsic value number.
We answer the question: What is Alpha and Beta?. Then we look at how a value oriented investor can approach these two investment concepts and become a better investor.
Portfolio Diversification is a foundational concept in investing. It can be a rather basic and easy to understand concept. However, in its implementation, many investors make catastrophic mistakes with too much concentration and others settle for average performance because of over diversification.
Portfolio diversification is a balance between concentration and over diversification to optimize risk and potential return.
As value investors, one of our most important rules is to avoid incurring large losses. There are two easy ways to subject yourself to possible large losses; buy stocks for more than they’re worth, and buy stocks of companies that go bankrupt. The Altman Z-Score is a formula of 5 basic financial ratios to help determine the financial health of a company. In particular, it is a probabilistic model to screen for bankruptcy risk of a company.
Many investors don’t differentiate between price and value. Buying stocks at bargain prices lowers your risk considerably. If you are buying stocks just because everyone else is (they are going up) then you are playing with fire. You will eventually get burned. To be a successful investor you must differentiate, and understand the relationship, between price and value.
92 Insightful Quotes from The Most Important Thing by Howard Marks. One of the best value portfolio management books ever written. One of the best value portfolio management books ever written.
Howard Marks delivers his commentary in a style that has been described as “insightful, direct, homespun, expert and sharply pointed”. His objective in writing The Most Important Thing was to provide a book that would lay out his investment philosophy in a manner that would be beneficial to the average investor.
His approach is to lay out The Most Important Thing Is….. in 20 Chapters. Each is a building block to successful investing. Together they create a “solid wall” in which each piece is essential “guideposts” that keep investors focused on the most important things for successful portfolio management.
There is a debate between two approaches among investors: qualitative vs. quantitative. In reality, every investor adopts at least a little of both approaches; but may emphasize one or the other. The qualitative approach concentrates on the quality of the company. Emphasis is put on the company’s products, services, management, competitors, etc. A quantitative approach concentrates on the income statements, balance sheets, and cash flows, and analyzes the relationship between price and intrinsic value .
The biggest risk of investing is permanent loss of principal. This may seem intuitive, yet few investors understand this or employ a comprehensive investment risk management plan.
New Year’s resolutions for investors should be focused on making them successful in building long term wealth. These 9 resolutions are part of the foundation of being an intelligent investor who can manage his own investments.
Our discussion of these 7 investment concepts will provide you with a different thought process or approach to investing. Successful value portfolio management requires a different way of thinking. Make the effort to be above average.
The Graham Number is part of Benjamin Graham’s stock screen for dividend investors. It uses price in relation to earnings and book value to identify the relative valuations of stable dividend stocks.
Return on capital ratios provide the value investor with quality metrics that can be employed after, or along side, valuation metrics. This allows the long term investor to look for “wonderful companies at a fair price” (Warren Buffett).
Return on Total Assets Ratios provide analysts with an indication of management efficiency in utilizing company assets to create profits. Because it includes all (total) assets (assets funded by debt and equity) it is a profitability ratio that interests both creditor and equity stakeholders.
Cash Flow From Operations (CFO) is an important line on the company Cash Flow Statement . It is the cash inflows and outflows of a company’s core business operations. The cash flow statement defines three types of cash flow :
A comprehensive review and summary of Deep Value -Why Activist Investors and Other Contrarians Battle For Control of “Losing” Corporations, by Tobias E. Carlisle.
Failing businesses, poor management, and unpredictability often provide the most promising investment opportunities. Deep value offers the best risk/reward ratio for investors willing to go against intuition and what is normally accepted by the investment crowd.
Owner Earnings and Owners’ Cash Profits are similar types of cash flow for analysis of businesses and stocks. These metrics provide important insight into the cash flow of the entity, particularly the cash flow available for the owners.
Are you ever confused by the different types of cash flow for investment analysis? There are too many cash flow calculations for most of us to have in memory. I know I get them confused and I’m a seasoned investor.
I believe you will find this a useful guide to the different types of cash flow and cash flow calculations, along with practical step by step comparisons and uses for each metric.