As a stock market investor, there's no way that you can look at and evaluate
all the tens of thousands of publicly listed companies individually.
However, you can narrow this massive number down
into a short-list of better than average opportunities
by looking at specific key ratios.
Much like an expert chess player, the intelligent investor wants to filter out the mediocre
or even stupid moves right from the get-go.
Let me show you a strategy that has been very profitable for me
since I started investing in 2013.
How do you find great investment opportunities?
Do you ask around among friends and family?
Or maybe you should copy the investments of some YouTuber or Twitterer with lots of followers?
I disagree with both approaches.
Warren Buffett:
"You can't buy what is popular and do well."
I'll soon show you a third option.
When investing in a stock market company,
there are many things that you want to see.
Preferably, the company should be cheap,
it should be able to pay out lots of money to you as a shareholder,
it should be financially stable,
it should be growing,
it should have experienced and dedicated management,
it should have a so-called moat,
which keeps competing businesses at bay,
it should be in a favorable political situation, etc.
Now, some of these things, you can check in just a few seconds,
while others may take days or even weeks to understand,
depending on your level of ambition.
When I'm investing in the stock market,
I look at the fast-to-check variables first
and exclude companies that do not fulfill them.
You shall not pass!
If you do the same, you'll save a lot of time,
and you can focus your efforts on better-than-average opportunities.
After all, I think that most of us want our "hourly wage" to be as high as possible.
Back in the 1950s, when Warren Buffett started out on his investing journey,
he plowed through elephant books such as the Moody's Manuals to find investment ideas.
These books had many thousands of pages.
Luckily, you and I do not have to do that anymore because we live in the digital age.
Today, many investment research platforms can help in your hunt for overperformance,
and the best one that I've used in recent years is one called TIKR.
TIKR.com is truly a one-stop shop for you as a serious value investor.
Here, you can filter out stocks from all over the world
and analyze them using high quality data
all gathered in one place.
Let me show you how I would do this, step by step.
Step 1: Valuation
This right here is a brand-new Ferrari.
Do you want to buy it?
This is a trick question
- there is no way you can answer that because I haven't told you the price yet.
Howard Marks:
"There's no such thing as a good or bad idea regardless of price."
I think that nowhere else than in the stock market are people so ignorant about
how much they are paying for things that they are buying.
Remember what the legendary investor Peter Lynch has said:
"Although it is easy to forget sometimes
a share is not a lottery ticket
… it's a part-ownership of a business."
As an intelligent investor, you should always yourself:
How much does that part-ownership cost me?
To continue our analogy with cars,
it isn't always the guy owning the Ferrari who is the winner in the stock market.
More often, it's the guy who bought a Toyota at a bargain price.
So, what I do when I look for excellent stock market opportunities is that first, I ask:
"How much?"
You can do this on TIKR.com by clicking on the Global Screener
and adding your first filter.
I start by selecting the countries that my broker allows me to trade in.
There is no need to waste time on some South Korean company if you can't buy it later anyway.
Yes, I'm speaking from personal experience.
Then I exclude sectors that I consider to be outside my own circle of competence.
For me, that’s primarily banks and insurance companies, lumped under “finance”.
Remember what Charlie Munger, Warren Buffett’s right-hand man has said:
"We have three baskets for investing:
yes, no, and too tough to understand."
I like to use either EV/EBIT or just a classic P/E for filtering out companies based on their price.
I do not want to pay too much compared to what I'm getting in earnings.
We are going to use a metric called trailing TEV/EBIT.
TEV, or total enterprise value, is the market cap of the company plus all its liabilities,
minus cash & equivalents.
I think I prefer EV/EBIT slightly over P/E because it punishes companies with weak balance sheets
and benefits those with strong ones.
Let's put this number at 15 for now.
This is quite a strict criterion, but I'll show you how you can be a little bit more flexible
at the end of this video.
Price, price, price.
By excluding costly companies, you will indeed miss a few opportunities.
Still, it is also true that you will avoid many, many more mistakes.
Once the most expensive companies have been filtered out,
we are left with about 20% of the whole universe of stocks.
We are one step closer of finding great opportunities in the market,
but there's more to be done.
A cheap company is an excellent start,
but I think we can do even better.
Let's go back to the other things that we talked about earlier.
A company can usually throw off lots of money
- dividends and repurchases for you as the shareholder
– if it has a high return on assets (RoA).
A high return on assets also reveals a lot about the business's success.
Compare these two:
Bob owns a restaurant that he paid $2m for.
In other words, his asset cost him $2m.
It delivers a profit of $200,000 per year.
Stephan owns a restaurant that he paid $4m for.
This one also provides a profit of $200,000.
Everything else equal, which restaurant would you rather own?
Yep, that should be Bob's.
Bob has a 10% return on assets, or capital,
while Stephan has a 5%.
Don't take my word for it!
Charlie Munger has famously said that:
"Over the long term, it's hard for a stock to earn a much better return
than the business which underlies it earns.
If the business earns 6% on capital over 40 years and you hold it for that 40 years,
you're not going to make much different than a 6% return
- even if you originally buy it at a huge discount."
While it is true that "past performance is no guarantee of future results",
this highly depends on which type of metric you are looking at.
It turns out that historical RoA is quite a good indicator for future RoA.
Let's say that we require an RoA of 10%.
This means that we’re now left with only about 1% of all listed companies,
which is an awesome thing for your time management.
We shall soon check out each company individually,
which might be where TIKR really excels,
but there is one more thing that I'd like to include in our screen first.
Step 3: Growth
Some investors think that growth is the most critical variable to consider
when valuing stock market companies.
If one could tell the future, it would be.
The problem is that historical growth numbers aren't really that reliable for the future.
Just look at the impressive development of this company.
Up until 2014, depending on your level of optimism,
you may have projected something like a 20% growth going forward.
However, suddenly, the growth stopped.
And shareholders who bought at the high price multiples of 2014 & 2015
have faced sluggish returns ever since.
This is a large pharma company called Biogen.
While I'm cherry-picking here, it is true that all companies eventually face growing pains.
For growth, it is true that "past performance is not a guarantee for the future".
And historical profit growth is even less reliable for the future than historical revenue growth is.
Compare this to the strong relationship that we saw for RoA before.
With that said, I'm slightly more favorable towards companies that have been growing historically
vs. those that haven't,
so let’s at least exclude companies in decline
with the help of TIKR's screener.
Step 4: Reliability
So, in just a matter of minutes,
we have been able to narrow down tens of thousands of alternatives
into a short-list of about 600 better than average opportunities.
If you want the list to be even shorter,
just increase the thresholds for the three variables that we’ve discussed.
You've probably noticed that much of the criteria we've used are based on earnings,
so the next step is to check that they weren't just a fluke.
A one-hit wonder of the investing world.
Sort the companies according to the most critical metric
– price
– and then look at them individually
starting from the top.
Here, we happen to find a Swedish company called AIK Fotboll AB.
Suppose we click on it and check out its financials.
We can clearly see that EBIT (also called operating income)
doesn't seem very reliable for the last 12 months.
It looks like it could well be a fluke compared to previous years
and is probably not something we should expect that the company can repeat in the coming years.
Therefore, let's discard this one and move on to the 2nd company on the list.
If we keep on excluding companies like this,
we’ll soon reach number 18 on the list.
This is a Japanese company called AJIS,
"which provides inventory and other retail support services in Asia".
If you are looking for undervalued stock market companies,
I would say that this isn't a bad place to start.
But maybe you do not have easy access to Japanese stocks.
Then further down this list there are a few companies that you might be more familiar with
such as Facebook, Merck, UPS, BHP and Target.
Step 5: Deep Dive
Depending on your level of ambition,
there are more things to evaluate from here,
and TIKR can help you with that too.
You can find pretty much all public filings of companies.
There are transcripts of live presentations.
Heck, there's even a list of insider ownership and recently made insider transactions.
TIKR can help serious investors to find opportunities without depending on anyone else.
You are not doing what everyone else is doing anymore.
You are doing your own research,
and in that, you are much less likely to be just another sheep in the herd.
You ever wonder why fund managers can't beat the S&P 500?
Because they're sheep,
and sheep get slaughtered.
Gordon Gecko might not be the best role model around, but he is right about this one.
Contrarianism is a hallmark of a great investor.
For bonus points, you could tailor-make your screener to fit your own investing beliefs.
For instance, maybe you think that EV/EBIT of 15 is a bit too strict.
Then I'd first ask you to remember that the higher this multiple is,
the greater the pressure on the future performance of your companies.
However, if you still don't agree with me about this one,
fine, then increase the EV/EBIT by 50% or something
but be stricter with RoA and revenue growth.
Or maybe you want to be even more cautious with companies with weak balance sheets.
Then, add an additional criteria,
perhaps a debt ratio and/or a current asset ratio.
There's truly a ton of data that you can filter through with TIKR.
This is very similar to how I currently find stocks myself.
You’ll find many of the stocks that I currently own on that list that I showed you before.
I've used TIKR for a little over a year.
It's the best value for such a service that I'm aware of,
and you can start your own account by using the link in the description.
If you hurry, you'll be able to catch a 15% discount
by using the code tsi15.
Cheers guys!