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“At the beginning, prices are driven by fundamentals, And at some point, speculation drives them. It’s that old story: What the wise man does in the beginning, the fool does in the end.”

Warren Buffett The Tao of Warren Buffett

 

ODDS-ON Investing™ Philosophy:


Don't gamble;
Take all your savings and buy some good stock,
And hold it till it goes up.
If it don't go up,
Don't buy it.

                        
                                                                                 Will Rogers
                                                                                October 31, 1929


The ODDS-ON Investing™ philosophy is designed to put the odds on your side when you invest. It is built on three core principles:

  1. An investor’s goal is to put more cash in his or her pocket;
  2. Cash value (Enterprise Value) is the true measure of value—not accounting numbers; and
  3. The 2nd Most Powerful Formula in FinanceTM is the basis for integrating fundamental (value) and technical (supply & demand) analysis. By integrating fundamental and technical analysis, you put the odds on your side.

Enterprise Value is defined on the website page titled The 2nd Most Powerful Formula in FinanceTM.

  • My preeminent goal is to put cash in my pocket, NOT to own a stock or stocks.
  • I will NOT be greedy. My personal benchmark is an 11 percent per annum return over 3-5 years (which is the long term return of the S & P 500)... My goal is to do better… This benchmark helps me to avoid being greedy.
  • I will not short stocks. I believe that it is anti-free market and un-American. It introduces volatility into markets which increases the cost of capital for businesses trying to create new products and jobs. The primary role of capital markets is first and foremost to efficiently provide capital for productive Investments that create national wealth. MBAs, academics, accountants and a generation of failed regulators at the SEC and in Congress have caused the primary role of the US capital markets to become wealth shifting rather than supporting companies in the process of wealth creation.
    In 1776 the father of modern economics, Adam Smith, explained how free enterprise works to create wealth. He called his book The Wealth of Nations, NOT The Wealth of Individuals.
  • The core of my Investment philosophy is based on common sense and the idea that:
         
 "PRICE IS WHAT YOU PAY. VALUE IS WHAT YOU GET."

                                                   Warren Buffet
                                                                                      and Benjamin Graham
    
  • To increase the odds of putting cash in my pocket, I buy cash at a discount, i.e. I try to buy stocks when the stock price is below their real cash value—their Enterprise Value. In addition I must buy them when institutions are beginning to buy them, not when institutions are selling them (Supply & Demand).
    • VALUE: A stock has two cash values: it's stock price and it's Enterprise Value per share. In pure theory they should be equal. The reality is that they are rarely equal. The stock‘s current market price is compared to the Enterprise Value to determine whether a stock’s current price is above or below the Enterprise’s Cash Value. In the absence of transparent financial reporting of Enterprise Value in the form of a Valuation Statement, the PEG (Price to Earnings to Growth) ratio serves as a rough proxy for whether stock price is above or below Enterprise Value. To that we must add the criteria that the debt to capital ratio must be below 25%. I will not buy a stock when its price is above its Enterprise Value or if its debt/capital ratio is above 25%. Over time, a stock’s price regresses toward its Enterprise Value and will probably move above it. (Markets have a remarkably reliable tendency to overshoot on both the up and down-sides.) When they overshoot on the up-side, it’s time to sell. Enterprise Value as explained on The 2nd Most Powerful Formula in FinanceTM page of this website and as defined in my books Rich Shareowner, Poor Shareowner™ (Revised Edition) and in Money Ain’t Free.
    • SUPPLY & DEMAND: 75% of a stock’s move is related to the market (50%) and its sector (25%). Before buying or selling an individual stock, I want to know what the market and the sector are telling me about their direction. Investor's Business Daily and their website investors.com are good sources of this information.


DISCIPLINE:
                                            

                                  Think globally (Market & Sector),
                                                             AND THEN act locally (Specific Stock).

Supply & Demand are measured by the price and volume movement of the market and individual stocks (or ETFs). This information is available from sources such as www.investors.com the website of Investor’s Business Daily ("IBD").

  • My personal benchmark is an 11 percent per annum return... My goal is to do better... This benchmark helps me to avoid being greedy. Over the long run, the S&P 500 stock index has returned 11% p.a.
  • Don’t fight the market; it is always right, and it will always win. If you want to learn humility—and how to invest—keep your living standard within what you make in the market. As my dear friend says, "I eat what I kill." This is why I overlay technical analysis from IBD on the fundamental analysis of Enterprise Value. Even an undervalued stock will not go up unless there are volume buyers such as the institutions.
  • Never fall in love with a stock. As much as you may love a company and its people, its stock price is a function of Enterprise Value & Supply and Demand. (This is especially important for employees Investing in their own company.) Allocate assets to stocks, NOT to A stock.
  • The market is a living organism. It is the sum of the knowledge and actions of many individuals, all of whom are constantly learning and changing behavior in response to different stimuli. As a result, over time Buy and Sell Disciplines on individual stocks—and on the market—will evolve. This is called continuous improvement. As a result, techniques of assessing changes in the price of a stock versus its cash value and the price action of a stock based upon market Supply & Demand will change. But the principals of cash as the measure of value and the relationships expressed in The 2nd Most Powerful Formula in FinanceTM will remain.
  • The Choice is Stocks and Cash...rarely bonds. I view my Investment alternatives as cash and stocks. Bonds and stocks move essentially in parallel based on interest rates. If I am going to take interest rate risk, I want to take it on stocks which earn an 8% premium to inflation rather than bonds which only earn a 2.5% premium to inflation. Cash preserves principal. It is nonsensical to buy "defensive" stocks when the market is declining. Why lose less money rather than be in cash and loose no money?
  • Myths: Avoid myths that take cash from your pocket.
    • Myth 1: Markets are efficient. If markets were efficient, then Warren Buffett could not have outperformed them over the past 30 years and neither could a minority of professional Investment managers.If markets were efficient, why did October 1987 have a dramatic two day decline then a recovery in several months? If markets were efficient, why did we have the internet bubble and stock market bubbles of the 1990s? If markets were efficient, why did Enron happen? If markets are efficient, why in approximately 35 trading days between September 21, 2012 and November 16, 2012, did Apple (AAPL) stock decline almost 30% from $705.05 to $505.75?
    • Myth 2: Professional money managers produce better performance than indices. The truth is that 85% of professional money managers underperform their indices. The trick is to identify the 15% who do better over the long run. That is why you want to own stock mutual funds, BUT NOT A stock mutual fund. You have to monitor and occasionally change them.
    • Myth 3: Include large capitalization ("Large cap") stocks in your portfolio because they are less risky. If you owned and held large cap stocks like GE, Home Depot, GM over virtually any three year period or longer during the past decade you lost money, not only in absolute terms, but also because you did not earn the 11% p.a. that you should have earned for taking equity risk. It was the large cap stocks that failed or required government rescues during the sub-prime mortgage crisis, including Citibank, JP Morgan Chase, Wachovia, Bank of America, Bear Stearns, Lehman, AIG, General Motors, Chrysler, etc.
    • Myth 4: Buy defensive stocks in a downturn. If market indicators show a downturn, why do you only want to lose 15% in defensive stocks vs 25% in other stocks? Why not go to cash?
    • Myth 5: Diversify by including international stock markets. Since the 1980s competent money managers have viewed international and emerging markets as opportunistic Investments, not a means of diversification. When monetary policies are correlated and economies are linked in a just-in-time world, instantaneous communications mean virtually no de-linkage or diversification.And when best-in-class global companies like Caterpillar, Deere, Apple and Microsoft, based in the US garner 50% of their sales outside the US, aren't you geographically diversified?
  • Math 101: The Law of Small Numbers: Small numbers get BIG. For a $100 million company to grow 10% it must grow sales $10 million this year. For a $100 billion company to grow 10% it must grow sales $10 billion this year. If growth of free cash flow is what increases Enterprise Value and stock price, then the odds are against large companies…Math 101.

 


 
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