Value Investor's Stock Screener

• Above Average Company
• 20%+ ROE. Five years+ indicates likely competitive advantage
• Note: the avg company has an ROE of 11%
• Price
• We want to pay a fair price, not an unreasonable multiple the market is willing to pay
• P/E < 15
• P/B < 1.5
• Margin of Safety
• Current ratio > 2
• Total debt to equity in the most recent quarter < 50Margin of Safety
• Psychology
• Recency Bias
• Opportunities for confirmation bias

Link to Google Finance stock screener (U.S. companies) http://bit.ly/mqInmI

Raving Fans - Ken Blanchard

"Raving fans - a revolutionary approach to customer service" was written in the early 90s and it's principles resonate today. Satisfied customers just are not enough. What an organization should aim to do is knock the socks off their customers, to create “Raving Fans.” These Raving Fans become some of your best marketing tools. They go out and tell others how great you are. Satisfied fans, on the other hand, will jump ship as soon as a competitor provides them with better service. According to the authors, there are three secrets to creating Raving Fans.

1.  "Decide on what you want" - When you decide what you want for your business, you must create a vision of perfection centered on the customer & promote that vision throughout your organization.

2. "Discover what the customer wants" - Ask your customers what they want, then re-align your vision. A customers vision will likely only focus on one or two areas - you need to fill in the gaps. A customer who says the service you provide them is "fine" is relaying a concerning message. Essentially, it means they aren't ecstatic about your business. On the other hand, you can't look after every need or every whim of your customer, so  sometimes it is best to be frank and send your customer elsewhere (to another competitor). Service leaders perform in a well-defined window – they do what they choose – what is in their vision – and they do it very well. Finally, a business should tie its' employees raises and promotions to customer service. If you don't look after your people they won't look after your customers.

3.  "Deliver plus 1%" - Once you've discovered what the customer wants then - deliver plus one percent.  In order to not get overwhelmed at creating a fantastic customer service from scratch you aim to improve by one percent per week. Over time this will compound. Delivering consistently is crucial because it takes time to build a relationship with a customer and establish credibility.  Don't offer too much service initially, first be consistent at what you offer. To be consistent you have to have systems and training programs to implement your systems.  A system is a predetermined way to achieve a result.  

Margin of Safety – Seth Klarman

Chapter 1 – “Where most investors stumble”

There is nothing esoteric about value investing. It is simply the process of determining the value underlying a security and then buying it at a considerable discount from that value. It is really that simple. The greatest challenge is maintaining the req­uisite patience and discipline to buy only when prices are attractive and to sell when they are not, avoiding the short-term performance frenzy that engulfs most market participants.

To be continued…. stay tuned!

Reasons to avoid mutual funds

The saying “80% of fund managers can’t beat the index” has some merit. Here are a few reasons why you should be prudent when considering mutual funds:

1) “Migrating Managers“: when a fund manager seems to have the Midas touch, every fund company wants to poach him/her.
2) “Asset Elephantiasis“: when a fund earns high returns, investors take notice and pour hundreds of millions in in a matter of weeks. That leaves the manager with few choices – all of them bad: a) keep the money safe, but investors will complain b) buy already owned stocks, but they have prob already made their gains and will become dangerously undervalued c) buy new stocks that he didn't like well enough to own already.

3) Expenses: it costs more to trade stocks in very large blocks than in small ones. With fewer buyers and sellers, it’s hard to make a match.
4) Fees: once a fund becomes successful, the managers don’t want to rock the boat. This is contrary to how how they made the fund successful, and now they just want to enjoy the lucrative fees.
5) Fees: Mgmt fees and loads.

If you do really want a managed fund, these are the things to look for: their managers are the biggest shareholders, they are cheap, they dare to be different, they usually close the door to new investors, they don’t advertise. Consider Index funds & ETFs.

"Good to Great" - Jim Rogers

Key points from the Jim Rogers’ “Good to Great” book:


Chapters 1 & 2 – Good is the Enemy of Great & Leadership

Great companies have the following traits:

• Their leaders had Personal Humility & Professional Will
• Their leaders attribute success to their managers and staff & take full responsibility for failures. They also attribute their personal success to a lot of luck.
• The Executives who ignited transformation from good to great did not first figure out strategy/vision (i.e. "where to drive the bus". They first got the right people on the bus (and the wrong people off) and then figured a way to drive it.
• Their CEOs were bred from within the company & succession planning was a key focus to ensure the company could persist.
• Executive compensation, strategy, technology, M&As were NOT key drivers to their success
• They established a culture of discipline. When you have disciplined people, you dont need hierarchy, when you have disciplined though you dont need bureaucracy, when you have disciplined action you don't need excessive controls.

Chapter 3 – First Who…Then What.

• Don’t hire for the sake of hiring – wait for the right people/person
• The moment you feel the need to tightly manage someone, you’ve made a hiring mistake. The best people don’t need to be managed. Guided, taught, led-yes. But not tightly managed.
• Put your best people on your biggest opportunities, not your biggest problems
• For no matter what we achieve, if we don’t spend the vast majority of our time with people we love and respect, we cannot possibly have a great life. But if we spend the vast majority of our time with people we love and respect, then we will almost certainly have a great life, no matter where the bus goes.

Chapter 4 – Confront the Truth

• Expending energy trying to motivate people is largely a waste of time. If you have the right people on the bus, they will be “self-motivated”.
• Ask them a lot of questions rather than pretending to have the answers to everything.
• Engage & Encourage heated dialogue & debate, not through coercion
• Take responsibility for bad decisions, never assign blame

TO BE CONTINUED...

The Intelligent Investor's Checklist

Benjamin Graham developed criteria that can be used to identify potential Common Stocks that are undervalued. Here is a superficial summary of some of his criteria:

Benjamin Graham's book

1. Size. Annual revenue > 2billion
2. P/E. Price less than 15x average earnings (per share) of last 3 years (calculate this yourself)
3. P/Book. Price < 1.5 last reported book value.
4. Current Ratio. Current assets should be at least 2x current liabilities. This gives a cushion of working capital to sustain the company through hard times. Also, long term debt (including pref shares) should not exceed net current assets (working capital)
5. Earnings Stability. Must have some earnings in each of the last 10 years. (Negative operating expenses, but positive financing expenses is a concern)
6. Dividend Record. Must be uninterrupted for 20 years. Increasing dividends is best.
7. Earnings Growth. Minimum increase of 33% in per-share earnings over the past 10 years. To calculate, use the EPS avg of 3 years at beginning vs 3 years at end (or use that website / excel spreadsheet)
8. Exchange Rate - Buy US stocks when CAD strong
9. Intangibles - strong management, owned by top investors, insiders buying

Other Definitions:

Diluted EPS = EP(S + Warrants,Options,Convertible Pref Shares). Always less than EPS, a more conservative metric.

Ratios. Can be broken up into four types. Should always be applied across an industry.

• Valuation Ratios. The price-to-earnings ratio (P/E ratio) is calculated as a stock’s current share price divided by its earnings per share (EPS) for a twelve-month period (usually the last 12 months, or trailing twelve months (TTM)). High PE may indicate that you are overpaying, or it may indicate that the company has greater future growth&earning potential than others with lower PE. PE in stable, mature industries tend to be lower than PEs in industries that are young & have upside.
• Profitability Ratios. Profit Margin = Net Income / Revenue (decreasing year after year is a red flag).  Operating Margin = Operating Income / Net Sales.
• Liquidity Ratios. How quickly can a company raise cash to purchase additional assets or repay creditors quickly. Account Receivables Turnover = Net Credit Sales / Avg Accounts Receivable. High ratio means the company can collect accounts receivable frequently (good liquidity), whereas a lower ratio may mean clients aren’t paying up in time.
• Solvency Ratios. a picture of how well a company can deal with its long-term financial obligations and develop future assets.Total Debt to Total Assets = Short&Long term debt / Total Assets. The total debt to total assets ratio is used to determine how many of a company’s assets were paid for with debt.