I also take inspiration from Joel Greenblatt and his Magical Formula. I am a little skeptical of his formula, though, as people have reported results that are less than the returns that he claims to have. It is also too difficult to replicate his precise calculations, not least because he hasn't laid them out in precise detail.
Another source that I am taking inspiration from is Stingy Investor, who is doing exceptionally well with a Ben Graham formula. The portfolio has thrashed, and I do mean thrashed, the S&P500 over a decade, having returned 18.1% annually. Good enough for you? The formula is very restrictive, and tends to throw up very few stocks.
I have decided to broaden and simplify their approach into just two basic criteria: balance sheet safety, and cheapness. Here are the exact criteria I used:
- market cap > £200m - for adequate size and low spreads
- z-score > 3 - the balance sheet safety measure
- PTBV (Price to Tangible Book Value) > 0 - I don't want any company with negative tangible equity
- PER > 0 - I want to ensure some earnings
- operating margin > 0 - this just ensures that earnings aren't made positive by exceptional gains
I have not investigated the companies in any depth, and have not applied any insight as to how they are likely to perform, their relative merits, and so on. I have simply tried to diversify sectors and applied a minor amount of common sense.
With that in mind, here's the list I came up with:
EPIC SP
ACHL 59 ASIAN CITRUS HOLDINGS - FOOD PRODUCERS
APF 328.7 ANGLO PACIFIC - MINING
BVS 441.6 BOVIS - HOUSEBUILDERS
BWY 703.5 BELLWAY - HOUSEBUILDERS
ELR 61 EASTERN PLATINUM - MINING
HOME 157.9 HOME RETAIL - GENERAL RETAILERS
MRW 300.5 MORRISONS - SUPERMARKETS
MSY 413 MISYS - SOFTWARE
RWD 324.5 ROBERT WISEMAN DAIRIES - FOOD PRODUCERS
SBRY 327.5 SAINSBURYS - SUPERMARKETS
The prices (SP) quoted are the ask price in pence as of yesterday closing, obtained from Interative Investor. The FTSE All Share stands at 3122. See you in a year's time.
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6 comments:
Sounds like me when I first got into value investing. It's a valid strategy for sure, if you can stick with it long term. My general opinion of investing now, having been doing it as a stock picker for over 3 years, is that the most important thing to do, once you've got a system you're happy with and that you think will work, is to STICK WITH IT!!!
That really is the hard bit. Most investors have much more brainpower than is required to be a good investor so all that spare horsepower goes into reviewing other systems and thinking that the grass is greener.
I hope this system works for you and that in 5 years time you'll still be talking about tangible assets.
Love the moniker 'stingy investor'! A name like that should keep you focused on your strategy.
I like the idea and I suppose that we're all chasing the same things: superior companies at discounted prices.
Have you found an easy or relaible way or back-testing your strategies? I know that Richard tried a few months ago, but that involved him being tied to his spreadsheets for days by all accounts.
Thanks for the reminder to keep things simple. My discount screen has been throwing up the same weak companies (which I eliminated during deeper research) for months now.
In desperation to broaden my portfolio I have been getting progressively bogged down trying to find other systems that work (thanks John for putting it so well).
I would love to have a long-term return of 18% pa - heading off to Stingy Investor to read up about it.
OK, I'm officially confused. This is deep value isn't it? And I approve! Particularly appreciate the operating margin > 0 innovation which is new to me.
I hope this system works for you and that in 5 years time you'll still be talking about tangible assets.
Fingers crossed. Actually, the reason I used a book value measure rather than PER is that Penman's table seems to indicate that low P/B performes slightly better than low P/E. I was also mindful of cyclic anomolies with PEs - i.e. cyclic companies are usually cheap when their PEs are very high, paradoxically. That's why I went with a book value measure.
Have you found an easy or relaible way or back-testing your strategies?
Nope. I think such a thing would be very difficult to do without an expensive database. A lot of work, too!
I would love to have a long-term return of 18%
I hear you on that one ;) I have attempted to capture a lot of their criteria in a single statistic: the z-score. I think that their debt/equity ratio and interest coverage should be amply reflected in the z-score. The current ratio is a very difficult one to achieve, and I think it might be needlessly picky. I am happy with the z-score as a proxy for 3 of their safety features.
I am less happy with their "price to sales" ratio, which I think has some theoretical weaknesses. So I have just gone for the simple value metric of PTBV.
This is deep value isn't it?
Yes, deep value. I am essentially using only two criteria: balance sheet safety (as measured by z-score), and cheapness (low PTBV). The other criteria just try to weed out anomolous statistics; they're not part of the "philisophy" of the screen.
Particularly appreciate the operating margin > 0 innovation which is new to me.
This is just one of those "anomoly" checkers - say for when you have negative profit before exceptionals, but the exceptionals are positive and put the earnings as a whole into positive territory. So there's less to this extra little check i do than meets the eye.
F_Score includes current ratio and debt/total assets but only checks to see if they are improving, not absolute levels.
If you're going to use single year PE/PB I read somewhere combining both is better than either individually!
However, I too am for keeping things simple and using as few variables in my screens as possible.
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