speedybure (< 20)

HOW I AVOIDED THE CRASH (WELL NOT REALLY, 25% WAS IN EQUITIES)

May 28, 2009 – Comments (4)

The most difficult part of investing, at least in my case, is knowing when not to buy or sell. Although abstract (stocks are pieces of paper that your broker holds), It is very easy to become sentinmental over a company, thus emotional behavoir can hinder performance a great deal. I have slowly developed the discipline to sell when the intrinsic value is near or surpassed by the market price based on conservative valuation models. I began liquidating nearly 75% of my holdings when the Dow hit 12,000 for the first time, and had 3 quarters in cash by DOW 12,600. It was because I found little to no value in the market according to my criteria. Although I definetly failed to benefit from the  price appreciation in most equities, I had been rather efficient in avoiding losses. I'm writing this in hopes it will help people know when to sell a stock as I don't believe in Buy and Hold (with few exceptions), therefore avoiding losses. 

 1) The Free_Cash Flow Yield or FCF per share / market price must be over 10% for companies transitioninig from high to stable growth, over 12% for companies with stable growth & over 5% should the company be expected to have a 3-5 year CAGR in earninigs a minimum of 15%, though 20%+ is ideal.  

2) Pre tax return on tangible capital ( EBIT/ (Net Fixed Assets + Depreciation from cf statement + net working capital). The minimum allowable ration must exceed 50%, with 65%+ Ideal. This is also usual when comparing to the rest of the industry. 

3) EBIT margins must be at least 30% (with exceptions of course for high-growth or emerging companies).  

4) Earninigs Yield Must be a minimum of 20% for stable growth companies and 9-12% for high growth companies (depending on the magnitude of the forecasted growth). This is Enterprise Value/EBIT.

 5) The current market price must be trading at least at a 50% discount from the determined intrinsic value via FCFF, H_MODEL, GRAHAM. When this discount narrows to 15-20% I begin liquidating the position in case my models were flawed.  

 6) By using the above metrics I avoid financials, most retailers, technology and a variety of other industries.  

7) Of course qualatative analysis is of much great importance, thus I only use these disciplines after the hard work and research has been done. many would disagree with the aforementioned, but it helped me preserve capital during a global market crash and it avoids industries I don't understand i.e tech.