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TMFPostOfTheDay (< 20)

The Depths of Due Diligence



February 13, 2013 – Comments (2)

Board: Value Hounds

Author: RaptorD2

I’m curious about how much dd people here do, and especially how deep you go into financial statements. For the folks who are tempted to say, “You first” okay, I hear ya.

I used to use the SIPro database to do some pretty involved exploration of financial statements and calculated lots of custom ratios to screen for companies, and used different ones when I actually was considering buying companies. Several of my spreadsheets became fairly well automated and (at least to me) quite complex. I traded on those calculations with mixed results, mostly good, and would probably grade my performance with a C+ where A+ were a Buffett or a Kitty. I decided about a year ago to change to mostly longer term investing and so far so good. So after 12 years of active investing and a few hundred stock tickers traded, I figured I had enough data to go back and see how accurately the original ratios were predictive of future price appreciation (actually returns, including dividends.) Although the time spent did help me find some super growth stocks that TMF didn’t (na na na na na :)) they were only mildly predictive on average of future earnings growth. Maybe my calcs were skewed too far toward searching for high growth, but even the stalwarts I bought were much more accurately predicted by the cycles in charts.

So now I would rather study a company’s story, gauge management by news clippings and conference call transcripts and peruse price charts. Plus, if financial dd passes my quick tests, I can tell in an instant whether I might or might not be interested in a stock by looking at charts of varying time frames overlaid with P/E and/or earnings trends and comparing those to competitors.

I know some of you fools and kittens go to great lengths to tear apart financials before investing. More power to you and well done indeed. I only point out that It just didn’t work for me. I would rather meet the CEO and management team of a prospective investment in person if only I could, view their facilities and study price charts than I would have all of Buffetts calculations for said company. Although I wouldn’t turn them down either, if you happen to peruse here, Warren.

Some would say it’s hard to buy great value without studying financials in depth and at one point I would have agreed. I still don't DISagree. I also would never have a reason or desire to try to change anyone’s mind about the worth of said work. I just politely offer that it didn’t work so well FOR ME so I would just like to know how much financial dd people here do before buying a stock. My financial opinions, now mostly done mentally only, take only about 10-30 minutes except for banks which I pretty much skip because I don’t fully understand their financials and wouldn’t believe their numbers even if I did. Call my dd crazy (but first please tell me the story and by all means, show me the charts. :))

My average thumbs up/thumbs down decision (that doesn’t mean buy today at all, I may like a company well enough to buy but need to wait for a better price, or place a rather low limit order if it’s withing 10-20% of my target buy price) now takes oh, I suppose 45 minutes to an hour for a stock that passes through each of my rather loose grading screens. After the initial run-through I am much more likely to read, read, read about an interesting company than go through their financials with a fine-tooth comb. I don't miss loading my massive spreadsheets each week either.

Feel free to blast away. And please, if you don’t mind sharing … please do.


2 Comments – Post Your Own

#1) On February 13, 2013 at 6:57 PM, icePICK00 (< 20) wrote:

 Hi Dan!

Usually I take an approach based on financials, management, unrealized assets and any other 'value points'. 'Value points' can be positive or negative - basically anything that adds or takes away value - present or future. Based on the company, it can take anywhere from 2-4 hours for dd - some longer, some shorter. I look to basic internet searches, similar company info and anything else suited to the market sector. I always study financials but understand they are only one component of many. Sounds like you're on track - hope this helps!!

- T

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#2) On February 14, 2013 at 12:52 PM, JohnCLeven (28.53) wrote:

There are many roads to investment success. Everyone has their own strategy.

Personally, I lean towards companies with consistently very high returns on capital and equity. If a company can retain a high % of their earnings, and successully generate high returns on those retained earnings, year in and year out, then they become ompounding machines.

I try to find companies that have been able to accomplish that for 10 or more years consistently, and that I think have competitve advantages that will allow them to continue to be compounding machines going forward.

There's only about 100 companies within my circle of competence that pass that test with flying colors. (and maybe another 150 or so that I just don't adequately understand) So I really just follow my 100 or so and wait for any of them to get cheap. Then I buy for the long haul.

It's great hearing everyone's different strategies!

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