My Investment Philosophy?

Maybe I am wrong but for the qualitative measures like management ...and the business model.
I prefer to assume that a blue chip has the management quality and business model to sustain (the very reason it became a blue chip was its management ability to create a business model that is competitive in their respective sector). I do know their business model but not in the details. I believe capable management adapt to changes and business model is just an execution of the strategy of the management. Do not fall in love with management as sooner or later an idiot will run the company and you will find it out too late.

I acknowledge that I do not have the ability to understand or read management or their business model in detail. That can only be done by insiders or person working in the industry in management position. For the rest, they are reading and analysing off annual reports and PR and news and that can be a little superficial as those things are meant to be marketing tools. I don't think you can spot cans of worms reading those.

So, I am approaching it via a quantitative screening of bluechips instead of small caps (Which would required really intense scruntiny of the management and business model). Graham did mention in his works of later years that he thought an intense scrutiny of balance sheets and companies might not even be necessary for stock investment. We just need that few quantitative variables that matter. Tweedy Browne did a work on their own investment and philosophy which is nearer to Graham than Buffett.. and have proven for their own benefit that Low valuation ratio have proven to be invaluable to their selection of securities. They believe in diversification and have no more than 5% in any holdings and are investing in a whole slew of securities based on that and they didn't come out all too shabby.

But of course, the trend is my friend too. Or...at least I hope he wants to be friend with me.

My Valuation Criteria

A lot of global blue chips (not financials) are turning up in my screen that fits my criteria of, even after normalising earnings & FCF with an appropriate capitalisation rate :-
1) EV/FCF of 10%.
2) P/B under 1
3) P/S ratio under 0.7
4) Discounted FCF with MOS of 20% at least.
6) Dividend Yield of > 5%
7) Strong B/S

Case in point, Arcelor-Mittal... Something is wrong somewhere.. maybe I missed it...

Views on Balance Sheet and Valuation

My views on analyzing the B/S, P&L and Cash Flow Statement:

1. On the B/S. A B/S that is well-structured or well-proportioned supporting the underlying business and its further growth, is certainly superior to a B/S with a big overall size and/or big key B/S items. It is also very important to verify that the asset items in a B/S are of sufficiently good-quality, and their values properly or conservatively recorded. Given a choice, I will much prefer to have the body of a healthy athlete, than an 'inflated' body or one carrying 'diseased' parts!

2. On the P&L. It is crucial to first critically assess whether the profits are real, fair and sustainable. To just fall for big and nice profit numbers is obviously quite dangerous. It certainly pays to remind ourselves that profits on the P&L are merely numbers derived by accountants using accounting rules; and it is quite foolhardy to assume that the accountants and management are honest and knowledgeable in accounting, and the auditors are always diligent and never make mistakes. In this regard, having a good-enough understanding of the underlying business activities and the industries concerned, will certainly help in the interpretation and analysis of the P&L and financial accounts.

3. On the Cash Flow Statement. It is only good, if the profits in the P&L and the current assets in the B/S are both good. The primary additional value-add from analyzing cash flow is to be able to value the underlying business based on its capacity to generate free cash, which is superior to just relying on accounting profits.


For valuation of a business or a stock, I like to make it simple. My own views and approach:

1. I will only rely on my own valuation to decide on my own purchase price, after factoring in an appropriate margin of safety.

2. My primary basis for valuation of a business is a reliable estimate of its current aftertax FCF, before adjusting for WC changes or capex. Depending on the stabiity of the underlying business and quality of the financial accounts, I can accept the numbers in the latest P&L, or take a simple average of the relevant numbers over the most recent accounting periods to adjust for volatility.

3. Having determined a reliable estimate of a business' current aftex FCF, I would apply an appropriate multiple - based on my own judgement - to derive my own estimate of the fair or intrinsic value of the entire business. The appropriate multiple will take into account the quality aspects of the business, including its profitability and sustainability, volatility and growth potential, management quality/competence, intangible assets (like brands and goodwill), business/industry risks, long-term capex requirements, working capital/capex requirements, etc. The derived estimate of the fair or intrinsic value of the entire business will be used to determine the fair value of the unit share, after adjusting for any existing derivatives like warrants or stock options.

4. Depending on whether there are additional 'reserve-type' assets - e.g. investment properties, 'hidden' value (vs. realisable current market valuation) in key assets, large cash reserve, etc. - in the company, I will usually attach additional value in my estimate of the fair or intrinsic value of the entire business.

These are comments extracted from Wallstraits Forum. I find it to be of value in my understanding of how others value their stocks.