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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35259  
Subject: Re: Bond study Project; selecting a company Date: 9/1/2006 11:13 AM
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Charlie,

Why are you excluding the AMEX? And why the insistence on "well-known"? As long as the company is trading above $5 and is up to date in its filings with the SEC, that's good enough for me.

I'm more concerned with good excercizes and well done homework then actually coming out the end with a winner. The market tends to price effeciently more often then not so the chances of us finding the needle in the haystack seem slim. The AMEX doesn't require the same level of reporting for all companies trading on it. Familiarity breeds comfort and what we need for the purposes of learning is comfort. Following the process through for a familiar or more heavily owned company is more likely to produce results inline with current pricing. This isn't likely to find us a bargain but does gives us postive feed back that the methods we use are not in left field.

I'd suggest that, first, a profile for the industry has to be created. Understand the industry, and you can benchmark the companies.

I'm a bottom up person so I start with the company. If the group would like to focus on an industry prior to picking a company then creating an industry profile prior to company profile makes senses. Bear in mind what I'm talking about for a profile is a about a paragraph, name, where they are, contact points, what they do, major competitors(maybe). No heavy lifting required.

jackStudy the quality of the company, their character, their tone, etc.

CharlieThe typical way those kinds of subjectives are determined is through on-site inspections and interviews with management, which are beyond the abilities of most of us and which some very good analysts think are a total distraction and waste of time.


I recognize that we can't get that deep. Most the time I don't think we need to, I would argue that if the deel is that close where we think we need to meet management face to face we are entering the realm of measuring with calipers which is unneccesary precision for our purposes. I walked away from both Cendant and AIG when the numbers said it was good deal because I didn't like the smell, the feel, something didn't sit right, two good decisions.

Most folks, if they aren't already enamored, can tell if the company is putting lipstick on a pig or when someone is trying to baffle them with B.S. Some used cars salepeople are sharks, their favorite customers are the ones that have to have that! car. Some used cars salesfolk are good at finding the compromise of what you need and the commission they need. Odds are you are more likely to do repeat business with the second one. Most folks shopping for a car can tell within the first minute which type of salesperson they are dealing with.

I believe that it is imporatant to have some sense of the character of the business we are dealing with. In the end we will probably know more about this business then we actually know about the person/bank that loaned us money for our last car or house.

We also need to keep in mind that for some people numbers dancing across the screen soon morph into woozles and hephelumps. Some folks are more people of story or narratives then numbers. These folks tend to be as good as spotting descrepancies in stories as numbers wonks are at finding ratios that don't add up. These folks are not likely to ever be truly comfortable with numbers. What they need to learn is to trust what they are good at and to double check the story with numbers that make sense.

I'm not talking about investing based on story. I'm talking about framing our object of study by the story the people involved in it are telling. For some investors the story being told is more telling then the numbers. With practice I believe the good story finders are going to have a good sense for how the numbers behave before ever grabbing pen and napkin.

jackstudy the fundamentals, about 10 years back is nice.

CharlieFive years is plenty, especially if good comparatives are done with its peers.


Your emphasis on peers demonstrate one of the places we differ. I use one to get a marker for the rest. You use the rest to place the one. I like ten years because it is more likely to cover a complete market or business cycle. I'm not wedded to 10, 5 is fine.

Are you talking about conventional ratio analysis?

When it came to screening I was really thinking about screening for individual bonds. We can certainly screen for company candidates using ratios as cut off points.

For all practical purposes, bonds can't be traded. So don't even mention the word, which isn't to say that a stop shouldn't be set and honored if things detriorate that far (or a hedge put on).

When need to take some time to upack what you stated here sometime during the project. What I'm convinced of is that we shouldn't buy before we have a good understanding of both the upside and the downside. We also should know before the purchase what we plan to do under best and worst case scenerios. Doing this prior to purchase is our best defense against investing by emotion.

I totally agree. It's the underlying company as it reveals itself within the context of its industry that matters.
Well we almost totally agree, I'm not as concerned about context as you are. I don't think it should be ignored, as stated before I'll use one company as primer for the industry and then arrange the rest of the industry in relation to that one company. You approach it by letting the industry shake itself out.

I keep repeating the differences so that everyone will know that these are places where we may bump heads. Neither process is better, I do believe that by using both approaches in dialog we are more likely to walk away with a clearer picture as long as we manage egos and feelings. This little dialog has pushed me to adapt and add a section on relative valuation, not a prefered method of mine but that was not a good reason for exclusion.

jack
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