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. Dan
Dan:There is a big dark secret being kept hidden from market analysts, a secret that has been scientifically demonstrated by particle physicists, but a secret I dare divulge to you, for your eyes only! "You can't predict the future." Nature doesn't know what she's going to do next, not even at the sub-atomic particle level. But somehow, at the macro level, many things are practically predictable like the Sun rising every day -- until it doesn't. Scientists studying how economic ideas evolve have shown that new ideas come about at random but always based on a combination of what has come before. The scientific term for this is "the adjacent possible." John Boyd was one of the few who figured out how to turn this random generation of ideas into a procedure humans could follow that was likely to accelerate the process: "analysis-synthesis, destruction-creation." He also developed the OODA Loop to better kill the pray or to defend against the predator as the case may be but that is a different subject -- or is it?Now that we know we can't predict the future, what is the best way to navigate into that uncertain future? That is really your question. The scientific method consists of observing nature to see what she does, making up theories to explain what she does and building experiments to see if they support or contradict the theory. Rinse, repeat, get Nobel Prize if lucky.One feature of the investment market is that only one in four investors beat the market. If a loser becomes a winner someone else will become a loser to maintain the one in four ratio. The OODA Loop is needed, after all, to kill your stock market adversary before he kills you! Investors don't think along these lines but they do admit that what works today might not work tomorrow and they are spot on. But some very few investors do manage to have a lifetime superior achievement. They are the ones we should learn from.To this day it's Peter Lynch I've been most successful in learning from. Lynch does not just do one thing, he does different things depending on the type of company he is investing in: Stalwarts, turn-arounds, cyclicals, retail, and so on. Don't go hunting for tigers with mouse traps! The one thing his various approaches seems to have in common is that he puts a greater weight on the "story" than on the "financials." It would seem that a good story attracts him and bad financials turn him off, not the other way around. His researching to story is deep but his researching the financials is rather shallow compared to what others do. You might say that a good story attracts him provided bad financials don't turn him off.Beating The Street is a pithier name than OODA Looping the Street but that's what Peter Lynch means.I'm going to have some breakfast now. Denny Schlesinger Beating the Street by Peter Lynch (Author), John Rothchild (Contributor)http://www.amazon.com/Beating-Street-Peter-Lynch/dp/B00150GH...
I’m curious about how much dd people here do, and especially how deep you go into financial statements.Quite a bit and not too much would be my answer.When I first look at a company it is usually because it is a candidate for the type of risk, or exposure I am seeking. So for example when the subject of ng's future came up, I set out to look for companies that were particularly exposed/levered to the the future price of ng.What is important to note here is I am deliberately looking for companies that are for the most part pure play ng producers as opposed to more oily companies where their ng may offer exposure but not to the same degree. A few years ago when I mostly wanted to reduce my exposure to ng, keeping some by investing in oilier companies made a lot of sense (kind of an option on ng) but if, and I am still at only the if stage, I decide to increase my exposure to ng (The North American variety)it is likely that the pure plays will provide me what I am looking for.Obviously "financials" matter, but for the most part looking at some quick ratios gives me enough information to go on as I proceed with my winnowing process. Like other industries there are a lot of other "metrics" that are important as well. In this case reserves, production growth, f&d costs, etc. all come into play, as well or in addition to the all important quality of management issue, but again, for the most part the quick ratio equivalents of many of these metrics is all I look for initially.I mentioned in a different thread that I was beginning to look at KWK,XCO & UPL primarily, at least viewed through the prism of their share price, because they are all train wrecks due to their exposure to the current low price of natural gas.(presumably) As an afterthought I've decided to add SWN to that list because although it is also a pure play ng producer, for whatever reason is performing on a relative basis (share price) much better.Although I currently have only a smidgen of knowledge about any of them I'm rather intrigued by and looking forward to seeing if I can figure out what has led to the divergence in share prices, in particularly between UPL & SWN given they both used to be darlings of many ng investors.The problem I have with "financials" and spreadsheets used to track the various metrics is, and I know this will cause some here to faint, IMO they too often delude people into thinking they can place a value on the companies and I remain skeptical that you can. I prefer my investments to involve a simple investment thesis (napkin variety) that although is predicated in part on numbers, is mostly predicated on if X happens (ng prices move up, down or stay the same) then Y can be expected. (To the moon, or not)So yes, in the beginning at least, I try to do my version of deep DD to help me select the best companies that fulfill my risk exposure desires with hopefully a somewhat improved risk to reward ratio. But once selected I'm mostly concerned whether my original thesis is intact (win or lose) and the obsessing over short term results and price movements are about as useful to me as someone blabbering on about why a stock price moved on any particular day....yawwwwwn. B
Here is one "quick look" tool that some might find useful:http://ogres-crypt.com/php/chart-mscf.php?s=JNJBut as Denny has so rightfully pointed out, all this does is chart the past...not predict the future.Cheers!MurphHome Fool
Excellent responses.As an investor of 48 years, having two engineering degrees and a 36year career as an analyst, I would say that the first hour or two ofDD gives you 90% of DD value. What really counts is money management and discipline. I never short,never overpay, will buy more if it drops, but only to a predetermined limit. The market offers many false lessons, but also a few real ones.For me, I never chase a fad, like green energy, a few years back.Also, I never made money on a biotech without a product, and always made money on a biotech with one. (There must bea lesson there somewhere.)
To this day it's Peter Lynch I've been most successful in learning from.Older posters know my theme so I apologize upfront, but the above could not be more true (by the way, you start with One Up On Wall Street which is theory while Beating is more application - read One Up FIRST - it is the more important of the two books, though for an industry primer you will find no better source than Beating).In fact, at the risk of sounding patronizing and insulting, I don't understand (MOST) people who try to develop an investment approach do so on their own. This is not only nuts - it is not time efficient, it is crazy, and my guess is few are successful. What most mere mortals should do is 1) indentify a style that works, 2) make sure it works for you, and 3) copy, copy, copy.What makes Lynch a uniquely qualified model to copy is pretty simple. Here:1 - He ran a mutual fund with a fantastic long term record. Thus, his is vastly experienced and successful in a very large organization and ran gazilliions of dollars.2 - He was HEAD OF RESEARCH for 3 years. Let's repeat that in all caps again - HE WAS HEAD OF RESEARCH FOR THREE YEARS. 3 - His books are written in plain english. This is remarkable achievment. 4 - Lastly, his books and articles are laced with checklists. Even bad investors can benefit from a simple route follow-up with a simple checklist. No, Lynch won't make you a successful investor, but he can give you the approach, foundation, and tools. A word of caution - you have to actually read the books. Second, you have to READ to APPLY. This is entirely different than most people's experience with a simple read.If you do this, you cannot help but become a better investor. Not necessarily a 'good' investor but a better one than you were before. His researching to story is deep but his researching the financials is rather shallow compared to what others do.ccs, no offense, but this isn't factually right. One Up and Beating were written for a general audience, not professional analysts. That said, that doesn't mean Lynch couldn't command a complete expertise of the numbers at hand. You always have to remember who Lynch was - he was head of Magellan, the largest fund on the planet. He could command enormous reasources and certainly wouln't shy away from complex financials (his whole series on S&Ls in Beating and Worth magazine proved that, and I can give you many other examples), though clearly he really really liked the simple story. ------------------Course, I am incredibly biased. I have based on my entire investment career on those two books and have read them more times than I can count and have them sitting at my side at all times when I am working. Lynch rules....
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.same here - it isn't hard to identify if a BS is pretty, if margins are going up or down, and if a business generates free cash flow. If interesting, I will do a spreadsheet to get a handle on the financials in more depth but it doesn't take long. What is more valuable is what you say - reading - esp. the company presentations and conference calls. I mean, if you follow restaurants, what are you really going to learn after reviewing the basics? It is too easy to get snowed under with fuzzballs that aren't predictive. it is better to study growth rates, where margins are going, capital allocation - etc. - or story stuff than to get lost in the details. All this said, you have to know how to at least go thru the financials. I think, like you said, you need to know enough to run from trouble or complexity when you see it.
ccs, no offense, but this isn't factually right. No offense taken. Nice post!Denny Schlesinger
Two different people can go over a company's financials with a fine-tooth comb and each one reach a completely different conclusion. So, I think it's not so much how thorough your due diligence is, but what you find relevant and insightful and what you do not. This is key. For example, Warren Buffett read IBM's annual report every year for decades, but it was (apparently) a footnote about share buybacks that finally got him to pull the trigger. But as Denny has so rightfully pointed out, all this does is chart the past...not predict the future.If you subscribe to the revision to the mean, in whatever incarnation, this kind of information is relevant. It places a stock's current valuation in a historical context. Depending on the company in question, and what products or services it provides, it's a judgement call as to if the future is likely to rhyme with the past.kelbon
Dan,Simple. Build an operating model from scratch. Do whatever due diligence it takes to get comfortable with the model. I like to look at least 3 years back and a couple years (3-5) forward to test assumptions.Not-as-Simple. Incorporate b/s items to better reflect potential capital raises/cash flow issues. Likely more critical for growing small caps that aren't profitable!Valuation will be driven off the model.Matthew(This is for a investing on a specific idea/thesis like rjf53 mentioned. This isn't how my large cap holdings were picked which uses top-down based factors.)
WeekEndMartian- Strong rec for Lynch- I've just ordered a copy of One Up since I haven't read it yet.Cheers,captal
Like WeekEndMartian, I've read it several times.Denny Schlesinger
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