The Price Earnings (P/E) Ratio is a well known and easily computed number regarding the value of a company. Yet, it's really not that well understood. What exactly does a P/E of 14 indicate? Is it better, or worse than a P/E of 16?
The way I see it, there are two main components that make up the P/E ratio, and they are not price and earnings - well, they are - but, if you slice it another way then you get two more revealing components.
The delusion...Value Investing
- Why it's the best long term investing strategy. Why most investors don't have what it takes. Why and how individual investors can outperform most fund managers, and why some fund managers are worth reviewing
Other stuff
- What is money, where did it come from, and where is it going? Some tax effective investment structures. The Australian Property Bubble. How investing, insurance, gambling, betting are all the same thing..
Quality Company Metrics
The first step in my investing strategy is to identify quality companies. There are approximately 2000 companies listed on the ASX, and I only want to invest in the top handful - and even then - only when they are cheap. But back to step 1, I'd like to walk you through how I identified the few companies at the top of the list.
I started by downloading all of the relevant company financial data from Comsec. Note that this was not the price history for the companies, but each company's financial reporting history.
I started by downloading all of the relevant company financial data from Comsec. Note that this was not the price history for the companies, but each company's financial reporting history.
Inflation
I've been thinking about inflation a lot lately. Some time ago, I realised that I had no understanding of what inflation was all about, and I was somewhat embarrassed by this knowledge gap. Since then, I've tried to build a model of understanding for inflation, and it goes something like this...
Subsequent Rates of Return
The concept of initial rate of return (IRR) is fairly straight forward and easy to understand. Related, but not so straight forward, to the initial rate of return, is the subsequent rates of return (no particular acronym) that apply in the periods following the initial rate of return.
The Evil Princes of Martin Place
I've (finally) just finished reading The Evil Princes of Martin Place by Chris Leithner. It took me quite a while to finish, primarily because I haven't had that much time to read lately, but also because it's not an easy book to skim - I really had to concentrate.
Overview of The Evil Princes of Martin Place
In the book, Leithner presents a history of banking and money, analyzes the causes of depressions and recessions, describes the failings of the banking system, including the central banks and governments that support them, and comes up with some fixes for the problems that he sees.
Some specific conclusions that Leithner reaches in the book are:
Overview of The Evil Princes of Martin Place
In the book, Leithner presents a history of banking and money, analyzes the causes of depressions and recessions, describes the failings of the banking system, including the central banks and governments that support them, and comes up with some fixes for the problems that he sees.
Some specific conclusions that Leithner reaches in the book are:
Bubbles
A friend recently asked me about the shape of bubbles. He wanted to know how long the Australian property market crash would last. (Note that the question wasn't about whether or not the Australian property market was in a bubble, nor whether or not it would crash - they were both givens. The question was simply whether the crash would be swift and brutal, or long and drawn out).
Baskets of Goods
Bananaman lives in Barterland. Bananaman grows bananas for a living, and often travels to the Barterland market where he swaps his bananas for other goods.
Bananaman is clever. He suspects that the Barterlandians are slowly thinking less and less of his bananas, but he's not quite sure, because many of the other goods are seasonal as well, so there is rarely any consistency between the number of apples or oranges that he gets for his bananas, but lately he's feeling as though he's just not getting as many swapped goods as he used to.
Bananaman is really clever. He devises a scheme, whereby he creates a basket of goods that he likes, including apples and oranges and other juicy things, and over time, he'll track how many bananas he has to swap to get the goods that he likes.
Bananaman is clever. He suspects that the Barterlandians are slowly thinking less and less of his bananas, but he's not quite sure, because many of the other goods are seasonal as well, so there is rarely any consistency between the number of apples or oranges that he gets for his bananas, but lately he's feeling as though he's just not getting as many swapped goods as he used to.
Bananaman is really clever. He devises a scheme, whereby he creates a basket of goods that he likes, including apples and oranges and other juicy things, and over time, he'll track how many bananas he has to swap to get the goods that he likes.
Making every post a winner
There is an expression in sports races: "Making every post a winner". By trying to race to every post along the way, the racer is going as fast as they can, and it is only a matter of time before they tire, because you can't go 100% all the way - unless you are very close to the end of the race already.
In races like the Tour De France, you generally never see the cyclists going 100%. For the most part, they wait, and wait, and wait, until the "key moment", and only at that time do you see them going flat out, and the race is won and/or lost in those very few key moments.
Similarly, in investing, the best strategy is not to make every "day" a winner, or every "week", or even every "month", "quarter" or "year".
In races like the Tour De France, you generally never see the cyclists going 100%. For the most part, they wait, and wait, and wait, until the "key moment", and only at that time do you see them going flat out, and the race is won and/or lost in those very few key moments.
Similarly, in investing, the best strategy is not to make every "day" a winner, or every "week", or even every "month", "quarter" or "year".
Compounding Engines and Price Volatility
I view companies as compounding engines.
Quality companies have consistently high returns on equity. They have this special ability to use their retained earnings to increase their equity base, which they can then use to generate even more earnings in the future, and so on. I don't give any consideration to low quality companies, that is, that don't have consistent and high returns on equity, so pour moi, and long term value investors alike, it holds that companies are compounding engines.
Quality companies have consistently high returns on equity. They have this special ability to use their retained earnings to increase their equity base, which they can then use to generate even more earnings in the future, and so on. I don't give any consideration to low quality companies, that is, that don't have consistent and high returns on equity, so pour moi, and long term value investors alike, it holds that companies are compounding engines.
Subscribe to:
Posts (Atom)
Posts
