Saturday, May 31, 2014

Stock Picking - A Nine Factor Model

Our decisions matter. We can change the world. Keynes economic prescriptions reveal that as we make decisions we do change the world.
Peter L. Bernstein, Against The Gods - The Remarkable Story Of Risk, p. 230

At the time of this writing there are 3,860 securities to pick from in Canada on the Consolidated Toronto Stock Exchange. If you live in the United States there are way over 10,000 securities to choose from on the three major markets. If you go into the pink sheets there are several thousand more to choose from. And the Oracle of Ottawa has heard that there is a ton of low hanging fruit still to be found on any given day.

Just Roll'em...

The Oracle of Ottawa cannot tell his Dear Readers from around the world, how many times he has held his fresh, new and very expensive copy of Investments by Bodie, Kane and Marcus in his left hand and his latest brokerage statement in his right hand only to be told by the standard book that what I did last month is totally impossible! Some day the Oracle of Ottawa is going to read that book and do it the "right way", but not today.

As a public service to my Dear Readers from around the world, the Oracle of Ottawa has decided that he is going to share with you basically how he picks a stock. It is a nine factor model of data that is commonly available on the internet for free. The Oracle of Ottawa has never paid for investment advice in his life, and neither should you Dear Reader.I will present my nine favorite factors with a link that will take into more detail. And some brief comments, that I have learned from having my own skin in the game for a number of years.

1./ Share Price: The lower the better! Contrary to the assumed wisdom, you will not make very much from buying Apple at over $500.00 a share. The Oracle of Ottawa has found that the sweet spot is between two to ten dollars a share. As a matter of fact my first ten bagger was on a two dollar stock. The Oracle of Ottawa loves two dollar stocks. If you are tempted to follow the crowd, ask yourself, what will double first, a two dollar stock or a one hundred dollar stock? Think about it.

2./ Price/Earnings: Lower the better. Buy a dollars worth of earnings for as little as possible. There is no law against it, and forget the textbook.

3./ Dividend Rate: The higher the better. New studies by the people of the book have recently found that that high yielding stocks do the best! Never buy a stock in a company that doesn't comp you with a nice fat rate for just waiting. Contrary to the book, high yields abound in the markets, all you have to do is discover them. And yes there are many free lunches to be had in capitalism, Who knew?

4./ Price/Sales: The lower the better. A low price sales ratio is a great indication of vigor. In Canada it is not uncommon to find price sales ratios way under 1.00. Would you believe 0.05 to 0.50 is pretty common? It is.

5./ Price/Book: The lower the better. There is nothing wrong with buying a dollar for fifty cents or even less. And contrary to the text book, these stocks are still out there in the market waiting to be discovered. So much for the Efficient Markets Hypothesis!   

6./ Volume: The higher the better. Steadily rising daily volume is very bullish from my experience.

7./ News: More positive news the better. A company with a clearly defined mission is very bullish indeed.

8./ Price/Cash Flow: The lower the better. (See the link...) The more money that is flowing through the company the better. A low ratio indicates wicked vigor.

9./ Beta: Doesn't make any difference. Beta is a lot like mutual fund performance. Past history is no indication of future performance. Trust the Oracle on this one. The Beta of a stock has made no difference to the Oracles historical performance. Don't let it get in your way.

The Oracle of Ottawa hopes that this will perform a much needed public service. And be very wary of academics who write about stocks and even win the Nobel Prize, and yet have never owned a stock in their own name in their life! Read their books for a laugh, then study the people who have actually went out and did it. You can't go wrong with those guys.

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