When to BUY and hold for 20 to 30 years – Axioms – Durable competitive advantages business
(Game Plan in Place for Mister Market) – 10 Important Screen Criterias for Stock Picking
- Brand Name Product that is having a problem such as an announcement – market shortsighted and is overreacting
Book Value – Review Value Line.com – Fortunes Magazine list of top 500 companies in America – High Rates of Return on Shareholder Value (Consistent Return) also known as Book Value (Not too many companies fit this criteria)
Shareholder Equity Formula (Consistent Return), The Balance Sheet doesn’t tell you if the company is making money, the Income Statement is issued every 3 months,
The average Return on shareholder’s equity over the last 50 years has been 12% – anything above 12% is above average.. this is where you need to be. The higher the better! This is a durable and competitive advantage. - The Safety Net – The Right Rate of Return on total Capital (Dividends and Buybacks hide this true value). Look at the Return on total capital
Formula = Return on Total Capital – Net Earnings / Total Capital in the Business
Look for a high Return on Total Capital - Per Share Earnings that are Strong and on an upward trend
- When Debt makes Buffett nervous – Relatively free of long-term debt little or no need for debt, large long-term debt makes it difficult for a company to survive economic crises or downturns.
Debt to Equity is a poor measure as a ratio
The wealth of a Company is in its ability to create a profit consistently – A good Example is Wrigley it can pay its debt in less than a year with its yearly profit whereas GM is terrible in profit and controlling its debt.
Needs to be Conservatively financed - The right Kind of Competitive Product Brand or Service
- How Organized Labour can hurt a Company’s Profit – for example unionized airline Pilots. Unions become demanding and Quasi-Owners destroy profits to losses quickly
- Can the Product or Service price be increased during periods of inflation (cost of production – heavy fixed cost – for example, airlines – could exceed inflation creating a money-losing business)
For example – Hershey, Coke etc can increase the price during periods of inflation keeping costs lower. (This type of business is inflation proof) - Perceiving the right operational costs – don’t have to spend a high percentage of retained earnings on maintaining their business optimal business is using zero dollars from retained earnings.
- Can the company purchase shares to the shareholder’s advantage? To do this a company needs an abundance of FREE CASH.
If a company begins to buy back its shares it is 1. buying back its shares and 2. future retained earnings (which would be positive and higher in future years). - Does the value added by retained earnings increase the market value of the company? If so then the stock price should go up. Example Berkshire Hathway
When to SELL – Axioms
- Bull Market Bubbles and subsequently collapsed companies with P/Es 50 x or better and later dropped to single-digit P/Es. Bubbles occur when value-oriented investors leave the market.
- Historically high P/Es of 50 or more and a good time to sell when stocks move from 10x and 25x P/E and then move to 40X P/E or more the market begins to bubble max speculation is occurring in the marketplace. Mister Market is optimistic and price has become a casino price speculation
- Keep an eye on the Horizon – The Business changing or the Environment changing be ready to sell if it doesn’t fit the top 10 criteria any longer.