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The investor return on capital - YouTube

 

 

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Last week we announced a new service called master of and everybody get back to some other people for seen email from us you get the top stock email the one hour on Monday or Tuesday this week people recalls I'll double check sure we we've had a couple technological glitches with getting the slots but will make sure it's running properly when I get back next week masters of Wall Street's kind of a new endeavor for us because I like our other publications to take more a qualitative approach stock I V masters Wall Street is a is really more about cool to help either evaluate stocks you or think you know buying or selling or as a source of ideas that's purely qualitative make your explain the whole process right so I'll leave it up to him to do that but this one's a little bit different from our this is it's a publication but it's different from our others and that it's not so much the narrative that's the yes and so the advice it's really.

 

The underlying week he's gonna explain it takes a little while to really get you had wrapped around Here I am somebody that's been in this business for thirty years and I was on the website for a couple of hours before I really haven't totally figured out one side this is really cool into a lot of interesting things with the stools jobs make real brief production john was a junior in high school basically I think he was just bored and applied MIT and was accepted into skip the senior high school straight MIT yugos sixteen years old for year old as a freshman at MIT degree in computer science and I'm sorry three degrees from my I'm in a master masters and yes so john was one of the earlier the pioneers in artificial intelligence went on to start his own company was very successful with it and sold it at a young age with enough money to effectively retire if manages is money well lack of curious about the whole investment advice industry he started interviewing stockbrokers financial advisors and quickly came to the conclusion that there was a what we seem to be as much of an exact science is maybe the most people would expect so with his background he started reading books by some of the all time great best legends and took his artificial intelligence expertise to essentially right algorithms that with mimic.

 

The thought process great masters up and once he did that to me his own portfolio decided got a pretty thing here started managing some money we approached Johnson hey we'd like to offer this in the form of publication to our subscribers just earlier this month we have formally launched master Wall Street with John talk about the track record how it works but this is another tool that I really think to take a hard look at understand how it works that's John Reese thank you Jim thank you very much are I'm going to try to speed this up a little and recognition the time a so I may cut through some material here but before begin I'd like to ask the audience a few questions I confess relay to you and sure some my story with you can I see by a show of hands have you still hold its individual stocks your portfolio teacher actually managing okay so he said almost everyone in this case how many do you study tour is a strategy is a famous investors.

 

I'll actually like ninety percent of you have you tried implemented stock picking strategies if those I investors but lack the discipline to follow them up okay have how many view we have some type of screening your idea generation tool that you currently using to pick ideas any tools or I might again the vast majority and finally how many view you stock fundamentals not technical analysis but stock by the mail such as price to earnings ratios and growth ratios return on equity to help you choose stocks okay excellent so the goal my presentation today I'm going to present to you a quantitative investing strategies by really highly successful investing masters I'm going to be using peter lynch up Warren Buffett and Benjamin Graham I'm to discuss an investing framework they can help you become better investor and I'm going to look at a few investment ideas that you might actually be interesting right now that's live on the investing website masters Wall Street so little bit about me to ads which emit said I'm also the author of book secure investor had to beat market using history's best strategies have a MBA from Harvard Business School undergraduate degree was at MIT columnist for Forbes real money Globe and Mail and several other sources right now arm two patents the area automated stock analysis and also an SEC registered investment with a capital management so a James Wright howitzer gun into this was that I built up my first company technology.

 

Company local area networks sold out of two GE Capital and was faced with how to invest on my own skip to you a lot of trial and error what I did it was finally successful is I came across certain books have many the satire at the one key one being one up on wall street by Peter Lynch my original copy in this where the key thing was he was somebody who had a proven track record who wrote in book in a very detailed manner how we went about picking stocks for the war the their sexual steps in this is a quantitative they can actually be computerized very sensual I'll i think im across other investors this one was Benjamin graham his Intelligent Investor book also became the basis love these master strategies so decide so peter lynch bencher Graham.

 

I just mention the other investing masters include Warren Buffett ken Fisher ken Fisher about thirty years ago I wrote a book called Super Stocks that became the basis that this now he's evolved his own methods managers things different I still stuck with his ritual strategy which is usually not the region strategy guys continue to do stellar I David Dreman known as the original country in Marty schweid was on Wall Street week with we were kind sir and had the best risk adjusted returns over years according to help digest James China Sea rights and some work somewhat works on wall street and analyze over forty five year period what works best John NAFCU was the manager at the famed Windsor fun for over years fabulous track record beast be the spare and a few others so why these masters again one they developed a framework to select stocks that basically delivered market outperformance very key.

 

So we're taking something that is very long term track record market histories are not just short one to three years success strategies very long term publicly disclose their strategies the book or other all paper that gave me special information and further they have to have within that a quantitative strategy the QB leverage using the artificial intelligence computer program a all three had to existing many hundreds if candidates for books but really boiled down to just a handful these masters so I mean actually take you through quantitative strategy for superior wench who is the star fund manager at the Magellan fund his track record was over his year period or ten-year he averaged about percent per year terms as the annualized returns I'll this may be getting a little too detailed actually one of the key things that I hope to share with you are what are the important variables really look at what did these masters look at to judge whether the fundamentals good or bad worth when testing it was a question always fascinated me because there's so many different variables you can look at water you use how did a sensual use them so the first thing that Lynch dead is he looked at the EPS growth at the firm to put into several different categories of is going to percent a year he call the slow grower if was growing between and percent.

 

Call this downward and it was growing faster than percent he called it a fast car any different criteria a for selecting each other stocks depending whether it was just our slow grower faster or for the purposes right now to simplify we're just gonna talk about fast growers so it was a fast Corey want things he was famous for with PEG ratio the price earnings ratio where your sensually comparing the price to earnings ratio of the company to its growth rate so that way that you don't know overpay his optimum case was if the price earnings ratios half the growth rate so if you're growing its percent but say the ideal case is the price earnings ratio would be fifteen or under and if they're about the same and it went marry me when P interest said it was over one to one ratio.

 

He focused on the inventory to sales want to make sure that the inventory was not growing faster than sales which should be a sign that the growth was about to peak total debt to equity something that you like that if the debt to equity ratio the company was less than percent that was the best case it was greater than eighty percent in the firm was not a utility firm firms can have much higher debt ratio that would essentially cause us to fail wanna the interesting things in my study all these masters is very few ratios were in common to masters but that's it debtor debt to equity was something that almost all thinkers masters essentially had the price to earnings ratio was also very interesting it's the most common ratio that everybody uses what brokers poets what's up magazine articles quote and less than half the gurus essentially use the price earnings ratio when they did they all have their own special twist to it superior wench for fast growers he would not even apply a p/e ratio up to it I in less the sales were over a billion dollars it was under billion dollars would not apply.

 

If it was ever billion you want to see the price earnings ratio less than for the growth companies another interesting thing about wench was that it was too possible to actually group for company if the earnings per share growth was over percent his feeling was that was unsustainable we threw it out his ideal sweet spot for fast growing company was between and percent if I only had some bones criteria such as if there is free cash flow per share very high amount or very mounted actual net cash per share it was on the books those the not insist on it that boy he sorta fun said mortgage upper House's and pay for it if you do find companies also matters other criteria as well as this so I'm actually going to show you from the masses wall street side current stock selections and how you actually use it if you want to develop a portfolio from it takes a second get there this is the new masters a wall street site from investing daily and here lists some current selections from the peter lynch strategy I just heard from bottom Celestica which basically is a supply chain company Green Dot corporation and Humana would be three traces ticker symbol it %um it's possible find out how many the Masters essentially like that and other statistical information about this what's also interesting about the system is you can just take the selections as they are invest in a portfolio but if you want to find out why the particular master actually selected white actually pass the criteria you can sense we do that by clicking on any of these you can get a step-by-step analysis about what's

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Which is very interesting all retailers own clothing one of the things that surprising because of and clothing retailers have a very terrible reputation nevertheless these companies have steady predictable cash for their earnings increasing every year including downturn of they've been marvelous cash producers and because they're unpopular they create good times to essentially by so Dollar Tree roster is coaching TGX then Benjamin great Benjamin Graham's generally considered the father value investing I he's had several bright prodigies his most well known prodigy courses were about that himself was a student I'll Benjamin Graham also I should emphasize look it portfolios of stocks not just individual stock picker but he also advocated it made no sense for individuals to you try to pick individual companies which one a portfolio stock that that hold similar characteristics so the first thing that he did is he generally limited at the stocks and excluded technology firms he want to see that stocks were reasonable size you want to see scaled up to today's inflation up size about $ million dollars have sales at the company.

 

If it didn't past that he went to go for the stock current ratio the company you want to see greater than to you which is a pretty high criteria in less the company was actually utility were a Telcom I in which case he could accept the higher ratio long term debt as I mentioned again one thing's it was common to almost all the girls that they had some kinda criteria regarding debt want to see that it was less than the net current assets so this is a pretty stringent criteria for most companies to you pass it's actually saying that with all the long term debt the company if you take basic net current assets into cash in the company if you actually pay off its long-term debt long term a earnings per share growth he didn't have tough creature I just want to see if thirty percent growth over a year period time which comes down to like about three percent per year want to see a positive bias in the company's not negative bias and if it was any negative years he would eliminate company price earnings ratio he want to see less than one of things it's interesting in terms of your replies.

 

It is rather than using the trailing months earnings he actually looks over a three-year training period of time had a price to book ratio urea love less than I am the total debt to equity ratio for industrial companies want to see it less than percent and for utilities phone companies railroad center want to be less than two hundred thirty percent and to get back you’re so some real time pics right now from his powerful I'll just pick a few interesting Chevron Corporation is on the list right now a Telcom NTT DoCoMo in Japan all and Holly frontier corporation smaller cap companies probably won't recognize and another one companies that have been hammered recently have been yen adult education Bridge point education company has come to a point with that's attractive very good guy reputation under the Benjamin Graham criteria so there's several other aspects that make these long-term strategies work continue to work I wanted to share their framework with you these are column investing peelers an important part of the success that these portfolios and strategies I in basically we've redefined long-term investing you don't have to hold onto the stocks to be a long-term investor you which goes across you your against your conventional wisdom you have to hold on to the strategies for a long time to be a long-term investor.

 

So buyandhold strategies in our experience don't produce the best returns I'll to be successful you need to stick to the strategies even after the game years so for years now I've been looking for continue to look for most successful long-term strategies that work in stock market I have still not found even one it every single year that looked at it is where it doesn't have a down year or doesn't have your word fails to beat the S&P all the strategies every single one come across has the characteristic it will have one or more down years so chill Greenbelt who wrote the book The Little Book the pizza market hedge fund manager again one at the Masters here this study he found that a on any one year period strategies would underperform by percent time times they were two-year period said under foreign seventeen percent times but when you come to a three-year period ninety-five percent at times the strategy what outperform the stock market the S&P evaporated time again the key inside the is with strategies you approved for long-term you must stick with them over multiple your periods anyone you're pretty time.

 

You can have down period now what's interesting is this is exactly the reason why the strategies continue to work we're generally shaken now strategies our faith is Lou slaw son strategy if it has a down year so I continue c we have two sizes for whatever strategy picket as long as it had a proven long-term track record you wanna stick through it through the damper its prime one of my interest has been and behavioral finance and how investors FIIs and how our brains are sexually wired on this is a all the topic and disconnect can sit down to a few points but as a whole weekend to be were optimistic about our ability to you that we can find good stocks actually do well with them we're very overconfidence that our judgment is right with stocks or creates an illusion of control we tend to be highly biased what's recently happening in the market over the last few months over the last year these are still fear short periods of time in the market and weekend the whole whatever's happened last we projected into the future and it's exceptionally difficult for us as human beings up in this includes virtually.

 

All the professionals and it’s you too overcome that recent see by ass we just strongly tend to fill what's happening recent market is what's going to continue and then loss aversion is that many times were actually far more sensitive to you the potential for us when something's going down we are to the gains that this creates a bias ace symmetry were feeling about something were much more worried about potential loss and again that shakes is from the competence of staying with the strategy and now that your finances probably at least years all and relatively well-known you think people knowing this could overcome these biases yet that hasn't happened are human mind still continue to do this when could when confronted with the stock market going down twenty percent thirty percent big market crashes we still have these potential problems that we can't get over so above a quote on emotions discipline investing is not a game where the guy with the IQ beat a guy with cue want you ordinary intelligence what you need is temperament to control the urges to get other people into trouble in investing arm performer construction one or the other aspects here is that we call proposing can twenty or fifty stocks depending upon model factors like the investment size as you also can be on the market by owning.

 

 

If you have stock your portfolio need like mutual funds do even a couple hundred stocks you're going to become the market as compared to be able to outperform the market and one other criteria that uses we generally tends liked equally wat each stock selections we find that outperforms portfolios were there very different sizes the initial selection the stock so here's the key question strategy becomes known the presumption is it stops working so do these investment destin strategies still continue to work today the answer is that resounding yes so a just give you the example why wisest why do I say this other the master portfolios were following about perform the S&P since inception arm some doubling or tripling the S&P turn these go back to this case generally about mid the S&P return for about that time to today is approximately.  Percent about the best performing portfolio over this time actually has been the Benjamin Graham with return just under percent I Fisher asana sees why clinch all have excellence outstanding a compound performances

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Investing Strategies by Highly Successful Investing Masters - YouTube

Richard houston's insight:

So many different variables you can look at water use how did they essentially use them so the first thing that Lynch dead is he looked at the EPS growth firm to put into several different categories of is growing at ten percent a year he call sober if it was growing between and percent a call that's downward and it was growing faster than percent he called it a task or any a different criteria I for selecting each other stocks depending whether it was just our slow grower faster or for the purposes right now to simplify we're just gonna talk about fast growers so it was a fast Corey one thing's is famous for with PEG ratio the price earnings ratio where your sensually comparing the price to earnings ratio of the company to its growth rate so that way that you don't know overpay his opt in case was if the price-earnings ratios half the growth rate.

 

So if you're growing at percent but say the ideal case is the price earnings ratio would be fifteen or under and if they're not the same and it went marry me when P interest said it was over one to one ratio he focused on the inventory to sales want to make sure that the inventory was not growing faster than sales which should be a sign that the growth was about to peak total debt equity something that looked at if the debt to equity ratio the company was less than percent that was the best case it was greater than eighty percent in the firm was not a utility firm from have much higher debt ratio that would essentially cause us to fail wanna the interesting things in my study hall his master's is very few ratios were in common to masters but get debtor to equity was something that almost although the cruise masters essentially had the price to earnings ratio was also very interesting it's the most common ratio that everybody uses.

 

What brokers quote it's wet magazine articles quote and less than half the gurus essentially use the price earnings ratio when they did they all have their own special twist to it sir peter lynch fast growers he would not even apply a p/e ratio to it I am us the sales were over a billion dollars and hundred billion dollars would not apply if it was ever billion he wants the price earnings ratio lesson for the growth companies another interesting thing about wench was that worst possible to actually grow grass for company if the earnings per share growth was over percent his feeling was that was unsustainable we threw it out his ideal sweet spot for fast growing company was between and percent if I'm he had some bones criteria such as if there is free cash flow per share very high amount or very man actual net cash per share it was on the books those the not insist on it boy he certainly fun said mortgage upper house and pay for it if you do find companies also matters other creature as well as this so I'm actually going to show you from the masses wall street side current stock selections and how you actually use it if you wanted to develop a portfolio from it second get there this is the new masters at Wall Street site from investing daily an lists some current selections from the peter lynch strategy.

 

I just showed bottom Celestica which basically is a supply chain company Green Dot corporation and Humana the three traces ticker symbol it %um it's possible find out how many the Masters essentially like that and other statistical information about this what's also interesting about the system is you can just take the selections as they are invest in a portfolio but if you want to find out why the particular master actually selected why actually pass the criteria you can sense we do that by clicking on any of these you can get step-by-step analysis about what's important I to make that decision in fact if you question that any stocking but its ticker symbol and get a step-by-step analysis by any vigorous the church's see going to strategy a and Warren Buffett now Warren Buffett's interesting as he himself has not actually authored particular book about how he goes about picking up his drop clues here and there but the best-organized work at a all the books I’ve seen more about that was written by sex daughter-in-law Mary Buffett and that’s that I that's the one that actually is replacing strategy on first key thing is to determine if the companies actually even about the type company is that the lowest cost basis in industry is a daily pass on costs I'll is the business.

 

Model complex simple little leader in its industry assuming that it does meet at criteria we're gonna actually then look for you some quantitative thanks one of the most important things and in essence this success as you look for earnings predictability he want to see that the earnings were going up homes each and every year not just for a few you preach I'm over years and reason that this was so important was that bomb normally you can't make projections ten years out in the company with any kind lightly at all his type the company's you actually can and it only works if there's fairly steady trans in the earnings per share the company he would accept some dips by the way in the earnings that more than percent over a -year period the time second thing long-term debt here one has another interesting twists in that is he compares yet not equity but the actual earnings capability the company so he would like to see ideally the very best cases the company to repay its long-term debt using to use with the earnings but in worst case now yours no worse than five years with earnings return on equity not just over the last couple years but again over years he want to see the average percent or better for the investor return on capital not just with the equity you also want to check some companies heavily financed with debt.

 

The return also was at least greater than percent you too much dad capital expenditures is ideal company a had a positive free cash flow so money's not be put back in the business but can actually be spun off from the business utilization chain earnings basically want to see that when the management the company over the years kept money retained earnings rather than paying you back in dividends that they can actually get a better than percent return on that the comment that would be a failure for the company even once the company past all those particular criteria and that's quite a lot he then asked the question well is the price right now alone a price if I bought the end that I could make a return from it I he would two different ways actually calculating returned from the company he projected out the place to share the company years using different methods and again that's why the predictability was so important and if the average if this was greater than percent or at least percent that's when he would become interested in buying the company saying that a type returned I’m looking for. so I'm gonna switch to couple of pics right now one of the things that you can notice very interesting I the top for choices on the buffer portfolio.

 

Right now actually turn out to be Dollar Tree rosters coach TJX Companies which is very interesting all retailers all clothing one of the things that surprising because of and clothing retailers have a very terrible reputation nevertheless these companies have steady predictable cash for their earnings increasing every year including downturn in they did marvelous cash producers and because they're unpopular they create good times to essentially by so Dollar Tree roster is coaching TGX then Benjamin Graham Benjamin Graham's generally considered the father value investing I he's had several bright prodigies is not well in prodigy

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Over this period of time in the presentation also gives the other ones we've now also complying the strategies into consensus based strategies we do a couple different ways but here's the performance again tracking the red line that you see a is the S&P over the period of time such concessions for folios the green line that you're seeing is the Hot List portfolio selection have some ten stocks in again far performing more than doubling basically the S&P performance over that period of time we the second consensus strategy game we can do it we take couple stocks each the master portfolios this is an even better performance returned over five you're pretty time a hundred thousand asunder investment in top five masters actually grows arm so is it finally we have a successful money management business a practice actually based upon those strategies so the good news is by hearing to the strategies through thick and thin following discipline strategies you can still continue to you perform the stock market by very substantial percentage is as how did your well Society membership you actually access to the masses Wall Street you've got its cool where you can analyze stocks according to those final strategies you can find new ideas using screen a you receive a master's hotness newsletter basically every two weeks and every other issue you have the topper forming consensus strategy that I showed you the performance of that you can destined to fall right along a with that I wall Abu questions yes sir I'm sorry actually did watch okay I did not see that in his cell recent book about also confirms his strategy and his performance.

 

Yes he changed his final strategy one things I find interesting he's actually gone through several revisions in this book cover pretty time right what I found through all these gurus is that on a temporary basis they've actually found ways tweaking the strategies looks like it gets more performance but over long periods of time going back to the original formulation actually is work the best and I join date so I actually sticking I found the best actually stick with the original formulation it was their original inspiration and work so is much is I find it fascinating the tweaks I found it beneficial not actually changed for male to the latest hot that they found wipe right I i mean the big agreement with you over the statistics and portfolios so in general that's what I found that I from implemented thank you for that more work at yes up the same was that up the examples presented did not show cash flows and the judgments found the cash flows have been pretty important are there are several other the Masters actually do you use cash flows and it is important are also in the buffet strategy he wanted to make sure the cash flow from operations actually was positive I'll so again it does go to that that is a very important variable several degrees actually to use ok I guess with up yes there were several columns in there when representing the stock portfolios it said something like three over one basically that was the total number.

 

I love masters anyone call me they're strong interest or some interest in the portfolio right now or when it was essentially ritually to portfolio so that you could actually see the change in the difference in the and I present at is informative I think that that doesn't make a difference in terms the performance if the portfolio whether you should followed or not the strong recommendation is to take selection can stocks in Sox portfolio and religiously implement them with on the list by them in the long run list sell them for ok a the question differences between the masses heartless the top five masses portfolio was the question we have multiple ways trying to find consensus within the gurus there's a system here that we can actually outperformed.

 

The individual portfolios I’m looking for. a degree of consensus their couple ways of doing it the Heartless is actually the most sophisticated way and it allows each at the Masters votes on each other securities in our database some securities and their vote is actually waited by the long-term risk adjusted performance arm that will result we take the top at the house and that results yen risk adjusted highly ranked consensus based choice using all the strategies an alternate way of doing it is to say what are our top five performing gurus and we take to stocks the top two stocks each those portfolios and combine them together so there are different ways a doing at when we do with the top five on wanted the ship’s actually tends to result the a smaller cap portfolio relative to the consensus Hotlist and each has different patterns I'm personally I'm de cette equally in both the strategies they tend to perform at different periods of time sometimes are together but some periods have a performance one purses that performance at the other so they're two different ways a combine.

 

The consensus the Tigers Weston's I'll know we take since our inception of our database will be tracking strategies that some will you stop by so that like the time with just with which we judge them grows each and every year and again we also look at risk adjusted basis how well they performed over that period of time take one more are okay and I apologize I slept over particular slider the question was week after his return how do we know when to exit from the stock we use a rebalancing strategy I'll for the normal rebalancing strategy in these particular portfolios when our new heartless comes out which is every other issues basically every days we wall our portfolio consisted the stocks are in their performance that day me have a strong discipline to sell if it's no longer there this opportunity cost me feel for holding onto stock it's no longer in the top part of the portfolio so the rebalancing discipline is very much interview method here it's no longer top ranked now for tax deferred accounts basically that's a that's a very good strategy for taxable accounts weekend actually using overlay for tax management on this so that results in long-term capital gains not a lot shorter cap against this little more sophistication to that s this is works before remark for up so well.

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