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Buffet, Lynch and other legends - Investing Strategies
 The Equity Desk Forum :Market Strategies :Buffet, Lynch and other legends - Investing Strategies
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karn
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Quote karn Replybullet Topic: Methods by the Masters
    Posted: 27/Jul/2010 at 3:13pm
Here are few examples of stock selection/screening methods by the masters. Please feel free to contribute.

Regards,

K.

The Magic Formula by Joel Greenblatt, the author of The little book that beats the market.

Step 1: Get a list of all listed companies.

Step 2: Find their return of capital (ROIC)

Step 3: Give ranks from highest to lowest. The company with highest ROIC gets rank no 1 and the lowest would get the last rank.

Step 4: Do above steps with reference to earning yield (EY). The company with highest EY gets rank no 1 and the lowest would get the last rank.

Step 5: Combine ranking and prepare the final list. Example: If the company is ranked 45 in ROIC list and 85 in EY list (45+85=130) gets higher position than the company which is ranked 35 in ROIC list and 105 in EY list (35+105=140).

Step 6: Scrutinize the results and make adjustments. Usually 20 stock selections are made to form a portfolio.

Return on Capital (ROIC) = EBIT/(Net working Capital + Net Fixed Assets)

Earnings Yield (EY) = EBIT/Enterprise Value

EBIT: is calculated as the trailing twelve months operating profit if available

Net Working Capital: is calculated as Total Current Assets - Excess Cash - Total Current Liabilities if Total Current Assets exceeds Total Current Liabilities, otherwise it is zero

Net Fixed Assets: is calculated as Total Assets - Total Current Assets - Total Intangible assets

Banks and insurance companies are skipped from this screener.

Enterprise Value: is calculated as Market Cap + Long-Term Debt + Minority Interest + Preferred Stock - Excess Cash. If the returned value for Enterprise value is negative, then a default value of 1 is used.


Edited by karn - 27/Jul/2010 at 3:34pm
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Khan
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Quote Khan Replybullet Posted: 27/Jul/2010 at 4:11pm
Originally posted by karn

Here are few examples of stock selection/screening methods by the masters. Please feel free to contribute.

Regards,

K.

The Magic Formula by Joel Greenblatt, the author of The little book that beats the market.

Step 1: Get a list of all listed companies.

Step 2: Find their return of capital (ROIC)

Step 3: Give ranks from highest to lowest. The company with highest ROIC gets rank no 1 and the lowest would get the last rank.

Step 4: Do above steps with reference to earning yield (EY). The company with highest EY gets rank no 1 and the lowest would get the last rank.

Step 5: Combine ranking and prepare the final list. Example: If the company is ranked 45 in ROIC list and 85 in EY list (45+85=130) gets higher position than the company which is ranked 35 in ROIC list and 105 in EY list (35+105=140).

Step 6: Scrutinize the results and make adjustments. Usually 20 stock selections are made to form a portfolio.

Return on Capital (ROIC) = EBIT/(Net working Capital + Net Fixed Assets)

Earnings Yield (EY) = EBIT/Enterprise Value

EBIT: is calculated as the trailing twelve months operating profit if available

Net Working Capital: is calculated as Total Current Assets - Excess Cash - Total Current Liabilities if Total Current Assets exceeds Total Current Liabilities, otherwise it is zero

Net Fixed Assets: is calculated as Total Assets - Total Current Assets - Total Intangible assets

Banks and insurance companies are skipped from this screener.

Enterprise Value: is calculated as Market Cap + Long-Term Debt + Minority Interest + Preferred Stock - Excess Cash. If the returned value for Enterprise value is negative, then a default value of 1 is used.


He also recommends holding period of 1 year, book short term loss and long term gain and the process to be repeated every month. So each month 1/12 of the portfolio gets churned.
If you do what you've always done, you'll get what you've always gotten
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karn
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Quote karn Replybullet Posted: 27/Jul/2010 at 4:29pm
Yep, you are right. However I'm not sure it was a month or year. I think he suggested that the process to be done every year. The capital gains can be offset against loss from taxation point of view.

Regards,

K.

Edited by karn - 27/Jul/2010 at 4:32pm
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karn
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Quote karn Replybullet Posted: 31/Jul/2010 at 7:21pm
The adjusted and crudely calculated list as per Joel's Magic Formula (by enlarge for small caps) comes something like this.

1. IFB Industries
2. Tata Sponge Iron
3. Mangalam Cement
4. Acrysil
5. Haldyn Glass Gujarat
6. Gujarat State Fertilizers & Chemicals
7. ICSA (India)
8. Mazda
9. Jetking Infotrain Ltd
10. Orient Abrasives
11. Suprajit Engineering

Regards,
K.
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manish_okhade
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Quote manish_okhade Replybullet Posted: 31/Jul/2010 at 9:42am
Does'nt we also consider qualitative factors as an additional input?
Past data whatsoever sound it looks may not be a sufficinet to look for future.
 
It's taken as reference for decison makin alone but future valuation should also be taken qualitatively too. Simple maths like above will not make one rich otherwise one can develop a s/w and let it run 24 hrs to fetch somethignwhich suits the formula and start the trade!
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Quote shivkumar Replybullet Posted: 01/Aug/2010 at 12:23pm
Originally posted by karn

The adjusted and crudely calculated list as per Joel's Magic Formula (by enlarge for small caps) comes something like this.

1. IFB Industries
2. Tata Sponge Iron
3. Mangalam Cement
4. Acrysil
5. Haldyn Glass Gujarat
6. Gujarat State Fertilizers & Chemicals
7. ICSA (India)
8. Mazda
9. Jetking Infotrain Ltd
10. Orient Abrasives
11. Suprajit Engineering
Regards,
K.


IFB Industries is a restructuring stories. debt has been rescheduled.
Tata Sponge Iron and Mangalam Cement are commodity companies so must be excluded, according to the magic formula.

There is a overhang of falling margins that is impacting ICSA but this is a classic stock that confirms to principles of Magic Formula and Ken Fisher's PSR concept. Ditto with Mazda Ltd which just sold its valves division at a decent profit to concentrate on the high margin vacuum business. Jetking Infortrain is another company which throws of plenty of cash and shows signs of decent growth. Last FY was bad, but one can expect growth momentum to pick up.

ROCE of Haldyn Glass is below 20 which is nothing great considering that glass companies consume expensive power. 

Sales of Orient Abrasives havent grown much and company has been reducing capital to push up ratios. (CAN THE SENIORS SAY HOW THIS WOULD IMPACT PROFITABILITY?)
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karn
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Quote karn Replybullet Posted: 02/Aug/2010 at 5:33pm
Manish Ji, This is very crudely calculated with limited means. You are spot on about the qualitative factors. As far as I have understood that this formula will bring stocks to your notice which are somewhere in between. Basically stocks with decent ROIC having decent earning yield. The list should be further scrutinized with qualitative factors.
Regards,
K.

P.S. More on the same is found here.
http://www.magicformulainvesting.com/welcome.html
I don't know how successful this formula is in context of Indian stock market but there are some data available for US and EURO markets which you may look at.

Edited by karn - 02/Aug/2010 at 5:36pm
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