Performing an analysis Buffet / Graham-inspired file

I like to quote from the first “The Intelligent Investor” by Benjamin Graham, summarizing, analyzing what we work for all the security, in our case, the common stock is referring to.

“Offers of security experts with the past, present and future of any security problem. It describes the company, but its operating results and financial position, exposing summarized their strengths and weaknesses, its opportunities and risks, an estimated earning capacity in the future under different assumptions or as “best estimate” comparisons. By several undertakings or several times the same company makes. Finally, he expresses an opinion as to its attractiveness as an acquisition, if it is a common core. ”

In general, it is the activities of investors should diligently to analyze an action for a potential purchase. To these simple ideas, how to perform the activities of a security analyst, since the context of a timeless Ben Graham / Warren Buffett to renew focus type ofanalysis.
They are defensive or enterprising investor?

Be sure to choose your own style and tolerance for volatility, investors inspired Buffett / Graham between a defensive investor or entrepreneur investor. As a defensive investor, Graham recommends adherence to large companies that have a long history of life (20 years) the increase in the dividend have. A long-term records of increasing dividends, he says, are a reliable measure of the quality of the question. On the other hand, a professional investor is free to look for small stocks trade less popular than “net current assets (or net working capital)” and / or topics that have a positive “invested return on capital have (ROIC),” terms that go into more detail later.

File common criteria
A strict philosophy of Graham style should conform to these criteria. Most recently, Warren Buffett has ventured outside the guidelines, always willing to pay a higher price for a company with “intrinsic value”. However, the investor Buffet / Graham are advised to strictly follow the guidelines of the financial position and results of stability described below. These are points in common is that all important investments in general.

First Profit Multiplier – a multiplier of earnings, or P / E of less than 10

Second Financial situation – a) Current assets less current liabilities of 1.5 times, and b) the debt is not greater than 110% of net current assets. (As I like to use the debt is long term debt / equity must be at or below 0.5)

Third Earnings stability – has lost money over the past 5 years.

4th Earnings growth – sales last year more than last year. (Set the recession)

5th Price – Less than 120% of the net tangible assets.

A closer examination of the net current assets, net working capital and return on invested capital (ROIC)
Quite simply, net capital and net working capital work can be used interchangeably (they are the same). To obtain the value of net working capital, take the value per share of current assets less the value per share of total liabilities, divided by the number of shares outstanding. If this number is higher than the share price, the problem symbolizes at a discount to the net current assets that are of great value in the sense of Graham the trade. Graham has long been an advocate of buying shares trading below their net working capital. Stocks trading below net current assets are nearly impossible to find in a bull market. See you in times of recession these available very cheaply, which tend to recover once the market recovers.

ROIC is closely tied to earnings per share, however, is a purer form of measuring the power of the profits of an enterprise. The main advantage of the EPS ROIC is that it is the accounting cost and time includes the bias may contain estimates of BPA. ROIC formula:
ROIC = Earnings / Capital Investment Owner

If the income of the owners is equal to operating income …

- Depreciation,

- The income taxes generated less the cost of stock options, investments and the income from the pension fund untenable statements.

And if the investment is equal to the total assets …

- Less money in short-term debt at an interest rate and no

- In addition to the existing accounting fees, which reduces the capital

An ROIC of 10% is attractive, can also be a problem with the 6-7% ROIC something more attractive if the company is the major brands and has a competent management.
At its margin of safety

Actions that can meet the most criteria mentioned above will greatly increase your safety margin, which decreases the probability of loss (a lot of Graham’s philosophy). The goal of Mr. Buffett, Graham, the margin of safety with a focus on future growth and development of the market and benchmark performance is combined. Buffett relies less on the quantitative analysis, and prefer, in simpler terms, then in order to achieve their investment decisions. The philosophy of Warren Buffett, with the help of his partner, Charlie Munger, the company is focused on easy to understand, in excellent financial health, they have an excellent record of continuous increase in return on investment. Both foci on the management philosophies of great integrity who think like owners, rather than managers, and not pay the salaries of luxury.
Inspired by an analysis of Buffett / Graham, an investor can understand how to achieve a stock market value and thus the comparison of other problems to a decision more favorable investment climate. A highlight in the investment is the willingness to say “no” and lower investment opportunities that are not specific criteria. Buffett and Munger have often spoken publicly more. Basically they say that throughout life, you can not get more than 20 investment opportunities change lives. The goal of the smart investor should first recognize these opportunities and secondly, they use to be brave and strong investment in the. This emphasizes the practice of targeted exploitation Buffett’s portfolio, rather than broadly diversified across sectors and regions.