This article is a website version of our weekly FREE Best Ideas Newsletter sent on 14.03.2023. Sign up here to get it in your inbox every Tuesday.
Over the past few weeks, I've sent you a few articles with investment ideas from the Magic Formula, high free cash flow yield companies, and what we've been doing in the newsletter.
In spite of all the volatility I'm sure you've seen the newsletter ideas holding up surprisingly well. For example, this morning I sold the Japanese company that received a takeover offer at a profit of 72% over six months.
You know that investments don't always work out this well but if you buy cheap companies this is a really nice added benefit that happened every now and then.
This, along with stopping your losses quickly (think stop loss) and letting your winners run makes attractive profits just about take care of itself.
What we can expect going forward
I'm sure you've also been following the volatility caused by the recent bank failure in the USA.
Is it an isolated event or just the canary that died in the coal mine?
Even if someone says they do nobody knows what will happen next. They did not even see this bank failure!
The problem is at the moment is we are seeing the results the ultra-low interest rates that have seeped into the economy everywhere. With interest rates rising fast to lower inflation, it is causing problems to jump out in all kinds of unexpected places.
Who is swimming naked
This reminds me of the great quote by Warren Buffett who said:
“You can only see who's swimming naked when the tide goes out.”
Well, the tide is going out fast and the people swimming naked are jumping out all over the place, including a few we haven't seen yet.
The value of diversification
As no one knows where problems will jump up next, it's worth reminding yourself of the value of diversification.
With diversification I mean companies in different:
- Industry sectors
- Countries and
- World regions.
As you know we have been very positive on Japanese companies for a long time (there are quite a few in the newsletter). They are dirt cheap and most have no debt at all, in fact a few have cash on their balance sheet equal the market value of the company.
You get the business for free
This means you pay only for the cash (on the company’s balance sheet) and get the business for free. I know it's hard to believe that companies can get this cheap but we have found them. Also, if you buy an investment this cheap there's not that much that can go wrong.
What I've been doing
Apart from the takeover company I sold I've also sold two other companies that have hit their stop losses.
This has brought the cash in my portfolio up to around 38%.
After the sharp declines over the past few days, I'm going to selectively start buying a few companies. Mainly companies recommended in the newsletter (I follow the same strategy in my portfolio), especially companies mentioned in the crash portfolio.
How to find the best market crash ideas
If you have not read about it yet, the crash portfolio consist of cheap companies that will survive.
You do not have to get ideas from us as you can find your own crash ideas.
This is what we do:
We use the following two valuation ratios:
- Value Composite Two and
- Qi Value
Using the two ratios to find cheap companies is only half of what we are doing.
We also make sure that the companies we recommend have the financial strength to survive a possible slowdown after a market crash.
To do this we use the following ratios:
- Piotroski F-Score - The Piotroski F-Score is a great indicator to find companies with positive financial momentum.
- Gross Margin (Marx) - This is the best quality ratio we have tested by far.
- Debt to Equity – To make sure the company does not have a lot of debt by using the Debt to Equity ratio
- Debt to Free Cash Flow – We also want to make sure a company generates enough Free Cash Flow to be able to pay back its debt by using the Debt to Free Cash Flow ratio.
- Net Debt to EBIT - Net Debt to EBIT is a conservative ratio (it uses EBIT not EBITDA) to make sure a company can pay back its debts through the profits the business makes.
Conservative position sizes
No one knows if these companies can go any lower and by how much.
That is why we recommend that you buy smaller positions, about 1% of your total portfolio.
And if you want to be more careful buy your investment in small positions over time. For example, 33% of the position now, 33% in a month and 33% in another month’s time.
Strict trailing stop loss
Also, because we do not know how low markets can go are following a STRICT trailing stop loss of 20% on all companies.
One year holding period
All recommendations will be sold after a year if they don’t fit the quality cheap strategy any more.
If you would like to read more look at the following article: Quant Value Crash portfolio started
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PS I know markets are still uncertain BUT have you already started building your buy list? If not, why not sign up today and start now.
PPS It is so easy to forget and put things off why don’t you sign up right now?