What factors to consider when assessing the value of your shares investment in companies?

Question

OTHER than the dividends received and capital growth.

Thanks

Answer 1

The fundamental concepts are good and give you something to compare against. But Enron and WorlCom both had a good looking set of books, that were approved by the SEC, right up until everything fell apart. We just need to be aware that there is not just one thing we need to be looking at.

The actual price of these stocks were more than cut in half before the first fundamental piece of evidence became apparent to the masses. And by the way, every broker on Wall Street was still recommending these stocks.

So to me, the Trend of the price action is more important than any piece of fundamental information. Regardless of fundamentals, why own a stock that is in a Downtrend, or in a steep dive, like the two examples here?

It is simply good money management to set a Protective Stop at some percentage of loss, say 20% or 25% of your investment. If a stock loses one-fourth of its value, I'm wrong about something and I'm out. We will find out why a few weeks or months later. To be protected is more important than anything we think we might know about the company.

Another area that many fail to consider is "market" risk. As of yesterday, we matched the historical all-time high in the Dow intraday at 11,721 set in Jan 2000. The last time we were here, stocks collapsed into the worst bear market since the Great Depression. Reaching the all-time historical high again may not be significant in itself, but merely points to the extended nature of this rally and increasing risk. To me, risk evaluation is more important than any set of company fundamentals. The name of the game is capital preservation, not how rich we can get.

There are always exceptions, but in general, no set of good fundamentals can withstand a "hard landing."

All recessions that have occurred since 1970 followed periods in which the Fed was actively tightening money. And all tightening cycles except two have produced a recession within at least two years after they ended.

A number of collapses and bankruptcies occurred in the wake of each tightening cycle.

-- Penn Central went bankrupt in 1970;
-- Franklin National Bank went bankrupt in 1974;
-- The Farm Belt and Latin American Debt crisis in 1982;
-- Drysdale Securities and Penn Square Bank collapsed in 1983;
-- Continental Illinois Bank went bankrupt in 1984;
-- Stock market crashed in 1987;
-- Savings & Loan crisis/real estate collapse/junk bond crisis in 1990;
-- Mexican Peso crisis/Orange County went bankrupt in 1994;
-- Asian currency crisis/Long Term Capital Management/Russian default in 1997;
-- Internet/telecom/ bubbles burst in 2000;
-- Stocks collapsed into worst bear market since the Great Depression in 2000.

Answer 2

1. comparison to other companies in the same industry. How does its value compare to the others.

2. size of the company.

3. roa

4. debt/equity ratio

5. amount of good will on the balance sheet

6. consistancy of earning and sales growth

7. current price compared to historic norms.

8. current price compared to alternative investments

9. economic outlook