The rules of the game are really really easy folks:
- Look for a good company. Good = owner’s earnings growth, no debt.
- If company is good, calculate price using discounted cash flow.
- Buy if price is lower with 30-70% of calculated price.
- Sell of price is at 95% of calculated price.
Why are so few people doing this??? Here I give a more in depth analysis, using Skyworks as an example.
I got Johnson & Johnson (JNJ) in my portfolio for a long time. First, is it a good company? Yes it is! Unlike some of the other gems in my portfolio, this stock has a bit too much debt. Based on 2016 Q3 data, the stock is undervalued, but not overly so. JNJ released 2016 Q4 data some weeks back, but google is to lazy to update their financial page. Me too;) As soon as I have the 206 Q4 numbers, I can update. But for now:
BUY AT: lower than 155 USD
SELL AT: 222 USD
Many people tell you to diversify your portfolio. I think you should have about 10 stocks that you are confident with following my method. Think about it: each of the 10 stocks is a good business AND cheap, and you buy it with a margin of safety, so that is extra protection. If 1, 2, 3 or even 4 of these stocks suddenly misbehaves (like in my case: GILD), its OK. The changes of it misbehaving are low, as with a margin of safety of 30-70%, you already buy it at a much cheaper price than it should be.
Overdiversification is just plain stupid. Lets take the example of EFTs. Why on Earth would you buy an EFT? You buy 100s, if not 1000s of stocks with it, both good, bad and plain ugly ones. Even more insane is buying EFTs that track a certain sector, say like ‘solar energy’. “He solar energy is going to boom in the next decades, so lets invest!” A solar energy EFT comprises all kinds of solar companies, from the bad to the good to the ugly. Just look for that 1 good company, and check the stock price. No need to buy them all and dilute your returns!
What bothers me the most is gold. “Yeah, lets buy gold, because if the stock prices go down, the gold will go up, and I am covered!” My point is, why buy stocks then in the first place, as you enter a zero-sum game by buying gold.
Bonds, I have to say is something different. I have bonds. They are very different from stocks, and unrelated to stocks (OK, they are a bit but lets not get technical). With bonds, you basically by debt. No risk (unless you bu junk bonds, which is plain stupid), and a fixed return.
MGA is a company I have in my pocket for quite some time. Its undervalued, growing. Mr Market thinks otherwise. No worries, I can wait. I if course every quarter update my prediction about price and see if the company is still good, which it is. Anyway, (1) is it a good company? YES -> HENCE, BUY! (2) At what price?
BUY AT: lower than 47.4 USD
SELL AT: 90.0 USD
Simple like a bunny rabbit. Duh.
Howdy money people. Let me guide you through the process of how to pick a Buffett stock.
STEP 1: (takes 5 minutes) Look for good companies.
To assess this, I set of 20 odd criteria that need to be fulfilled. Here is a screenshot:
If course, each of these criteria are based on calculations. I just cut and paste here how I assess ‘owners earnings are growing’ (…and in the case of Skyworks, they are growing with 41%).
All of these data you get from Google finance.
STEP 2: (takes 0 minutes – its automatic in my Excel sheet) If and only if you have a good company, then you calculate the stock price using discounted cash flow.
Add a margin of safety, and voila, buy only and only if the price is below your margin of safety price, and sell when the price is at 95% of the ‘real’ stock price.
See the screenshot below. Skyworks is worth 325 USD. I buy if lower than 168 USD, and sell at 319 USD.
Here is my super-duper excel sheet, but I removed the formulas. Feel free to download, and if you are interested, I can send you the excel template with all the formulas.
Apple. The biggest company in the world. Loathed, overpriced, reviled, admired…so what to take home? Dont look at the stories, look at the numbers. Its a cash machine, period. A great company with no debt. OK, it has debt, but that is because all of its cash is in Europe and it need to take out loans in the US to keep functioning. So the debt is not real debt – it sits on billions of cash. Anyway, its a great company, so ‘buy-able’. Now we got that out of the way, when to buy and when to sell?
BUY AT: lower than 164.2 USD
SELL AT: 240,0 USD
Just buy this gem.
BIIB is a screaming buy as well. 1) great compnay with no debt to speak of and growing cash. Now, when to buy and when to sell?
BUY AT: lower than 305.8 USD
SELL AT: 446.0 USD
BIIB recently spun off a company called BIVVV. I got it for free (like all shareholders) as part of the deal. I will update you with new BIIB buy and sell prices soon.
SWKS is a screaming buy. First the company is growing like a bunny rabbit,generating owners cash with no debt. Great. So when to buy and when to sell?
BUY AT: lower than 168.1 USD
SELL AT: 319.8 USD
My top pick.
Yes, Warren Buffett is with two ‘t’s. Unfortunately, he already took www.buffettstocks.com so I removed a ‘t’. Which makes sense, as my picks are slightly different. All right, now back to work.