Journeys of a Bumbling Investor

Rating: Average

Background:
Some book that I picked up when I got the Dollar Crisis book (see previous review)

Detail:
Explains author's stock selection methodology using Relative Dividend Yield (RDY) and Relative Price-to-Sales-Ratio (RPSR) and 12 other qualitative/quantitative factors.

Points:

1. RDY = Stock dividend yield / Market index dividend yield, where Market index dividend yield = Index annual dividend / Current market value
2. Author assumes that for companies with "dividend-paying cultures", dividend is a good indicator of a company's own expectations of future earnings growth prospects. Boards set dividend policies so that the dividend can remain a relatively constant percentage of earnings in good times and bad (showed example of Chevron (CHV) where dividends tracked the volatile earnings).
3. Sell when RDY is below 1. Can only buy when RDY is above 1.25. RDY does not work for stocks with Relative Price not correlated with RDY. Relative Prices = price of stock / price of S&P 500.
4. Stocks with high RDY have very depressed prices and are totally shunned by the market. Author aims to use that to look at stocks while Wall Street is not looking.
5. PSR = Price of stock / Sales per share. RPSR = Stock PSR / S&P 500 PSR
6. Sell stock at mean + stdev. Buy stock at mean – stdev.
7. Screen dividend-paying stocks using RDY. Screen no-dividend-paying stocks using RPSR. After that, screen using 12 fundamental factors.
8. 12 fundamental factors as follows:
   1. Buggy Whip: Are the company's products viable today and into the foreseeable future?
   2. Franchise or Niche Value: Is the company profitably maintaining/gaining market share? Can the company leverage its franchise to enter new markets profitably over time? Has franchase value increased over time?
   3. Top Management and Board of Directors: What is the strength of a company's management depth and culture? Is the management compensation plan tied to increasing shareholder value? Is the Board of Directors independent and relevant (size of board, insiders vs independents, quality and breadth of board)?
   4. Sales/Revenue Growth: Historical growth rates, industry growth rate, trends, estimated long-term company growth rates and catalysts, declining/stable/improving competitive position.
   5. Operating Margins: Trend analysis of firm's operating margins. Operating margins relative to industry margins.
   6. Relative P/E: Trailing/current/foward P/E relative to industry. Historical P/Es. Projected EPS growth rate relative to the industry growth rate.
   7. Positive Free Cash Flow: Free cash flow trend (operating net + DD&A – capital spending – common dividends). Trend in operating cash flow per share relative to EPS. Working capital turnover trend analysis relative to historical and industry. Historical and projected ability of the company to fund its growth internally.
   8. Dividend Coverage and Growth: Current payout ratio in-line with peers. Current yield relative to historical yield. Dividend growth rate relative to earnings growth rate.
   9. Asset Turnover: Improving/deteriorating asset turnover. Company turnover ratio relative to indsutry.
   10. Investment in Business/ROIC: Trend analysis of firm's ROIC relative to WACC. Capex trends relative to depreciation for the company and industry. R&D as a percentage of sales historically and relative to industry trends.
   11. Equity Leverage: Increasing/decreasing leverage. Earnings growth relative to the growth in leverage. Operating margin trends relative to growth in leverage. History of write-offs and restructuring charges if growth has been acquisition driven.
   12. Financial Risk: Debt/equity ratio adjusted to include off-balance sheet items. Trend analysis of the coverage ratio. Firm's reliance on access to capital markets to fund its growth. Firm's historical and projected credit ratings by S&P and Moody's. Firm's ability to fund any maturing debt and/or puttable bonds over the next 2 years. Specific restrictions/covenants stipulated in available credit lines and debt outstanding.
9. Tech stocks tend to be negatively correalted with Pharmaceutical stocks. IT stocks negatively correlated with Financial stocks.

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Rating: Good

Background:
Book that I picked up to better understand the macroeconomic situation, especially with all the talk about impending dollar collapse.

Detail:
Argues that the US dollar will crash very soon. Very good explanatory graphs and charts, good reference for what to look at for macroeconomic predictions. Good book to own.

Points:

1. The Gold Standard (before 1942) and Bretton Woods (1942 – 1973) worked well to prevent crazy crashes, the current system doesn't.
2. Balance of Payements: Current account balance = Net capital and financial account + reserve asset transactions
3. Cited example of Japan. Major exporting power by late 1960s. Huge trade surpluses deposited into the banking system, resulted in increase in high-powered money + international reserves and set off an explosion of credit creation (money supply), leading to asset price inflation. Asset price inflation creates positive wealth effect that spurs consumption and causes the rate of economic expansion to accelerate. That leads to over-investment and overcapacity. Purchasing power of the public (wages) does not increase quickly enough to absorb the surge in production. Hence downward pressure on prices and profits, debtors find they are no longer able to pay interest on their debts, bankruptcies follow, credit contracts, asset prices plunge, economy enters into recession.
4. US will suffer the same fate as the US dollars from the foreign countries get re-invested back into US. Shows data on US, that foreign investors are buying less and less treasuries but more US corporate bonds + agency (fannie/freddie) debt + equities.
5. Countries with balance of payements surpluses will be forced to convert their dollar surpluses into their own currencies, causing a sharp appreciation in their currencies and a sharp decline in the value of the dollar. This will help restore equilibrium but will throw the major exporting nations into recession as their exports to the US collapse.
6. The international monetary system generates deflation. When excessive credit expansion leads to excess capacity and falling product prices. There is also downward pressure on prices brought about by relocation of the world's manufacturing to very low wage countries.
7. Makes the argument that the only safe place for foreign investors to invest their US dollars is in US treasuries. doesn't have a good use for the extra cash.
8. Makes the argument that the US dollar will crash when the US property market pops. The American shopping spree is financed by the bubble in the US property market, fueled by low mortgage rates and ample financing from Freddie/Fannie. How much longer can property bubble last depends on 1) how much longer low mortgage rates, 2) how much longer can americans finance home prices that are rising at a considerably faster rate than the increase in their wages (shows data that Home Affordability Index is dropping).
9. Makes the argument that when the dollar crashes, China bad, Japan bad, Asian bad, Mexico bad, Europe Good.

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