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Listen in as Teeka Tiwari, Chris Rowe, Costas Bocelli, Ed Pawelec and special guests give you the world financial news that you need to be profitable every market day... Sign up today to receive audio commentary every morning from some of the brightest minds in the industry.
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By Teeka Tiwari - Creator: ETF Master Trader
Americans have lost almost 30 years of wealth over the last 10 years. They've seen a 40% drop in net worth just since 2007. American household wealth is now below where it was in 1983.
Whose Fault Was It?
Was it the bankers for making credit so easy? Was it the government for failing to supervise the bankers? Was it corporate greed that cooked the books and pushed up stock prices to unimaginable levels?
Or was it something more?
Because not everybody lost money. Some people sold out of their stocks at the highs... some people sold their homes at the highs... and many others simply chose to hold onto their cash and stayed out of stocks and housing.
What was it that these people knew that everybody else didn't? And how did they get so smart -- or were they simply lucky?
Most folks will never ask these questions. Most folks will always look for somebody else to blame for their losses, because facing the truth is difficult.
The truth is that 75% of ALL professional mutual fund managers cannot beat the S&P 500. That means that your local broker has absolutely zero chance of ever growing your money for you over the long term.
It means that you must take responsibility for running your own money.
What Price to Pay?
If you are a conservative investor and willing to wait long periods of time between making stock market buys, then read on, because there is a method that you can use that will virtually guarantee that you'll never over-pay for a stock.
In fact, if you had just restricted your buys to Blue Chip stocks and followed this method over the last 12 years, it would have taken exceptionally bad luck to have experienced a permanent loss of capital. The added advantage is that you would have pulled the trigger on your biggest buys during periods when other investors would have been at their most fearful.
For example, August 2010 and October 2011. Each of these recent periods were chock full of buying opportunities that fell squarely in the sweet spot of this method. But let me warn you, this is no magic bullet, so please don't misunderstand me. You would have certainly experienced market volatility, but you would not have experienced permanent loss of capital like so many other folks did in the tech wreck and the financial crisis.
It’s a very old valuation method created by the Godfather of value investing, Benjamin Graham. The formula looks like this: P/E Ratio (less than) Earnings Yield + Growth Rate. You buy into the stock when the PE ratio is lower than the combined value of the company's earnings yield and growth rate.
What's an Earnings Yield?
Let me explain with a real life example, using McDonalds (MCD). This is a stock that I recommended in The Tycoon Report back on June 6th, 2012 at $88.
Today the stock is at $91.89. Is it still a good buy? Let's find out...
First thing we do is figure out the earnings yield. This number tells us what percentage return we would make on our investment if the company kicked out every cent of this year's profit to the shareholders. Here's the formula:
1 divided by P/E Ratio of stock = Earnings Yield
McDonalds is expected to earn $5.70 per share this year, so we figure out the PE by dividing the price of MCD ($91.89) by earnings per share ($5.70) which equals 16.12 times this years earnings.
So our formula for earnings yield would look like this:
1 divided by 16.12 (P/E) = 6.2%, so if every penny of this year's profit were sent to shareholders, and you bought the stock here at $91.89, you'd have a yield of 6.2%. That's the earnings yield.
Now we have to figure out the growth rate. There are a couple of ways to do this: You can take the average Wall Street estimates, or simply see what the company has done in the past. For this example I took the McDonalds' 17 year compounded annual earnings growth rate, which is approximately 10%.
Our valuation formula, once again, is P/E Ratio (less than) Earnings Yield + Growth Rate.
If the current P/E ratio is smaller than the combination of the earnings yield and the growth rate, then the stock is a buy. The earnings yield is 6.2% + the growth rate which is 10%, equals 16.2.
So we can see that the growth rate + earnings yield combination is actually matching the current P/E. This tells us that MCD is fairly valued here, and also lets us know that it can be bought on a pull back.
No Free Lunches
Let me reiterate, this is a very broad brush illustration. There are other mitigating issues that go into making a long term investment decision that are outside the scope of this article.
What I wanted to do here was share with you a "quick and dirty" method for getting an idea as to whether something was cheap or expensive.
I find this method works best with companies that have a durable competitive advantage, a long earnings track record, and relatively low debt levels. Things get trickier when you are in an environment like 2008, because P/E ratios and earnings yields can get out of whack as even Blue Chips can have little to no earnings during extreme recessionary periods.
During times like that you can use a different valuation method that is extremely good at getting you in at a terrific price while everyone else is cowering on the sidelines. But that’s a topic for another article...
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Teeka Tiwari epitomizes the American Dream. He came to the United States from England at sixteen with just $150 in his pocket and the clothes on his back. By eighteen, Teeka had become the youngest employee at Lehman Brothers, and two years later he shattered convention by becoming the youngest Vice President in the history of Shearson Lehman. By the time he was 23 Teeka had made and lost a million dollars. At 27, he was a millionaire several times over. In June 2005, Teeka co-founded the Institute for Individual Investors and created Point & Profit, the trading service. Point and Profit made his wealth-building acumen available to the average individual investor for the first time. Since then, Teeka has been developing and perfecting the ETF Master Trader System, an interactive education program that teaches a complete Sector Trading investment methodology, and gives ordinary investors the confidence they need to master the markets using Exchange Traded Funds. In June 2008, Teeka launched Sector Hunter, the world's first fully-automated ETF trading technology. Sector Hunter provides individual investors with an institutional quality tool for identifying big money moves in 46 narrow sector groups, and then selecting those ETFs and stocks best positioned to yield profits from the move. Teeka is a regular contributor to FOX Business Network, and has appeared on FOX News Channel, The Daily Show with Jon Stewart, and international television networks. He manages a hedge-fund which is closed to new investors. Teeka's recent Tycoon Report articles can be found below. |
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Today's Laugh Line
"In an interview with CBS, President Obama said the biggest mistake of his first term was not telling a story to give Americans a sense of unity. In response, Americans were like, 'Yeah, fixing the economy would’ve been cool too.'" -- Jimmy Fallon
(Got Jokes? Send your best jokes or funny videos to editor@tycoonresearch.com ... if it makes us laugh, you might just see it in The Tycoon Report some day!)
1996: Johnson makes bid for Prince
1996: Johnson makes bid for Prince
On this day in 1996, erstwhile car seating manufacturer Johnson Controls, Inc. made a bid to become the king of automotive interiors by acquiring Prince Holding Corporation. For the regal sum of $1.35 billion, Johnson snapped up a company that, for the past thirty years, had strove to "surprise and delight" drivers and passengers. Towards that end, Prince pioneered the use of electronics in car interiors; one of the company's main claims to fame was grafting lighted mirrors on to car's sun visors. This and other luxury-minded novelties made Prince an attractive partner for Johnson. Indeed, as company honcho James Keyes noted, Johnson had been looking to expand beyond the world of automotive seating "systems." Viewed in purely fiscal terms, the addition of Prince and its lucrative roster of products promised to fatten Johnson's already healthy coffers. In a statement released shortly after the deal, the companies estimated that th eir combined sales muscle would skyrocket Johnson's annual sales from $850 million to $6 billion.
Source: www.history.com
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