I have been in the finance industry over 20 years, first in IT as a developer on trading desks then as trader at Merrill Lynch, trading Convertible Bond Credit and Stock Arbitrage strategies.
I have always been fascinated by companies and the CEOS which make them great creating real jobs and wealth for the economy. However, I never made money in investing in outright stocks because I could never seem to buy them at the right time or price.
Warren Buffet says ‘better to buy great companies at a fair price than fair companies at a great price’. But how do you know what is a fair price? Simple P/E ratios do not give the complete picture of the value of a stock.
I started to build a model to determine what the fair value of a stock should be. The objective was to determine the fair value, calibrated to the way stocks trade today i.e. not based on what the stock should be in 3 years but what should be the value now. 3 years (part time) later, after using a few different models to value different kinds stocks, in Oct 2012, I decided there can only be one model – with different inputs. And it started to yield results!
The answers to complex problems are normally elegant and simple (E=mc2 being the classic) – getting the answer is the hard bit!. The final model, is an earnings based model – so not complicated – but the hard bit is knowing what are the right inputs and how to interpret the results.
My first trades were in $TCG (Thomas Cook), and $SGP (SuperGroup). Both companies had massive falls in their stock price but were starting recover. In Oct 2012, The Fair Value (FV) for $TCG was 50p when the stock was at 20p and the FV for $SGP was 5 pounds when the stock was at 3 pounds. This meant there was a gap between future earnings potential relative to the current stock price – the stocks were oversold and the FV told me by how much!
Both these stocks have yielded me returns of over 250% – the majority of the return was made in not holding the stocks to the Fair Value – where i sold half my position – but the move from 50 to 150 in $TCG and the move from 5 pounds to 11.50 in SGP. The FV was also moving up as the stock price was rising, until the stock price and the FV converged.
Another great quote from the legendary Warren Buffet when asked “What is your favourite holding period” to which the answer is “FOREVER”. So look to invest in great companies which will be around for a while – but not necessarily forever! As Buffet tends to invest in staples – whereas opportunities in 2CentView will cover the entire spectrum of sectors, including Technology where a hot company today can become history.
So the objective is build up ‘free or low cost’ positions in ‘core’ companies you like, where real gains are made on holding periods over 12 to 24 months!. It is then just a matter of keeping an eye on the stocks to ensure they do not go into a steep decline!
I did similar trades in $DXNS (dixons), $FB (FaceBook), $YHOO(Yahoo), $MS(Morgan Stanley), $RDN (Radian), $SAVE (Spirit Airlines), $GOOG (google), $BLNX (Blinkx), $JDS (JD Sports), $ITV, $DLG(Direct Line) all yielding returns of between 25% and 250%, with an overall return of 70% in less than one year!
I decided to make the 2CentView website and twitter feed to share this method with you!
Copyright, 2CentView.com, November 2013.