The Piotroski F score is a quantitative checklist for quickly spotting possible value stocks. It uses 9 different metrics to score each stock between 0-9 with 0 being a poor value stock and 9 a strong value stock. The value of each metric is binary. A stock scores 1 if it meets the criteria and […]
Say you were buying a house as an investment. It costs £200,000 and you plan to rent it out at £1000 per month which comes to £12,000 per year. The return you get annually from this property (your yield) is £12,000/£200,000 = 6%. You are making a gross return of 6% on the £200,000 investment. […]
Discounted cash flows (DCFs) are used to value a company by taking the sum of all future cash flows and discounting to the present value. DCF are contentious among value investors because of the large effect a small change in the assumed growth or discount rate has on the present value of future cash flows. […]
Depreciation, amortization and depletion are all essentially the same concept. In all three cases, you are spreading out the value of some asset over its useful life. Depreciation is used for tangible assets like hardware, trucks, machines etc. Amortization is used for intangible assets like patents. Depletion is used for natural resources for example a […]
The global economy is often described as a machine. The problem with this analogy is that machines operate in the physical world where there is a strong link between cause and effect. Outcomes in the physical world are often deterministic. This is why we can accurately predict the motion of distant planets or the precise […]
The best investors tend to be voracious readers. Two of my favourite investors – the young Warren Buffett and Michael Burry (before the events in the Big Short) are prime examples of investors with strong reading habits. In his earlier days, Buffett read about 500 pages every week. He may have slowed down over the […]
One central tenet of value investing has always been mean reversion. If you buy something for less than its worth, eventually the market will notice and push the price up. The key question of course is how do you measure ‘worth’. In 1934 when Benjamin Graham wrote Security Analysis, his definition of worth was based […]
The Flesch score measures how easily a text can be read. Scores range from 0 – 100 with 0 meaning very difficult to understand to 100 meaning very easy to understand. Some generic examples of Flesch scores are: Comics = 92 Wall Street Journal = 63 UK Income tax act = 26 Scientific Journals = […]
A monkey hitting keys at random on a computer for an infinite amount of time will eventually write all the Harry Potter books. In fact, this monkey will eventually write every book that has or ever will be written. This may sound absurd at first but it is mathematically correct and it becomes intuitive once […]
Imagine you were feeling unwell and went to the doctor to have a check-up. A blood test is carried out and the doctor tells you that you have a rare terminal disease which only affects 0.1% of the population. This blood test is 99% accurate and you start to panic. A test that has 99% […]
