Hi
This week I’d like to show you how to measure the consistency with which a company is able to generate profits, dividends and growth over the years. This is a continuation of a series of articles that I’ve written recently.
To recap, those articles are:
Why you need an investment process - This article covered, yes you guessed it, the benefits of having a investment process which is written down and stuck to.
When is a good time to invest? – This one looked at how it is possible to value the market, and then decide whether the current price (the index level) is attractive or not.
Why the FTSE 100 is hard to beat – Here I outlined what makes the FTSE 100 such a good investment, and why the pros and the public usually fail to beat it. The answer is consistent, long-term growth of earnings and dividends.
Why defensive stocks make more money – This article continued the theme of long-term, consistent profits, dividends and growth, and why it makes a compelling investment strategy.
How to find the best high yield shares – Unsurprisingly, this article covers ways of finding high yield shares that are not ‘yield traps’, but are instead great companies selling at low prices.
The shocking truth about growth investors – This over the top title is for an article which points out that growth investing is good when the growth is long-term and consistent.
So by this point you should have picked up on the general theme! I think the best approach to beating the market for the private stock picker is to build a portfolio which is quite similar to the index we’re all typically trying to beat.
We want more income, more capital growth, but we don’t want more risk or more volatility. The answer is to buy a diversified collection of high yield, high growth, highly consistent companies, and to ‘recycle’ them for something better if any of those criteria fall away, which they will do if a share’s price goes too high.
The latest article looks again at a method for working out just how consistent a company has been over the years. We’ve looked at yield, we’ve looked at absolute growth rates, so now it’s time to look at measuring consistency:
How to find the best defensive stocks – This latest article gives a simple method for calculating a ‘consistency rating’. You can them use that rating to compare one company to another.
So we now have four tools to compare companies:
1. Absolute growth rates over a 10 year period.
2. The consistency of earnings, dividends and growth in that time.
3. The value for money you are getting with an investment by using the PE10 or its inverse, the earnings power yield.
4. The dividend yield, which tells you how much income you can get today.
I’m in the process of putting together a simple, One Page Investment Plan which brings all of these things together. It will be easy to fill in the raw earnings per share and dividend data for the last 10 years, and then it will walk you through how to calculate these various numbers and how to compare them to other companies and most importantly, how to compare then to the FTSE 100.
Since we’re all trying to beat the FTSE (or at least you probably should be, otherwise why bother picking stocks?), it’s important that each investment looks like it has a good chance of outperforming over say a 5 year period.
Hopefully by next week I’ll have a presentable version of that investment plan ready for you to take a look at, comment on and use. I’ll also put my 15 (or so) point investment checklist on another page, and I’m also putting together a spreadsheet version what will do all the work for you, and it has a handy graph too, showing you visually how the company has fared over the years.
Well, it looks like I’ve gone on a bit this week, so I’ll do a mini-version of the 5-star stock review:
This week it’s RSA Group (Epic = RSA), which used to be Royal Sun Alliance. It’s a FTSE 100 listed insurer and is seen to be at risk from the Euro crisis.
Have a look at its numbers from the past decade (I use Morningstar premium, Stockopedia and Sharelockholmes), or you can get the data straight from the horse’s mouth using http://www.investegate.co.uk/.
There’s a list of buttons starting ‘ALL – FTSE 100 – FTSE 250’, etc, click on ‘company’. Then type in ‘rsa’ and search. You should see a link for ‘RSA Ins Grp (RSA)’. Click on that and that’s the official news feed.
Then to see everything just click on the little ‘down arrow’ with two arrows. This loads everything going back as far as they have data, which is usually a bit over 10 years.
Then use your browsers text search (ctrl-f usually) to search for ‘final’ or ‘results’ or ‘preliminary’. Then open those annual reports in a separate tab or window. Now you can just start collecting the earnings and dividend data, and anything else you like.
That should keep you busy for a while! Some people tell me that this is too much work, but honestly, if you’re not willing to look at 10 years of data about a company, then you should seriously re-think whether you may be better off sticking with an index tracker.
I hope you enjoy the rest of your weekend, until next week,
John
P.S. You can reply to this email if you want to get in touch.
This week I’d like to show you how to measure the consistency with which a company is able to generate profits, dividends and growth over the years. This is a continuation of a series of articles that I’ve written recently.
To recap, those articles are:
Why you need an investment process - This article covered, yes you guessed it, the benefits of having a investment process which is written down and stuck to.
When is a good time to invest? – This one looked at how it is possible to value the market, and then decide whether the current price (the index level) is attractive or not.
Why the FTSE 100 is hard to beat – Here I outlined what makes the FTSE 100 such a good investment, and why the pros and the public usually fail to beat it. The answer is consistent, long-term growth of earnings and dividends.
Why defensive stocks make more money – This article continued the theme of long-term, consistent profits, dividends and growth, and why it makes a compelling investment strategy.
How to find the best high yield shares – Unsurprisingly, this article covers ways of finding high yield shares that are not ‘yield traps’, but are instead great companies selling at low prices.
The shocking truth about growth investors – This over the top title is for an article which points out that growth investing is good when the growth is long-term and consistent.
So by this point you should have picked up on the general theme! I think the best approach to beating the market for the private stock picker is to build a portfolio which is quite similar to the index we’re all typically trying to beat.
We want more income, more capital growth, but we don’t want more risk or more volatility. The answer is to buy a diversified collection of high yield, high growth, highly consistent companies, and to ‘recycle’ them for something better if any of those criteria fall away, which they will do if a share’s price goes too high.
The latest article looks again at a method for working out just how consistent a company has been over the years. We’ve looked at yield, we’ve looked at absolute growth rates, so now it’s time to look at measuring consistency:
How to find the best defensive stocks – This latest article gives a simple method for calculating a ‘consistency rating’. You can them use that rating to compare one company to another.
So we now have four tools to compare companies:
1. Absolute growth rates over a 10 year period.
2. The consistency of earnings, dividends and growth in that time.
3. The value for money you are getting with an investment by using the PE10 or its inverse, the earnings power yield.
4. The dividend yield, which tells you how much income you can get today.
I’m in the process of putting together a simple, One Page Investment Plan which brings all of these things together. It will be easy to fill in the raw earnings per share and dividend data for the last 10 years, and then it will walk you through how to calculate these various numbers and how to compare them to other companies and most importantly, how to compare then to the FTSE 100.
Since we’re all trying to beat the FTSE (or at least you probably should be, otherwise why bother picking stocks?), it’s important that each investment looks like it has a good chance of outperforming over say a 5 year period.
Hopefully by next week I’ll have a presentable version of that investment plan ready for you to take a look at, comment on and use. I’ll also put my 15 (or so) point investment checklist on another page, and I’m also putting together a spreadsheet version what will do all the work for you, and it has a handy graph too, showing you visually how the company has fared over the years.
Well, it looks like I’ve gone on a bit this week, so I’ll do a mini-version of the 5-star stock review:
This week it’s RSA Group (Epic = RSA), which used to be Royal Sun Alliance. It’s a FTSE 100 listed insurer and is seen to be at risk from the Euro crisis.
Have a look at its numbers from the past decade (I use Morningstar premium, Stockopedia and Sharelockholmes), or you can get the data straight from the horse’s mouth using http://www.investegate.co.uk/.
There’s a list of buttons starting ‘ALL – FTSE 100 – FTSE 250’, etc, click on ‘company’. Then type in ‘rsa’ and search. You should see a link for ‘RSA Ins Grp (RSA)’. Click on that and that’s the official news feed.
Then to see everything just click on the little ‘down arrow’ with two arrows. This loads everything going back as far as they have data, which is usually a bit over 10 years.
Then use your browsers text search (ctrl-f usually) to search for ‘final’ or ‘results’ or ‘preliminary’. Then open those annual reports in a separate tab or window. Now you can just start collecting the earnings and dividend data, and anything else you like.
That should keep you busy for a while! Some people tell me that this is too much work, but honestly, if you’re not willing to look at 10 years of data about a company, then you should seriously re-think whether you may be better off sticking with an index tracker.
I hope you enjoy the rest of your weekend, until next week,
John
P.S. You can reply to this email if you want to get in touch.
