A bit on Value Investing and using screeners

I am a student of Value Investing. I seek out businesses by (paraphrasing Benjamin Graham) thoroughly analyzing a company, and the soundness of its underlying businesses, before I buy its stock.

There is a famous quote from Warren Buffett: “Risk comes from not knowing what you’re doing.” So seek information wherever you can and utilize everything from books, newspapers to tech. Which brings me to the next point. Stock Screeners.

There are many ways which technology can help a value investor find good businesses with undervalued prices. One way is to use a stock screener. Google Finance has one. So does Yahoo Finance. There are more screeners avaliable on the internet.

I normally use the following filters on the screener:

  1. Price/Book Value <80%
  2. ROE > 15%
  3. TTM Debt/Equity < 50%
  4. 5 or 10 year EPS growth rate > 10%
  5. Div yield >5%

Some people feel that filtering on certain criterias, for example EPS, might block out some good companies, so tweak it according to your risk appetite.

I don’t know about you, but I can (almost) guarantee that I will almost end up with the same companies most of the time. Sometimes, I might get a few different companies popping up due to certain tweaks, but mostly they are the same.

This is what I called the first pass. Run through the list and note down those companies which you can afford at this time. Be realistic. Not everyone can buy Google shares. I mean some can, but like me, I don’t want to own just a few Google shares and end up with those as 50% of my entire portfolio! So you might want to add stock value as a filter. Play around with the filters and they can throw up some gems.

Once you have listed some companies into your research list, that is when the real work begins. You need to analyze these companies in detail. Get to know their business. It helps if these businesses are in your circle of interests.

As the mighty Warren Buffett says: “Never invest in a business you cannot understand.”

 

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