As a stock market investor, there's no way
that you can look at and evaluate all the tens of thousands of publicly
listed companies individually. However, you can narrow this
massive number down into a short-list of better than
average opportunities by looking at specific key ratios. Much like an expert chess player, the intelligent
investor wants to filter out the mediocre or even stupid moves
right from the get-go. Let me show you a strategy that
has been very profitable for me since I started investing in 2013. How do you find great
investment opportunities? Do you ask around among
friends and family? Or maybe you should copy the investments of
some YouTuber or Twitterer with lots of followers? I disagree with both approaches. Warren Buffett: "You can't buy what is
popular and do well." I'll soon show you a third option. When investing in a stock market company, there are many things
that you want to see. Preferably, the company should be cheap, it should be able to pay out lots of
money to you as a shareholder, it should be financially stable, it should be growing, it should have experienced
and dedicated management, it should have a so-called moat, which keeps competing businesses at bay, it should be in a favorable
political situation, etc. Now, some of these things, you can
check in just a few seconds, while others may take days or
even weeks to understand, depending on your level of ambition. When I'm investing in
the stock market, I look at the fast-to-check
variables first and exclude companies that
do not fulfill them. You shall not pass! If you do the same,
you'll save a lot of time, and you can focus your efforts on
better-than-average opportunities. After all, I think that most of us want our
"hourly wage" to be as high as possible. Back in the 1950s, when Warren Buffett
started out on his investing journey, he plowed through elephant books such as
the Moody's Manuals to find investment ideas. These books had many thousands of pages. Luckily, you and I do not have to do that
anymore because we live in the digital age. Today, many investment research platforms
can help in your hunt for overperformance, and the best one that I've used in
recent years is one called TIKR. TIKR.com is truly a one-stop shop
for you as a serious value investor. Here, you can filter out stocks
from all over the world and analyze them using high quality data all gathered in one place. Let me show you how I would do this,
step by step. Step 1: Valuation This right here is a brand-new Ferrari. Do you want to buy it? This is a trick question - there is no way you can answer that
because I haven't told you the price yet. Howard Marks: "There's no such thing as a good or bad
idea regardless of price." I think that nowhere else than in the stock
market are people so ignorant about how much they are paying for
things that they are buying. Remember what the legendary
investor Peter Lynch has said: "Although it is easy to
forget sometimes a share is not a lottery ticket … it's a part-ownership of a business." As an intelligent investor,
you should always yourself: How much does that part-ownership cost me? To continue our analogy with cars, it isn't always the guy owning the Ferrari
who is the winner in the stock market. More often, it's the guy who bought
a Toyota at a bargain price. So, what I do when I look for excellent stock
market opportunities is that first, I ask: "How much?" You can do this on TIKR.com by
clicking on the Global Screener and adding your first filter. I start by selecting the countries that
my broker allows me to trade in. There is no need to waste time on some South
Korean company if you can't buy it later anyway. Yes, I'm speaking from
personal experience. Then I exclude sectors that I consider to be
outside my own circle of competence. For me, that’s primarily banks and insurance
companies, lumped under “finance”. Remember what Charlie Munger,
Warren Buffett’s right-hand man has said: "We have three baskets for investing: yes, no, and too tough to understand." I like to use either EV/EBIT or just a classic P/E
for filtering out companies based on their price. I do not want to pay too much compared to
what I'm getting in earnings. We are going to use a metric
called trailing TEV/EBIT. TEV, or total enterprise value, is the market
cap of the company plus all its liabilities, minus cash & equivalents. I think I prefer EV/EBIT slightly over P/E because
it punishes companies with weak balance sheets and benefits those with strong ones. Let's put this number at 15 for now. This is quite a strict criterion, but I'll show you
how you can be a little bit more flexible at the end of this video. Price, price, price. By excluding costly companies,
you will indeed miss a few opportunities. Still, it is also true that you will avoid
many, many more mistakes. Once the most expensive companies
have been filtered out, we are left with about 20% of
the whole universe of stocks. We are one step closer of finding
great opportunities in the market, but there's more to be done. A cheap company is an excellent start, but I think we can do even better. Let's go back to the other things
that we talked about earlier. A company can usually throw off lots of money - dividends and repurchases
for you as the shareholder – if it has a high return on
assets (RoA). A high return on assets also reveals
a lot about the business's success. Compare these two: Bob owns a restaurant that he paid $2m for. In other words, his asset cost him $2m. It delivers a profit of $200,000 per year. Stephan owns a restaurant
that he paid $4m for. This one also provides
a profit of $200,000. Everything else equal, which
restaurant would you rather own? Yep, that should be Bob's. Bob has a 10% return on assets, or capital, while Stephan has a 5%. Don't take my word for it! Charlie Munger has famously said that: "Over the long term, it's hard for a stock
to earn a much better return than the business
which underlies it earns. If the business earns 6% on capital over 40
years and you hold it for that 40 years, you're not going to make much
different than a 6% return - even if you originally buy it
at a huge discount." While it is true that "past performance is
no guarantee of future results", this highly depends on which type of
metric you are looking at. It turns out that historical RoA is quite
a good indicator for future RoA. Let's say that we require an RoA of 10%. This means that we’re now left with only
about 1% of all listed companies, which is an awesome thing
for your time management. We shall soon check out
each company individually, which might be where
TIKR really excels, but there is one more thing that
I'd like to include in our screen first. Step 3: Growth Some investors think that growth is
the most critical variable to consider when valuing stock market companies. If one could tell the future, it would be. The problem is that historical growth numbers
aren't really that reliable for the future. Just look at the impressive
development of this company. Up until 2014, depending on
your level of optimism, you may have projected something
like a 20% growth going forward. However, suddenly, the growth stopped. And shareholders who bought at
the high price multiples of 2014 & 2015 have faced sluggish
returns ever since. This is a large pharma
company called Biogen. While I'm cherry-picking here, it is true that
all companies eventually face growing pains. For growth, it is true that "past performance
is not a guarantee for the future". And historical profit growth is even less reliable
for the future than historical revenue growth is. Compare this to the strong relationship
that we saw for RoA before. With that said, I'm slightly more favorable towards
companies that have been growing historically vs. those that haven't, so let’s at least exclude
companies in decline with the help of TIKR's screener. Step 4: Reliability So, in just a matter of minutes, we have been able to narrow down
tens of thousands of alternatives into a short-list of about 600 better
than average opportunities. If you want the list to be even shorter, just increase the thresholds for the three
variables that we’ve discussed. You've probably noticed that much of the criteria
we've used are based on earnings, so the next step is to check that
they weren't just a fluke. A one-hit wonder of the investing world. Sort the companies according to
the most critical metric – price – and then look at them individually starting from the top. Here, we happen to find a Swedish
company called AIK Fotboll AB. Suppose we click on it and
check out its financials. We can clearly see that EBIT
(also called operating income) doesn't seem very reliable
for the last 12 months. It looks like it could well be a fluke
compared to previous years and is probably not something we should expect
that the company can repeat in the coming years. Therefore, let's discard this one and
move on to the 2nd company on the list. If we keep on excluding
companies like this, we’ll soon reach number 18 on the list. This is a Japanese company called AJIS, "which provides inventory and other
retail support services in Asia". If you are looking for undervalued
stock market companies, I would say that this isn't
a bad place to start. But maybe you do not have easy
access to Japanese stocks. Then further down this list there are a few
companies that you might be more familiar with such as Facebook, Merck, UPS,
BHP and Target. Step 5: Deep Dive Depending on your level of ambition, there are more things to
evaluate from here, and TIKR can help you with that too. You can find pretty much all
public filings of companies. There are transcripts of live presentations. Heck, there's even a list of insider ownership
and recently made insider transactions. TIKR can help serious investors to find
opportunities without depending on anyone else. You are not doing what everyone
else is doing anymore. You are doing your own research, and in that, you are much less likely to be
just another sheep in the herd. You ever wonder why fund managers
can't beat the S&P 500? Because they're sheep, and sheep get slaughtered. Gordon Gecko might not be the best role model
around, but he is right about this one. Contrarianism is a hallmark of
a great investor. For bonus points, you could tailor-make your
screener to fit your own investing beliefs. For instance, maybe you think that
EV/EBIT of 15 is a bit too strict. Then I'd first ask you to remember
that the higher this multiple is, the greater the pressure on the future
performance of your companies. However, if you still don't agree
with me about this one, fine, then increase the EV/EBIT
by 50% or something but be stricter with RoA
and revenue growth. Or maybe you want to be even more cautious
with companies with weak balance sheets. Then, add an additional criteria, perhaps a debt ratio and/or
a current asset ratio. There's truly a ton of data that you can
filter through with TIKR. This is very similar to how I currently
find stocks myself. You’ll find many of the stocks that I currently
own on that list that I showed you before. I've used TIKR for a little over a year. It's the best value for such
a service that I'm aware of, and you can start your own account
by using the link in the description. If you hurry, you'll be able
to catch a 15% discount by using the code tsi15. Cheers guys!
