Valuation cheat sheet. What are some of your favourite metrics?

 

Valuation Cheat Sheet

What are some of your favourite metrics?

1.  How to think about valuation

All intelligent investing is value investing:  you try to buy stocks for less than what they're worth.

Here are some valuation ratios you can use:

P/E ratio:  stock price / earnings per share

EY (Earnings yield):  earnings per share / stock price

P/B ratio:  stock price / book value

PEG ratio:  P/E ratio / yearly EPS growth

FCF yield:  free cash flow per share / stock price

2.  Always buy stocks at a discount

When you go to the mall, you like to buy your favourite products on sale.

The same goes for stocks.  You want to buy a stock at its cheapest possible price and valuation.

The beautiful thing about the stock market is that Mr. Market often acts as a Manic-Depressive.  You can use this volatility to your advantage by buying when there's blood running through the streets.

3.  Short term versus long term

Over a one-year period, most stock price fluctuations are driven by changes in valuation. 

versus 

In the long run, stock prices are driven by the evolution of the intrinsic value of a company.

This means that in the short term the valuation you pay for a company is very important while in the long term the rate at which a company can grow its earnings per share is the crucial factor.

Markets are Competitive

Passive Management

Holding a highly diversified portfolio

No attempt to find undervalued securities

No attempt to time the market.

Active Management

Finding mispriced securities

Timing the market

The biggest mistake that investors make

The biggest mistake that investors make is not sticking with the plan when the market goes down.

What you do when the market goes down is more important than what you do as it is rising.  WHY?

Because the worse days are followed by the best days.

Manage your emotions

When it is our own money, we think it is math, but it is actually not.  Just because we learn about money in math class doesn't mean it is math to us.  It is actually very EMOTIONAL. 

One of the things that we need to do is manage the emotion, because we do feel the pain of a loss more than the euphoria of a gain.  

Manage the emotion and just keep plodding along, paddling along in the markets for a long time.

Catherine Keating

Global Head of BNY Wealth

Bloomberg Interview

Emotional Intelligence

Conflict between our thinking and our feelings makes things complicated.   

Instincts, feelings and personal values take over and become a major part of our actions and behaviour. 

Gut instincts or intuition rely a great deal on emotion and feelings.  

Both feelings and instincts are major influences on our behaviour in the real world.

How can you benefit from improving your emotional intelligence?   

Doing so, will also make life easier for those who have to interact with you.  

Emotional intelligence is a valuable set of ideas you can use everyday and everywhere:  in the workplace and in the home; as a parent, teacher or manager.

It is about being aware of feelings in yourself and in others, understanding them and managing their impact.

It is about being in control, interpreting body language, coping with negativity, working with others and building psychological well-being.

Emotional Intelligence

Emotional Intelligence is an assortment of mental abilities and skills that can help you to successfully manage both yourself and the demands of working with others.

Developing your own emotional intelligence enables you to:

• Know yourself reasonably well
• Control your own emotions
• Show empathy with the feelings of others 
• Use social skills in an effective as well as simply pleasant way.

How to develop your own emotional intelligence?

This involves:

• Mindfulness: being aware - understanding yourself and others
• Being in control of your own thoughts, emotions and needs
• Being positive and self motivated particularly in the face of setbacks
• Using empathy:  being able to put yourself in others' shoes
• Communicating effectively to build productive and positive relationships
• Using emotional reasoning:  being able to use emotions to enhance rather than restrict your thinking.

What are the components of emotional intelligence?

Emotional intelligence incorporates at least these two:

Cognitive intelligence - the ability to think rationally, act in a purposeful way and manage your environment.  It is your intellectual, analytical, logical and rational skill set.

Social intelligence - the ability to understand and manage situations which involve other people.  It is your ability to be aware of yourself, to understand yourself, to manage relationships and understand the emotional content of behaviour.

Importance of emotional intelligence for our own mental health

In everyday life, people universally experience the difficulties of both coping with their own emotions and the practical difficulties created by those of others.

Emotional disorders affect huge numbers of people.  

• It is estimated that 15% of people will have a bout of severe depression at some point in their lives.
• 2% of teenagers are diagnosed with emotional disorders before the age of 18.
• Emotional disorders in old age is also a major and increasing problem.

Emotional intelligence is important for our own mental health and gives us the capacity to understand both ourselves and how we deal with the pressures we face.