Value investing toolkit
Updated
Hello Investors! This educational post is about my toolkit developed for filtering out the almost perfect applicants for further analysis and research in the light of the principals of value investing. The work is based upon Warren Buffett's principals, calculations and recomendations.
After publishing my two previous posts on the "Value investing chart set" and the "Intrinsic value calculation" I have received a lots of positive comments and feedbacks. Alongside the encouraging comments I have received quite a lots of requests to share the chart layout and the other scripts I am using while compiling the chart set I have introduced. I have promised to further develope both tools and come up with an even more powerfull toolkit.
Now it is here! :-) I have combined the already published Intrinsic value calculation script with the Value investing chart set and further developed both on the way! This setup now is way more powerfull and exciting and is loaded with features as described below.
First of all: here is the public link to the shared chart layout setup: tradingview.com/chart/TkVD3Ycm/
Which company could be more adequate for the introduction of a value investing toolkit than Berkshire Hathaway, the company of Warren Buffett? It is not just an honor to use this ticker for educational purposes but aparently -as you can see during the analysis- it makes a perfect long term investment! What a surprise, right? :-)
Here I will only explain all the new features of this chart as there is a very detailed explanation of both the Intrinsic value calculation script and the Value investing chart set in those two posts. You can find the links for them below.
SO! Obviously the biggest developement is poping into your eyes right away: I have programed a value investing analysis tool into the chart so whenever you enter a ticker, the toolkit will supply you with an instant assesment on the given ticker. Of course it is a very basic tool and can only supply you with a preliminary overview on the company and does not, in any way substitute detailed and troughly research before you make any investment decission!
- The assessment is based on the principals Warren Buffett, Ben Graham layed down. Some of Peter Lynch's work has been used, too.
- The tool is using a rather conservative approach as the main goal is to maintain the capital invested and only additional to that to produce adequate gain on the long run
In general: if you see a green labell with the text 'Possible subject for firther research' than you have found a company which passed a conservative test and is worth for further study. Needless to say that if you see a red label with the text 'XX NOT RECOMENDED XX' and a bunch of reasons below, why (overvalued - overpriced - debt risk) do not rush to your broker to put your life savings on it.
To give you an example, here is how Google is evaluated today:
In order to get the green light a company has to meet the following, rather strict criterias:
- Valuation: The current price of the stock has to be below the Intrinsic value. (In this case $224 closing price vs. $426 for the Int. value) This line will precisely tell you how far the price is from the Intrinsic value, in other words, it will tell you your margin of safety when investing to the company on today's price level. In this example it is 90%
- Pricing: The close price has to be below the "Buffetts limit price" indicator. To make it short Graham and Buffet stated that the number you get when multiplying the Price to Earnings (P/E) ratio with the Price to book (P/B) ratio has to be below 22.5 in order to consider the given share cheap. This line will tell you how far the price is from the Buffetts limit price. This case it is 61%. ($224 vs. $361)
- Debt risk: The company has to have much less debt than equity in order to qualify for long term value investing. The limit here is 1, meaning that the company has to have more equity than total debt. If this is not the case, the company fails the test. (This can be taken a little flexible as certain industries, like banking and insuarance by definition deploy a lots of debt instruments without risking their long term profitability or sustainability) In the example of Bershire this is 0,27 meaning that Berkshire has more than 3 times more equity than debt which is needless to say a more than perfect setup. (What do we expect from Mr. B, right?)
These are the first 3 deciding criterias where a company can fail the test. Any of those turn to be out of range, you will get a red labell with a big fat NO recomendation. And most of the time this is going to be the case...
As for the other points you will get more inside peek into the state of the company:
- Price/book: this line will tell you if the price is still below the 1.5 times book value point. This is the highest price what value investors find comfortable paying. If the P/E value is very low for the share you might run into a situation where the Buffetts limit (P/E times P/B) is still low (below 22,5) but the stock is rather overpriced.
You will not get a red labell here, only a 'Caution' warning and a grey label, instead of 'GOOD!'
- Earnings: you will get an opinnion on the earnings here. The main criteria to get a 'GOOD!' evaluation is to have a growing level of EPS in the last 5 years.
- Revenue: It is very important to invest in a company which is able to grow it's revenues steadily. This line will analyse that and will tell you if it wouldn't be so.
- Profit & loss: Although it is not a deciding factor but a value investor should avoid investing to companies that were producing losses in the past decade or so. This line examines the last 5 years in this respect.
- Dividend: The one and only point where Berkshire fails the test! :-) As Warren Buffett used to say: I am not paying income tax, Berkshire doesn't pay dividend... :-) Poor guy! Since we are investing for a very long term it is imperative that we top the gains we might have over the years with the 3-4% dividend p.a. As you can see here, there is a Warning! comment should the company fail in paying dividend.
- Number of shares: Here you will see a quick analysis on the share buyback habits of the company/management. Again, what we examine here is wether the number of shares outstanding is less than 5 years ago or more which means that the company is buying back it's shares thus help investors to maintain equity.
So entering your choosen ticker you should have an instant overview if the company can supply you with the value investing criterias or fails in this field.
One very instructive exercise is to click through the leading blue chip stocks with this valuation toolkit and see how hugely overvalued they are at the moment.
Some further developements I made in the mean time:
- I have automated the calculation of the book value growth with finding the very first data point regardless when it happens. In this way you do not have to enter any parameter and you can simply click conveniently from one ticker to the other without reentering the needed inputs. Hopefully it doesn't matter which pricing structure you are in at TradingView. Free acounts will use 5 years data.
- I have included a 4th pane just below the main pane. This shows the revenue of the company in 3 way: the white line is the anual values, the grey line is the quarterly data and I have also added the red line showing the TTM (trailing twelve month) figure in order to visualise the very recent trends in the revenue of the company.
- The same way I have added the TTM figure on the lowest pane to the EPS figure, for the same reasons.
- I have added explanatory labells to the right of the charts showing the actual value of the indicators, like the Intrinsic value, Buffetts limit, and book value.
- Should either the Book value or the EPS figure be negative for the current year the script will issue a red label without any data regardless the other values as the Buffetts limit can not be calculated. (Negative numbers does not have square roots and that is required to calculate the limit price back from the P/E and the P/B values)
One final remark: this toolkit is as complete as my knowledge is about value investing. It is a purely educational tool, not in any way intented to be investment advice. I do use this tool and for instance I do have position in this example company Bershire Hathaway at the time of writing this post. You have to make your own research and decision when it comes to investing your money.
For further explanation on the Intrinsic value calculation please check my earlier post here:
For further explanation on the Value investing chart set please check my earlier post here:
After publishing my two previous posts on the "Value investing chart set" and the "Intrinsic value calculation" I have received a lots of positive comments and feedbacks. Alongside the encouraging comments I have received quite a lots of requests to share the chart layout and the other scripts I am using while compiling the chart set I have introduced. I have promised to further develope both tools and come up with an even more powerfull toolkit.
Now it is here! :-) I have combined the already published Intrinsic value calculation script with the Value investing chart set and further developed both on the way! This setup now is way more powerfull and exciting and is loaded with features as described below.
First of all: here is the public link to the shared chart layout setup: tradingview.com/chart/TkVD3Ycm/
Which company could be more adequate for the introduction of a value investing toolkit than Berkshire Hathaway, the company of Warren Buffett? It is not just an honor to use this ticker for educational purposes but aparently -as you can see during the analysis- it makes a perfect long term investment! What a surprise, right? :-)
Here I will only explain all the new features of this chart as there is a very detailed explanation of both the Intrinsic value calculation script and the Value investing chart set in those two posts. You can find the links for them below.
SO! Obviously the biggest developement is poping into your eyes right away: I have programed a value investing analysis tool into the chart so whenever you enter a ticker, the toolkit will supply you with an instant assesment on the given ticker. Of course it is a very basic tool and can only supply you with a preliminary overview on the company and does not, in any way substitute detailed and troughly research before you make any investment decission!
- The assessment is based on the principals Warren Buffett, Ben Graham layed down. Some of Peter Lynch's work has been used, too.
- The tool is using a rather conservative approach as the main goal is to maintain the capital invested and only additional to that to produce adequate gain on the long run
In general: if you see a green labell with the text 'Possible subject for firther research' than you have found a company which passed a conservative test and is worth for further study. Needless to say that if you see a red label with the text 'XX NOT RECOMENDED XX' and a bunch of reasons below, why (overvalued - overpriced - debt risk) do not rush to your broker to put your life savings on it.
To give you an example, here is how Google is evaluated today:
In order to get the green light a company has to meet the following, rather strict criterias:
- Valuation: The current price of the stock has to be below the Intrinsic value. (In this case $224 closing price vs. $426 for the Int. value) This line will precisely tell you how far the price is from the Intrinsic value, in other words, it will tell you your margin of safety when investing to the company on today's price level. In this example it is 90%
- Pricing: The close price has to be below the "Buffetts limit price" indicator. To make it short Graham and Buffet stated that the number you get when multiplying the Price to Earnings (P/E) ratio with the Price to book (P/B) ratio has to be below 22.5 in order to consider the given share cheap. This line will tell you how far the price is from the Buffetts limit price. This case it is 61%. ($224 vs. $361)
- Debt risk: The company has to have much less debt than equity in order to qualify for long term value investing. The limit here is 1, meaning that the company has to have more equity than total debt. If this is not the case, the company fails the test. (This can be taken a little flexible as certain industries, like banking and insuarance by definition deploy a lots of debt instruments without risking their long term profitability or sustainability) In the example of Bershire this is 0,27 meaning that Berkshire has more than 3 times more equity than debt which is needless to say a more than perfect setup. (What do we expect from Mr. B, right?)
These are the first 3 deciding criterias where a company can fail the test. Any of those turn to be out of range, you will get a red labell with a big fat NO recomendation. And most of the time this is going to be the case...
As for the other points you will get more inside peek into the state of the company:
- Price/book: this line will tell you if the price is still below the 1.5 times book value point. This is the highest price what value investors find comfortable paying. If the P/E value is very low for the share you might run into a situation where the Buffetts limit (P/E times P/B) is still low (below 22,5) but the stock is rather overpriced.
You will not get a red labell here, only a 'Caution' warning and a grey label, instead of 'GOOD!'
- Earnings: you will get an opinnion on the earnings here. The main criteria to get a 'GOOD!' evaluation is to have a growing level of EPS in the last 5 years.
- Revenue: It is very important to invest in a company which is able to grow it's revenues steadily. This line will analyse that and will tell you if it wouldn't be so.
- Profit & loss: Although it is not a deciding factor but a value investor should avoid investing to companies that were producing losses in the past decade or so. This line examines the last 5 years in this respect.
- Dividend: The one and only point where Berkshire fails the test! :-) As Warren Buffett used to say: I am not paying income tax, Berkshire doesn't pay dividend... :-) Poor guy! Since we are investing for a very long term it is imperative that we top the gains we might have over the years with the 3-4% dividend p.a. As you can see here, there is a Warning! comment should the company fail in paying dividend.
- Number of shares: Here you will see a quick analysis on the share buyback habits of the company/management. Again, what we examine here is wether the number of shares outstanding is less than 5 years ago or more which means that the company is buying back it's shares thus help investors to maintain equity.
So entering your choosen ticker you should have an instant overview if the company can supply you with the value investing criterias or fails in this field.
One very instructive exercise is to click through the leading blue chip stocks with this valuation toolkit and see how hugely overvalued they are at the moment.
Some further developements I made in the mean time:
- I have automated the calculation of the book value growth with finding the very first data point regardless when it happens. In this way you do not have to enter any parameter and you can simply click conveniently from one ticker to the other without reentering the needed inputs. Hopefully it doesn't matter which pricing structure you are in at TradingView. Free acounts will use 5 years data.
- I have included a 4th pane just below the main pane. This shows the revenue of the company in 3 way: the white line is the anual values, the grey line is the quarterly data and I have also added the red line showing the TTM (trailing twelve month) figure in order to visualise the very recent trends in the revenue of the company.
- The same way I have added the TTM figure on the lowest pane to the EPS figure, for the same reasons.
- I have added explanatory labells to the right of the charts showing the actual value of the indicators, like the Intrinsic value, Buffetts limit, and book value.
- Should either the Book value or the EPS figure be negative for the current year the script will issue a red label without any data regardless the other values as the Buffetts limit can not be calculated. (Negative numbers does not have square roots and that is required to calculate the limit price back from the P/E and the P/B values)
One final remark: this toolkit is as complete as my knowledge is about value investing. It is a purely educational tool, not in any way intented to be investment advice. I do use this tool and for instance I do have position in this example company Bershire Hathaway at the time of writing this post. You have to make your own research and decision when it comes to investing your money.
For further explanation on the Intrinsic value calculation please check my earlier post here:
For further explanation on the Value investing chart set please check my earlier post here:
Note
So, many asked how to use the toolkit: I have looked it up in thre helper of TradingView and it seems I can only share on a View Only chart layout.What you have to do is to click on Copy at the top right corner of the chart window and save the chart layout as your own. From than on you can use it freely. (I really hope)
"Note that the person who has the link can select copy and save the layout as his own."
Note
Hi Investors!As some of you pointed out I haven't been here for a long while. Sorry for that!
I also got some feedbacks in the mean time that the script stopped working.
Just FYI it wasn't me changing anything in the script (not that I know of at least) but something in the Pine Script core must have been changed.
Anyways, I have made some correction and -at least for me on my acount and computer- it works fine. I hope all of you, who experienced problems use the script is able to do so as from now! Any feedbeack on this bugfix is appreciated!
Sorry for the inconvenience!
Peter
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