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Symbols mean nothing if the values aren't there.

Lee Iacocca

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Investment Reading

Quantitative Value Philosophy by Alpha Architect has five sequential steps to reduce the investment universe to conviction picks:

  1. Identify Investable Universe: Our universe generally consists of mid- to large-capitalization U.S. exchange-traded stocks.
  2. Forensic Accounting Screens: We conduct financial statement analysis with statistical models to avoid firms at risk for financial distress or financial statement manipulation.
  3. Valuation Screens: We screen for stocks with low enterprise values relative to operating earnings.
  4. Quality Screens: We rank the cheapest stocks on their long-term business fundamentals and current financial strength.
  5. Investment with Conviction: We seek to invest in a concentrated portfolio of the cheapest, highest quality value stocks. This form of investing is by definition contrarian, and requires disciplined commitment, as well as a thorough understanding of its theoretical and intellectual underpinnings.

Looks like an interesting article - although the implementation details and calculations are in a book on Amazon.

Some calculation ideas are obvious, such as the CFO/NI ratio where higher ratios indicate higher quality income, i.e. fewer accrual driven earnings. CFO = cash flow from operations

Another measure of forensic accounting is financial distress.

Valuation metrics:

  • P/E – Price-to-Earnings
  • TEV/EBITDA – Enterprise Multiple = total enterprise value / EBITDA (the author's best-performing valuation metric)
  • FCF/TEV – Free Cash Flow Yield
  • GP/TEV – Gross Profits Yield
  • P/B – Price-to-Book

Measurement of financial strength: Piotroski’s F-SCORE

A summation of the alpha architect approach: The evidence was pretty clear: never buy expensive stocks (Value) and ride winners and cut losers (Momentum) Links to discussion: Value and Momentum

Automation of simple tasks through technology tools or apps

Amazon Mechanical Turk Ask workers to complete HITs - Human Intelligence Tasks - and get results using Mechanical Turk.

Best of PhD Comics

Saturated Fat research / writing

First get your facts, then distort them at your leisure.

Mark Twain

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