The Ultimate Scorecard Criteria In "Words"
For readers who have been reading too much about Fundamental Scorecard website on my blog, such as the IN member below, I have to remind you that this article is again on Fundamental Scorecard website.
However, for this post, I will explain in detail about the methodology of The Ultimate Scorecard – one of the scorecard database on the Fundamental Scorecard website. This will be useful to those who do not understand the criteria within the scorecard or are not familiar with the numbers.
Having created the Value StockScorecard – the very 1st version – in March 2015, I realize I have yet to write in words about my scorecard methodology.
Before I start, let me repeat that The Ultimate Scorecard is created based on value investing concepts and contrarian investing methods.
So here are the thoughts that created The Ultimate Scorecard:
1. Cash Is King! You Cannot Deny It.
In the recent market downturn, did you wish that you should have more cash on hand?
This is the same for the companies. During a crisis, companies with CASH can acquire others, give dividend, do share buy-back and grow while its competitors can only tighten their belts.
Furthermore, companies with CASH can even try to ask their suppliers for a bigger discount when they make upfront payment to their suppliers. In this way, their inventory cost will also become lower which will potentially lead to a higher net profit in future.
Companies that are able to produce FREE CASH FLOW on a regular basis will also tend to benefit. With predictable cashflow, the companies will be able to make the future decisions earlier.
2. Gearing Is Bad. Period.
If you pay your bills on time, you will not need to worry about payment if your cash suddenly dries up.
During a crisis, companies with LOW GEARING (low trade payables or debts) will not need to worry about finding CASH to pay its suppliers or creditors, while companies with high gearing may need to dig deeper to source for additional cash to make the necessary payments.
This was explicitly illustrated during the recent oil and gas crisis where companies (Swissco, Swiber, Ezra, Ezion, etc) with high gearing went into judicial management, while those with lower gearing survived the downturn and came out stronger.
3. Dividend Are Great. But Not Too Much!
I like companies that give out DIVIDEND because they helped to keep your mind focused! This is especially true when you are a value investor and have to wait very long, sometimes years, for the value of the counter to be realized.
At times when you want to “give up” on a counter, DIVIDEND will act as a comforter to keep you focus on your initial decision on why you purchased that company.
Nevertheless, it is important that companies should not give out all its net profit as dividend. They should still keep some cash to support its growth and operations!
4. Companies Have To Make Profit. Hopefully In Cash!
Although I do not really look at net profit, but I still believe a company have to be able to generate a profit. If it is not possible, why make the effort to continue to do business?
In addition, all of the profit should thrive to be CASH EARNED. Because there are possibilities of non-cash item, such as revaluation of investment properties, reported within net profit.
Thus, if the net profit is not able to convert fully to cash, it is just like diluted sugar cane – slightly sweet, and able to quench your thirst, but just not nice enough for you to buy another cup.
5. Management Meeting Its KPI!
Since you bought into the company, you will want to make sure its management, whom are being paid extraordinary salary, are doing a good job. But how do you gauge them?
The simplest way is RETURN ON EQUITY. Their KPI should be judged by the amount of net profit they make.
6. You own Part of The Company.
This is something I am learning as well.
When you buy a share, you should view it as you own part of the company. In addition, you should only own the best out of the best. So as retail investors, we should thrive to buy GREAT COMPANIES AT FAIR PRICES!
Concentrate your efforts because your funds are limited. No point looking at any cheap Tom, Dick or Harry, because there will always be Tom, Dick and Harry around. But there is only 1 unique “You”.
After reading the thoughts behind The Ultimate Scorecard, you will realize that the scorecard has a focus on Cash. But you may still wonder how will this Ultimate Scorecard help me in selecting a company to invest in?
Quantitatively, The Ultimate Scorecard's 15 criteria can be breakdown according to:
The 1st 5 Criteria are focused on Balance Sheet.
Next 3 Criteria are focused on Dividend.
Next 4 Criteria are focused on Free Cash Flow.
Next 2 Criteria are focused on Revenue and Earnings.
Final Criteria is focused on Management Capability.
Therefore, in the event a company passed The Ultimate Scorecard with a score of at least 8 points, the company must be performing fundamentally well (or undervalued) in at least 2 categories.
This also meant that a company that passed the Ultimate Scorecard must have some form of margin of safety. In the event of a market downturn, the margin of safety will be able to buffer the fall in the share price for that company, minimizing the drop in its share price.
In addition, if you purchase a company based on fundamentally sound principles, it will also recover back faster than other companies.
Notwithstanding the above, you maybe still thinking, "Will this be enough?"
The Ultimate Scorecard has gone through simple backtesting of 20 randomly selected counters over the period of 2015 to 2017. Over the same period of time, STI was a “U” shape.
Generally, the testing has concluded that the Ultimate Scorecard accuracy on determining that a counter is undervalued range from 60% (during a downtrend) to 80% (during an uptrend).
This meant that if The Ultimate Scorecard state that the counter is undervalued, the chance of you making a gain as small as 0.001/making minimal losses are from 60% to 80%.
In my opinion, this only satisfy the quantitative portion of investing. The other 20% to 40% should be analyze from a qualitative approach. This will have to come from an investor's understanding of the business. After all, since you intend to own a part of the business, you must also understand the business.
In Short
I hope this post explain clearly the thoughts and the usefulness of the Ultimate Scorecard. It may not produce a 100% accurate decision. But I personally believe, especially for newbies, that this is a start to learn to invest fundamentally. For the investing veterans, this could become another source of finding undervalued companies.
Once you make a fundamental decision, daily changes in share price should not affect you IF THE FUNDAMENTAL OF THE COMPANY DID NOT CHANGE. Even in a market downturn, you will be less affected if you continued to believe in the fundamentals of the company.
Before I end, here is a screenshot of a subscriber whom has benefited from using the scorecard since the “olden” days:
If you are interested to sign up on The Ultimate Scorecard, do click here!
Oh... and do remember, please like our Facebook page (T.U.B Investing) and follow me on InvestingNote.
 |
| Screenshot from IN |
However, for this post, I will explain in detail about the methodology of The Ultimate Scorecard – one of the scorecard database on the Fundamental Scorecard website. This will be useful to those who do not understand the criteria within the scorecard or are not familiar with the numbers.
Having created the Value StockScorecard – the very 1st version – in March 2015, I realize I have yet to write in words about my scorecard methodology.
Before I start, let me repeat that The Ultimate Scorecard is created based on value investing concepts and contrarian investing methods.
So here are the thoughts that created The Ultimate Scorecard:
1. Cash Is King! You Cannot Deny It.
In the recent market downturn, did you wish that you should have more cash on hand?
This is the same for the companies. During a crisis, companies with CASH can acquire others, give dividend, do share buy-back and grow while its competitors can only tighten their belts.
Furthermore, companies with CASH can even try to ask their suppliers for a bigger discount when they make upfront payment to their suppliers. In this way, their inventory cost will also become lower which will potentially lead to a higher net profit in future.
Companies that are able to produce FREE CASH FLOW on a regular basis will also tend to benefit. With predictable cashflow, the companies will be able to make the future decisions earlier.
2. Gearing Is Bad. Period.
If you pay your bills on time, you will not need to worry about payment if your cash suddenly dries up.
During a crisis, companies with LOW GEARING (low trade payables or debts) will not need to worry about finding CASH to pay its suppliers or creditors, while companies with high gearing may need to dig deeper to source for additional cash to make the necessary payments.
This was explicitly illustrated during the recent oil and gas crisis where companies (Swissco, Swiber, Ezra, Ezion, etc) with high gearing went into judicial management, while those with lower gearing survived the downturn and came out stronger.
3. Dividend Are Great. But Not Too Much!
I like companies that give out DIVIDEND because they helped to keep your mind focused! This is especially true when you are a value investor and have to wait very long, sometimes years, for the value of the counter to be realized.
At times when you want to “give up” on a counter, DIVIDEND will act as a comforter to keep you focus on your initial decision on why you purchased that company.
Nevertheless, it is important that companies should not give out all its net profit as dividend. They should still keep some cash to support its growth and operations!
4. Companies Have To Make Profit. Hopefully In Cash!
Although I do not really look at net profit, but I still believe a company have to be able to generate a profit. If it is not possible, why make the effort to continue to do business?
In addition, all of the profit should thrive to be CASH EARNED. Because there are possibilities of non-cash item, such as revaluation of investment properties, reported within net profit.
Thus, if the net profit is not able to convert fully to cash, it is just like diluted sugar cane – slightly sweet, and able to quench your thirst, but just not nice enough for you to buy another cup.
 |
Since you bought into the company, you will want to make sure its management, whom are being paid extraordinary salary, are doing a good job. But how do you gauge them?
The simplest way is RETURN ON EQUITY. Their KPI should be judged by the amount of net profit they make.
6. You own Part of The Company.
This is something I am learning as well.
When you buy a share, you should view it as you own part of the company. In addition, you should only own the best out of the best. So as retail investors, we should thrive to buy GREAT COMPANIES AT FAIR PRICES!
Concentrate your efforts because your funds are limited. No point looking at any cheap Tom, Dick or Harry, because there will always be Tom, Dick and Harry around. But there is only 1 unique “You”.
After reading the thoughts behind The Ultimate Scorecard, you will realize that the scorecard has a focus on Cash. But you may still wonder how will this Ultimate Scorecard help me in selecting a company to invest in?
Quantitatively, The Ultimate Scorecard's 15 criteria can be breakdown according to:
The 1st 5 Criteria are focused on Balance Sheet.
Next 3 Criteria are focused on Dividend.
Next 4 Criteria are focused on Free Cash Flow.
Next 2 Criteria are focused on Revenue and Earnings.
Final Criteria is focused on Management Capability.
Therefore, in the event a company passed The Ultimate Scorecard with a score of at least 8 points, the company must be performing fundamentally well (or undervalued) in at least 2 categories.
This also meant that a company that passed the Ultimate Scorecard must have some form of margin of safety. In the event of a market downturn, the margin of safety will be able to buffer the fall in the share price for that company, minimizing the drop in its share price.
In addition, if you purchase a company based on fundamentally sound principles, it will also recover back faster than other companies.
Notwithstanding the above, you maybe still thinking, "Will this be enough?"
The Ultimate Scorecard has gone through simple backtesting of 20 randomly selected counters over the period of 2015 to 2017. Over the same period of time, STI was a “U” shape.
Generally, the testing has concluded that the Ultimate Scorecard accuracy on determining that a counter is undervalued range from 60% (during a downtrend) to 80% (during an uptrend).
This meant that if The Ultimate Scorecard state that the counter is undervalued, the chance of you making a gain as small as 0.001/making minimal losses are from 60% to 80%.
In my opinion, this only satisfy the quantitative portion of investing. The other 20% to 40% should be analyze from a qualitative approach. This will have to come from an investor's understanding of the business. After all, since you intend to own a part of the business, you must also understand the business.
In Short
I hope this post explain clearly the thoughts and the usefulness of the Ultimate Scorecard. It may not produce a 100% accurate decision. But I personally believe, especially for newbies, that this is a start to learn to invest fundamentally. For the investing veterans, this could become another source of finding undervalued companies.
Once you make a fundamental decision, daily changes in share price should not affect you IF THE FUNDAMENTAL OF THE COMPANY DID NOT CHANGE. Even in a market downturn, you will be less affected if you continued to believe in the fundamentals of the company.
Before I end, here is a screenshot of a subscriber whom has benefited from using the scorecard since the “olden” days:
If you are interested to sign up on The Ultimate Scorecard, do click here!
Oh... and do remember, please like our Facebook page (T.U.B Investing) and follow me on InvestingNote.
I am very sure many informed investors today are using a similar "scorecard" approach like the one that you are promoting and just like you, most adopted it from none other than Ben Graham and Buffett. It took me less than 2 mins to pull out Ben Graham's checklist. Summarized from Chapter 14 of The Intelligent Investor - Stock Selection for the Defensive Investor:
ReplyDelete1. Not less than $100 million of annual sales.
[Note: This works out to $500 million today based on the difference in CPI/Inflation from 1973]
2-A. Current assets should be at least twice current liabilities.
2-B. Long-term debt should not exceed the net current assets.
3. Some earnings for the common stock in each of the past 10 years.
4. Uninterrupted [dividend] payments for at least the past 20 years.
5. A minimum increase of at least one-third in per-share earnings in the past 10 years.
6. Current price should not be more than 15 times average earnings.
7. Current price should not be more than 1-1⁄2 times the book value.
As a rule of thumb, we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5.
Apart from a few "proprietary" tweaks here and there, how is yours any different? and why would one pay for it since it's easily available on the net for free. Dont think there's anything new here, just a concept that's been recycled over and over again. Apologies if I'm being brutally honest here, but just some feedback from a third party perspective.
Hi Anonymous,
DeleteThank you for reading and commenting.
What you said make sense and I totally agree.
This is because since my scorecard approach is influenced by value investing ideas, there will definitely be traces of Graham and Buffet methods.
However I can also tell you why one should pay $120 for this 1 year of subscription.
1. There are definitely differences. My scorecard approach focus on cash or cash generating ability of the company. But Graham method focus on current assets. In this time and age, current asset could be too losely define and realising of value may be slower. But if it is Cash, the value realisation will be faster.
2. Since you stated you took 2 minutes to pick out the Graham methods from the net, you should also understand that almost everyone will be using the same method if THEY WANT. But what happens if everyone goes for the similar counter, then will it still be undervalued at that point? I believe my "changes" gave you an edge above others.
3. Graham had actually changed his method a few times. This method is not perfect. Mine is not either. But it is important to understand why he made changes along the way.
4. You stated "informed investors". In my previous article, I already stated "informed investors" whom already had a winning method, will not be interested in this method. I totally understand that. Thus, I created this scorecard method database for newbies to understand that investing can be easy. On the other hand, should informed investors be open to other methods as well?
5. Try using Graham method and search for counters in US market or SG market. You may not get any results. However, if you did fine a result, the next question is will you dare to invest in that counter?
6. Like you said, you used 2 mins to find a method, which you may need another 30 mins or more to find if a counter passed these criteria. For me, since it is a database, I only need 2mins to know if a counter passed the criteria and I could use the rest of the time to read up on other news.
That's all.
Hope you are not offended by this reply.
Do comment or email me if you want to know more. Love to understand what everyone think about this website.
Regards,
TUB