INVESTING STRATEGIES - INVESTMENT FABLES

Investment Fables – Damodoran.


Low Price to Book Ratio

• PBV<0.80
• Beta<1.5 or Debt to Capital Ratio<70%
• ROCE>8%

Stable Earnings

• Increasing EPS over the last 5 years
• Beta<1.25
• SD over the last 3 years<60%
• PE<15
• Expected growth in EPS over the next 5 years=>10%

Good Companies

• EVA has to be positive [EVA = (Return on Invested Capital-Cost of Capital)
(Capital Invested)]
• Top Company ranking
• PBV < 2.5
• PE < current industry-average PE

Growth

• Projected Earnings Growth>15% over the next 5 years
• PEG<1
• Revenue Growth>10% per year over the last 5 years
• Beta<1.25
• SD<80%
• ROE>15%

Recovery

• Bottom 25% on Relative Strength
• SD<80% or Beta<1.25 or Debt to Capital Ratio<50%
• Positive Earnings in most recent period
• Increased Earnings over previous period

Takeover Targets

• Poorly managed companies e.g. ROE more than 4% below peer group ROE and
investor returns lag peer group returns by more than 5%
• Insider holdings <10%
• Debt to Capital Ratio<50% or SD<80%

Momentum

• Relative Price Strength and Relative Volume Strength>1.4
• Beta<1.2 or SD<80%
• PE<20


General Guidance:

1. Beware of fancifully-named investment strategies.

2. High Return = High Risk.

3. Remember the fundamentals.

4. Most cheap stocks are cheap for a reason.

5. Good companies may not be good investments.

6. The only predicable thing about shares is their unpredictability.

7. Numbers can lie.

8. Markets are more often right than wrong.

9. Define a strategy to suit your personality.

10. Luck tends to dominate skill.