Q
With Conscious Investor will I have to
plough through hundreds of shares to determine whether or
not they are good investments?
Conscious
Investor is a simple tool that allows you to scan the
entire stock market for quality companies trading at profitable
prices. It will enable you to eliminate the majority of
stocks from consideration and provide comprehensive information
on the quality companies at your fingertips.
Q Why
can't I simply rely on my broker's "buy" recommendations instead
of buying Conscious Investor?
Increasingly, investors are taking their decision making
into their own hands. Generally they have been disappointed
with the results that have been getting from their brokers,
they are put of by the lack of objectivity of the analysts
and media reports, or they simply like to be more in control
of their own finances.
We
often hear from people who have lost a small fortune relying
on brokers. When these clients see the quality or the
valuation of the stocks that they were recommended, they
are usually very upset.
Think
of the Conscious Investor approach as the "McDonald's
of Stock Analysis" because it can be applied consistently
to any stock, allowing you to reach conclusions about
companies with confidence. So our approach delivers the
reliability and dependability that investors desire for
making rational decisions about both buying and selling
stocks.
Q I
am past using newspapers, tipsters, gurus, advisers etc,
all of whom have failed me. How is Conscious Investor different?
Conscious
Investor is a simple, yet comprehensive, investment tool.
It is built on investment principles that have been proven
over time, through experience, and by extensive backtesting.
These principles are incorporated using proprietary methods
developed by Professor Price.
Q How
is Conscious Investor different from other fundamental software
packages on the market?
The
fundamentals-based packages on the market are really mixtures
of various ideas. In an attempt to attract as many subscribers
as possible, they include all sorts of methods and approaches.
The results are a mish-mash of ideas that leaves the subscribers
confused about what they should do or should be looking
for.
In
contrast, Conscious Investor contains crystal clear selection
procedures based on rational, time-tested principles for
both buying and selling.
The
second difference is that Conscious Investor contains
proprietary tools developed over decades by Professor
Price. It is not just a simple screening system based
on a few standard ratios. It is a genuine quantum leap
in the world of investing.
In
this way in a few minutes you can weed out 95% of the
stocks as “wealth hazards." These are stocks
with various weaknesses that limit their possibility of
being successful. At the same time, Conscious Investor
locates those great companies selling at profitable prices
to help you outperform the market.
The
third difference is that Conscious Investor is designed
for investors at all levels, from novices to seasoned
professionals. It can even be used as a “black box”
by simply investing in the stocks that come through the
default filters.
Q Does
Conscious Investor rely on the PEG ratio for stock valuation?
There
are various simplistic tests available such as the PEG
ratio (PE ratio/Growth rate). However, even as a rule
of thumb, such tests are far too naive to be used when
investing your dollars. They are not used in Conscious
Investor.
Conscious Investor applies a world-class valuation methodology
developed by internationally acclaimed financial mathematician
- Professor John Price. John Price's intellectual property
is the first to truly allow investors to fairly choose
stocks based upon a robust Buffett-style methodology.
John
Price has undertaken large-scale studies into his approach
and proven that there is an extremely high correlation
between his methodology and total stock returns. The same
cannot be said for simplistic valuation methodologies
such as the PEG ratio.
Q Would
a Conscious Investor have invested in USA companies such
as Enron and WorldCom or Australian companies such as One-Tel
and HIH?
Many
people lost large amounts of money through buying stock
in USA companies such as Enron and WorldCom or Australian
companies such as One-Tel and HIH. In these cases accounting
irregularities and the illegal behavior of management went
on for years before it was uncovered. When it was uncovered
there was a huge drop in price and it was too late for anyone
holding stock in them to get out without losing most of
their money.
So naturally,
many people are nervous about getting caught in such a situation
again.
When
talking about Conscious Investor we usually focus on the
side of finding great companies selling at profitable prices.
But there is another side, namely how the filters would
have blocked such companies as those we just mentioned
To give
you a practical example, we list some of the reasons why
One-Tel and HIH not have passed standard Conscious Investor
filters.
- Would
a Conscious Investor have invested in One.Tel?
Reasons
why a Conscious Investor would not have invested in
One Tel:
-
Telecommunications is very competitive industry:
very difficult for any single company to stand out.
-
Customers
have little loyalty to any provider and will migrate
to the cheapest provider.
-
Highly
technical area with constantly diminishing revenues
per minute of phone time.
-
Rapidly
changing technology: a wrong decision can take many
years to remedy.
-
One.Tel
is a start-up: no history to show the ability of
management to provide consistent and strong profits.
-
Accounting
standards of the management cannot be relied upon:
in the months up to September, 1999, One.Tel made
accounting changes resulting in an increase in profits
of $50 million.
-
The
bonuses of Jodee Rich and Brad Keeling, the founders
of One.Tel, were heavily weighted to share price
instead of more objective measures such as revenue
and profits.
- Would
a Conscious Investor have invested in HIH?
Reasons
why a Conscious Investor would not have invested in
HIH:
-
Insurance industry has a large timing mismatch between
revenues (in terms of premiums) and expenditure (in
terms of claims).
-
Because of the timing mismatch, a company needs to
demonstrate stable profits over an extended period
to be considered as a rational investment.
-
The history of HIH as a public company only goes back
to 1992.
-
In its first two years it made reasonable profits
followed by a major loss in the following year.
-
From 1992 until 1997, the "good years" of
HIH, earnings only increased by 3% per year.
-
Even in the profitable good years (excluding the loss
in 1994), return on equity was a modest 10 per cent
or so.
-
During this period, sales increased by 45% per year,
indicating that claims expenses were unexpected and
unplanned for.
-
In 1998 earnings decreased significantly leading to
substantial losses in 2000.
Q What
are the most common investment mistakes that Conscious Investor
is designed to help you avoid?
-
Investing in stocks without taking the time to learn
how to evaluate companies as businesses (treating the
stock market as the national lottery!).
-
Investing with unreasonable expectations -- perhaps
that they'll earn 50 percent returns every year, or
that they'll never have a bad year.
-
Companies with shaky balance sheets whose stock has
soared.
-
Snapping up shares of hyped penny stocks, believing
rumors or pie-in-the-sky promises.
-
Putting all your money in too many stocks (in the mistaken
belief that diversification can reduce risk).
-
Putting off investing, thinking they're too young for
it.
-
Bypassing the stock market, assuming they're too old
to invest in it.
-
Brokers and other financial professionals "churning"
their customers' accounts, buying and selling frequently
in order to generate commissions.
-
Investors themselves buying and selling stocks too frequently,
paying too much in commissions and short-term capital
gains taxes.
-
Investors missing out on the miracle of compounding
of wealth, instead chasing short term cash flow by trading
in and out of stocks.
-
Investors trying to time the market, thinking they know
when various stocks will hit peaks or valleys.
-
Taking on too much risk with margin, where they borrow
money from their broker with which to invest.
-
Not doing their own homework evaluating businesses and
instead relying on the recommendations of so-called
experts in articles or on television.
-
Acting on hot stock tips from strangers, acquaintances
or even friends, buying or selling hastily without doing
any due diligence.
-
Panicking and selling just because others are panicking
and selling.
-
Rushing in and buying just because others are rushing
and buying.
-
Taking on a lot of risk by not thinking of the future
and planning for their retirement.
-
Taking too little risk in their retirement planning,
parking money that can grow over years or decades in
overly conservative places, such as money market funds
and bonds. These kinds of investments grow at historically
lower rates than stocks.
Q Why
do I often see different PE ratios on different sites?
In
simple terms, the PE ratio is the price of a stock divided
by its earnings per share EPS. The differences occur because
of the way that EPS is calculated. There are three main
methods leading to three different PE Ratios.
| PE
Ratio |
Earnings
per Share EPS |
| Trailing
PE Ratio or PE Ratio (ttm) |
Sum
of reported company earnings over the last twelve
months. |
| Central
PE Ratio |
Sum
of reported company earnings for the past six months
and estimated earnings for the next six months. |
| Forward
PE Ratio |
Consensus
analysts’ forecast of next year's earnings |
But
beware—their names are not standard. For example,
the central PE ratio is sometimes referred to as the current
PE ratio. Or simply the PE ratio which shows how much
we have become dependent on analysts’ forecasts.
In
Conscious Investor we want to be independent of earnings
forecasts. For this reason we use the trailing PE ratio.
Another
variation arises because of differences between the protocols
used by different data suppliers as to what should be
included in earnings and what should be excluded. And
no matter what the actual method, there is the issue of
the quality of earnings as discussed in The Conscious
Investor Approach. This is why it is vitally important
to always have a “margin of safety.”
Q Should
I only buy stocks with low PE ratios?
PE
ratio on its own means nothing. What counts is the PE
ratio compared to the future growth of earnings. A PE
ratio of 3 could be too high for some stocks while a PE
ratio of 35 might be too low for others.
Value
comes from finding stocks for which you have confidence
of a fairly high rate of growth of earnings compared to
their PE ratio.
Some
investors focus on stocks with PE ratios above average,
others focus on stocks with PE ratios below average. The
former are often called growth investors, the latter are
called value investors.
However,
the use of value in front of the word investor is redundant.
If you are an investor and are not interested in value,
what are you doing? With Conscious Investor we are looking
for value whether it has a high PE ratio or a low PE ratio.
Once
you go to the “what if” scenario stage, then
it is important to put in PE ratios that are acceptable
in terms of your own “margin of safety” (we
teach our clients how to do this). This tool allows us
to look forward rather than looking just at a company’s
history.
Return
to FAQ Main
Disclaimer:
Conscious
Investing provides general advice and information, not individually
targeted personalised advice. Advice from Conscious Investing
does not take into account any investor’s particular
investment objectives, financial situation and personal
needs. Investors should assess for themselves whether the
advice is appropriate to their individual investment objectives,
financial situation and particular needs before making any
investment decision on the basis of such general advice.
Investors can make their own assessment of the advice or
seek the assistance of a professional adviser.
Investing
entails some degree of risk. Investors should inform themselves
of the risks involved before engaging in any investment.
Conscious
Investing endeavours to ensure accuracy and reliability
of the information provided but does not accept any liability
whatsoever, whether in tort or contract or otherwise, for
any loss or damage arising from the use of Conscious Investing
data and systems. Past performance is not necessarily indicative
of future results. Information and advice provided here
is not an offer to buy or sell securities. View
the full Disclaimer.
