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The What If Game | Print |

 

Dear Fellow Investor

 

Did you also play the what if game after the severe market declines in 2008 and in the first quarter in 2009?

I know I did and, to a large extent, it kept me out of the market in 2009 causing me to lose out on quite substantial gains.

It is not that I did not find any attractive investment opportunities, I was just frozen like a rabbit in the headlights by the banking crisis, Lehman bankruptcy and sudden market decline.

Frustrating but too late to do something about now.


In 2009 (after the market lows in March) my number one "what if" question was:

What if there is another sharp decline should the economy stall after its jump start and steroid boost through stimulus spending? Which led me to think: As the markets hit new low it will be time to get in!


It never happened and I watched the market take off with me just watching.

I did however earn a return of 6.5% on my portfolio while being about 70% in cash.

But I could have done a lot better.


So what did I learn?

I realised is that at any time there are a thousand things that can go wrong; with the world economy, country economy and the company you invested in.

At the same time however there are a thousand things that can go right.

Companies aren't static entities, they constantly change, new products get developed, businesses or divisions get sold or closed, and they fight for survival. So there are a lot of positive things that can happen as well.

 

The secret to profitable investing is not paying for all the positive things that may happen. Thus to invest if you find an undervalued company, irrespective of market conditions.

What you must do is look for companies where the worst or all negatives are reflected in the price. That way you get all the positive developments for free.

How do you find these companies?

The best places to look are:

  • The 52 week or all time low share price list
  • Companies with the highest dividend yields
  • Companies with the lowest price to earnings ratios
  • Companies with the lowest price to book ratios

But wait a minute, you may be thinking. There are also a lot of junk companies in these lists...

...companies that are in a dying industry such as newspapers, companies with inflated past earnings due to a bubble or industry tailwind such as commodity companies and US, Irish or Spanish construction companies in 2008.


You would be 100% correct. But you know what, it doesn't matter.

Why?

Because numerous long term studies have shown that indiscriminately buying the cheapest companies using for example price to book or price earnings ratios leads to index beating performance.

Not every year, but on average over long periods of time.

Even if you do not indiscriminately want to buy cheap companies this is good news.

What you need to do is further analyse the companies on these lists to identify worthy investments.

Look at it this way.

Analysing companies on these lists are like digging near a rich vein of gold. There may still be some rubble around but it's a lot easier to find gold than for example just starting to dig anywhere.

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So in summary


There is always a 1000 reason not to invest, but if there is a really compelling undervalued company you have to make use of it.

With the markets having moved up so much the obvious candidates are gone. But if you look carefully, and am willing to turn over a few rocks there are still very good investment opportunities around.

You can do it yourself or you can take a look at my subscription service where I uncover hidden gems every month.



Your digging in the dirt analyst


Tim du Toit

P.S. A media company in the wrong country at the wrong time...

This month the company I found for subscribers is located in France.

In terms of the size of companies I look at its quite large with a market value of €1,72 billion.

The company owns the most popular television channel in one of the largest European countries but is also very active in new media channels including the internet, tablets and smart phones.

In spite of this, the market views it as an old media company that is soon going the way of the dinosaurs. However, when you look at its financial statements you will see what a great business it is.

Its balance sheet is solid with no debt, and it generates a high amount of free cash flow and profits. This enables it to pay a dividend of just under 7% that can easily be maintained and has room to increase.


When I recommended the company it was trading at 7 times free cash flow, 7,7 times 2010 earnings and 5,6 times EBIT to enterprise value.

I am sure you will agree this is undervalued.

 

To immediately get your hands on this value investment idea (for as little as €39) click here.


 

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