1, magic formula for stock selection
Source: Joel Greenblatt's "Stable Stock Market Income"
Introduction: This book is simple and practical, and points out two elements of stock selection, namely valuation and yield. The basic idea is to sort all the stocks in the market according to the valuation from low to high. The lower the valuation, the higher the score. Then, the higher the rate of return, the higher the score. Finally, add up the two scores, and the higher the score, the better.
Operation: Method 1, taking PE as the valuation parameter, excluding stocks with PE less than 5; ROE is used as the rate of return parameter; The second method uses EV/EBIT as the valuation parameter and EBIT/ tangible net assets as the rate of return parameter. The latter excludes the leverage factor and measures the overall operation of the company.
Disadvantages: Only one year's data will be used, so it can only be used as a preliminary screening. In addition, this law needs to exclude public utilities and financial enterprises.
2.ROE stock selection
Source: Buffett
Introduction: Buffett has repeatedly stressed that companies with a long-term ROE greater than 15% have a competitive advantage, so they can screen stocks with a ROE greater than 15% in the past 5- 10 years. Because ROE is affected by leverage ratio, Buffett also mentioned the importance of a strong balance sheet, so the standard of asset-liability ratio below 50% can be added.
Operation: ROIC, ROA and other aspects can also be used to measure the company's income level, not limited to ROE.
Disadvantages: For insurance, banking and other financial industries, asset-liability ratio screening is not applicable. In addition, this method only considers the rate of return and does not reflect the price factor. Stocks with high ROE are naturally good, but you need to think about whether it is expensive or not.
3. Cash flow stock selection
Source: Buffett
Introduction: Buffett's valuation adopts the cash flow method, and the simplest model is the perpetual valuation method, that is, the equity value of the enterprise = the free cash flow of the equity/discount rate, and the discount rate is the yield of ten-year US Treasury bonds or the average yield of S&P 10. For A shares, it is suggested to adopt a unified discount rate of 8- 10%. Compare the equity value of the enterprise with the market value of the company, focusing on stocks with discounts.
Disadvantages: Formulas in the financial terminal or cash flow data derived in batches are simple calculations based on financial statement figures, which may have errors compared with the actual cash flow without adjustment and can only be used as a preliminary screening.
4.PB stock selection
Source: Graham
Introduction: There are two ways to invest in value investment. One is the asset faction, which measures whether the replacement value of the invested property is lower than the price. The other is the income faction, that is, paying attention to the profitability of enterprises and whether the cash flow ability matches the valuation. PB stock selection method is the asset school, which selects broken stocks, re-evaluates their asset values and looks for undervalued stocks.
Disadvantages: sometimes the net assets of stocks cannot accurately evaluate the value of enterprise assets, such as real estate accounted by cost method, such as intangible assets that will produce greater returns in the future. The underlying logic of asset law is that the liquidation value of an enterprise is higher than the current price, but A-share enterprises generally do not go to the stage of bankruptcy liquidation, and shareholders rarely interfere with the management to sell restructured assets. Therefore, retail investors are still looking forward to the return of value, and it is really difficult for us to predict how long it will take for the return of value based on asset value. Therefore, this method can only be used as a preliminary screening, and it still needs the profitability of enterprises.
5. Davis stock selection
Source: Davis Family.
Introduction: This method comes from the description of Wang Chaozhong of Davis. The Davis family chose inactive stocks with a P/E ratio below 15 and a growth rate of 7- 14%. This is a stock selection method for Davis' double click. Moderate growth rate is easy to maintain, and a low P/E ratio below 15 is likely to increase the valuation.
Disadvantages: the growth rate may not be maintained, so it depends on the understanding of the company's business, and the price-earnings ratio may not be restored. Low price is reasonable, so the key is your unique insight into fundamental analysis as an investor.
All the above methods have a disadvantage, that is, they only focus on historical data, and history does not represent the future, so they are only used as the logic of stock screening to narrow the research scope. Various methods are not limited to specific numbers and proportions, and can be used interchangeably or even jointly. Other indicators that can be considered include gross profit margin, interest-bearing debt ratio, predicted growth rate and so on. The core logic of stock selection is to choose a good company. These financial indicators are just our road lights. Whether this lamp is good or bad needs us to ponder more.
Let's take a closer look at how Warren Buffett picks stocks.
Buffett's stock selection must meet three conditions: the net interest rate is higher than 5%, the gross profit rate is higher than 40%, and the return on equity is higher than 15%. These three standards prove that the company has high revenue and sales volume and low sales cost.
Ba Lao has only practiced this law for decades, and even if the cash book this year is nearly $654.38+050 billion, it has not broken this law.
So sometimes successful spelling is outside the rules.
There are not many good rules, but three are enough.
Basically, you can refer to the rules of Ba Lao, or make one according to your own preferences.
For technical schools, you can also set an entry and exit standard, such as when the trend rises, three K-lines enter the market, where to leave, and how much to lose.
Most importantly, once you make your own rules through long-term practice and summary, can you stick to it for decades?
However, in fact, it is often the time when rules are made, and it is also logical.
However, if you lose three times in a row, you will have a mental breakdown or lose confidence in your own rules.
This is the main reason why most people can't succeed in the stock market.