Buy good companies on the cheap – PE Ratio and Earnings Yield
Two keys to investing success
- Finding good quality assets
- Don’t overpay (this is the hardest part)
A simple valuation – PE ratio
Rather than guessing a market value for a company, is there some simple measure of value?
The simplest form of evaluation is to add up the equity (or book value) of a company. This is all it’s assets (properties, equipment, cash etc) minus all of it’s liabilities (outstanding loans, IOUs etc). However companies operate on the very premise that “the whole is greater than the sum of the parts”. Some businesses have very little equity, in the traditional sense, and make very large profits.
Following from that, the most common valuation metric is to value companies based on how much they can earn. This includes all future earnings (or cash flows). Analysts estimate future earnings (a notoriously error prone task) then use discounted cash flow analysis to determine the present value of the sum of that cash.
If we wanted to simplify even further, we could just compare the current year earnings of various companies. For example, if analysts estimate that next year; BHP will earn $10 billion and Woolworths will earn $5 billion. Which company would we want to own? If it’s not going to cost me anything, I’ll take BHP thanks .
But if we have to pay for ownership, and say; BHP will cost $100 billion and Woolies will cost $60 billion.Which company would we buy? If we wanted to buy the most amount of earnings per doller paid.
BHP price to earnings ratio = 100 / 10 = 10
WOW PE = 60 / 5 = 12
So BHP sells for 10 times it’s earnings and appears cheaper than WOW on 12 times earnings. We’ll take BHP thanks.
Think of PE as the inverse of yield
Yield = yearly earnings divided by price paid for an asset = inverse of PE ratio
Say you buy a house for $100,000 and get $10,000 in rent for a year.
Yield = 10,000 / 100,000 = 0.1. or 10% yield.
The PE ratio is the opposite = price paid for asset / yearly earnings
So, the house has a PE of 10
The simplest rational way to buy cheap companies
The simplistic approach to investing in stocks is to buy companies for as low a PE as possible, maximizing how much earnings you’re getting for the price you pay. Problem is, those companies going down in flames have lowest PEs, so it’s a tricky game. Some investors mitigate this risk by sticking to very large companies who have been around for decades. But, i think this PE thing is one of those simple things that is not simple at all when you really look into it further.
A famous (and surprisingly effective) strategy along the low PE lines is the “Dog’s of the Dow”. It involves choosing the 10 highest yielding (low PE) stocks of the 30 largest companies in the US. The strategy is to switch stocks based on this simple criteria every year. Interestingly, this strategy outperforms the overall market over long time frames and under a variety of conditions.
The key thing with low yielding stocks is that they are, by definition, out of favor. So it’s fundamentally contrarian (against prevailing wisdom). This is often a good thing in investing since the worst error most people commit is to pay too much.
My weight loss program – google chart
I’ve decided that publicly charting my weight and tummy circumference should, apart from the risk of illness, help me get back on track with my fitness program. It’s one of those ideas I’ve had bubbling in my mind for a while, so I thought it’s better to do it rather than think it!
Google charts even has QR codes
My name encoded in QT, so that some Japanese person can read it with their mobile device (for example)…
Google charts rock!
Google has done a great job implementing a chart API available via the URL.
For example, the following snippet produces the following image.
<img src="http://chart.apis.google.com/chart?cht=v&chs=200x200 &chd=t:100,100,100,30,30,30,30" alt="" />
How cool is that??
I’ll be using this here, to post my weight loss progress and also other goals I’m reaching for that can be easily presented as charts.
Check out; my weight loss progress
Back to the blog!
I’m back again to give this blog another go. Sometimes we need to go easy on ourselves 
Wow, a lot has changed in recent months.
- I have accepted a new job offer at seek.com
- The stock market has plunged and then rallied strongly
- I’m now regularly walking for 45mins. At least once per week for last couple of months.
But most importantly… my dear wife is now 6 months pregnant. It’s a boy!!
Now what hasn’t changed that should have:
- I still haven’t got a running business (althought I’ve sorted the name out
- I still haven’t lost weight, but I also haven’t gained any, which isn’t much consolation considering I’m over 100 kgs still!!
Captain’s Exercise Log
| Date | Walk | Pushups | Situps | Extras? |
|---|---|---|---|---|
| Mon 8th Sep 08 | 30mins | 36 (3×12) | 0 | |
| Tue 9th Sep 08 | 20mins | 15 (1×15) | 0 | |
| Wed 10th Sep 08 | ?? | 24 (3×8) | 10 (1×10) | Stair Climb (7 flights) |
My strategy for losing weight (after my first failed attempt)
I thought it would be handy to myself (and maybe others one day) to outline a concrete strategy to lose weight. Firstly, to outline a summary of many hours of reading and even more hours of chit-chat with friends about the topic of losing weight, I’ll summarize it all in the following points…
- Eat good food (vegies, fruits, almonds, fish, fiber, red meat, complex carbohydrates)
- Don’t eat too much (especially sweet things and carbohydrates)
- Drink lots of water. Also prefer green tea over coffee
- Exercise most days, walking for 45mins is a great base. Swimming is excellent. Building core strength is excellent. If possible exercise in the mornings; it’s free time, you can do it consistently, it’s a metabolism booster, and good for fat burn due to low insulin levels in our blood.
- Get a reasonable amount of sleep most nights (8 hours is a good amount). For me this means, to bed by 11pm, up at 7am (for my walkies!)
That’s it! If i can think of more crucial things for getting healthy and in the process losing weight, I’ll add it here. Any others with some advice, please comment away
As far as exercise goes, I thought it would be useful to outline an incremental plan of increasing the amount of exercise I do each week since exercise, as my GP pointed out to me has *many many* benefits aside from simply burning energy. It has been proven many times that exercise increases flow of blood to the brain. Therefore I will make this morning walk a mandatory part of my daily routine, it simply has to become a norm!
Week 1 ( 8th – 14th Sep 2008 ) goals:
- Walk 45mins (every morning)
- 10×3 push-ups (every day)
- 10×3 sit-ups (every day)
- 10×3 supermans (every day)
- 500m swim (20 laps) – Wed Morning
Week 2 ( 15th – 21st Sep 2008 ) goals:
- Extra set of push-ups, sit-ups, supermans (eg. 10×4)
- Extra 250m swim – Wed Morning (e.g. 750m – 30 laps)
Week 2 ( 22nd – 28th Sep 2008 ) goals:
- Maintain routine
Week 4 ( 29th – 4th Oct 2008 ) goals:
- Maintain routine + extra 250m swim (e.g. 1km swim)
I’ll definitely need to review this plan, but for now i think it looks achievable with a bit of grit and determination. And I’m facing it, this is becoming a real health issue for me. My weight could give me a serious desease.
How to lose weight 104kgs, 119cm
Stop the press! My weight is officially out of control 
I have had a moderately bad week on the diet front. Two days were outright failures involving binge snacks and pizza. However, other days were good and I’ve even upped my exercise slightly by doing pushups and walking the stairs at work (10 flights once a day). I’m just amazed at how fat I’m getting.
I have to deal with this problem head on. My bad days seem to outweigh (a sad pun) my good days? I need to closely monitor both my exercise and diet for at least as long as it takes to drop below 100kgs.
Therefore I pledge to keep an accurate exercise and diet journal here on my personal blog, with weight and waist measurement recorded, until i reach double digit kgs!
Oh and to keep my word about putting a photo of myself up here, …..
man boobs
How to lose your man boobs
OK since giving up excessive eating and coffee recently, i’m glad to say I’ve shed another centimeter from my waist!! My circumference has now ’shrunk’ to a paltry 115cm. Yahoo! I’m mainly trying to become more healthy, but I’ve actually developed some serious man-boobs over the years and they are quite embarrasing. I want them off, it’s a mater of urgency!
Man boobs kind of sneak up on you. They just seemed to pop out after my stint living and working in London. Geez what do they put in those curries? I have heard various theories about getting rid of them. Some folk have told me that eating too much chicken is the problem, due to the steroids they pump into them to grow faster. Hmmm wouldn’t that make me stronger, like some atheletes? Who knows! My theory is this.
Man-boobs are lost by losing weight
Let me act as a kind of experimental hampster, to prove once and for all this theory. I will try to summons the courage to post a photo of my man-boobs online. This might mark my sole contribution to the world of online porn Please keep reading, I’ll wear a t-shirt.
