Tuesday, May 22, 2012

Summary of the Quality of Earnings Measures

The next step is easy and quite satisfying: sum all of the quality of earnings ratings to get a final figure*.  The bigger the number, the higher our confidence in what the financial statements are telling us.

I turned the sums into a chart:

You can see that CVX (5 out of 6) and BP (4 out of 6) look the best, but I would still consider the 3 out of 6's as well, depending how the other factors turn out.

If you were looking for a short candidate the securities with a negative number would be a consideration.

If you want to see the spreadsheet that drives the chart, click here:

Quality of Earnings Summary Spreadsheet

Our next step is to do some value analysis.  I just think it is common sense not to overpay for a stock.  When we over pay, we are letting our emotions get involved - objectivity is definitely a good discipline to develop when investing.  I think I could trace at least 70% of my investing errors to a loss of objectivity.

Besides that, the greater the difference between the price and the value of the security, the greater our risk.   I don't like excessive risk, I like to sleep well at night, which is why I like pessimistic markets, unfashionable sectors, and undervalued securities.

*To sum all of the ratings, I created a new spreadsheet and used the "importrange" feature to collect the rating for each measure.

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