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My Invention - Fundamental Strength
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| Krypton |
Me and philliez are developing a website to showcase my new invention. It is an algorithm called, fundamental strength.
Here is a summary. And what might be on the home page. The algorithm is secret and I've only given it to a few people, but I plan on maybe patenting it as intellectual property. But what the website will do will be to spread the fundamental strength to an investing audience, make it well-known, and become just like the other popular metrics used by stock analysts. I will be publishing an index of fundamental strengths for hundreds of stocks initially, but I project me and my future team to maintain an inventory of thousands of fundamental strengths, with a subscription service for access to our personal stock picks.
I really hope we can make it a success!!
You guys are more than welcome to put any suggestions!!
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Heading: Welcome to StockGrade!
Body:
Welcome to StockGrade.com. Stockgrade was created to showcase a new metric similar to the relative strength which measures the strength of a stock relative to overall market. The new metric is called the fundamental strength. Like the relative strength, the fundamental strength is a measurement of the performance of a business model compared to a benchmark.
Specifically the fundamental strength measures in this way:
1. Company vs. Industry
2. Company vs. Market
3. Industry vs. Market
The objective of the fundamental strength is to:
1. Compare the company to its industry.
2. Compare the company to the overall market.
3. Compare the industry to the overall market.
The fundamental strength algorithm measures and informs for stock analysts the level at which a company outperforms or underperforms its industry and the market. Similar to the relative strength, the higher the fundamental strength, the more the company has outperformed its market and industry.
The theories behind fundamental strength are threefold:
1. High fundamental strength increases probability of excess returns on the market.
2. High fundamental strength reduces risk of losses.
3. When the fundamental strength is compared to the relative strength, an investor can evaluate fundamentals performance relative to stock performance.
Value investors can benefit from the fundamental strength because:
1. When the fundamental strength is higher than the relative strength, this is an indication of an undervalued security.
2. When the fundamental strength is lower than the relative strength, this is an indication of an overvalued security.
The beauty for the value investor is the fundamental strength algorithm will indicate whether a stock is cheap or expensive based on fundamentals. This will aid ANY investor in the most important decisions they make about money.
Before you buy, make sure your stock picks fundamental strength is high! Find out more HERE.
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What is the fundamental strength algorithm?
The fundamental strength algorithm is calculation of based on 147 different variables. Taking about 6 months to develop, the algorithm is a completely new metric that I have not seen anywhere online or in investing journals.
The algorithm evaluates the initial state of 147 variables into 1 end state answer to the entire evaluation. That end state of the algorithm, the answer if you will, is the fundamental strength. The higher, the better. Compare the fundamental strength of any company to that of its relative strength (a metric already widely published), the most novice investor can determine whether a stock is cheap or expensive.
The evalution is based on business model performance of the following variables:
Sales (Qtr vs year ago qtr)
Net Income (YTD vs YTD)
Net Income (Qtr vs year ago qtr)
Sales (5-Year Annual Avg.)
Net Income (5-Year Annual Avg.)
Dividends (5-Year Annual Avg.)
Current P/E Ratio
P/E Ratio 5-Year High
P/E Ratio 5-Year Low
Price/Sales Ratio
Price/Book Value
Price/Cash Flow Ratio
Gross Margin
Pre-Tax Margin
Net Profit Margin
5Yr Gross Margin (5-Year Avg.)
5Yr PreTax Margin (5-Year Avg.)
5Yr Net Profit Margin (5-Year Avg.)
Debt/Equity Ratio
Current Ratio
Quick Ratio
Interest Coverage
Leverage Ratio
Book Value/Share
Return On Equity
Return On Assets
Return On Capital
Return On Equity (5-Year Avg.)
Return On Assets (5-Year Avg.)
Return On Capital (5-Year Avg.)
Income/Employee
Revenue/Employee
Receivable Turnover
Inventory Turnover
Asset Turnover
I will be turning this into a service, and hopefully retire by the time I'm 30!!!!!!!!!!!!!!!
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Example:
FS Scale: 1 - 100
Relative Strength (RS) Scale: 1 - 100
Coach Inc. (COH), the maker of the luxury apparel brand most of us are familiar with has an FS of 85.
If the RS is 90, the stock is expensive. If the relative strength is 50, the stock is cheap. This makes evaluating the value of almost all stocks really easy. Just compare the two numbers. And I publish the FS for the appreciative analysts! |
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| mndeg |
| msn and vectorvest plus many other services already do it |
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| Krypton |
| quote: | Originally posted by mndeg
msn and vectorvest plus many other services already do it |
Well, I'll be the new guy on the block then right? Msn doesn't do this. Vectorvest looks like they do, but this is just going to start out as a hobby project. I'll even make it free. |
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| Capitalizt |
| You should post your stock picks openly based on the info and allow the public to track your record...If this model works and gets a good return, THEN you can make your picks a secret, and start charging for the info ;) |
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| Krypton |
| quote: | Originally posted by Capitalizt
You should post your stock picks openly based on the info and allow the public to track your record...If this model works and gets a good return, THEN you can make your picks a secret, and start charging for the info ;) |
Good idea. I wasn't going to charge anyways. Only unless we start getting a good visitor flow. |
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| Krypton |
| quote: | Originally posted by mndeg
msn and vectorvest plus many other services already do it |
I have seen "graded stocks" from morningstar and other services. But no other service provides a "fundamental strength" as a comparitive to the relative strength. I will be the first to develop, publish, and market such a metric. |
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| atbell |
I have a feeling that there might already be something similar to this around. Have you done much research on it? I think there have been many attempts to develop computer aided "formulas" for investing. I'm sure that taking a look at ones that have failed will strengthen your model.
I've been reading "The Age of Fallibility" by George Soros recently. It would probably add to your thinking. I think he uses a similar type of fundemental analysis to make his money.
I'm going to echo Capitalizt in pointing out that you've got to be slow to make your findings public. If you're consistantly right, what ever you are doing is worth a lot of money, as in not just a lousy couple of million.
A friend of mine is a day trader in Montreal and I had a chance to talk with him once. He pointed out that some 70% of new traders go bust quickly (a matter of months) and the ones that do usually think they know something that others don't. |
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| Krypton |
| quote: | Originally posted by atbell
I have a feeling that there might already be something similar to this around. Have you done much research on it? I think there have been many attempts to develop computer aided "formulas" for investing. I'm sure that taking a look at ones that have failed will strengthen your model.
I've been reading "The Age of Fallibility" by George Soros recently. It would probably add to your thinking. I think he uses a similar type of fundemental analysis to make his money.
I'm going to echo Capitalizt in pointing out that you've got to be slow to make your findings public. If you're consistantly right, what ever you are doing is worth a lot of money, as in not just a lousy couple of million.
A friend of mine is a day trader in Montreal and I had a chance to talk with him once. He pointed out that some 70% of new traders go bust quickly (a matter of months) and the ones that do usually think they know something that others don't. |
I've been researching, and I have not seen a number that is a measurement of strength of the fundamentals compared to a benchmark (like the S&P500 or industry). The method of using the fundamental strength to compare against the relative strength; I have not seen it anywhere in any service or website. Either they keep it secret or its not out there. Obviously there is a hole out there that I'm hoping to fill with this one.
WHat I will be making public is the fundamental strength of each company I have evaluated. Hopefully, if I get a small staff being paid for each evaluation, I could have thousands of stocks with fundamental strenght being published on my website. What I will not be doing is releasing the formula used to get the fundamental strength.
Your friend in Montreal is right. Most traders do go bust. But I am an investor. My system of stock analysis is for the investor. Traders buy and sell according to volatility of a stock, without much thought as to the underlying business. Investors invest in the underlying business rather than the stock volatility. So my concentration is on the performance of an underlying business rather than the performance of a stock.
What I'm excited about is that my formula compares the performance of a business to the performance of the stock. It is my belief, and the belief of millions of investors that stock performance and business performance can, and many times, is not exactly coordinated. That is where bargains can be had, and that's what I do. |
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| atbell |
| quote: | Originally posted by Krypton
What I will be making public is the fundamental strength of each company I have evaluated. Hopefully, if I get a small staff being paid for each evaluation, I could have thousands of stocks with fundamental strenght being published on my website. What I will not be doing is releasing the formula used to get the fundamental strength.
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Sounds like a good plan. I'll have to think on it a bit more to give some decent comments.
| quote: | Originally posted by Krypton
Your friend in Montreal is right. Most traders do go bust. But I am an investor. My system of stock analysis is for the investor. Traders buy and sell according to volatility of a stock, without much thought as to the underlying business. Investors invest in the underlying business rather than the stock volatility. So my concentration is on the performance of an underlying business rather than the performance of a stock.
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This is a very good description of the differences. I've got a bit of a chip on my shoulder about day trading because I feel it distorts the whole functioning of the market. I did hear a decent argument for it though, which is quite simply, if you can do it why wouldn't you. I've yet to come up with a really good argument against it.
| quote: | Originally posted by Krypton
What I'm excited about is that my formula compares the performance of a business to the performance of the stock. It is my belief, and the belief of millions of investors that stock performance and business performance can, and many times, is not exactly coordinated. That is where bargains can be had, and that's what I do. |
That's definately an exciting prospect.
I've got the term that Soros uses to describe the situations that have made him rich. He calls them "far-from-equilibrium" conditions. This makes complete sence in clasical economic terms. He spots situations where the market, through incomplete knowledge, is extremely off balence (read: far from it's theoretical market clearing price where supply and demand curves intercept). Then Soros would place his money in such a way to take advantage of the market correction he anticipates.
Your system is similar. If you've got this right then a more technical description of what you are doing is that you've developed a way to help identify stock prices that are far from equilibrium because of the imperfect knowledge about the business.
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PS. I still want to go over your spread sheet but I'm in the middle of moving so it won't be for a while now. |
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| Omega_M |
| Why don't you speak with some of the professors in the finance/economics department and see if they have come across similar work in the literature ? |
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| Krypton |
| quote: | Originally posted by Omega_M
Why don't you speak with some of the professors in the finance/economics department and see if they have come across similar work in the literature ? |
I am testing it on marketocracy. So far, it's outperforming everyone in the club. Last week I went to a technical investing group, all retirees :p, but I did a little presentation showing my system, and they several of them asked for my email address. These are people in their 60's and 70's who want my 20 year old advice! |
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| Krypton |
Ok some improvements...
How I use fundamental strength:
1-59 = F Strong Sell
60-69 = D Sell
70-79 = C Hold
80-89 = B Buy
90 and higher = A Strong buy
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Additionally, I've created a new metric. It's called gamma. I chose the third letter in the greek alphabet to represent fundamental strength (FS) divided by relative strength (RS).
FS / RS = Gamma
The higher the gamma, the better. Generally, you want a gamma of above 1. Multiply the gamma by the current stock price, and you will get the value of the stock based on business fundamentals.
So, for example...
Stock A has a fundamental strength of 80 meaning the company is generally about 80% better than the rest of the industry and market in terms of historical performance. Stock A also has a relative strength of 60, meaning the stock has done better than 60% of the market. Divide the FS by RS, {{{ 80/60 = 1.3 }}} Stock A's current stock price is $20 a share. Multiplying the stock price by the gamma, {{{ 20 x 1.3 = 26 }}} So the if the stock price was priced at in terms of fundamental data based on historical performance of the business compared to the stock, the price should be $26. Now at the current price of $20, that is around 8% discount, which is a bargain, a sale, a good deal. That is how my quantitative strategy runs. Continue watching my funds as I incorporate gamma into my buy/sell lists for december. 8% is pittance to the discounts I'm looking for. I'm actively looking for 20+% discounts on stocks, and have found about a couple dozen. Given 1 year of inception, I'm sure I'll handily beat the market by a wide margin!!:)
Out of the 1000+ stocks I've looked at, only about 3 dozen, maybe a little more, are both fundamental excellent AND discounted by my analysis. According to my strategy then, the majority of the market if hogwash, the rhelm of short-term traders and speculators. Thank god there are systems such as mine and the DCF method that help us fundamentals-minded investors stay sharp on finding good deals. |
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