April 26, 2019

What are Value Ranks and how can they be used?

How can the Obermatt Value Ranks be used for investments and subsequently converted into money? First, we need to know what Value Ranks are.

Value Ranks relate the size of a company to its price. That is, companies that are cheap compared to their size get good Value Ranks and those that are expensive get bad ranks.

So it is important that we know how to measure the size of a company because if we know the size of the company, we can compare it to the price (known as the "market value" of the company). The principle is:

Companies of a similar size should have a similar price.

Remember this principle! Why should you pay more for a company if comparable companies are cheaper?

Stock prices, however, often violate this principle: some are expensive for the size of the company, others are cheap. But why? The decisive factor is the future - and only the future!

A company with a bright future in which it can easily grow, has a higher price than a company with a difficult future. The higher price is justified due to the larger size of the company in the future.

But when is a share price considered "cheap" and when "expensive"?

The more you pay for a certain size company, the lower the Value Rank because you get less value for what you pay. So a company with a bright future and a high price has a low Value Rank and a company with a difficult future and a low price will have a high rank.

And this is where your investment challenges lie: Not all high Value Ranked companies necessarily have a difficult future and not all low ranked companies have a bright future. You must now decide for yourself whether you believe these facts are justified or not.

What does this insight mean for you as an investor?

You have to relate the Value Rank with the future of the company. You must decide whether it is justified.

Is the future of a company with a high Value Rank truly very bad and should the price for the size of the company really be so low? Or, to put it another way, is the future of a low-value company (low Value Rank) really that good?

To answer this question, you need to take a closer look at the company and then decide for yourself, because only if you don't think the good rank that reflects a low price/size ratio makes sense do you have a reason to invest. In other words, a high Value Rank means that the company is cheap. If you think this should not be the case, you have reason to invest.

And the opposite is also the case: if a stock has a low Value Rank and is expensive, it does not automatically mean that you should sell it. The high price may be justified by bright future prospects.

Let's look at a few examples:

A Value Rank of 50 means that the company has an average share price. A Value Rank of 75 means that this company is cheaper than 75% of all comparable shares and a Value Rank of 33 means that one-third of all comparable companies are more expensive and two thirds cheaper.

The Value Rank gives you a good sense of the price you pay for a stock: If you have an average company, any value over 50 is a good reason to buy. If you have an excellent company, it may be expensive and the Value Rank is low. If you have a rank of 25, the company must not only be good, it must be one of the top 25% of companies in the future. If you have a Value Rank of 75, the company is cheaper than 75% of all comparable companies. This means that if the company performs better than only 25% of comparable companies in the future, then this will already be a good return for you.

The bottom line is that companies with a high Value Rank will have to achieve far less in the future than those with a low rank.

How to Use the Value Rank

Use the Value Ranks as an estimate of the price! High ranks mean low prices and low ranks mean high prices. In the next step, compare the price with what you expect from the company. If you have reason to expect more than the Value Rank suggests, then you should invest! If you see a good Obermatt Value Rank and think the company is at least average, buy the stock. If you see a bad Obermatt Value Rank and think the company is more or less average, sell the stock.

Dr. Stern himself uses Value Ranks as follows

When buying shares: he looks for companies with high Value Ranks. Most of these companies should have a problem or even more than one problem because their share price is so low. If he doesn't find any relevant evidence and at the same time believe that the future of this company is intact, then he will buy it.

When selling shares: He is looking for companies with a low Value Rank in his portfolio. Most of them should have an exciting future because only then would their high price be justified. If he finds such highly valued stocks which don't seem particularly exciting or even average, he sells them.

Investment decisions based on Value Rankings always require two things: the Obermatt Value Rank and your personal assessment of the future. This forms the basis of your "investment story", which has a great advantage over other stories: it has not been told many times before, because you created the story yourself and therefore you are to one to profit from it.

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