June 28, 2019

Why, when investing, some dangers are not so dangerous after all!



First things first, if you take to heart two things, which we repeatedly advise you to do, the dangers of investment decisions are never greater than the general risks of the stock markets:

  1. Concentrate on the big companies
  2. Diversify your investments into many different stocks

“Why”, you ask? One reason might be that many professional investors buy the same shares at the same time. Moreover, many executives and investors make sure that these companies perform as well as possible. In other words, you can't make “mistakes” that professionals haven’t done as well. A simple fact illustrates this: most banks recommend investing in index funds that buy all the stocks in the market. And if this approach is considered safe, it is just as safe to build your own diversified portfolio.

So the dangers are not so dangerous. And yet some advanced users might want to know how the Obermatt ranks can be interpreted even better. And this is exactly the kind of advanced users we are addressing here. For this purpose, we discuss selected case studies below.

Biotech and high-tech companies

For companies that invest in the future, sales and profits are primarily generated in the future. Also, these companies often pay no dividends. The Value Ranks based on current financial data are not particularly reliable in these cases. As we know, they relate the size of a company to its share price. But if the real size is only realized in the future, how can we measure it?

So you need to look for other sources to evaluate the future prospects of the stocks. As you can imagine, there aren’t many reliable sources of such predictions. That is also the reason why I usually avoid such hard-to-judge stocks. If I make an exception because I really want to be a part of a technology company, I always make sure these shares make up only a small part of my entire investment. This reduces the risk.

Companies affected by scandals

A prime example of this would be Volkswagen with its exhaust scandal or Boeing with its problems with the autopilot. In line with the bad news such scandals generate, share prices are falling, which increases our Value Rank. Until the next financial report, these losses are not yet visible in the balance sheet. And even then it could be that the losses in our share price and profit-related Value Rank will remain hidden because we only measure cash profits (so called EBITDA). This makes the price-related Value Rank more reliable.

In the case of VW, all this is not really a problem - the loss is clear and can be estimated. It also only reduces profit once. This means that only the company's current assets are affected and much less its future profit prospects. This of course only if the problem is solved eventually. So, scandals are not really a problem for Value Ranks. But since they are accompanied by a lot of bad news, you may still feel insecure to invest in such companies.

A problem might arise in the Growth Ranks though. They are likely to be misleading because past growth is a poor indicator of future growth, especially when something bad has happened. All the growth indicators we measure on revenue, profit, capital, and share price typically decline in such cases, leading to low Growth Ranks. However, in the case of one-off scandals, poor Growth Ranks are often only temporary and can recover quickly. In the case of scandals, Growth Ranks are even less reliable than usual. Remember: We usually use Growth Ranks only as additional information.

Obermatt ranks based on old data

Some companies publish financial reports only once a year. And even then, it can take another two to three months after closing until all financial facts are made public. For the Obermatt ranks for such companies, we use current share prices, but financial data that can be up to 15 months old.

This is not problematic for some of the data: sales revenue and capital growth usually remains similar over time. Although profits may be subject to fluctuations, their values can be verified with the more recent dividend payments. In this way, the dividend yield can still serve as a reliable indicator for forecasts. For Value Rank, old data is less of a problem.

Growth data, on the other hand, is different: growth for sales, profits and investment capital is often too old in such cases. There is only one Growth Rank that is usually up to date: the Stock Return. Thus, the Stock Return Rank is quite reliable, but the other Growth Ranks need to be reviewed.

When we list the Obermatt ranks on our website, the date of the most recent financial report used to calculate the Growth and Safety Ranks is usually listed. This way you can always be sure that the data is up to date enough for you to make a decision.

How can you be sure that Obermatt is using correct data?

Obermatt buys financial data from the world's leading commercial data providers - and yet mishaps can happen to the best of us. Since 2012, we have therefore been working to further develop and improve our methods of analysis. As soon as we discover errors in the programs, we correct them.

We are also in constant contact with our customers. If someone asks us questions about the data, we immediately follow up with them and check the data for accuracy and meaningfulness. If necessary, we correct data errors and improve our methods. So if you have any questions about our stock research, don't hesitate to ask us! We will explain how we arrive at our conclusions and potentially improve our methods.

You also have the opportunity to do a first check yourself: Go to reuters.com and check the financial data of the respective company (here I use Unilever as an example). I recommend Reuters because Reuters always lists industry averages (called 'Sector' and 'Industry' at Reuters) next to the financial data of the company. This allows you to check the direction of the corresponding Obermatt rank: If the Obermatt rank is above 50, the corresponding ratio should be better than the industry average. If you conclude that Reuters draws a different picture than we do, let us know. We'll investigate the situation in more detail and get back to you with our findings.

Fortunately, mistakes in financial data don't really play such a big role - nor do Obermatt's ranks. This is because share prices are reassessed daily by professional investors. When you buy a stock, you pay the market prices. The market price is what it is! ...regardless of what we at Obermatt say about it. Even if an Obermatt rank is wrong, you don't pay more. You always pay the same price as everyone else.

You have to think of Obermatt as a mirror for financial facts. We reflect the financial facts of a company to give you a more complete picture. Now you know how to use this mirror even better for your own investment decisions.



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