November 15, 2019

Obermatt ranks are signals - not recommendations

The Obermatt ranks make investing easier because the ranks are easy to read: The higher the rank, the better the financial characteristics of the stock. Nevertheless, ranks may be misunderstood because they are sometimes interpreted as recommendations. But they are not.

Obermatt ranks are signals and not recommendations. Be careful here: "traffic lights" are a false association: If the traffic light is red, it is an order to stop. Obermatt ranks are neither an order to buy or to sell.

The better association is a storm warning signal. On Swiss waters, a storm warning signal that blinks forty times a minute means that a storm is brewing. For most people on the lake, this means heading to safety as quickly as possible. But when Obermatt CEO Dr. Stern was a young sailor, the storm warning signal meant something completely different: finally wind! He hoisted his sails and set out into the lake. For him, it was not a warning, but an invitation.

Therefore, storm warning signals must be interpreted because they do not give clear instructions for action. That is also the case with the Obermatt Ranks. A good Value Rank means that the company is rather cheap compared to its size. Anyone who is convinced about the future of the company has good reasons to buy. But those who think that the company will have difficulties act differently. In this case, the good Value Rank could only be a reflection of these future difficulties, so not a good reason to buy. Read more about this in the insight on the Value Ranks.

The safety ranks are also more complex than you might think. A good security rank means that the company is financed relatively securely. If a downturn is expected, this is certainly a reassuring signal. However, if you believe in strong growth, then higher debt is better because more of the growth remains with the shareholder, the owner. So for a bright future, deep security ranks are not a problem. You can read more about this in the Insight on Safety Ranks.

The growth ranks are not recommendations either, because they only show what has happened in the past and, as you know, this is not a particularly reliable indicator for the future. Read more about this in the insight on Growth Ranks. The Obermatt Ranks are therefore signals and do not yet say what you have to do as an investor. You must decide for yourself what significance the ranks have for your specific investment.

How does Dr. Stern deal with this? For him, the ranks are a good filter for finding stocks that already have desirable financial characteristics. If he chooses from an Obermatt Top 10 list, then he already has a higher chance of a good return.

Ranks are also easy. Hermann doesn't have to worry about the numbers and only needs limited financial expertise to understand the rank.

He never uses the ranks for trading (frequently buying and selling stocks). This is almost always a mistake and can be very costly. So he doesn't sell stocks even if they have a low Obermatt Rank. He sells stocks primarily when he needs the money. This is by far the most important reason for selling a stock, much more important than the historical price trend or the latest news because both have already past and therefore are included in the price of the stock. Obermatt Ranks are signals, not recommendations.

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