Using the Earnings Yield as a Simple Valuation Screening Technique

earnings yield as a stock screenerOne of the reasons posts have been few and far between since the fall is that I have been transitioning the cash flow from debt repayment to savings and investments. If I wasn’t that interested in the art and science of investing, I would have picked 2 Vanguard ETFs, done regular dollar cost averaging over the next umpteen years, and called it a day (this is something I think most people should do as they will have no further interest in analyzing investments). However, I have an obsessive level of interest and curiosity in businesses and want to figure out the most optimal way to invest in businesses. Thus, a lot of time was (and still is) spent gaining knowledge. Let’s talk about one metric I use to screen potential investments: the earnings yield.

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A Simple Way to Look at Discount Cash Flow

TSMLFor me, value investing is the only logical approach to investing. I recently wrote about how the price you pay for an asset will determine its rate of return, using a condo as a simple example. It really is as simple as that: you need to determine the rate of return you are seeking and then calculate the appropriate price to pay for the cash the asset will generate into the future. Value Investors will talk a lot about discount cash flow analysis. I’ll show you a simple way to look at discount cash flow and how it connects to the price of an asset and the rate of return you are seeking. If you’re still feeling slightly confused, don’t worry, let me show you what I mean by using the ad revenues of this website to determine what price you would need to pay to purchase this asset’s cash stream.

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How Intelligence Increases Wipe Out Risk

gt advanced technologies abcChills ran down my spine. I had just finished reading about investors losing their entire life savings. These people had doubled down and wagered everything on a single company. A single stock. And they lost everything. This is a fascinating read. As I sifted through the carcass of an online trading forum where this drama played out over 500+ pages, I couldn’t help but notice the story and the lessons that unfolded as the days went by. The company was GT Advanced Technologies.

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Of Inflation and Investments

Of Inflation and Investments

My recent post about inflation got me thinking about holding cash versus investing. The image above demonstrates the extraordinary effects of inflation and investing. The black line shows the deteriorating effect of inflation on $1 and the red line shows the wealth generation of investing $1 – both over a 100 year time period. The $1 held in cash deteriorated from possessing a purchasing power of $20.52 in 1914 to just $1 in 2014. In contrast, a $1 invested in the S&P 500 in 1914 grew to $15,197.23 of purchasing power in 2014. In a nutshell what does this mean? Like a previous post I had titled Why You Need to Invest Your Money… you need to invest your money!

Why You Need to Invest Your Money

Why You Need to Invest Your Money

Blah blah blah, people are always going on about the importance of investing your money. If you weren’t given visual aids when this lecture occurred, you are forgiven for getting a glazed look over your face while you pretended to listen. I’ll keep this one sweet and short: IT’S SO IMPORTANT TO INVEST YOUR MONEY. Here is why in 2 graphs.

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