My strategy is to try to buy shares of significantly distressed companies, and sell them when they’ve been looking better somewhat.
To pick a stock, I need extensive research. It is critical for me to understand a company’s value before I invest a penny. Graham’s “margin of safety” is the key for my stock picking. Conservative investigation of the risk of downside of the stock helps me protect my permanent loss of capital. Foreseen catalysts are plus, but outrageous price (vs value) is sufficient.
I do care about the level of general marker and always be aware the true value of market. I always conduct top and bottom analysis and understand the trend of economics and industries. However, there is no restrictions on potential investments. They can be micro to large-caps, tech or non-tech, VIX, Options. Whenever there is outrageous bargains, it becomes a candidate for my portfolio. I have found, however, that in general the market delights in throwing babies out with the bathwater. So I find out-‐of-‐favor industries a particularly fertile ground for best-of-breed shares at steep discounts.
To Determine the discount:
I usually focus on free cash flow and enterprise value (market capitalization less cash plus
debt). I will screen through large numbers of companies by looking at the enterprise value/EBITDA ratio, though the ratio I am willing to accept tends to vary with the industry
and its position in the economic cycle. If a stock passes this loose screen, I’ll then look harder to determine a more specific price and value for the company. When I do this I take into account off-‐balance sheet items and true free cash flow. I tend to ignore price-earnings ratios. Return on equity is deceptive and dangerous. I prefer minimal debt, and am careful to adjust book value to a realistic number.
I also invest in rare birds — asset plays and, to a lesser extent, arbitrage opportunities and companies selling at less than two-thirds of net value (net working capital less liabilities). I’ll happily mix in the types of companies favored by Warren Buffett — those with a sustainable competitive advantage, as demonstrated by longstanding and stable high returns on invested capital — if they become available at good prices. I also like to use 2+yrs LEAPS to invest if it is available.
I prefer to buy within 10% to 15% of a 52-week low that has shown itself to offer some price support. That’s the contrarian part of me. And if a stock — other than the rare birds discussed above — breaks to a new low, in most cases I cut the loss.