You’re Doing Great Bud
If one were investing simply based on attributes – cheapness (low P/E I only use low P/E as a good starting point for further investigating a stock. P/E is a widely used measure in stock valuation and there are many research reports supporting low P/E as a good measure of value. For some time I have been seriously considering the question, “Can Value investing knowledge be spread more effectively through Webinars? Time is perhaps the most important element in building or rebuilding a portfolio. The value of an apartment building is determined by the monthly rental and mortgage payments. The above is what a multiple tells you about value. If the stock price rises from 40 to 42 the inner value (stock price-strike price) has risen from 1 to §3.
Since the beginning of 2013, PG’s price is up 23% compared to 50% for the S&P 500. In a bear market, however, Royal Blue chip stocks act like parachutes. For stock funds, the index used is usually the S&P 500, which as a beta of 1.00. A fund with a beta of 0.85 means the fund might go up or down only 85% as much as the index. Royal Blue chip stocks are the reason our Cornerstone portfolio was down by far less than the S&P 500 in the 2008-09 financial crisis. The chances that a Royal Blue chip company could go out of business is extremely slim. This will distort its multiple compared to a similar business which has grown organically (organically generated intangibles don’t need to be recognised or amortised for accounting purposes). Secondly, I would also add back amortisation expense to EBIT for my multiple measure. In summary, the best multiple to use depends on the specific circumstances of the company being investigated. It only makes sense to test a theory in real-world circumstances to see if it will be effective.