Simply put, the secret to making money in the stock market is to find the value of an asset and then pay a lot less for it.
Establishing the value of a common stock is quite a process. It’s certainly not something that the average investor could easily complete on their own. Even large institutional houses will only have the resources to place a value on a small section of the market.
In “Stocks, Strategies and Common Sense”, Dr Bart DiLiddo details exactly how he calculates the value of a stock. The book can be downloaded from the VectorVest program. Click on “views” and then on “special reports”. It’s also available to all who take a 5-week trial of VectorVest UK and USA.
The Power of VectorVest
The algorithm within VectorVest uses forecasted earnings per share, forecasted earnings growth, profitability, interest and inflation rates. The value of each share is calculated each day and provided in a simple and easy to read format. At a glance you can see if any share is undervalued or overvalued. It’s simple with a mouse click to use the Unisearch tab on VectorVest 7 to locate undervalued shares. This alone in an enormous edge in the stock market.
I am writing this after the close on Thursday 26th October 2017. Using the Unisearch tab on VectorVest I can go back in time and easily test my investment theories with cold hard numbers. For this example I have asked the program to go back in time 1 year, to the 26th October 2016. The only requirement of the Unisearch is that the share price is less than the VectorVest valuation. As a default, the program will sort these shares (that are undervalued) by the VectorVest…
Master Indicator VST
Master Indicator VST (Value, Safety of Earnings and Trend). Over the last year, the overall market has appreciated by 11% while the top 10 shares from the Unisearch have appreciated by 53%. That’s quite an edge.
Analysing the Value of a Share
VectorVest then provides a second measure of value called Relative Value (RV). Relative Value is a measure of the long term price appreciation potential. The calculation is simpler than that of finding value.
The first step in the RV calculation is to forecast the earnings of a share over the next three years only. We then make the following assumption. We assume that those earnings will be fully discounted into the share price at SOMETIME over the next three years. We calculate the share price at that future date and by subtraction work out the upside. This upside is then divided by what an AAA rated corporate bond would pay in that time. The result is RV.
If the RV of a share is 1.4, then the probabilities favour this share out performing an AAA rated corporate bond by 40%. If the RV is 0.9, then the probabilities favour the share underperforming a bond by 10%. Why would you wish to take a position is something as risky as a share if you could get a better return from a bond where the capital is at less risk than in a common share?
VectorVest rates an RV of greater than 1.3 as excellent.
At VectorVest, we favour undervalued shares and I personally only trade in undervalued shares with an excellent RV of greater than 1.3. That’s where the winners are. Contact us if you want to learn more.
Start your 5-week trial of VectorVest UK today and start the process of becoming a more confident and profitable investor.
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