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Current State of Stock Research
There are over 50,000 stocks in the world, but the average Wall Street firm provides research for only 4% percent of that total. They ignore 96% of the world’s most innovative companies and undervalued investments. To fix this problem, a whole generation of data-driven companies used their computing power to masquerade as research firms. These “free research” providers sell low quality analysis full of colorful diagrams, crazy omens, and mysterious patterns to novice investors. The overall degradation of investing research led to the worst recession since the Great Depression. Quality investment research is meant to avoid these disasters.
How WikiWealth Improves Stock Research?
WikiWealth uses a value investing technique created by Benjamin Graham and featured in The Intelligent Investor. Our founder discovered a way to combine Value Investing with internet technology to create an upgrade to one of the most successful investing techniques in history. WikiWealth’s Value Investing 2.0 is realizes the full potential of investor knowledge by organizing the collective knowledge, thinking, and skills of millions of individuals from around the world.
What is Value Investing?
Value investing is an investing technique that values a company based on its ability to generate cash. The more cash a company can generate the more valuable the company becomes. For example, let’s say you are a street performer. During an entire day of performances, you make $27 dollars, but have no expenses. If you were a company, your stock price would be worth $27 dollars. If you worked every day of the year and made $27 on average, your stock would be worth $1,000 dollars. If you had $700 worth of expense, your stock would be worth $300. Companies work the same way. It’s how much money they generate that determines their price. When revenue is high than expected, the stock price increases. If expenses are higher than expected, the stock price falls.
What is Stock Research – Quantitative Analysis?
The quantitative analysis is one half of WikiWealth’s stock research report. WikiWealth’s quantitative analysis uses three methods to predict company value. Two of those methods are based on the cash flow method described above. A third method predicts company value uses a comparative method. WikiWealth describes all three approaches below:
- DCF Cash Flow Analysis: To project cash flow, WikiWealth use conservative estimates for each statistic that affects company results. We have to predict revenue growth, profits margins, expense ratios, capital expenditures, etc. that affect how much money each company takes home at the end of the day.
- Comparative Method: The comparative method predicts the fair value for a company by comparing the target company to similar companies. This is the same method used to find the selling price of a house. A house with two bedrooms and one bath, will sell for roughly the same price as a similar house in the same neighborhood with the same features.
- Buffett Method: The Buffett method predicts the fair value for a company based on the free cash flow method. The formulas to predict free cash flow are different from the ones used in WikiWealth’s DCF analysis. The Buffett method is simpler.
What is Stock Research – Qualitative Analysis?
Qualitative analysis is the other half of WikiWealth’s stock research report. WikiWeath's quantitative analysis focuses on a collection of important investor questions. These questions help to identify the intuitive value of a target company. Each questions focuses on the variables Warren Buffett finds important in his investment, so they may not find every undervalued company, but they will guide an investor towards the best companies with the least risk. For Example, it’s difficult to predict Apple Inc. financial results, but an investor intuitively knows that Steve Jobs creates great products and services. WikiWealth’s qualitative analysis determines if those factors help or hurt a company. Below are the six questions WikiWealth uses to determine qualitative value.
- Is the Business Simple to Understand?
- Is the Company the Dominant Industry Leader?
- Is the company's management pay in line with financial results?
- Does the business have significant barriers to entry?
- Are the company’s strengths greater than their weaknesses?
- Are the company’s opportunities greater than their threats?
How do I Use WikiWealth’s Stock Research?
WikiWealth’s analysis is best for value investors who want to buy undervalued investments. Speculators can also use our research to sell short undervalued investments. Investments with two buy ratings is best, whereas, two sell ratings is worse. To get a buy or sell ratings requires overwhelming evidence that an investment is good or bad, respectively. Additionally, the higher the investment potential the better the investment; however, investors must do their own homework before investing in any company.
Why Buy Undervalued Stocks?
WikiWealth uses a value investing technique called safety margin. Warren Buffett also uses this method to identify undervalued investments. The safety margins relates to the size of a moat that protects a castle. The larger the investment moat, the better the investment’s defense against making investment mistakes. WikiWealth identifies and ranks companies by the size of their investment potential, which is a numerical representative of a company’s moat.
Why Investing Seems Difficult?
When someone invests in a company, they own share of that company. We’ve already explain why shares increase and decrease in value, but not why investors have so much trouble buying and hold great companies. To explain this difficulty, we use a shoe example:
- Day 1: You see a pair of shoes selling for $100. You think to yourself, “I really love those shoes, but that price is too expensive… I would buy them if the price fell to $50.”
- Day 2: You see the same pair of shoes selling for $10. What do you do? Most people would buy the shoes. Some people would buy the shoes in multiple colors… for friends and family… and a few extras just because.
- Day 3: You return the next day to find the price of those same shoes jumped to $300 for some strange reason. What do you do? Return some pairs you bought during your exuberant shoeing spree the previous day, assuming you get the higher price.
Our shoe example explains how people rationally think about undervalued and overvalued investments. The problem is most people can’t relate buy shoes to investing, although it’s the same thing. When a stock price goes from $100 a share to $10 a share, most investors run for the hills. They think Armageddon struck the stock market and prices will continue to zero (read: Great Recession). This is crazy, especially if a stock is worth $50. Inversely, if the price goes from $100 to $500 per share (read: Google), everything automatically thinks it must be a great investment.
How WikiWealth Fixes Stock Research… What is Fair Value?
When something is undervalued, buy it. When something is overvalued, sell it. In our shoe example, the fair price for our shopper was $50. Investing requires the same analysis; unfortunately, it’s is much more difficult to do. Shoppers have vast experience shoeing, but few do investment analysis on a daily basis. Additionally, investment analysis requires thousands of formulas, data inputs, and calculations. What to do? WikiWealth calculates a target price for each stock. We also calculate an investment potential that shows how far away a company is from their target fair value price.
Stock Research is Completely Transparent
Our analysis is completely transparent, so if you have different assumptions, we encourage you to find a set of assumptions that makes sense to you. Experiment with our analysis, see how.