What You Must Know to be Successful in Post GFC Years

Professor John Price

We can wish that the global financial crisis did not occur. We can wish that fewer CEOs were not so greedy and reckless, or that banks had better controls over predatory lending practices, or that economists hadn't got it so wrong!

But as investors all we can do is look at what happened and learn from it. In fact, properly managed, this will be a time when large fortunes are made just as has happened time and time again throughout history. For example, it was after the financial Panic of 1873 and the Depression of 1931 that huge fortunes were made by those who really understand the difference between great businesses and businesses cobbled together to line the pockets of a few.

People say that things have totally changed because of the GFC. That we now need to approach the market in a totally new way. For the majority of investors this is completely true. People made money in the past because of luck and a share market bubble. The old saying is that a rising tide lifts all boats.

Continuing with the nautical flavor, it is only when the tide goes out do we see who has been swimming naked. And boy, do we see a lot of naked investors, analysts and stock market gurus at the moment.

For instance, think of the legions of analysts and share market "gurus" who were recommending Babcock and Brown right up to its demise. But none should have been recommending it. Why? Because of its astronomical levels of debt, the most extreme I have seen in a major company. It was an accident waiting to happen. And what about the banks and institutional investors who poured money into A.B.C. Learning Centres while Eddie Groves was flitting around the world in his cowboy boots paying inflated prices for child care centres? Where was their due diligence? Did they turn off their brains?

What is needed now is a return to time-proven methods that have been shown to make money in all markets, bull and bear.

In this report I am going to outline some of these timeless investment principles that people forgot about over the past few years and got BURNED. More importantly, following these principles will likely set you up to make serious money going forward. These are just a few of the principles that are part of the membership of Teaminvest.

Debt, the Four Letter Word

Picking up on what was said about Babcock and Brown above, at the end of 2007 they owed a whopping $11.3 billion with equity of only $2.5 billion, a debt to equity ratio of over 450 percent! With this amount of debt 25 percent of revenue was needed to pay the interest bill.

Related to debt, another capital killer those companies with high debt but also with a high dividend yield. We all love to receive dividends. The problem is that companies know this and many will do anything to keep up the dividend yield, even borrowing more to pay the dividends. This is great for a while until the debt builds up and they have to cut the dividends. Then the dividends and the share price tumble. Teaminvest can show you how to filter out companies with high levels of debt.

Strong and Stable Growth in Sales and Earnings

Most people lose money in the share market because they don?t even invest in companies with any earnings at all, let alone growing earnings. They are hoping that somehow the company is going to turn around and start making a profit. Or perhaps they are just hoping that, for some mysterious reason, someone will be willing to pay more for the stock than they paid for it.

Of the companies on the ASX with market cap above $50 million, last year about 50 percent lost money. Here I am not talking about the share price going down. What I am saying is that the actual businesses did not make a profit. For the smaller companies the figure was even higher, about 75 percent lost money. Putting it bluntly, I think you are deluding yourself if you believe that you can consistently make money by investing in businesses that are losing money. Unfortunately most people do.

But successful investing requires much more than avoiding money-losing companies. It requires real businesses with real products and services that are in demand. It requires businesses with superior management that understand what they are doing. It requires businesses that stand out from their competitors. It requires finding companies for which you can be confident that the sales and earnings will continue to have strong and stable growth because this is what is going to drive the share price. Teaminvest can show you how this can be done with proprietary tools that I have developed.

High and Consistent Return on Equity

Every year Warren Buffett, the legendary investor and head of Berkshire Hathaway, says that he looks for companies with high return on equity and little or no debt. Return equity (ROE) is a measure of how well management is using the resources that they have. You wouldn't invest your money with someone who has a track record of only a few percent per year. But this is what the majority of investors do when they invest in companies that have low levels of ROE. Successful investments are based on high and consistent ROE year after year. Teaminvest will show you how to screen on ROE to identify the best businesses in every sector.

Companies with Management Who Put Shareholders First

One of the greatest investors of all time was Phil Fisher. In his ground-breaking book Common Stocks and Uncommon Profits he wrote that we should confine our investments to companies with management with a "highly developed sense of trusteeship and moral responsibility to their shareholders." When you know where to look, there are many indicators of boards and management of companies that put themselves first in terms of both income and job protection. One of the highlights of Teaminvest membership are the in-depth workshops that show you how to recognize and avoid these companies. The workshops consider question such as: What are the risks associated with competitors or new technology? Are the reports by the chairman and CEO informative and open? Is the remuneration report clear and intelligible with the remuneration aligned with the interests of the shareholders? Or are they go-for-broke schemes that reward management no matter what happens?

These are just a few of the principles that we look at with Teaminvest that will help all members get maximum profits in the years ahead. I warmly invite you to make an appointment to find out more details. Also, if you have any questions, please feel free to contact me.