3 SOF Strategy Disclosed

[David Randolph]

Finally here's the promised PDF document and the excel file I use to make the fundamental studies with the 3 year valuation model.

This thread will stay here for further strategic developments. Feel free to post opinions or contributions to improve the current strategy.

Thank you

[Garoh]

Hi David

This is great   


it really makes it very easy for us to understand ....

You'er doing great work everyday David I'm impressed with your strategy disclosed and fundmental study

thanks David 

[Se7en]

Very very interesting David!!! 

<Applaud>

[LSUJay]

I've enjoyed reading your evaluations and it's great to see what you are looking for... I've just begun investing my money on my own and have been very pleased with your picks to this point.

Keep up the great work and I'm looking forward to learning more and making money with your sound stock picking advice.

Great work and great site!!

[kpunarc]

wow...you are the man! <applaud> 

[Houlahan]

David! That was awesome.
Thank you sooo much. I learned a lot.

You described me ... "wait for a pull-back before I invest" hehe
And then I miss the "wave".

Thanks for your time and knowledge.

One area you did not cover was volume. Some stocks trade with very low volume. What is too low  or is this not a critical factor?

[nullzero]

David! That was awesome.
Thank you sooo much. I learned a lot.

You described me ... "wait for a pull-back before I invest" hehe
And then I miss the "wave".

Thanks for your time and knowledge.

One area you did not cover was volume. Some stocks trade with very low volume. What is too low  or is this not a critical factor?

I found what works well is look for stocks that trade more then $300,000 worth of volume each day on average. Also if the PPS is very high I would look for stocks that trade a min. of 50,000 volume on average each day.

Example Volume: 50,000 PPS: 10 = $500,000
               Volume: 300,000 PPS: 1.00= $300,000

[berloga]

Excellent work, David! Don't you think you should copyright protect it to prevent resale and reprinting?

Also, I have a question. When a stock becomes less convincing to hold over the long period and you decide to let go (like ARRS yesterday), would it be a good strategy to determine the exxit point based on the current technical reading of the chart? In other words, if there is no immediate need for the capital, should we set an exit target or put a stop limit order? For example, ASTI built a very nice short term speculative technical chart and is way above where we sold it. But is moves too fast, whereas ARRS is rather slow and may give us some extra $$$ if we set the exit point based on the technical analysis. What do you think?

[David Randolph]

Thanks for the encouraging words

One area you did not cover was volume. Some stocks trade with very low volume. What is too low  or is this not a critical factor?

Volume is not a critical factor in my opinion. It is a technical aspect, not fundamental. It has nothing to do with the value of the business so, over the long term, it has nothing to do with the stock price either.

Excellent work, David! Don't you think you should copyright protect it to prevent resale and reprinting?

Thanks berloga, I don't think this paper is that good

Also, I have a question. When a stock becomes less convincing to hold over the long period and you decide to let go (like ARRS yesterday), would it be a good strategy to determine the exxit point based on the current technical reading of the chart? In other words, if there is no immediate need for the capital, should we set an exit target or put a stop limit order?

That would be assuming I could predict the short term movements of stocks, which I don't believe I can (or better, I might believe I can, but reality over several years shows a different picture). If I waited to sell after I see it is no longer a hold, the stock might go up or down over the short term, since the short term is unpredictable. Why should it go up for us to take an extra points? It can also go down, and if sound fundamental analysis says it is a sell, it will probably go down.

For example, ASTI built a very nice short term speculative technical chart and is way above where we sold it.

Yes, my timing on selling ASTI was bad, but I believe my reasoning was right. That stock probably won't go above $11 for a couple of years, and if it does that, it will quickly reverse in my opinion (as it happened yesterday when it approached $11). I could have had some patience there ... the stock didn't even fit my current model, so I shouldn't have bought it in the first place.

But is moves too fast, whereas ARRS is rather slow and may give us some extra $$$ if we set the exit point based on the technical analysis. What do you think?

As I said it can go both ways over the short term, and when I sell a stock, it doesn't mean I expect it to go down, I just don't expect it to go up as much as it should over the medium term to be part of the Main Portfolio.

In a couple of weeks I expect the Main to be full invested and to have several candidates waiting for their opportunity to enter the portfolio.

Thanks for the suggestions

[stocky]

Great strategy, I will fine tune my CGAR values with each update suggestion. I think it will be very important if the CGAR values are based on the last closing price of the stock and not the price at which it was bought for the portfolio. You may have the same thing in mind but just wanted to point out.

[David Randolph]

Great strategy, I will fine tune my CGAR values with each update suggestion. I think it will be very important if the CGAR values are based on the last closing price of the stock and not the price at which it was bought for the portfolio. You may have the same thing in mind but just wanted to point out.

Yes, that's the idea, the CAGR value for each holding will change:

1) When the stock price changes;
2)  When one or more of the 4 working variables of the valuation model change

Hmm, this would involve some programming efforts (unless I insert the CAGR values by hand everyday, which wouldn't be a problem either).

I'll talk to Ramsburg about this, thanks for the suggestion to improve our service

[eggman11]

Great strategy, I will fine tune my CGAR values with each update suggestion. I think it will be very important if the CGAR values are based on the last closing price of the stock and not the price at which it was bought for the portfolio. You may have the same thing in mind but just wanted to point out.

Yes, that's the idea, the CAGR value for each holding will change:

1) When the stock price changes;
2)  When one or more of the 4 working variables of the valuation model change

Hmm, this would involve some programming efforts (unless I insert the CAGR values by hand everyday, which wouldn't be a problem either).

I'll talk to Ramsburg about this, thanks for the suggestion to improve our service

That is a great idea to update the CAGR on a daily basis and it will be easier to determine the "Top 3: for the 3SOF Portfolio".

[JKN]

Great work David...I appreciate all the hard work you've obviously put into this...uhh, and also hoping that we reap the benefits.

Question...a methematical model is just that, a simplified representation of a complex system.  I understand that you incorporated key variables that you know from experience (and perhaps other models) will affect the future.

What has the model been 'calibrated' against?  Have you been able to capture historical data from perfroming stocks that fit this model?  Would this perhaps be a method for 'tweaking' the model that ultimately leads to validation and ultimately, improved predictive capabilities?  Obviously, the point of the model is too as accurate as possible.

I am a scientist and we often attempt to mathematically model something, but the model always requires calibration and subsequent validation.  You iterate your inputs based on testing, refine the model, and iterate some more until you are satisifed with the performance.

[David Randolph]

Thanks for your questions and comments JKN

Let me see ... as you know I've studied what, 400 stocks over the last six months? Since I studied them with an historical perspective, as time went on, I was able to see what influences stock prices the most, what fundamental changes led to major movements in stock prices.

I came to the conclusion that changes in the next 4 variables have the most impact on stock prices:

1) Historical dilution, I call it the "dilution factor"
2) Revenue CAGR
3) Net profit margin
4) EPS multiple

So I built this model that, given my estimates for these 4 variables, show the expected results of the investment in that stock at that price. If the four variables are correct, that is, reality meets the expectation, results will be the ones the model says and no other.

Now, since these variables are so important (the only ones that matter according to this fundamental system), perhaps I should have a model to estimate each and every one of them before inserting them into the major model

The way I'm doing it now, I'm considering history with an emphasis on more recent data and also qualitative information like press releases, analysts estimates and other, to get to the numbers for those 4 variables. But I guess I could be much more scientific about it, and I guess this process would be your "calibration" phase?

But, there's no need at all to be right on estimates to make money. Why? Because the available public information lead to those estimates, so everybody will see more or less the same share price CAGR that I see, that's why they'll buy the stocks I'm buying. What we need to make money is to immediately know the long term impact of changes in the four variables of the model in the stock price. Imagine there was a very important fundamental change, the stock is up 10%, but we see the long term impact of that change is 200% (this often happens). Or, another example, we hold a stock, and the quarterly results are out, the stock opens down 5%, but we see the long term impact of that change will take the stock down a lot more than that, so it is an obvious sell.

Of course, it would be great to test all this on past data, but since the four variables are not estimated using a mathematical method, I don't think that's possible, since there's always qualitative information and personal judgment involved.

I'm not sure I answered your questions, thanks for your comments

[JKN]

Thanks Dave.  I know that much of your experience with the relevant variables drove the construction of the model and that the value of the model wiill be proved out over time.  I guess its just the scientist in me that is always interested in details and improving the predictive capabilities of models.

Again, I want to underscore the appreciation that I have for you and all of the 3SOF staff.  You have the time, ability, and DRIVE to help me make money. 

I have come to really enjoy the 'black box' investing that 3SOF allows me.  I don't worry or spend as much time over the market anymore and that allows me concentrate on other things...like work and family.

Kudos...