have
low or even negative Betas.
Given this dilemma, I use
Betas with a grain of salt.
I prefer to analyze absolute
price behavior to measure
risk.
Absolute price behavior
not only provides an unequivocal
measure of volatility, but
it allows one to assess
risk in relation to the
stock’s price history. Since
all things tend to move
toward a mean, stocks which
are above their price moving
averages are more likely
to move down, and stocks
which are below their price
moving averages are more
likely to move up. Therefore,
a stock which has moved
well above its price moving
average is riskier than
one which has moved well
below its price moving average.
LONGEVITY.
It’s better to deal with
the devil you know, than
with the one you don’t.
All other factors being
equal, there’s less risk
in dealing with a company
with a long track record
than one which is brand
new. Young companies offer
some of the best investment
opportunities, but they
also bear potential pitfalls
that could be fatal. Regardless
of how good a stock looks,
it’s risky if it hasn’t
been traded for at least
5 years.
DIVIDEND
HISTORY.
A company doesn’t have to
pay a dividend to have a
very safe stock. But if
it does pay a dividend,
it must maintain or increase
the dividend without exception.
A cut in dividend is a black
eye for any company, and
reflects poorly on its management
and stock safety.
DEBT/EQUITY
RATIO.
The US government allow
companies to deduct interest
payments as a business expense.
That’s nice, but some companies
overdo a good thing. They
load up on debt beyond the
point of being able to report
any net earnings. Time Warner
is a classic example of
such a company. Its businesses
are very good, but its balance
sheet is a mess. Its Relative
Safety rating in the |
|
VectorVest system is well
below 1.00 on a scale of
0.00 to 2.00. Beware
of companies with excessive
debt. Don’t be fooled by
the line about valuing a
company based upon its cash
flow. A company that can’t
report positive earnings
after interest and tax payments
is in big trouble no matter
how you slice it. Safe stocks
belong to companies with
low debt/equity ratios.
OTHER
FACTORS.
The items cited above are
only a short list of the
many things that may be
considered in assessing
stock safety. Anyone who
has studied accounting or
read Benjamin Graham’s book,
"The Intelligent Investor,"
knows that there are many
other things to look for.
Regardless of how one might
assess stock safety, it
is important to do it systematically.
Services such as VectorVest,
Value Line, and Standard
and Poor’s use systematic
approaches to assessing
stock safety. Investors
should always factor risk
into their investment decisions.
USING
STOCK SAFETY.
Mr. Graham spends a lot
of time in his book, "The
Intelligent Investor," discussing
the difference between investing
and speculating. Basically,
this difference is a matter
of using knowledge to reduce
risk to the point where
the odds of winning are
in your favor. Mr. Graham
approaches the reduction
of risk by advocating the
purchase of undervalued
stocks.I
approach valuation and safety
as separate issues; then
tie them together. In the
previous chapter, High Growth
vs. Low P/E stocks, I showed
how valuation and stock
safety are linked together
in assessing a stock’s long
term investment potential.
Both factors also play key
roles in establishing Buy,
Sell, Hold recommendations.
Intelligent investment decisions
cannot be made without including
a knowledge of stock safety.
Do not let stock safety
be your missing link. |
