overview

 

recalculating: why we are hardwired to fail financially and how to overcome it

 

This book is designed to provide information and motivation to the readers. It is sold with the understanding that the author is not engaged to render any type of psychological, legal, or any other kind of professional advice. The content is the sole expression and opinion of its author. The author shall not be liable for any physical, psychological, emotional, financial, or commercial damages, including but not limited to special, incidental, consequential, or other damages.

 

 

 

recalculting toolkit

 

numbers game: THE BASICS OF FINANCIAL ANALYSIS

 

We will examine the building blocks of a process and provide you with a list of useful ratios and metrics to use during your quarterly recalculating process. These blocks will become the foundation of your tripod process and will be used consistently every quarter for financial review. We will break down each section of the tripod and explain why each ratio is relevant in the recalculation process.

 

 

 

the tripod

 

You must meet the criteria on every leg to ensure that the tripod supports a purchase or hold decision for each investment.

 

 

Leg 1: REVENUE AND EARNINGS

Revenue Change: (3 Months Ending DEC 31, 20XX (Current year) /

Revenue 3 Months Ending DEC 31, 20XX (Previous year)

 

We use the same calculation for Earnings Per Share growth.  Remember that earnings are equal to revenues, less all operating expense incurred by the company.

 

Earnings Change: (3 Months Ending DEC 31, 20XX (Current year) /

Earnings 3 Months Ending DEC 31, 20XX (Previous year)

 

 

Leg 2: BALANCE SHEET TESTS

Current Ratio:

Ability of Company to satisfy short term debts

(Current Assets / Current Liabilities = X)

 

Long-term Debt to Equity Ratio:

Measure of debt load

(Long-term Debt / Equity = X)

 

Payout Ratio: How much of a company’s earning are used for Dividends

(Dividend / Net Earnings = X)

 

 

Leg 3: VALUATION TEST

PEG Ratio: Relationship of PE Ratio to

Growth Rate of Earnings

(PE Ratio / Expected Five Year Growth Rate = X))

 

 

Emotional Mistakes When

Choosing an Investment

 

 

5

BUYING BECAUSE EVERYTHING IS “ON SALE”

You only make an investment when the company passes all of your tripod tests.  You don’t buy simply because a stock is down 10% today and “looks cheap”.  Any time you use words such as “I feel like” or “it looks like”  you are letting emotion make your investment decisions.  When the tripod tests are passed then you make an investment.

 

 

4

FALLING IN LOVE WITH A STOCK

Just because one of your stocks has increased substantially you still need to sell it when it fails your tripod tests.  Past performance does not exempt your stocks from tripod testing.  If you were building a track team you wouldn’t add a runner that set the record 10 years ago.  You want current competitors. Enjoy your gain, take it, and replace it with a current performer.

 

 

3

MAKING EXCEPTIONS

You have a stock in your portfolio that has been a strong performer and has now passed all of your tripod tests except 1 key test.  Say for example current ratio.  You then start to rationalize why that happened and decide to make an exception for this stock.  Exceptions can lead to losses because you are now accepting a stock that has not passed all your tests.  Many times I have seen very successful portfolio managers fall prey to losses when they make exceptions.  Be disciplined and follow your analysis..

 

 

2

OVER EXPOSURE

Occasionally we can end up with market situations where your tripod process ends up generating a list of stocks that are all from the same sector.  You want to make sure that you don’t overweight anyone sector in your portfolio.  Create a rule that you will follow, for example limit your exposure to no more than 20% in any one sector.  In a 30 stock portfolio that means you  would not have more than 6 holdings or 20% in any one sector.

 

 

1

BREAKEVENITIS

We talk about the X factor or what I called Breakevenitis in Chapter 8 of Recalculating. This is when you buy shares at a certain price and the share value has decreased significantly from where you bought at.  A stock has dropped from say $40 to $25 and you don’t want to sell until it hits $40 again.  However what you should be considering is that you have $25 right now and, forgetting how you ended up with $25, where would you invest it today.  Would it be in your current stock that maybe no longer passes your tripod test?  Or would it be in a new stock that passes your tripod test and has better potential for upside?  Forget the past, forget how you got to your current position, and invest the dollars you have available today into the best prospects for growth.

 

 

 

 

 

Dave entered the financial services industry in 1990, starting in the accounting sector where he specialized in business valuations and accounting information systems. The connections and experience gained from helping business owner accounting clients allowed for a natural transition to wealth management.

 

Over the course of his career, he has represented some of the industry’s largest firms in the Senior Vice President and Managing Director positions at both a bank owned firm and a leading national independent firm. A significant component of his experience includes a focus on business development involving the recruitment and training of Advisors. Dave has worked with hundreds of Advisors and thousands of investment clients. In his current role he consults with entities considering solutions for capital requirements and works with high net worth investors on early stage investment opportunities.

 

Dave received the Chartered Financial Analyst designation in 2003 and is an active member of both the institutional and retail investment industries.

email dave

anytime 24/7

 

call 813 579 1662

mon - fri | 8am - 5pm

 

about the author

david potter

 

 

 

100 north tampa street | suite 1600 | tampa, florida 33602

 

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