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Barry North
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Barry North is a successful full-time share trader, owner of North Capital Management and the founder of free investment website The idea for came from a desire to share his successful trading strategies and the stock-selection techniques he uses every day on US... More
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  • Research Reveals Secrets Of Warren Buffett's Success

    An article in The Economist's September 29th - October 5th issue, has revealed the secrets behind Warren Buffet's stock picking prowess. Research by New York University and AQR Capital Management, a hedge fund adviser; say they have identified the main factors that have driven his success over decades.

    Turns out there are two main factors. Buying stocks with a low beta and a cheap source of funds by drawing on the floats maintained by the insurance companies he owns.

    It is a popular misconception that low beta equals low return. A good example is this excerpt from the

    Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk. Read more:

    The economist article goes on to say that pension and mutual funds are barred from borrowing, so opt for higher beta stocks hoping for higher returns, making their portfolios more volatile. With funds chasing higher beta and ignoring lower beta stocks, the latter become under-valued and vice versa. So the astute Warren is using cheap money to buy undervalued stocks.

    We thought we would do a test on the 986 stocks that we cover at, beta range 0.17 to 2.93, and we have found it to be true. Lower beta stocks do out-perform their more volatile counterparts and we have found the optimum level, to draw the line. More on that later.

    What was also interesting is what we found when we grouped stocks by our recommendation and their average beta.

    Value Buys averaged a 1.06 beta, non-value Buys 0.96 and Holds 0.94, had an overall average of 0.99, so lower by .01 than the S&P500. These are stocks we like and like Warren we are leaning towards lower betas.

    Sells 1.25 and *no opinion offered 1.39, had an average of 1.32. These two, for varying reasons, are not wanted, at least not by our modeling and the much higher beta would suggest Warren doesn't want them either.

    * These stocks have a safety rating (NYSE:SR) greater than 4, our cut-off point.

    Now to our test. We took the 986 stocks, their respective betas and their *2yr ARR then sorted by beta low down to high. To smooth data, we ran a moving 200 over the ARRs. As the chart below shows, the average ARR constantly rises and began to accelerate once 1.00, the index average, was past and continued to rise more steeply after that. So there you have it, stocks with a beta lower than 1.00, all other aspects being satisfactory, are likely to be good additions to your portfolio.

    * This Annualized Rates of Return (NYSE:ARR) period closely corresponds to the period we do our beta calculation over.

    Nov 07 1:08 AM | Link | 3 Comments
  • No Dividend, No Debt Equals High Growth

    Quite often the first thing would be stock buyers ask, is what dividend does it pay? Not unreasonably they feel that from day one they will be eligible to receive dividends, which over time will defray their original outlay and reduce the real cost of the investment. Hard to argue with that, but we will.

    In our experience, although not always, dividends are paid by companies that have no better avenue to re-invest the cash in their own company. They are out of ideas, so give money back to shareholders who in turn "invest" either in low single digit savings accounts or try to find another stock that will give them capital growth, as the one they are in certainly won't do it.

    Companies with no debt are attractive, as apart from the obvious low risk benefit of no debt, they generate so much free cash flow that they simply don't need to borrow.

    Taken together what you have is a company generating strong free cash flow and knowing exactly what they will do with it.

    To find these rare stocks we ran our screening filters through the 932 stocks we currently analyze, setting Dividend Yield and Debt to Equity columns in our Watchlist manager to zero. We found less than 8%, or 72 to be exact, fitted the bill.

    We were not overly impressed with the group's average Annualized Rate of Returns (ARRs). Their 3yr, 5yr and 10yr percentages came out at 21%, 11% and 21% respectively. Certainly better than the 860 non qualifiers managed; which was 11%, 1% and 10% respectively.

    There had to be a super group within the sample of 72, so we added two of our screener filters; Performance Ranking (PR) and Safety Rating (NYSE:SR) of less than 3, i.e. superior to the average setting of 4. We now had our super group consisting of just three stocks.




    Sh / Lng Tr























































    Note both the high Free Cash Flow (NYSE:FCF) and Return on Total Capital (ROTC) numbers. They have the cash and they know how to use it.

    NB. We should point that we have had Monster Beverage Corp (NASDAQ:MNST) as a Sell since July 19th 2012 when it closing price dipped below its 63dma. Since that call the company disclosed after hours on Thursday August 9th, that an unnamed state AG is investigating its namesake drink line. This caused a 10% fall the following day and it has been fairly stable around that price since. For us, to re-establish a growth trend, the price would have to rise to over $61.60

    Disclosure: I am long AAPL.

    Oct 04 8:48 AM | Link | Comment!
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