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A-Primer-On-Value-Investing-By-CTWU

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Stock Market as a System-1. Stock Market is a Complex Adaptive System 2. In order to beat the System, you have to be outside the System—This is the core reason why Technical Analysis, Marketing Timing Prediction and Momentum Investment would fail most of the times. 3. Graham essentially established “Intrinsic Value” and “Margin of Safety” as “Outside the System” parameters to aid investment decisions. Magic Formula’s “Earning Yield” and “Return on Capital” are also “Outside the System” parameter
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  Stock Market as a System--     1. Stock Market is a Complex Adaptive System 2. In order to beat the System, you have to be outside the System This is the corereason why Technical Analysis, Marketing Timing Prediction and Momentum Investmentwould fail most of the times. 3. Graham essentially established “Intrinsic Value” and “Margin of Safety” as “Outside theSystem” parameters to aid investment decisions.  Magic Formula’s “Earning Yield” and“Return on Capital” are also “Outside the System” parameters.  4. Stock Market has been known to portray mainstream investors momentum led systemidiosyncrasies that often lead to short to medium term under-pricing or over-pricing of stocks relative to their intrinsic values .  Intelligent investors attempt to takefull advantage of these system anomalies.                                        More notes:  1. Intrinsic Value determination is hard; Business Model Quality Analysis Framework inconjunction with certain key financial parameters can be a big help here. “Return onCapital” is the most important parameter here . 2. Margin of Safety implies adopting the Contrarian type of investment strategy .  Youhave to bet against the market mainstream crowds at times when the stock market isoverly optimistic or pessimistic. “Earning Yield” is the most important parameterhere.  You invest in stocks when their earning yields are high, and sell stockswhen their earning yields are low . 3. Per John Neff, the Stock Market tends to price stocks based on the P/E ratio, sodividends are kind of being free gift to the investors .  Also, companies which offerstable dividends tend to perform better in sustainable earning power over the longer term.So dividend stocks deserve some more weight in portfolio decision.                                          C.T. Wu’s Magic Formula Dividend:  1. Low P/E (<= Sector Stocks’ Historical P/E Average)2. High ROE (>=15%) and High ROA (>=12%)3. Good dividend yield (>= 10-YR T-Bill Rate) and track records4. Good EPS Growth Rates (>=15%) track records and future prospect5. Low debt/equity ratio (<=25%) Note:  (1) &(2) are the Magic Formula for buying good companies’ stock cheap (3) is from John Neff’s perspective on Dividend advantage. (4) is based on the fact that the main driver for stock’s value appreciation in the long term isits EPS growth power, which is derived from David Dreman’s Constrarian Strategy perspectiveand his new definition for investment objective and risk minimization. (5) is just to insure that the company’s financial risk exposure is minimized.    
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