Picking up from the last post, I will talk about the three ways to use Gross Profit to make superior returns.
Note however, that you are looking to invest for the long-haul and must have the time period and liquidity to do so.
The sound reason for increasing the percentage in common stocks would be the appearance of ‘bargain price’ levels created in a protracted bear market. Conversely, sound procedure would call for reducing the common-stock component when in the judgment of the investor the market level has become dangerously high.” Benjamin Graham.
The way I do it is by putting 50% of my money in stocks when they are at all-time highs. The other 50% are left liquid. I’d then increase my stock holdings by 10% increments with every 10% fall in the index.
With that in mind, let’s discuss the three ways:
1) Investing in stocks who are at a low price to gross profit ratio compared to their historical average.
This is a very hard thing to find by the way in bull markets like this one. You basically get the Gross Profit of the last 10 years. After that, you get the price highs and lows for the following years. Once you have the data, you look for the lowest and highest ratio you had over that period and compare it to the current ratio. You want to invest when the ratio is at a new low or 20% above the 10-year low.
The results of this method, once you do them, are actually counter-intuitive. For example, Samsung (which has a PE less than 10 and is actually a buy if you apply the Graham number or formula) is still some way away from being a buy according to this level. If you really want to know, buying the SMSN ticker can only be triggered below $650.
Pfizer, which has a PE of 11, is more expensive than Facebook using this method (only the latter is a buy). And Netflix is cheaper than Apple (neither are a buy), even though the former’s P/E ratio is basically 7 times the latter.
We’ll continue in the next post.