Identifying quality Swiss stocks and promoting them (6/6)

THE VALUATION STAGE

Once you have established whether you are looking at a quality company, the final step is to determine whether the current stock price is justified based on its fundamentals, which is done by comparing the stock's VALUATION to its INTRINSIC VALUE.

The goal is not to grossly overpay: “Price is what you pay, value what you get” summarizes Warren Buffett.

I determine a price that I consider correct and that I am prepared to pay: I do not make any prediction, I do not say that this is the price at which the stock will trade over the next 12 months.

Nestlé shares can go from a PE of 25 to 15 in the space of a few months, not because this corresponds to its correct valuation, but only because the market is in correction mode and the public mood has changed radically.

Similarly, although Geberit shares are already overpriced with a PE ratio above 30, it is not impossible that the current stock market euphoria will continue and its PE ratio will reach 40.

By being careful not to overpay at the time of purchase, one ensures a certain margin of safety which was so dear to Benjamin Graham.

Here too, in order to calculate the stock valuation, I recommend keeping it simple. Choose a single variable and stick to it! It is not so important if we use, for example, the PER (price to earnings ratio), the PBR (price to book ratio) or the PSR (price to sales ratio).

I use the PER (price/earnings ratio), which is the share price divided by the earnings per share. The higher the quality and the better the predictability, the more a high PER is justified. Remember our example with EMS Chemie and Schaffner!

For my part, I combine the 5 criteria presented above with my little home-made algorithm (I can't reveal all my secrets after all!), which tells me, for example, that EMS Chemie is currently overvalued by around 10% (thanks to the current stock market euphoria), but that's nothing compared to Schaffner which is around 30% too expensive.

Finally, I would qualify my remarks by saying that we should not give too much importance to timing at the risk of missing out on a great opportunity. Nestlé will be worth more than 100 francs in a few years and will pay a higher dividend each year between now and then than the previous year. From this point of view, buying it at 77 or 81 ultimately does not make such a difference.

PSYCHOLOGICAL AND EMOTIONAL ASPECTS

Once you have become the happy owner of a quality company, you have to be very patient, stick to your winning positions, not sell at the slightest correction (fear) or after a small gain that you want to quickly pocket (greed).

Charlie Munger says it so poetically: “Investigation is where you find a few great companies and then sit on your ass”.

A buy and hold strategy also helps to limit brokerage fees. Another problem when you have sold a high-quality stock is that it may continue to rise and you will never be able or want to buy it again. The train has left without you!

Don't forget to systematically reinvest your profits and dividends, in order to create a snowball effect. Better to let compound interest work for you than to work for the interests of others!

We must try to avoid being distracted by the overabundance of information bombarding us by the media. Be interested in what the companies we own are doing rather than what the stock market indices are doing. Follow the evolution of our dividends rather than that of our shares. Learn to live with uncertainty, tame volatility. Accept that risk is part of the stock market as it is of life. Have confidence in our analyses and assume the consequences of our decisions. See our shares as interests in real companies rather than as simple pixels moving on a screen.

Invest in solid companies that make simple products that they will still sell in 20 years (traditional, stable, mature companies) rather than trying to find the next technology that will revolutionize the world (in theory, because in reality you will find nothing but a company that will devastate your bank account).

Diversify your stock portfolio well, unless your name is Warren Buffett.

All things being equal, favor stocks with lower volatility (low beta) and whose “dividends” are tax-exempt (e.g. Cembra).

Stick with the winners and quickly get rid of the losers. Most investors do exactly the opposite, what Peter Lynch so aptly called “cutting the flowers and watering the weeds.”