Investing rules from Fachhochschule Worms

Posted on 14 October 2009

It’s been a long time since we had anything new for the Investing Rules – so how about these from Max Otte, professor of Corporate Finance at Fachhochschule Worms in Germany, who gave a presentation at the Value Investing Seminar in Italy entitled Investing Buffett Style: A Simplified Approach.

Likes Simple and Robust Valuation Approaches - answers should “scream at you”)
Some Examples of Simple Valuations for Stock Markets include market cap to GDP, P/Es based on 10-year earnings, dividend yields vs. bond yields
Importance of Organizing One’s Research According to 1) Reliability (eg current margins are better information than estimated margins 2 years from today) and 2) Underlying Strategic Assumption (does company have competitive advantage?)

Valuation Approaches:

Asset-Based Valuation (can be applied to 70% of companies): industry is economically viable but no incumbent competitive advantage –> asset value (replacement costs) = earnings power value
Earnings Power Valuation, Without Growth (can be applied to 20% of companies): industry is viable, firm enjoys sustainable competitive advantage (moat, franchise) but no/low growth
Earnings Power Valuation, With Growth (can be applied to 5% of companies): industry is viable, firm enjoys sustainable competitive advantage (moat, franchise) and exhibits growth
Liquidation Valuation (can be applied to 5% of companies): industry is NOT economically viable

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