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StockCentral.com is an online
community that provides high-
quality data, insightful
Table of Contents
discussion, and intuitive
software for the people who An Introduction to Take Stock 3
need it most -- individual
investors. Whether you’re Meeting the Challenge 4
managing your own portfolio,
Eliminating Outliers 6
running an investment club, or
helping to educate your fellow A Look Under the Hood 9
investors, StockCentral gives
you the exclusive web-based Portfolio Management Tasks 13
tools and support you need:
Pedagogy 14
Community
Gain insight through peer
discussion and workshops led by
industry experts in our message About the Author
board forums.
Data Ellis Traub, renowned financial author and public
Examine historical data and speaker, is one of the most respected names in
detailed financial reports using the world of fundamental investing. After
the StockCentral Data Service, embracing the methodology behind qualitative
provided by Hemscott Americas growth analysis, he was able to turn his financial
(used by Yahoo! Finance and life around and has since devoted himself to
Forbes).
helping educate other investors.
Screening & Analysis
Identify winners for your Ellis is also the author of the popular book Take
portfolio with the StockCentral Stock and its companion software, as well as the
Screener and then generate an original developer of the Investor’s Toolkit line of
Instant Stock Analysis with Take legacy stock analysis desktop software programs.
Stock Online. His company, Inve$tware Corp., merged with
Plus, you’ll have instant access ICLUBcentral in 2003. ICLUBcentral’s online
to other smart features like an investing community at StockCentral.com
investing Event Calendar, Doug features an online version of Ellis’ original Take
Gerlach’s Blog, an Investing Stock “Instant Stock Analysis” software.
Book Store, Member Discounts,
and much more! Now retired, Ellis lives with his wife in Davie,
Florida and maintains an active speaking schedule
Start your free full-featured and online education presence.
trial today at
www.stockcentral.com
An Introduction to Take Stock
Our challenge was to develop a product that was so simple to use that it
would not require any previous investment education to use it. We
wanted to create a program so innovative that it would effortlessly
perform all of the steps required in our investment methodology as well
as an educated user might.
It would have to contain the educational content that would enable the
user to learn the simple investing concepts behind the methodology, and
to understand why this investment approach works.
Our challenge: to come up with a program so simple anyone could use it,
yet sophisticated enough to not only perform the mechanics of every step
required by the methodology, but also automatically estimate and
forecast—judgment tasks that heretofore had been the domain of only
the experienced.
The user interface — the “face” of the program the user must “talk to"
for it to work — would be the key. The answer? What could be simpler
than to ask the user to merely enter the name of the company she wants
to study, or the ticker symbol, if she knows what it is?
But, another issue arose: comprehensive instructions were one thing, but
being able to translate the results into a language anyone could
understand was another. Were there not shades of gray? One company
could be better than another, so it would not be enough to simply provide
a pass/fail answer. There would have to be a way to easily quantify the
different levels of "good" or "bad" if for no other reason than to permit
investors to prioritize their selections — to have an educated preference
for one over another.
There were two clearly determined goals of the process: the first was to
determine whether the company was good enough to warrant investing in
it. The second, strictly contingent upon the first, was to determine
whether the price was reasonable. Indeed, those two items could be
presented to the user all at once.
But if the user was to be empowered as any experienced investor was,
she should be able to not only judge whether the company met the tests
for quality, but, if it passes, also judge how well it passed. Ask any
experienced investor how good a company is, and she'll have to go into a
great deal of detail, explaining how each parameter meshed with the
others to cause her to say, “very good,” “just okay,” or some other shade
of grey.
Someone doing a stock study by hand would look at the plotted points on
a growth chart (semi-log graph) and arbitrarily place a ruler along those
points to come up with the slope of a line that represented the rate of
growth for all those data. Where the person with the ruler “eyeballs” the
data and varies the position of that ruler to roughly compensate for the
data that is irrelevant, the computer has the ability to calculate the slope
of such a line instantly using the "least squares" formula and regression
analysis.
However, for the computer to take into account only data that is
relevant, it must have some way of simulating what the human eye can
do instinctively and remove irrelevant data from that calculation.
Whether doing a study by hand or with a computer, this is the first point
at which judgment must be applied: the elimination of irrelevant data, or
"outliers."
To the mix, we added the stability of that growth. One of the by-products
of regression analysis of the sales and earnings data is the calculation of
the coefficient of determination (R-squared). [This is a measurement of
Using those attributes of the Efficiency Indicator and the Growth Index,
along with some simple math, we were able to produce the Quality
Index. Now anyone could judge the quality of a company, based entirely
on the attributes we have been taught, on a simple scale of 1 to 10. For
the first time, we would be able to say just how good a company was,
based entirely on the principles Nicholson taught us.
To make it even simpler, the grades have been broken down into thirds:
“desirable,” “acceptable,” and “unacceptable,” and those levels are
indicated in the program using green, yellow, and red, respectively.
Called the Buy Price, we would display it only if the company was of
sufficiently good quality to be considered for purchase. (If the company
was not that good, it would be overpriced at any price!)
From the user’s point of view, being able to type in a name and hit the
Enter key satisfied our desire to make using the program simple enough.
But what made the product simple and user-friendly was the novice’s
ability to read a single statement in plain English that summarized the
result, combined with the Quality Index to tell her “how good,” and the
Buy Price to show whether or not the price was right.
Let’s take a look "under the hood" and see what actually happens when
you enter a ticker and hit Enter or click Go.
• From the relevant data, it estimates the future growth of sales and
earnings, tempering the forecast according to the stability of the
historical data (the less stable the historical plots are, the lower
the forecast growth rate), capping it at no more than 20 percent.
• It analyzes the ten years of profit margins and returns on equity and
sets the Efficiency Indicator accordingly.
• It analyzes historical PEs, high and low. Calculates the median, and
uses that for the Signature PE. It calculates the current PE and,
with the Signature PE, calculates the Historical Value Ratio (HVR) --
the ten-year version of Relative Value. Then it offers that result as
the Mood Indicator to inform you how the current PE compares
with the historical PE. This tells you whether the stock is "Hot" or
"Cold" or about right in view of its "usual" selling point. When
“cold,” it cautions the user not to buy it until checking out why
“the herd” is selling instead of buying.
• It averages the lowest half or majority of the historical high PEs and
low PEs to provide a reasonable estimate of the high PE and low PE
five years out. If the result is above that sustainable rate, the
program caps it at 30.
• It then forecasts the high price in five years using the product of
the forecast earnings and the High PE.
• Using the product of the earnings of the last twelve months, and
the forecast low PE, it conservatively calculates the estimated low
price in five years.
• It then calculates the highest price the stock could sell for and still
produce a hypothetical return of 14.9 percent.
• It calculates the highest price the stock could sell for and still
produce a Risk Index of 25 percent.
• It selects the lower of the two and displays it as the Buy Price.
• It compares the Buy Price with the current price and indicates
whether the stock is currently selling at a price that will provide for
the desired return and risk.
I'll just bet that many who have merely put a ticker into Take Stock and
produced a result think that's all there is to the program. Not so!
While there will be many who are content to do just that, taking for
granted that there's some validity to the methodology even though they
don't know why, there will certainly be others who want more. And, trust
me, Take Stock has much more.
If you want some evidence of that, you can look at the ICLWager
Portfolio, mechanically managed by Lowell Herr. It's been running now for
three years and, with the buy and sell decisions being virtually made for
him, the portfolio soars well above the S&P 500 and the market as a
whole — performance that eludes most professionals.
Here's an example. You're a new investor and you have heard that ACME
Inc. is a great company. Would it be a good investment? Ask Take Stock.
Whoa! That's a kick in the head! And I thought it was a good company.
• WHY does it say it "doesn't meet your standards for quality at this
time?"
• WHY does it say "the fundamentals don't justify a purchase at this
time?
• WHY... etc.?
The average user is not going to be content with what he or she sees
there.
They click on the Buy Price or Quality Index to learn more, and now
they are on their on the way to a better understanding of investing. This
is called drilling down, and each time they do it, they are led to ask yet
another question and look for the answer.
It's only natural to want to explore. And the average user comes away
from each experience with a little more understanding — all the time
being able to put these principles to work without yet knowing all that
much about them.
You'll have more convenient access to the Web to do your research, being
able to click on a variety of URLs that provide you with the information
you seek, and avoiding the inconvenience of having to enter the ticker
symbols and click extra times to access the company-specific pages and
sites.
All of these features are now available to those using the desktop
versions of Take Stock. But, they are not yet available in the online
version. However, during the upcoming months, they will be available to
users of Take Stock Online at StockCentral.com.
Successful teaching has two components: the first is, of course, the
imparting of knowledge. Most teachers are pretty good at that. The
second is the stimulation of curiosity, and that is one facet of teaching
that escapes many, if not most.
We have approached Take Stock with that in mind, and we like to think
of it as a teaching “wolf” in non-threatening clothing. We've tried very
hard to present a program that not only gives answers but stimulates the
natural curiosity as well.
On the left side of the screen there is a hierarchical list of items. This
operates as did the navigation map in the desktop versions. Clicking on an
item enables the user to navigate from one part of the program to
another after he or she has become familiar with what's contained in
each "compartment."
Click on the Help Menu link beneath that list. When you do, you will see
Take Stock Concepts halfway down the page. Select the section that
matches where you are in the program and find, in very easy-to-
understand language, the concepts behind that aspect of the
methodology.