Minimize Effect of Negative Sentiment on Price

By Verlag von Wilhelm Jacobsohn, Breslau [Public domain], via Wikimedia Commons

All Time Sleeping Average: (Target) 7h30m / day (Actual) 7h32m / day (145 night average)

3 Day Sleeping Average: (Target) 7+h / day (Actual) 7h34m / day (3h23m, 10h43m, 7h28m)

I’ve proclaimed before on this website that “If Wide Moat Div Yield + Growth > Discount Rate, Forget Market Timing“.

While I still stand by the rationale behind the article, it still bothers me that negative sentiment could drive prices down and kill my total returns. It’s the reason behind researching on “How to Deploy Lump Sums of Money” with a rule for deploying capital over a certain period of time.

That’s because Stock Return = Sentiment * Fundamentals + Dividends, Fundamentals being things like Earnings and Book Value while Sentiment is the Multiple applied to the Fundamentals such as P/E and P/B.

Which is why I’ve been experimenting with researching wide moat stocks at 10 year low P/B.

So besides controlling the returns through valuing the Dividend stream and ensuring the Fundamentals are strong, if I can buy stocks that are already surrounded by heavy negative sentiment such as 10 year lows, although I can’t predict if the sentiment can get any worse, but the fact that it is in the 10 year lows means that I have a large margin of safety in terms of Sentiment.

As for why 10 year low P/B instead of other things such as P/E or P/FCF, it’s because earnings can be cyclical or volatile, which makes it hard for a fair apple to apple comparison among companies of different industries. Book value on the other hand fluctuates much less than earnings, and a  great company theoretically should continue to build upon its book value in the long run throughout the good and bad times.

So the strategy? Demand that the current P/B is lower than the 10 year low P/B. As for current P/B, use the lesser of the latest annual report book value and the latest quarterly report book value. If book value didn’t grow over 10 years, then use the lowest book value in 10 years for P/B calculation.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

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