Resumo de Chasing Value Versus Growth

Write your abstract

here.

That

is fine. There are, however, other kind of
investing

that

will burn your pocket. A lot of investors engage in
an

investing style that get little reward while taking
a

big

risk! Buying a stock at any price is one example.
Do

not

misunderstand growth stocks with buying at any
price.

It is

just plain silly. There are calculations and

predictions

involved in buying a common stock. Determine its
fair

value

and decide whether you want to invest on a stock
based

on

the risk/reward that it offers.

Every investor's goal is to find undervalued
investment

and then sell it when it reaches fair value. To find
the

fair value of a common stock, we need to predict the

profits generated by the stock over a period of time.
This

prediction may not be accurate. After all, nobody can
know

the future with 100% certainty. When things
unexpectedly

turn ugly, investors need to guard themselves against

capital losses. The way to reduce this risk is by
investing

in companies with positive net cash.

Net Cash is the difference between cash & short-term

investments with the amount of long term debt. We can
find

this three items on the balance sheet of every company.
A

lot of times, one can include long term investment as
cash.

Long term investment can include instruments such as 18

month Certificate of Deposit or treasury bond maturing
one

year or more. To be on the safe side, let us consider
just

cash and short-term investments.

You might wonder why we do not subtract short-term

liabilities such as accounts payable. Good question.
The

reason is that accounts payable is normally used to buy

inventories. Some of the revenue is also tied up in

accounts receivable. In normal business operation,
these

two things can be used to pay for short-term
liabilities.

There are of course exceptions such as banks where they
use

short-term liabilities ( customers' deposit) to give
loans

(long-term investments) to businesses or individuals.

Once we understand why we define net cash the way they
are,

we can then appreciate the function of it. Net Cash
defines

the financial structure of a company. We can tell
companies

with strong financial structure by looking at its net
cash

position. Generally, investing in companies with
positive

net cash is less risky.

As the word implies, positive net cash means that the

company has more cash in hand than long term debt. In
other

words, the company is less leveraged and less burdened
with

debt. It can pay its long term debt right away if it
wants

to. This is the right way to leverage a business.

All of our sample portfolio stock picks have a positive
net

cash on their balance sheet. The reason is that when
our

prediction fails, the company is less likely to go

bankrupt. When a company has plenty of cash, it can
afford

to incur losses until its business turn around.

Another reason is that companies with positive net cash
can

afford to buy assets on the cheap during economic
downturn.

When the economy is in a bad shape and losses are
mounting,

weaker companies tend to raise cash by selling off its

valuable assets. Companies with positive net cash will
be

there to buy.

Finally, companies with positive net cash can afford to
buy

back shares or give dividends even when businesses are
bad.

It is no surprise. They have more financial muscles
than

others to be generous. This will benefit common

shareholders like us.

There are some investors that feel that companies with

positive net cash are not efficient. They reason that

companies should take advantage of the power of
leverage so

that it can maximize shareholders' return. Well, their
view

is not wrong. Buying cpanies with positive net cash
might

not give you a 10 fold return in one year. But, you
won't

lose all your capital in one year either. It is all up
to

you. Do you want to maximize your investment return
with

incredible risk? Or do you want to get a decent return

while minimizing your risk? I prefer the latter.

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