Listening to Jim

July 12th, 2015

July 12, 2015

I try to watch Jim Cramer’s ” Mad Money ” on CNBC as often as I can.  He clearly enjoys what he does…his nightly stated intention being to help you make money.  His encyclopedic knowledge of equities impresses me.  He has helped me by pointing out paths less travelled which deserve  investigation by me.

Superficially, he seems to be all about stocks, but his real message is to stay away from stocks…UNLESS you have the time and motivation to do all the research required to match wits with the guy on the other side of your trade.  He  suggests you channel your equity investments toward Index funds and Index ETFs  such as SPY ( S&P 500 largest USA Equities ).  That being accomplished, he will teach you to invest your ” Mad Money “, the money you have to play with,  in a manner which is thoughtful not playful.

The USA stock market ended  the week of July 10,  as a week of Greek and Chinese inspired turmoil. This was the type of week sure to give one an ulcer had he not been occupying a knowledge inspired zone of calm and confidence.  This comes from having a game plan and seeing the market obeying your every command.

The action of  SPY since January 1 carries a relevant message…. tug of war within.

Market close December 31,2014,. $ 205.54.  Market close July 10, 2015 $ 207.48.  A gain of 9/10 of 1 % year to date.  That is about as flat as you can get.  That tells me this is a stock picker’s market.  In other words, a market where having an edge wins.  A market where the specific risk of individual stocks is higher than normal .  A very dangerous market for the average investor. You had better know what you are doing or stay within the relatively safer precincts of SPY.  The twelve moth appreciation of SPY has been 5%.  Not a loss !,  and its not scanty money market interest ( a net loss when adjusted for inflation )

If you are retired, and 5% will float your boat, I suggest you stay with SPY.  Unhappily, 5% will not float my boat,  unless I enjoy sailing with water up to my thighs in the main cabin.

The far more dangerous alternative is to invest in stocks,  and here is where focus, motivation and knowledge improve your risk profile.  The underlying question for every stock in your portfolio is ….WHY?  Goldman Sacks has a ” Conviction List ” and you better have your own conviction list. And, you better be able to articulate a plausible reason for every stock on your list.  And,  your reason shouldn’t be because its on this list or that list.  True conviction comes from your knowledge that you have done your work, not that Goldman has done theirs.  Jim Cramer gives lots of clues on how to approach the work.

For instance,  just the other night Cramer  pointed you toward the ” 52 week  new highs list ” as a place to start an investigation in a market that is selling off.  If a stock is making new highs while the rest of the market is selling off, doesn’t that tell you that  the new high stock is worth investigating !

By conviction list , I mean a list of stocks you would invest more money in if the market sells off….rather than freak out and have a perfectly good investment be shaken out of your  hands !  By having a conviction list you would be buying while everyone is selling and selling into strength when your investment more than pans out.  That is the recipe for making money with individual stocks.

My conviction list starts with my conviction about the primary direction of the market. Do I believe this market has legs ( yes I do )  WHY ?..low interest rates and high earnings yields relative to alternative investments.  If you really believe this  (as I do), then everything else you hear or read is just noise, a buying opportunity….so smile !  And, this week you had a pretty good example of the type of damage ( temporary ) noise can create. That the market closed Friday  on a high note was , to me, indicative of its internal strength.

Turning to my portfolio, 40% invested,  I was disappointed that equity prices didn’t continue lower as they hinted they would earlier in the week. Just a hedge fund head fake.

If the market won’t go lower,  and allow me to buy on weakness,  I’ll just need to create some synthetic weakness to allow me to purchase at lower prices.  I don’t have a ton of patience !  I’ll create this opportunity by contracting to purchase specific equities at a specific ( lower ) price I select.within a specific time frame.  For instance, I intend to contract conditionally  to purchase a specific amount of Time Warner Communications at $82, expiry August..    As of the close Friday, Time Warner closed at $88.67 per share.  My contracted buy price is  7.5% below Fridays close.  Is buying at a 7.5% discount, buying on weakness ?  Maybe.  It certainly isn’t buying at a premium. And, here is the kicker….I’m to receive a 10.6% per annum premium ( up front ) for taking this risk.   If I’m wrong and Time Warner gets assigned to me at $82 per share while the market price is $77 per share, I lose ( temporarily ) but I can apply the  premium to reduce my per share cost from $82 per share. And, since I am convinced about Time Warner’s prospects, I’ll take my chances with a smile.

Why Time Warner ? , Why Disney ? ,  Why O’Reilly Automotive, Why Mohawk Industries ? Why Walgreen Boots Alliance ?, Why Apple ?, Why Gilead Scientific ?,  Why CVS ?,  Why SPY ? at a strike price of $199.  Trust me when I tell you I have my reasons.  But, this is my conviction list. I suggest you either create your own conviction list, buy SPY  or stock up on TUMS.  Also please read the DISCLAIMER in my Archives,   April 19,  which explains why your conviction in me could be better placed in you !

Oh, and a final word.  Unless you can operate effectively on two to three hours sleep per night,  I wouldn’t attempt all this ” conviction ” work while pursuing a full time career.  Instead, I would follow Jim Cramer’s advice and  invest in Index funds or Index ETFs. I know I could never have expended anywhere near the research effort required to create a conviction list during my working career.  Its far better to watch grass grow ( SPY ) than fret you don’t have enough information to match wits with the hedge fund professional on the opposite side of your trade.

Richard Maurice Gore

Monday – Early AM – Greece Agreement in the wee hours.  Expect that to impact the premiums I was expecting on my “synthetically”  weakened conviction list.




July 4th, 2015

July 4, 2015

Here is my logic on this subject.

A member of the Euro Block and it can’t pay it’s debts = uncertainty about stability of European Economic Union = US dollar safe haven.

Who benefits from a strong dollar = European exporters = primarily Germany.

Europe is trying to re-ignite economically, so a strong dollar/ weak Euro  helps make European export merchandise bargains.  Very similar to what is happening at Buffalo, NY.  With the Canadian dollar worth just 80 USA cents, it pays to shop in Canada.  Who takes the hit….Buffalo storefronts.

A strong dollar versus the Euro hurts USA export storefronts and any USA international company that needs to convert its local currency profits to dollars for remittance and display  on USA home office income statements.

But, it seems a decision has been taken to play on and on with the “Greece” card to allow time for Europe to reflate and be able to balance its strength with the USA. All the talk and uncertainty about Greece  plays right into Germany’s objectives.

Going back to the time of Adam Smith, international economics has been thought to be a self correcting mechanism…sort of like a pendulum’s swing.  At this  moment the ” Greece ” card is causing the dollar to swing toward strength and the Euro to swing toward weakness. At some point in time the crisis will resolve itself.  When ?  Read on.

The Greek crisis also plays into the hands of hedge funds and individuals like Carl Icahn (  and me ) who want to buy equities with less risk at lower prices.  Our wish is being aided and abetted by the talking heads on TV who need to fill air time and do so by treating the crisis as if it were huricaine Greece.  Will it strengthen from a tropical storm and when will it make landfall.? The closer the storm comes to landfall the closer I am to increasing my 41% stake in this market.  I believe its all a ploy and the storm will weaken and/ or miss making landfall. I need to make my move before the crisis abates.

With USA internationals taking the hit, temporarily , the S&P 500 is flat. The mid caps, small caps and micro caps are carrying the market, temporarily.

Q…..When will the crisis resolve itself ?   When will USA interest rates rise ?.

A…. When Europe has reflated itself sufficiently well that it’s economies are following the same growth trajectory as the USA .  At that point a rise of USA interest rates will not strengthen the dollar or weaken the Euro.  The US economy will be able to resume export- import activity with  Europe in a balanced way and sales will be based on factors other than price advantages / disadvantages  based on currency disequilibrium.

For sure, this little post will be drowned out by TV and anyone who wants to see stocks fall.

If stocks do fall,  I’m an Index ETF buyer ( but maybe not SPY )  and an Index ETF Put writer( definitely SPY ) . As long as my perception is that USA will continue to keep interest rates low and SPY remains above its 200 day moving average ( at month end ), I’ll be searching for opportunities to be long.

Richard Maurice Gore



Tale of 2 Tapes

July 2nd, 2015

July 2, 2015

SPY ( S&P 500 Index ) closed 2014 at $205.54. …. It closed June 30, 2015 at $205.85.

What’s going on here ? ….. Not exactly a wealth recipe !

On the other hand, the SPY trade of December 30, 2011 is still marching on.  This trading theory requires you buy SPY if it has  penetrated and closed above its 200 day moving average on the last day of any month. The last day of the previous month should have found it below its 2oo day moving average. I have been waiting 878 days for SPY to create a sell signal and it still hasn’t.  During this time, SPY appreciated at an average annual gain of 21.71%…..without me on board!  ….That 21.71%per annum is a wealth recipe !

Even though I’m not in the trade, I am using this SPY trade as a signal that its safe to swim. When SPY  takes its month end dip below its 200 day moving average, I’ll consider that either a Great White Shark sighting or a Black Swan sighting.  Take your pick ! ….I’ll be gone !

SPY represents the” varsity ” of the  USA economy which presently  is considered healthy enough to foster a debate about when the FED will raise interest rates.  But, these 500 SPY entrants  perform on a world stage either by conducting operations overseas or by exporting to the world….so the dollar’s strength has a head wind  influence on profits.   Additionally,  15.3 % of SPY holdings are in the financial services sector ( including banks ).  Bank’s , yearn for an interest rate hike to ensure a profitable loan book…..And,  7.8% of SPY holdings are in depressed energy names.  It’s the pulling and pushing of this mixed SPY  bag of 500 which is dictating that SPY follow a flat biased upward trajectory.

So,  if you don’t want to watch grass grow,  but are uncomfortable with any more than market risk ( SPY ),  You may want to consider an alternate slice of market risk which steers clear of the strong dollar and low oil prices. For instance, here are several alternative index ETFs  and their returns  YTD

IWM….the smallest 2000 companies in the Russell 3000 index…..5% return YTD

MDY….Tries to match returns of the S&P Midcap 400 ( average market cap of each included stock $4.9 billion versus SPY…$ 73 billion.  This ETF has appreciated 4.5% YTD

VTI…holds almost every liquid USA stock and includes 3,800 holdings in its basket. Return 2.5% YTD  with the largest 500 of the 3800 acting like a sea anchor.

If you are willing to accept more risk for more return, you may be willing to assemble a small portfolio of Sector ETFs to complement IWM and MDY.  Such as Biotechs as represented by XBI, 49.95% appreciation  since November 3, 2014,  Health Care as represented by XLV,  11.66% return since November 3, 2014, and Defence / Aerospace as represented by ITA with an 8.19% return since November 3, 2014.  These are not indexes, so you are relying on stock pickers selections  for the ETF.

In my opinion….

#1   There are a lot of people who want the market to correct but it resists giving ground for more than a day or two…an indication of its internal strength.

#2  The USA can’t raise interest rates in any meaningful way until signs of over heating are prevalent because it will cause the dollar to strengthen to the disadvantage of USA international companies

#3  As long as interest rates remain low and alternative investments can’t compete with USA earnings yields,  intelligently selected equities will continue to prosper.


Richard Maurice Gore


Channels are Open

June 30th, 2015

June 30, 2015

I have been advised by web hosting service that, if you wish,  you can again use ” Word Press ” Comments “.

Or, you can contact me at

Look forward to hearing from you…..Richard Maurice Gore

To Contact Me

May 31st, 2015

June 1, 2015

I’ve blocked comments on ” Word Press ” because of too many comments are unrelated .  If you want to comment, or question, please feel free to contact me directly at  I still have a lot to learn and I would welcome your ideas!

Richard Maurice Gore

Rx for Stock Market Anxiety

May 27th, 2015

May 27,2015

Just know this…..and relax.

The earnings yield of the US stock Market is presently 4.88%   ( as represented by the S&P 500 Index,  whose basket of  500 equities  trade as the  symbol  ” SPY “, ( $103.09 / $2,110.93 )….  while the earning yield of the 10 year Treasury Bond is 2.18%.  Which would you rather have ….a guaranteed fix rate of return for 10 years of 2.18% ( not accounting for inflation )  or the variable dividend growth  and unlimited  growth in value of America’s 500 largest companies. ??!!

And, it seems as though foreign money has resumed its flow toward the USA.  Where does this money go on arrival ?  To purchase bonds which will make the bond market even less competitive with stocks ?,… into fine art ? ,…… how about expensive real estate ?  Any money invested in the stock market will  just be further fuel for the market.  Of course we need to be wary of extremes because there are plenty of USA stocks which can be hurt by a dollar mania.  The trick is to know where to be in the market.  I believe SPY will continue its flatter  upward trend hiding all the pushing and pulling going on inside among its 500 names based on strong dollar / low oil.

Respecting ” Play till May “, I’m still on alert looking for any news which can be sold to the market as a genuine  “Black Swan “.  The difference this time ( for me ) is not having market anxiety. I believe, when the dust settles , anything the market does will have benefited me.  Here is how I’m set up.

a ) One third in cash a)  looking for a proper entry point.

b) One third in marriage equities ( buy and hold and buy more on dips ). These equities have some sort of sustainable competitive advantage, growing revenue, growing net profit, growing free cash flow and a beneficent attitude toward shareholders  as evidenced by, dividends, buy backs, and debt ( if any )  pay down.  In this market adding additional funds requires an earnings profile not threatened by a strong dollar. And finally a chart flight profile indicating a smooth flight at a higher altitude than SPY.  ( Beating SPY is the  challenge for  every analyst )  At present, for me, these equities include AAPL, GILD, ANTM and BX.

c)  One third invested in the possibility that equity prices will temporarily head lower giving me a proper entry point by having equities assigned to me via PUTS.  I want to be forced to purchase these equities in return for a premium paid to me by the successful PUT purchaser.


GILD – June $107 assignment price. At a premium  to me from the purchaser of $ 1.31  = 14.69% per annum premium for my patience.

AAPL – June $130 at $1.74 premium to me = 16.06% per annum for my patience.

SPY – July $200 at $1.53 premium to me = 9.18% per annum for my patience.

This means I hope to own these equities, but not at present prices, and I want to get paid for not being the  “impulser”. which, truly,I am!

Richard Maurice Gore


Disclaimer: I do not offer or sell advice, accept deposits, commissions or fees or make any offer to ” run ” your money or act on your behalf.  I am unlicensed.  What I do, entirely at your risk, is allow you to peek over my shoulder to see how I go about attempting to earn a living using my own liquid financial assets.  These posts are for me to follow how my thoughts are evolving into strategies that win for me.  I still have a lot to learn !





An Endorsement For Bernie

May 18th, 2015

May 18. 2015

After watching the PBS film ” Park Avenue – Money Power and the American Dream”….and doing a lot of soul searching, I’ve decided to stand next to Senator Bernie Sanders, Democrat Vermont, and declare myself a Democratic- Socialist.  I’ve decided not to accept tarnished Democratic merchandise or any of the Republicans who beat their breasts espousing American middle class values but accept billionaire money with the other hand…in exchange for further rigging the game against you and me..

I firmly believe  anyone who is concerned about the rapid disappearance of the American middle class should view  ” Park Avenue “.  Its available on Netflix. Its a shocker,  and I promise you won’t be disappointed.

“Park Avenue”  focuses on one building, 740 Park Avenue , which houses more billionaires than any building in the United States. There  are only 31 apartments, the largest of which has 37 rooms and 20,000 square feet. Some of the billionaires who reside there include David Koch, the richest resident of New York City, Steven Schwarzman, formerly of  Lehman Brothers, now of The Blackstone Group (he has the largest apartment) Ezra Merkin, known as one of Bernie Madoffs ” feeders “, and  John Thain  who presided over the handoff of Merill Lynch to Bank of America  while rewarding the failure of his executives with large bonuses which came from you and me via low interest government bail out loans.

Park Avenue’s supporting cast includes Wall Street’s Senator, Charles Schumer, non-resident of the building ,  who poses as a Democrat liberal while feverishly protecting federal tax provisions which make certain Steven Schwarzman and his billionaire associates are taxed at a lower rate than the firemen who climbed the  stairs of the World Trade Center…….,  

…..Representative  Paul Ryan, Republican, Wisconsin who is said to  take more money from David Koch than any member of Congress, ostensibly to foster the American middle class dream by espousing the rugged individual ideals of Ayn Rand,  ” Atlas Shrugged ” , but in reality, does the the bidding  of  David Koch who finances  his ambitions.  And lets not forget Governor Scott Walker, Republican, Wisconsin who humorously falls for a phone scam where the caller pretends to be David Koch and inveigles Walker into a discussion of tactics to be used to destroy the collective bargaining rights of Wisconsin Unions.

The central theme of ” Park Avenue ” is to unmask how the right wing of the  billionaire class  ( no,  not Warren Buffett, not Bill Gates ) has used its money to get Congress to rig the rules in their favor and tilt  the playing field against middle class Americans… not to mention the disadvantaged!

Today 400 families control more wealth than the 150 million American taxpayers who  account for  the bottom half of our national income structure.

In 1965 CEO pay was roughly 21 times that of the hourly worker.  Today that multiple has expanded to 231 times the pay of the average hourly worker.

In 1980 getting an education was 5oo times less expensive than it is today.

The chasm between the super rich and middle income / wage earning America has widened into the Grand Canyon.

How did this happen ?  Look no further than ” trickle down ” economics.  Remember when Newt Gingrich  claimed that by giving the wealthy Americans huge tax breaks including reducing the capital gains rate,  the tax windfall of the rich would trickle down to the middle class and beyond ?   There was a trickle alright, but its direction turned out NOT to be in the direction of  middle income America….it flowed  in an other direction, toward  Congress.  That the super rich wanted something in return for the trickle was proven by an exponential expansion of lobbyist activity and more money given to support the re-election efforts of compliant congressmen.  What did the billionaires want.  As Steven  Schwarzman characterized his visit from Mitt Romney….. What I wanted from him  is for me to know.  Lets just say he listened and I am not shy !

The billionaires want less government interference, except for when their interests collide with regulations  enacted for the common good such as anti pollution measures. They want exemptions for any activity that will further enrich them, even  at the expense of what is good for America.  Since they don’t really need more money they spend their ” trickle ” by doubling down on their  investments in members of Congress.

Isn’t it ironic that on the same weekend you have a derailment on the AMTRAK northeast railroad corridor owing to government money not available to fund infrastructure improvement…..Then,  just  a day later,  you have a logjam of helicopters circling above the Hamptons  waiting to land !!  Gatsby would have really appreciated this scene.

How was it that  the government was able to help the big five ” too big to fail ” financial institutions who were actually gambling with shareholder money, but  had no money to help with the sunami of foreclosures which hit hardworking everyday people  who had  lost their jobs .  Bank  lobbyists actually wrote the legislative amendment  that will allow the big five to resume gambling with the middle class absorbing all the risk.  Bernie Sanders and Elizabeth Warren are in the forefront of those in Congress still attempting to block this Wall Street inspired tampering.

Do you actually suppose  Wall Street would allow Congress to exempt IRA withdrawals from current penalties,  if such withdrawals were used to pay off student loans or be used as a down payment on a non-financial asset such as a house ?  Not a chance!

The billionaires espouse traditional middle class values and cite the Tea Party as a spontaneous middle class  expression of the desire to return to American values. According to ” Park Avenue” there was nothing spontaneous about the Tea Party movement.   Its a planned ploy to point the resentment of the middle class downward instead of upward  at the billionaire class.

What is especially frightening about ” trickle down ” is that it has financed the ultra rich takeover of Congress and funded the efforts of compliant congressman to remain in office.  Now, how do we effect REFORM if  Congress refuses to act in  the common good and also refuses to go home ?.   Our founding fathers didn’t want Congress to be a career.  Today congressmen are the government equivalent of CEOs who hijack corporations by surrounding themselves with a compliant manager class and board members to do their personal bidding.  When you are dealing with this type of entrenched situation your  vote is worth the same as your proxy….nothing !  You can sell your shares or leave the USA. …or both….take it or leave it……. Nice!…

Personally, I don’t know how to separate the tentacles of the Wall Street / Corporate billionaire class from our government. As a layman, I see this as a growing cancer and bordering on in-operable.   

I look at Bernie Sanders and wonder whether he has Reagan genes. As a socialist, he doesn’t want much….just free medicine for everyone to replace our broken system, as in Sweden,  and a free technical or liberal college education for everyone so that the USA can compete in an ever competitive world without our kids going broke choking on loans.. .  He wants to abolish corporate and fat cat political contributions and limit lobbyist activity. Unlike traditional socialists, he doesn’t espouse nationalizing  the railroads, the newspapers , private property, or private business.  He is transparent. He does not accept political action group contributions only contributions from individuals.  His candidacy deserves to be investigated by anyone concerned enough to want REFORM. I believe he is absolutely clean and is his own man.  I believe he is a patriot and, as a New Yorker ,  I congratulate Vermont on its choice for the Senate.

I’d rather waste my vote on him as a protest for REFORM than be swept  along with all the organized money wrapped in red, white  and blue but earmarked for hidden agendas

Richard Maurice Gore



May is a Week Away

April 25th, 2015

April 25, 2015

Here I sit, Saturday afternoon,  at peace with  my year to date Wall Street performance ,  but nervously speculating on the NFL College Draft which starts Thursday evening. The source of my anxiety is the New York Giants and whom they will  chose with their number 9  first round pick.

For me, my preoccupation with the NFL draft is the ” Go Away “. phase of  “Play Till  May, Then Go Away ”  and I want to thank Wall Street for allowing me to sell 70% of my holdings into strength this week..

I am happy to say I’ve out performed SPY from November 1 until now by a score of 5.76% to 4.41%.  Of the 5.76% total profit , 85.5% is  in my pocket and waiting to be re-deployed.  My year runs from November 1 till May 1 and re-starts November 1, unless there are compelling reasons to be invested between May  1 and October 31.

I’ve seen the first two weeks of May wipe out a big chunk  of my year to date winnings more than once, so, this year I’d rather take the risk of losing a bit of the upside instead of  half my winnings in just a few days,  with me in full financial and emotional  retreat.. ….even though I do believe strongly this market is headed higher due to macro factors such as relatively low interest rates compared to earnings yields.

While the  concept of ” Play till May ” is based on fear, this year it has allowed me calmly  to rebuild my cash reserve to allow me to purchase  at attractive prices should the opportunity arise after May 1..  If I am wrong. all I’ve lost is some opportunity  profit and I’ll re-enter the market after May 15 if conditions are as compellingly positive as they have been until now..

So, at this point, I am alert to a buy point.  I am not a seller.

Now, all I need is for the Giants to draft that tackle from Iowa and someone on Wall Street’s crowded  balcony to stand up and  shout ….FIRE !


Richard Maurice Gore


DISCLAIMER:  I do not offer or sell advice, accept deposits, commissions or fees or make any offer to “run” your money or act in your behalf. I  am unlicensed.  What I do, entirely at your risk, is allow you to peek over my shoulder to see how I go about attempting to earn a living using my own liquid financial assets.  These Posts are primarily for me to follow how my thoughts are evolving into strategies that win for me.  I still have a lot to learn !    RMG




April 19th, 2015

April 19, 2015

I have been advised to incorporate a ” disclaimer”  in my Posts to protect myself against capricious lawsuits based on people saying they lost money relying on my advice..

I reviewed the ” boiler plate ” it has been suggested I use and I have decided that I can use plain English sufficiently well to thoroughly denigrate my reputation for reasonable financial thought and analysis.  By the same token, it has been suggested I can protect myself best by suggesting you place yourself in the hands of a registered financial adviser.   I’m not about to do that because the whole point of this blog is to encourage you to learn to be your own adviser.

I do not offer or sell advice, accept deposits or make any offer to ” run ” your money or advise you.  What I do, at your own risk, is allow you to peek over my shoulder and see how I go about attempting to earn a living using my own liquid financial assets.  These posts are primarily for me to follow how my thoughts are evolving into strategies that win for me. I still have a lot to learn.

To save time and ink, at the end of every Post I will refer you to the Archive containing the above

Richard Maurice Gore

Bank Robbers, Inc

April 7th, 2015

April 6, 2015

There are three parts to my evaluation of a company for  an investment  of up to 5% of my liquid assets.

Management is the key determinant in each step of my evaluation..

A )  The Past  –  The creation of a competitive  product or service by  managing  resources in a sufficiently skillful manner as  to give the product a fighting chance to sustain and enhance  its market success.

B )  The Recent Past  … The  management of existing  resources by the current  CEO and his team to maximize revenue, operating margins, net income and cash flow.

In either ( A) or ( A & B ) Lots of data to mine…..No problem…..But first……

C ) The  Discovery Phase … This is where I visualize myself showing up at the headquarters of Bank Robbers, Inc and asking the CEO and his team …how much cash did we get ? what’s my share ?,  and what is  this years target ?

The Discovery Phase …is where my entire evaluation  could begin  and  could  end….  very quickly.

Since my staff of analysts is me, it is imperative  I  make quick  decisions about  whether an equity deserves an in depth evaluation effort by me.  For instance, just yesterday,  I read that Meg Whitman, CEO of Hewlitt Packard has a severance package of $51,000,000.  On that basis, I wouldn’t  want her as my employee and I would have minimal confidence in any Board that would grant an employee that benefit. So,.. I cross HPQ off my evaluation list.  My eyes and  ears are on duty 24 / 7 to uncover  evaluation candidates.

I don’t return to Parts A and B until I successfully complete  a Discovery phase analysis..

I want to know ( 1 ) how much cash is being generated in relation to the market price of the equity…. and ( 2 ),  how the  CEO and his team are  allocating all the cash being  generated.

a) Are they making  capital expenditures to improve or sustain the competitiveness of the product ?… Why ?

b) Are they using this cash to make an  acquisition or enter a new business.?… Why ?

c) Are they indulging  in an orgy of dead end expenses which do nothing to increase intrinsic value ?

d) Will they pay down debt ?

e) Will they pay dividends ?

f) Will they buy back shares?

But even before I ask these questions  I want  to determine how much cash is being generated in relation to the market price of the stock. The ratio of Price to Cash Flow  ( P / CF ) tells me how many years of cash generation  it will take the company to  pay back my entire investment. I have come to the conclusion that this is the magic piece of information that allows Warren Buffet in the blink of an eye to  decide whether he should pursue or cut bait on the possibilities of a potential  investment.

Using trailing twelve month data, I can give you  a quick comparison between Apple and say….  Amazon.

According to “Morningstar”  data, Apple  generated $11.76 cash per share during the past 12 months . Divide that into Apple’s current price, $125.32 and you come up with a multiple of price to cash flow of 10.65 times.  It will take Apple……10.65 years for cash being  generated to cover my entire investment of $125.32 per  share.

On the other hand, Amazon  generated $14.81 cash per share,…. but the price of Amazon is $372.25 per share, resulting in a multiple of 25.14 years of cash required to payback my investment.  Then,  when you consider that Amazon’s capital expenses ( to further Jeff Bezos’ visions ?  ) are $4.22 per share, it creates a price to “free cash flow”  multiple of  88.21 years of cash generation to repay my Amazon investment…This is versus a price to “free cash flow ” multiple of  12.63 years  for Apple.  ( Operating Cash Flow minus Capital Expenses  = ” Free Cash Flow”  )

Since I am searching for great stocks at great prices, I will invest my evaluation time in Apple.

Now lets talk about ” Shareholder Yield “ which  has three components;

1) Dividend Yield percentage , plus…..

2) Net Buyback Yield percentage, ( one years difference of the number of shares outstanding divided by the market cap of the company. )  Buybacks give you a bigger slice of the pie providing they take place when stock is undervalued and provided the buyback is not paid for by increasing corporate debt. Add this yield  to the dividend yield  percentage,  or subtract it if the Company has created net additional new shares.

3) Net Debt Paydown Yield  percentage …Net changes in short and long term borrowing divided by the market cap of the company.  Add this incremental percentage to the sum of ( 1 ) and ( 2 ) to arrive at ” Shareholder Yield % “…..or subtract it from Shareholder Yield if the company has added net debt.

To make a long story short, I am looking to “invest” in companies which generate sufficient cash and possess sufficient shareholder sensitivity to establish an attractive Shareholder Yield . Morningstar uses terms such as  “exemplary” and “standard” to rate a CEO and his team in terms of skill in managing resources for the benefit of shareholders..

It has always been my belief that a CEO, and his team  that short changes  its employees will short change it’s customers and short change its shareholders and anyone else it sees as an obstacle to its perceived dreams and / or entitlements.  Its a ” me first ” attitude that usually considers employees lucky to have a job  and share holders as ” them “..

You can say  what you want about ” activist ” investors such as  Carl Icahn, but I believe  we need big time investors such as Icahn  to hold self serving CEO’s and their compliant Boards accountable.

Thank goodness there are plenty of companies who think in terms of ” we “.  You just need to find  them.

Richard Maurice Gore