The FFN investing methodology

This post complements the other posts I’ve done so far on value investing and how to choose a company. My investing style (or FFN investing methodology) has been modelled after Warren Buffett. I’ve also incorporated into the methodology, my own criteria that I look out for. I look out for stocks with a mix of value investing, dividend play and technical analysis. Below is a summary of my style:

Value investing portion

The company I’m looking at MUST have:

  1. Earnings and free cash flow growth year-on-year
  2. Little or no debt
  3. Considerable amount of cash in hand but not in excess
  4. Low capital expenditures (CAPEX)
  5. High ROE above 12% and ROA above 7%
  6. Predictable business with a wide-moat
  7. Competent and honest management
  8. Future growth plans in place
  9. Lastly, the business must be undervalued

It would be preferable if the stock is under-researched, if not, not researched at all by analysts and investment houses. In this way, the price would be beaten down relative to the value of the business.

Dividend play portion

When I invest, I’m looking at both capital gains and income. So, I look out for a few criteria. They are:

  1. Dividend yield around 5%
  2. Dividend payout ratio of 30% to 50%
  3. Dividends paid out growing year-on-year

At times, it would be hard to find an undervalued company which is giving out consistent dividends. If the company is fundamentally very strong without a proper dividend plan, I would still consider purchasing the company.

Technical Analysis portion

Before buying the business, I look at the technicals to have a better entry. The daily candles should be in an uptrend channel and above the 20DSMA and 50DSMA to prevent me from catching a falling knife. The weekly candles should also be in an uptrend.

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8 thoughts on “The FFN investing methodology

  1. Hi FFN,

    For me, I usually look for ROE in excess of 20% as a benchmark; just curious how did you arrive at 12% as a benchmark? Also, how do you classify an investment as “under-valued”? Using NAV or PER or some other objective measure?

    For dividends, I would say a growig dividend is symptomatic of a company which has excess cash which cannot be reinvested; thus it is paying out part of the cash as dividends. Still, some companies may have a combination of both – some cash retained to grow the business (hence high ROE/ROA) while still having enough to pay out some dividends. I look for the latter types.

    You are right to say there are not many undervalued companies with consistent FCF and good yield; but then again we must weigh all factors together and ensure you pay a fair price for a good company, rather than trying for a low price for a mediocre one.

    Good luck!

    • Hi MW,

      I got ROE of 12% from Adam Khoo’s book (Secrets of Self-Made Millionaires). He stated that on average, companies have 12% ROE. So, anything above that figure is good for me. I use DCF to get intrinsic value.

      High five! I’m just like you. I go for companies that both grow and pay consistent dividends like Thomson Medical. This is the reason why I’m a beliver in growth of retained earnings as well. Since it can be difficult to have all financials and ratios perfectly going for the investor, I demand for a margin-of-safety (MOS) whenever necessary. This was the case for Kingsmen. I demanded a huge MOS for Kingsmen due to the very low FCF for the latest FY. But, this has picked up for latest quarter and I’m happy about that (digression, haha).

      I go for companies that have a sustainable and wide moat. Coincidentally, most of the companies I’ve invested in falls under the moat of “branding”. Like Buffett says, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. The most desirale would be to buy a wonderful company at an undervalued price with a huge MOS though.

  2. Hi FFN,

    Haha thanks for the explanation. Personally I don’t really like Adam Khoo as I think he’s just full of salesmanship. But that’s another story…. :P

    I think we see eye to eye on choosing good companies; willk continue to visit your blog, keep up the good work!

    Btw, maybe you’d like to take a look at Royston’s blog? He is also vested in Kingsmen and I’ve left some comments on his post for Kingsmen’s 1H FY 2010 results.

    http://thegameplan81.blogspot.com/

    Cheers!

  3. Hi MW,

    Ok. May I ask how did u arrive at 20% ROE? Do you think 12% ROE is too low?

    I’m also a very frequent visitor to your blog. I visit it almost every day. I’ve learnt a lot from your blog as it’s extremely informative.

    Woah, Royston holds Thomson Med too. I will keep up with his blog as well. Thanks for the information, MW!

  4. Hello FFN,

    Well 20% was a benchmark I used because it’s generally not easy to achieve; as few companies can consistently hit above 20% (without leverage that is). I think I read it in one of the Buffett books (books written on Warren Buffett); but I cannot recall specifically which title. Personally, I think 20% is a lot tougher and acts as a better “screen” for companies; and I have found companies such as Kingsmen which can consistently earn above 20%.

    Thanks for visiting my blog, glad it has helped you with your investing! It’s sort of a diary for me initially but now helps me to collect and collate my thoughts.

    Regards,
    Musicwhiz

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