Sunday, September 3, 2017

All Roads Lead to Rome

This post is for many of you who went for the recent Value/Growth Investing Workshop, for the readers who have read the post on the Ultimate Scorecard, and for the subscribers to the Ultimate Scorecard database via Fundamental Scorecard website.

Because once again I had made some changes to the Ultimate Scorecard.

Few days ago, I was prompted by a subscriber who went for the workshop that "PB to ROE" equals to "PE" ratio!

Seriously I was dumbfounded. Thus, this weekend I decided to double check on the database and I found that this is absolutely true.

Hence, if I continue to use "PB to ROE", I will end up putting more emphasis on "PE" ratio. Even if I amend some of the figures, I realized the impact will not be great.

Therefore, I decide to change the criteria from "PB to ROE" to just "ROE" ratio. This is because I still want a criteria to calculate management capability.

In addition, the subscriber also shared an article to me indicating the relationship between PB, PE and ROE and how it benefits an undervalue counter.

On the other hand, on the day of the workshop, Christopher of Growing your tree of prosperity has also reminded me that "ROE" encompass the usage of debt. This will actually benefit counters with high debts - something which I am not particularly keen.

Thus, I decided to only award a counter with points for this criteria only if its "Total Liabilities to 50% of its Equity" is below 1. Therefore, this will result in the criteria only awarding points to counters with low liabilities and  high ROE.

Do note that with this adjustment, there are some changes to the back-test result.

Firstly, out of 40 counters, 17 actually provided a "Value or Buy" result. Previously only 12 provided a "Value or Buy" result.

Secondly, despite the increased number of counters with a "Value or Buy" result, the accuracy still remains the same. Out of the 17 counters that provided a "Value or Buy" result, 15 recorded a gain.

Thirdly, despite the changes in the Ultimate Scorecard, the overall accuracy remains the same.

In short, I may have complicated matters when I started using "PB to ROE" as a criteria. I could simply just use ROE as a criteria for management capability. After all, what we want is to find a undervalued counter and that is the objective of using the Ultimate Scorecard.


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