The likelihood of Wealth Winners®
By Howard Coleman
Wouldn't it be nice if we could somehow evaluate the likelihood of a particular company becoming a Wealth Winner® for us? I've been pondering how we could do this – the answer could be worth a lot of money to all Teaminvest members.
Here's a simple and reasonably accurate answer.
Our Teaminvest scoring system for 'likelihood of risk' in a workshop is scored as follows:
0: Unlikely to occur in the next economic cycle (5-10 years);
1: Possibly could occur in the next economic cycle;
2: Probably will occur in the next economic cycle; and
3: Virtually certain to occur in the next economic cycle.
If the occurrence we refer to is regarded as 'becoming a Wealth Winner®', then the question we would be scoring about any company would be:
Could this company be a Wealth Winner® in the next 5-10 years?
If we randomly select any company from among the 2,200 listed on the ASX we could answer this 'close to zero'. Around 1,400 of the 2,200 lose money every year and few of the rest have a Return on Equity (ROE) of greater than 10%. In other words, few stand any chance of providing us with a 10% per annum compounded return. At Teaminvest, we aim for 15-20% compounded so on our scoring system, we'd score it a 0.
The probability rises if we ask the same question of the 60-100 companies that pass Conscious Investor® with the STRETD™ set at zero. Here we'd expect about a third to prove Wealth Winners® after 5-10 years. Naturally we wouldn't expect members to be buying them when their STRETD™ was near zero, but bought at the right prices these companies would either 'possibly' or 'probably' prove Wealth Winners®. Conservatively, we could score each of them a 1.
This probability rises further once the best companies have been whittled down to 30-35 in a Triage. Stats suggest each of these 30-35 is 'probably a Wealth Winner®' and should score a 2.
Once a company has passed a few SMaRT workshops (preferably spread over a few cities) I expect most of us would score this small group of companies a 3 as 'virtually certain' to become a Wealth Winner®.
Why only 'virtually certain'? We expect around 15% of companies to disappoint compared to the calculated return (STRETD™) in Conscious Investor® under the automatic margin of safety.
How can we minimise the Risks of Disappointment?
Two categories of risk make up virtually all major disappointments when held for 5-10 years.
Price Risk: we pay too much for shares in the company
The price we pay can be expressed in a multiple of annual earnings. This ratio is the Price divided by Earnings or P/E ratio. The higher the multiple, the more years it will take for the company to earn sufficient profits to cover the cost of our shares. This money can be paid to us in the form of dividends or the company may retain the money for further growth. Time creates risk: the longer it takes for the company to earn in profits per share what we paid for our shares, the higher the risk something will go wrong.
Management Risk
This covers a host of sins varying from management doing something foolish with our money, to management leaving the business in less time than it takes for the company to become a Wealth Winner®. It includes boards paying themselves and management too highly for poor performance.
The longer we need for the company to repay our capital and become a Wealth Winner®, the more likely one of these sins will happen.
Management risks are generally greater with hired management than with founders with 'skin in the game'. Boards and management with little of their wealth tied up in the company are less likely to be focused on generating shareholder wealth than a board and management with their own wealth in the same pot as shareholders.
Conclusion
In seeking Wealth Winners® for your portfolio on the ASX, choose companies that have passed several SMaRT workshops (preferably spread over several cities), and seek to pay a low P/E ratio relative to HGROWTH™. From these select those where board and management have significant 'skin in the game'. Then be patient and hold them long enough for them to repay your capital and go on to become Wealth Winners®.
Are you interested in finding Wealth Winners® for your own share portfolio?
Conscious Investor® is a powerful stock picking software that contains proprietary tools developed over decades by Teaminvest co-founder Dr John Price. Teaminvest members enjoy full access to all ASX stocks on this stock selection tool, along with member intelligence, SMaRT workshop summaries and company reports. To find out if Teaminvest is right for you, and if you would be a good fit for Teaminvest, book a call with long-time member Chris here.
Conscious Investor® is a registered trade mark in the US and Australia. Other trade marks used on this site and in Conscious Investor include HGROWTH™ and STRETD™®, STRETD™ is registered trade marks in Australia. All trade marks are used under license.
This article contains general investment advice only (under AFSL 334339). Authorised by Mark Moreland.
