One comment on point 9 - I always understood Buffett's 1 Dollar test as a quick test to see if the market recognizes the value of retaining earnings - meaning that if a company retains earnings and grows but the market value does not go up by at least that amount, the company is "out" (or a deep investigation is needed as to why the market doesn't reward it). https://www.safalniveshak.com/warren-buffetts-dollar-test/
This means that the test looks for companies where the market price _does_ correlate with retained earnings (and those should increase earnings in the future as they are reinvestments into the business).
I write this as I interpreted your statement about "avoiding FOMO" to be meaning that the intention of the test is the opposite: to avoid overpriced securities, i.e. those that have gone up way more than retained earnings did. Obviously, we don't want FOMOing into an overpriced security, but if I interpret your statement correctly you seek companies that are undervalued that have been reinvesting but the market did not at least recognize the value of the retained earnings.
You are right about the test. I see two different views on point 9:
1- if the stock price never correlated with earnings, further investigation is needed and it kight never correlate so avoid. For long term investments in high quality companies is absolutely fundamental.
Then we have value/growth companies were:
2-earnings and price were correlated but now, they dont:
2.1 undervalued companies: is the non-correlation right?(ie its a value trap?) or the market is overreacting? (Value opportunity?)
2.2 the opposite, is the market being too optimistic? Avoid FOMO
I focused on FOMO given the current market conditions, but you are right that this point is more about long-term correlation of earnings and price
Thanks for the review.
One comment on point 9 - I always understood Buffett's 1 Dollar test as a quick test to see if the market recognizes the value of retaining earnings - meaning that if a company retains earnings and grows but the market value does not go up by at least that amount, the company is "out" (or a deep investigation is needed as to why the market doesn't reward it). https://www.safalniveshak.com/warren-buffetts-dollar-test/
This means that the test looks for companies where the market price _does_ correlate with retained earnings (and those should increase earnings in the future as they are reinvestments into the business).
I write this as I interpreted your statement about "avoiding FOMO" to be meaning that the intention of the test is the opposite: to avoid overpriced securities, i.e. those that have gone up way more than retained earnings did. Obviously, we don't want FOMOing into an overpriced security, but if I interpret your statement correctly you seek companies that are undervalued that have been reinvesting but the market did not at least recognize the value of the retained earnings.
You are right about the test. I see two different views on point 9:
1- if the stock price never correlated with earnings, further investigation is needed and it kight never correlate so avoid. For long term investments in high quality companies is absolutely fundamental.
Then we have value/growth companies were:
2-earnings and price were correlated but now, they dont:
2.1 undervalued companies: is the non-correlation right?(ie its a value trap?) or the market is overreacting? (Value opportunity?)
2.2 the opposite, is the market being too optimistic? Avoid FOMO
I focused on FOMO given the current market conditions, but you are right that this point is more about long-term correlation of earnings and price