Peggy mentioned to me yesterday that our mysterious “John Bell” had sent yet another e-mail. Today, I was able to study this latest e-mail. My comments follow copy of the e-mail.
************** the e-mail **************
When you invest two things are important:
A) The price you pay.
B) The future profits of the business you buy.
In an ideal world every investment you make
will be in a good company at a cheap price.
The price being cheap keeps your risk low
and increases your return.
And a good business will not only continue
for a long time it will also have the
opportunity for growth.
To find these opportunities (good companies
selling at bargain prices) we need to figure
out exactly what it means.
What makes a “good” business?
What price is cheap and how is it measured?
Firstly let’s discuss finding good companies.
The mark of a good business is the return
A good business is one that can use a small
amount of money to make a large amount of
Most businesses in the US earn roughly 10%
on their capital.
That’s the average.
So a good business probably earns roughly 20%
on their capital.
An outstanding business may earn 40% on
You get the point.
The higher the Return on Capital the better
This is the reason companies like Facebook
and Google can grow so big so quick – They
have HUGE returns on capital.
I measure Return on Capital as:
EBIT/Net Working Capital + Fixed Assets
The chief advantage of owning a “good”
business is that it can reinvest its
earnings at this higher return.
The ability to invest money at a 30%
return is valuable, very valuable.
But finding a good business is only half
You also need to buy that good business
at a cheap price.
This price part is probably even more
important than the return on capital part.
Imagine you just inherited $1m and plan
to invest that money to earn a good return.
First you consider government bonds. At
no risk you can earn a 6% return.
But you also notice two businesses are
for sale in your town.
Business A will cost you $1m and earn
$100,000 per year.
Business B will also cost you $1m but
will earn $200,000 a year.
Which is the better option?
Of course it’s B.
This is because the Earnings Yield is
Business B offers a 20% return (or
While Business A offers a more standard
All else being equal you want to buy
businesses with high earnings yields.
The easiest way to measure earnings
yield is the P/E ratio.
Price per Share/Earnings per Share
In summary, smart investing can be
broken down into buying above average
companies at below average prices.
************** the end of the e-mail **************
I wonder if those that have subscriptions with the “John Bell” service are experiencing excessive chagrin at about this time. The e-mail contained absolutely no new information or concepts. In fact, the “return on capital invested” and “earnings to price ratio” method of evaluating stocks is neither new nor particularly useful to discerning investors. Mr. Joel Greenblatt first published his work on this problem in 2004, or perhaps 2005; Mr. Greenblatt tested the model against actual market data predating 2004 by 17 years and found that the method provided average annual gains of more than 30%.
Jammin Java Corp. is a clear case study supporting my conclusion that “John Bell” does not actually employ the magic formula investing protocol of Mr. Greenblatt.
Several weeks ago, I called the next “John Bell” penny stock scam. GBLS: of course, I could be wrong.
I will not be defeated and I will not be deterred from my mission of exposing corruption and frauds.
Nathan A. Busch