This article is an online version of our weekly FREE Best Ideas Newsletter sent on 14.03.2023. Subscribe here to receive it in your inbox every Tuesday.

Recently, I've shared several articles presenting investment opportunities sourced from the Magic Formula, highly free cash flow yield companies, and our latest actions in the newsletter.

Despite the market's ups and downs, I'm confident our newsletter ideas have shown remarkable resilience. For instance, this morning, I divested a Japanese company that garnered a 72% profit over six months due to a takeover offer.

While such favorable outcomes are not guaranteed for all investments, seizing opportunities with undervalued companies yields promising benefits sporadically. Coupled with prudent loss mitigation (consider stop-loss strategies) and allowing profitable investments to flourish, attractive gains largely take care of themselves.

Anticipating the road ahead

I'm certain you've been observing the turbulence stemming from the recent bank collapse in the USA.

Is this an isolated incident or a proverbial canary in the coal mine?

Who can tell?

Even if someone claims to have an answer, nobody truly knows what tomorrow holds. After all, no one anticipated this bank collapse!

The current turmoil can be attributed to the ramifications of pervasive ultra-low interest rates in the economy. Rapid interest rate hikes to counter inflation are unearthing challenges from unexpected quarters.

Revealing vulnerabilities

This situation brings to mind a resounding quote by Warren Buffett:

“You can only see who's swimming naked when the tide goes out.”

Indeed, as the tide recedes swiftly, the exposed are becoming increasingly conspicuous, including some we haven't yet recognized.

The power of diversification

In light of the unpredictability of future challenges, it's prudent to acknowledge the significance of diversification.

Diversification involves investing in companies across different:

• Industry sectors
• Countries and
• World regions.

As you know, we have maintained a highly favorable view of Japanese companies for an extended period (many of which feature in the newsletter). They are incredibly affordable and most carry no debt, with some even matching their market value with cash on hand.

Obtaining businesses at no cost

This essentially means you are paying solely for the cash (reflected in the company's balance sheet) and acquiring the business for nothing. It may seem unbelievable for companies to be priced this attractively, but we have discovered them. Furthermore, investing in such undervalued assets presents minimal potential for mishaps.

Current actions

In addition to the recently divested takeover company, I've also sold two other companies that reached their stop-loss thresholds.

As a result, the cash position in my portfolio has surged to approximately 38%.

Following the significant downturn in recent days, I intend to selectively commence acquisition of several companies. Primarily, I will target companies endorsed in the newsletter (employing the same strategy in my portfolio), particularly those highlighted in the crash portfolio.

Identifying optimal market resilience strategies

If you have not yet perused it, the crash portfolio comprises inexpensive companies poised for survival.

You need not rely solely on our suggestions; you can also source your own resilient investment options.

This is our approach:

We utilize the following two valuation metrics:

• Value Composite Two and
• Qi Value

However, employing these two metrics to identify economical companies only represents half of our strategy.

We also ensure that the companies we recommend possess the financial fortitude to endure a potential slowdown following a market crash.

To accomplish this, we utilize the following metrics:

• Piotroski F-Score – A valuable metric for identifying companies with positive financial momentum.
• Gross Margin (Marx) – The most reliable quality metric we have tested.
• Debt to Equity – To ascertain that a company does not carry excessive debt through the Debt to Equity ratio
• Debt to Free Cash Flow – This metric evaluates a company's capacity to service its debts by measuring the Debt to Free Cash Flow ratio.
• Net Debt to EBIT – A prudent ratio considering EBIT instead of EBITDA to determine a company's ability to repay debts using its profits.

Prudent position sizing

Given the uncertainty surrounding potential downturns, we recommend purchasing smaller positions, comprising approximately 1% of your overall portfolio.

For added caution, gradually acquire investments in small increments over time. For instance, allocate 33% of the position now, another 33% in a month, and the remaining 33% a month later.

Rigorous trailing stop-loss measures

Since the extent of market declines remains uncertain, we are implementing a STRICT trailing stop-loss policy of 20% on all companies.

One-year holding period

All selections are slated for divestment after a year if they cease to align with the quality economical strategy.

If you’re interested in delving further, refer to the following article: Quant Value Crash portfolio commenced

Your financial guide to maximizing returns

PS I understand that the markets are still uncertain but have you commenced constructing your buy list? If not, why not sign up today and get started now.

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