SIX SIGMA

 

BOOK VALUE

Benjamin Graham and David Dodd implied to pick stocks with share prices that are way below the company's value to obtain a margin of safety so as not to lose the investment.  

The book value of the company is calculated by dividing the net asset with the weighted number of shares.  The net asset value = Total assets – Total liabilities.

Total assets, total liabilities and the weighted number of shares can be found in the company’s annual report.  The annual report is filed in the U.S. Securities and Exchange Commission as 10-K for U.S. companies or 20-F for non-U.S. companies. The company filings can be searched in https://www.sec.gov/edgar/searchedgar/companysearch.html by searching the company ticker symbol.

For example, using 20-F of ticker symbol GSM for Ferroglobe PLC and subsidiaries, the book value for year 2020 is calculated as follows:

In the “Consolidated Statement of Financial Position”,   

Total assets = $ 1347145 K

Non-current liabilities = $ 548640 K

Current liabilities = $ 432786 K

Total liabilities = Non-current liabilities + current liabilities = $ 548640 K + $ 432786 K = $ 981426 K

In the “Consolidate Income Statement”

The weighted average basic/diluted shares outstanding = 169269281

Therefore the book value = ($ 1347145 K - $ 981426 K) ÷ 169269281 = $2.16 per share

On April 14, 2020, GSM share price = $ 0.471 per share and it is below the book value by 459%.  The discount of 459% to book value is assumed as the margin of safety.  With the GSM closing price on Jul 2, 2021 = $6.25,   the stock price has gained 1227% since April 14, 2020. 

Go to this link for the free mobile app for US listed shares with share prices below book value:

https://winged-prose-8987.glideapp.io/

Reference:

Graham, Benjamin and David, Dodd. 2008. Security Analysis, sixth edition.  New York: McGraw-Hill Education.

Central Limit Theorem

In 1989, I had used statistics regularly to solve process problems in semiconductor manufacturing while working as an assistant process engineer for NEC Semiconductors.  I had received many awards for solving wire bonding problems and my solutions were presented at the NEC Headquarters in Tokyo, Japan.

Image:  My NEC Award Certificates

In 1992, I left NEC to further my studies in Scotland at the University of Glasgow.   At the University of Glasgow was where I first heard about the Central Limit Theorem.

The Central Limit Theorem defined that "the sampling distributions of the mean from non-normal populations approach a normal distribution as the sample size increases" (Schumarker and Tomek 2013, 96).  

Dennis McNicholl (2002) had applied the Central Limit Theorem on DJIA closing prices from 24 Mar to 25 Oct 1999 and resulted in a DJIA bell shaped curve which indicated normal distribution.

Fast forward to June 2021, can the Central Limit Theorem still apply to Dow Jones Industrial, Nasdaq and the S&P500 indexes?  I followed McNicholl's (2002) way to apply the central limit theorem on DJI, Nasdaq and S&P500 closing prices from a year ago starting from yesterday.  Getting the DJI, NASDAQ and S&P500 data from Yahoo Finance into my excel spreadsheet, I generated the following curves using the concept of Central Limit Theorem:

My conclusion is that the Central Limit Theorem has proven to make the DJI, Nasdaq and S&P500 into a bell shaped curved that indicated normal distribution.  Since the prices of the indexes are distributed normally, we can apply statistics on stock picking effectively.  I will talk about stock picking later.  Stay tune...  

References:

McNicholl, Dennis. 2002. "Old statistical methods for new tricks in analysis." Futures, 31(5), 30.

Schumacker, Randall, and Sara Tomek. 2013. Understanding statistics using R. New York: Springer.