June 12, 2024

The Code That Turned
$1K Into Over $100K

Tim Melvin

Is your head spinning yet? This industry would tell you value investing is dead (I'll address that soon).

They'd tell you to follow the new shiny object and win 5,000% by tomorrow. But nothing beats the tried and true... Today I'll share a special code with you that's timetested and works over time.

But back to the masses:The first thing you have to understand is that "value investing does not work anymore."

Just ask anyone.

Investing has experienced a profound transformation. It is now centered on memes, technology, and the audacious realm of artificial intelligence.

It is about stories and perceptions.

Options trading is the path to tread for maximum leverage and substantial returns.

Day trading - in and out like a ninja. That is the ticket.

You can ask the academics and Wall Street consultants as well.

They have changed the definition of value to fit their need to generate huge fees and have been shocked to find that the expanded definition of value is not worth a tinker's dashgumit.

Passive investing is clearly the solution. Invest in the indexes, irrespective of valuation or economic conditions.

It will all be okay, no matter how old you are or what your goals are at any given moment.

There are all sorts of stories and ideas about what worked, but most people agree that value investing no longer works.

I hear the story all the time, but what the evidence shows is a different story.

Value Investing 101

Classic value investing involves buying companies that trade for very low multiples of the cash produced by the businesses or less than the value of the assets owned by the business.

It also involves insisting on a financial margin of safety that removes as much risk of near- to intermediate-term financial distress as possible for any of the companies you buy.

It still works.

It has always worked.

It does not outperform the indexes or other approaches every week or even every year, but over time, the outperformance is massive.

The number of companies that you will find when you uncover opportunities that fit the strict rules of classical value, you will find there are not that many.

You cannot use the techniques of Ben Graham or a young Warren Buffett to manage billions of dollars.

Institutions will have a hard time using this to manage endowments or pensions.

Individual investors, however, can use it, and they should.

Instead of competing against the most prominent institutions and the rocket scientists staffing most trading desks, individuals can use various techniques to rack up huge profits.

If you feel the need to juice it up, then add leverage to the mix when the markets are well off their highs.

Just stop playing a game where the odds are stacked against you and move into a corner of the market where the odds are, in the words of Effie Trinket, ever in your favor.

The Winner's Combo: 8-3-8

Today, I am going to give you a combination that unlocks a strategy that can make you enormous amounts of money.

It is a 3-number combination, just like the one you had in high school.

This one unlocks the potential to reach all your financial goals instead of allowing access to unread textbooks and mildly toxic gym garments.

The combination is 8-3-8.

Back in 2000, a professor named Joseph Piotroski published a paper in the Journal of Accounting Research titled "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers."

In the paper, he unveiled a nine-step model that measures corporate health and prospects. The higher the number of points checked, the more attractive the company is as an investment opportunity.

EIGHT: We only want to buy shares of companies that check 8 of the 9 boxes.

Professor Edward Altman of NYU invented the Z-score measure back in 1968 as a tool to measure the likelihood of financial distress.

The higher the score, the less likely a company was to struggle financially.

THREE: A score above three put the company in what Altman called the safe zone. We only want companies with Z-scores in the safe zone.

Wes Gray at Alpha Architect, Tobias Carlisle at the Acquirers Multiple, and a handful of other practitioners have done an enormous amount of work suggesting that using the enterprise value of the business to incorporate all the capital employed in the business and using earnings before interest and taxes as a measure of the cash produced by the company gives the best valuation forum.

EIGHT: We only want to invest in businesses that pass the first two filters and have an enterprise value to EBIT ratio of less than 8.

This only produces a small number of companies. Over the past 25 years, there have been less than 30 at any given time.

The closer we are to the bottom, the more stocks the combination unlocks. The closer we are to a top, the fewer stocks make the grade.

From $1,000 to $110,000

If you started using this formula on the first trading day of 2000, checked your portfolio once a month, and made the necessary changes, $1,000 would be worth over $110,000 today.

The index fund investor would have to be content with $56,400.

You will never own the popular stocks everyone is talking about. For instance, a year ago, you would have owned a bunch of coal stocks, and as we all know, coal is the most hated resource on the planet.

You would have doubled your money in these hated stocks.

Two years ago, your holdings would have included trucking companies and car dealers.

Very boring.Again, they doubled.

Buying pre-Covid in 2019 would have given you some insurance companies and steel producers that have risen by three to five times your cost.

Buying today would give you a portfolio that includes:

• A Teddy Bear Store (BBW)
• A woman's apparel designer (GIII)
• A lift truck manufacturer (HY)
• A furniture company (VIRC)
• A steel producer (MTUS).

There is not a semiconductor or chatbot in the bunch.

In all, there are only 14 stocks, about half the average.

That makes a statement in and of itself.

8-3-8 is the combination that can unlock market-beating returns from a portfolio of deeply undervalued companies with a large margin of safety in the financial statements.

History tells me that most readers will ignore it and continue chasing the hot story or the elusive magical pattern that leads to trading glory.

One of these two groups will make a lot more money than the other, and history also tells us which group it will be.

Stay informed,

Tim Melvin
Yield & Growth Expert

Unlock the Code to Wealth

Read to implement a time-tested method that gets REAL results? Go right here to access the Yield Report.

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