Ask Colin

Who can tell me on demand which companies are undervalued based on discounted cash flow or are within the margin of safety?

Your full service broker should be able to do this. Many use discounted cash flow, but others will use PE multiple models or more esoteric models like the capital asset pricing model. If your broker does not do discounted cash flow valuations, and you need to have it, shop around for one who does.

I am not aware of anyone doing the margin of safety work exactly as I have shown it could be done in my mini course or the Shares Charting booklet. This is my interpretation of one easy way to apply the principles. However, any competent full service broking analyst should be able to advise you whether a specific company they follow meets the rules. Most will follow the top 100 stocks as well as more in the top 300 if they are tradeable in enough volume to make the research effort pay for them.

Having answered your question, I must also say that I am worried by it. You said in the preamble to your question that you were an experienced technical analyst. I would ask why you do your own technical work, but want to use someone else's fundamental work?

I know you can answer that your broker does not do technical analysis. That is fine, but if your broker did do it, would you rely on it? Maybe you would, but in my experience, we do not have enough faith in investments where we have not done the work ourselves. We can therefore be frightened out of good investments because of this lack of faith.

Even more pernicious is the problem that having made a decision on someone else's work you are then totally dependent on them to manage the investment. If the analyst moves, is unavailable or stops following the stock, you are out on your own.

Finally, much fundamental analysis is subjective - you are relying on the judgement of the analyst. Many broking analysts are not entirely free to tell you should sell (the company might cut them off from further information) and they may have a conflict of interest in telling you to buy (the firm or a large client may have a lot of that share to sell). These things can colour their judgement.

On balance, I really think you should do your own work if you can. If time is a problem, you should cover fewer stocks or consider a professional manager. Half measures are not good enough in this game.

The margin of safety analysis can be short-cut to a large extent. As you are mainly a technical investor, you could sift out a short list of companies that are attractive technically. Then you could do a scan of one key margin of safety variable for just those companies. Continue with those that remain for another key variable until you have a short list that you will want to do very thorough work on.

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