I thought I'd say a little something about how I decide to buy and sell companies, and what my rationale is behind each trade. There is some discretion involved, but not much, and this is certainly a fair summary of what I do.  A simplified version of this is available on the Checklist page. Let's say I start with £1000 in cash.  I look for a company where I can pay £1000 for something worth at least £1,500. 'Worth' is a slippery term, but to me it means shareholder equity or book value, and I prefer tangible real assets to intangible assets. I realise that book value isn't always the actual net value of the company assets, what with 'cooking the books' and all. However, I don't have the time or interest in digging out all the details so I imagine that the good and bad net each other out. To be on the safe side I use a wide margin of safety.

So I head out into the market and find some companies where I can buy a pound fifty of book value for a pound. These companies are typically quite sick, often making losses, often unloved by almost everybody. Because they are often losing money they need to be able to weather their current problems. They need a bomb-proof balance sheet, or as near as can be. Typically this means they don't have a lot of debt and have at least fair liquidity.

Debt is often what gets a company killed. If the banks refuse to lend to a company which is dependent on debt it's game over and the companies I buy are not top of many banks lend-to lists.  Debt can be measured in many ways, but I tend to use net gearing, which is gearing based on net debt, which is interest bearing debt minus cash and equivalents. What exactly is low debt is debatable and I don't have a hard rule, but certainly less than 100% of tangible equity.  

Once I have added a nice cheap strong company to my portfolio I only check on it's market value once a week. Each week I take a quick look to see if the market value has reached the book value. The answer is usually no. It's usually no for many months if not longer. Sometimes there will be…

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