BI wiki

Hits:

Top Ten Pages

To a beginner applying judgment is one of the most intimidating aspects of the SSG. It shouldn't be. They don't realize they have already exercised their good judgment to save some of their discretionary income for investing purposes. They have further used their judgment to look at stock investing and since they are at this site, have used their judgment and decided to use BetterInvesting methods of fundamental stock analysis to purchase and manage stocks.

They've made good decisions thus far, so why wouldn't they think they would use good judgment in the future?

Judgment - The Big Picture

Ellis Traub brings judgment into focus. His thoughts on judgment can be found in the ToolKit 5 manual (and also in a 2002 CompuServe workshop that's apparently no longer available). Also, in his updated 2005 CompuServe 2005 workshop.

He says there are three levels of judgment for the SSG.

• First Level: Make history relevant by discounting early, rapid growth and one time events aka "outliers."
• Second Level: Based on relevant history, estimate future growth rates, reducing them appropriately for historical inconsistency.
• Third Level: Based on those future growth estimates, estimate potential future price levels.

First Steps in Judgment

In the Toolkit SSG software there are five judgments you must make.

1. Future sales growth rate
2. Future EPS growth rate
3. Future High P/E
4. Future Low P/E
5. Potential low price over the next 5 years.

Please realize there are many more judgments you can make and that you have already made some judgments such as which data source to use.

Five Simple Rules for Beginners

Irving Roth presented a set of beginner's rules for these five points of judgments you must make in ToolKit.

1. Estimate future sales growth based on RELEVANT historic sales growth. Limit to 20%
2. Estimate future EPS growth based on estimated sales growth rate. Limit to 20%.
3. High P/E should not exceed 30 (PEG ratio of 1.5 -- EPS 20% X PEG 1.5 = P/E 30).
4. Low P/E should not exceed 20 (PEG ratio of 1.0 -- EPS 20% X PEG 1.0 = P/E 20)
5. Select low price from section 4B(a) (low P/E X estimated low EPS) unless 4B(d), price dividend will support, is greater.

Five simple rules for the five points of judgment you MUST make to complete a ToolKit SSG.

Ellis reminds us that experience is your license to "bend" the rules.

Selected articles on SSG Judgment

Ed Champi: Understand the SSG Or You Will Buy Turkeys When It's Not Thanksgiving (BetterInvesting Magazine, April 1998).

Nancy Isaacs: Judgment, Judgment, Judgment! (BetterInvesting Magazine, September 2001).

Cy Lynch: Judgment and the NAIC Stock Selection Guide (BetterInvesting Web Feature, Septermber 2002).

Other Areas Needing Judgment

Data source.

Low EPS estimate - latest four quarters vs. latest fiscal year

Percent payout

Add others here