Copyright: Value Trend Indicator, Wm. W. Odlum


Table of Contents

Overview

Reading and Interpreting

Value Trend Indicator

Entry Form for Database

Viewing Graphs

Value

Price

Annual Earnings

How to View


Overview

Value Trend Indicator

Copyright 1994

by

William W. Odlum

All rights reserved.

The Value Trend Indicator was developed to take advantage of the well known averages and ratios that affect the price of the Shares of Companies listed on Stock Exchanges and on Stock Market Index movements.

It can be used in determine the value of any income producing asset whether it is Shares in a Company,  Mutual Fund,  Commercial Real Estate or any of the popular Stock Market Indices.

The most important and misunderstood ratio is that of  Price/Earnings. The Price/Earnings ratio of an asset is simply the current price divided by its current earnings.

An asset or share of stock is considered good value when its Price/Earnings ratio is 10.  Even better if  the ratio is a lower figure. A lot can be learned from this one ratio. It also makes it easy to compare values of one company with another.

For example a share selling at $10.00, with annual earnings per share of $1.00, has a Price/Earnings Ratio of 10. By dividing 100 by the Price/Earnings Ratio we get the return on our investment which in this case is 10%.

Another important factor is the Annual Earnings Growth of a share. If it is growing then the share price will grow, if it is dropping then the share price will drop. If earnings remain static then the share price will not move.

The relationship between Price/Earnings, Earnings Growth and Price can be seen if the annual earnings in the previous example were to increase the following year to $1.10 per share.

For the  Price/Earnings Ratio to remain at 10 the price per share would increase to $11.00. Giving a  gain of $1.00  or 10% on the original share price plus an increase of  $0.10 cents or 10% in annual earnings.

At times investors will put a higher Price/Earnings Ratio than 10 on the price of a share in anticipation of greater earnings growth several years later. This is fine if the stock has shown consistent earnings growth for a number of years but can be disastrous if  based on projected growth which fails to materialise.

Don't confuse annual earnings with annual dividends. Earnings are the total profit per share while dividends are the portion of that profit paid to shareholders.

The retained earnings can be used to expand the business or pay down debt and shows up as an increase in the share price.

Some fast growing companies pay no dividend, choosing to plough the profit back into more growth. A really fast growing company will show earnings growth in excess of 20% per year.

Debt/Equity Ratio measures the assets of the company against its indebtedness to banks or bondholders etc.

 A  ratio of 1 is considered manageable, meaning that 50% of its assets are owned by the shareholders and 50% by the debt holder.

 If it is higher than that then the risk of owning these shares becomes greater because if the company runs into difficulty with a turndown in earnings it must still pay the interest on its debt which can only come from the sale of assets or adding more debt  thereby decreasing the value of the shareholders equity.

Another very important factor in evaluating a company is to find out who is running the company and for whose benefit, the owners or the management group.

A lot of large public companies today have their shares so widely dispersed that no one person owns more than 1% of the company,  the running of which is left to a management  group with no stake in the company, who can set their own remuneration, bonuses, goals and some of whom have an  inferiority complex which can only be assuaged with their own  corporate jet and luxurious homes around the world, courtesy of the company,  without  having to consider the shareholders and as there is no boss cannot be fired for incompetence.

You may think me cynical but all you have to do is look at some of the large companies which over the past few years have had losses in the hundreds of millions and their management team voted themselves huge bonuses each year.

I like to see a major shareholder with at least 10% of the stock. Since this would represent an investment in the tens of millions of his own money he is going to do his best to make sure that the company is profitable and management performs or else!.

The Rule of 72 is a quick and accurate way to figure out growth rates. Dividing the number 72 by the growth rate of an asset or money will give the time in years it takes to double.

Example 1: Find number of years to double your money.

Growth rate = 20%.   72 divided by 20 = 3.6  or 3.6 years.

Example 2: Find growth rate required to double your money.

Number of years = 3.6.   72 divided by 3.6 = 20 or 20%.

To be an Owner or a Lender. Most people take the safe approach to investing by putting their money in Treasury Bills, Bonds or other debt instruments knowing that they will receive a specified annual interest and be able to redeem their investment at full face value on the redemption date.

Others invest in equity, such as share ownership in companies, with no guarantee of dividends or even getting back the price that they paid for their shares.

However studies show that over the past 60 years the return on Treasury Bills, bonds etc. has averaged out at 3.5% per year.

While over the same period an investment spread over all the common stocks listed on the New York Stock exchange shows a return of 7% including dividends and capital gain. This includes the good, bad and indifferent companies.

The lender just managed to keep up with inflation while the owner showed a gain over inflation of 3.5%.

With a little effort the owner could have weeded out the bad and indifferent stocks and  on average the good stocks would have given him a return of greater that 15% per year.

I have used these ratios and averages for many years in the successful selection of stocks and mutual funds for my own portfolio.

See About...  in Entry Form for Database.

Acknowledgements

A special thank you to Vincent O'Meara, Leigh Lister, Evelyn Ann Fowler, Tom Rafferty and John Mann for their help and advice  in checking out the program for errors, readability and ease of use, also to Bill Gates and all the Team at Microsoft who made this program possible.


Reading and Interpreting

Keep in mind that while each indicator will show important factors they should not be used alone but interpreted together as part of the whole evaluating process coupled with common sense.

2 Weeks: Shows the average of last two data values entered in the file. Not very important by itself. It is used as the base period against which all other weekly averages are measured.

4 Weeks: Shows the average of the last 4 data values entered in the file. Will show the earliest change in direction. However, short term swings are common.

6 Weeks: Shows the average of the last 6 data values entered in the file. Shows a definite trend  is taking place.

8 Weeks: Shows the average of the last 8 data values entered in the file. At this point  can show an established trend.

26 Weeks: Shows the average of the last 26 data values entered in the file. If this is below the 2 week  average then it can be  a good indication of more good things to come. If it is above the 2 week average it is time to be cautious.

52 Weeks: Shows the average of the last 52 data values entered in the file. Same as above.

104 Weeks: Shows the average of the last 104 data values entered in the file. If it is way  below the 2 week average then it is time to be really cautious as bull markets have a life of about 2 to 3 years. If it is above the 2 week average then it is time to seriously consider getting fully invested as it has been a bear market for 2 years.

Direction of Market:  Is based on the difference in the two week average and the eight week average. If the latest two week average is greater than that of eight weeks then the trend is in an upward movement. If they are the same then the trend is moving sideways and could break up or down. If the two week average is lower than that of  eight weeks then the trend is moving down.

Needs at least 8 weeks data to establish a trend.

Last Data Value: Shows last data value entered in the file.

High - Last Data Value: Shows the percentage difference between the highest data value in the file and the last data value entered in the file.

Low - Last Data Value: Shows the percentage difference between the lowest data value in the file and the last data value entered in the file.

High Value from all Data: Shows the highest data value in the file.

Low Value from all Data: Shows the lowest data value in the file.

Difference: Shows the difference in percent between the highest and lowest values in the data.

Annual Earnings: Shows the earning for the latest year entered in the file.

Change Year - Year: Another very important  factor in evaluating the future value of an asset as there cannot be a growth in price without a corresponding growth in annual earnings. Requires at least two years data but more is better as it will show the long term trend in growth or lack of it..

Price/Earnings Ratio: This is one of the most important ratios used in evaluating share prices as it shows the ratio of a common stock's current market price to its current earnings per share and is used as an indicator of a company's profitability.

As there is a direct relationship between earnings and price this ratio can be used to compare different companies on the basis of profitability. Most important of all it shows when prices are out of line with actual earnings.

Risk at 10 times Earnings: Shows the percentage of risk involved based on the traditional factor of 10 times current earnings compared to the current price.

If negative it indicates the amount by which the current price could fall, if positive the amount by which it could rise.

This factor can be changed in the DataBase Entry Form.  As a higher factor could be used for faster growing companies.

Could Drop or Rise to:  Based on current earnings times the above factor it shows what  the price could move to.


Value Trend Indicator

Getting Started: There is a sample database program included in the package called Sample.TND, use it to try out the various features.

Load the file from disk by pressing the Load button and select it from the directory  by clicking on it and then on the OK button.

The program has been made as simple and user friendly as possible. Don't be afraid of hitting wrong control buttons or making wrong entries as there are lots of error correcting routines.

Exit program: Closes the program and exits.

Printer: Sends the current Averages and Ratios as shown, to your printer.

Database: Opens up the database where you can create a new file or add data to an existing file.

Graphs: Shows all data points plotted on a chart.

Save: Will save the file existing in memory to disk. File must have a .TND extension. As the Disk Filename can only be 8 characters long it can be different from the Database Filename which can be any length.

Load: Will load a file from disk into memory.  File must have been created by this program and have a .TND extension.


Entry Form for Database

How to Use:  Click on cell, selected cell will have the focus and show a dark line around it's border, ready to  accept entries. If the cell contains data it will be overwritten.

Latest data will be shown at the top of the list with the oldest data at the bottom.

Week and Date are automatically updated by one week as I have found that one entry value for the same day each week is enough for averaging purposes.

Starting a Database File: Click on Add Row. Today's date will be shown, change to the date for your data,  date must be entered in the form shown. Then move to Data cell and enter data.

Click on File Name and enter the name of the file.

Adding Data: Press Add Row  and Week shown in first row cell along with  date shown in first row Date cell will be automatically updated to 7 days after previous entry,  move to Data Cell and enter your data.

 If you are making more than one entry during the session, repeatedly pressing Add Row will leave the focus on the first row Data cell making entry a one keystroke operation.

To erase a Row: Delete the Date or Data in the row and when the file is recalculated on Exit  to Ratios the row will be eliminated as blank rows are not allowed.

Using Controls:

About: Details about the Author and Copyright. Contains order form.

Exit to Ratios: Returns to Value Trend Indicator.

Printer: Will send the database file to your printer.

Insert Row: If you have forgotten an entry then use to insert a new row. The new row will contain a Date for the last day and month  of 1999 and Data of 1. Reason for this is because no blank rows are allowed as they would interfere with results. Change date and data to your own requirement.

Add Row: Will insert a new row at the top of the database and automatically set the new date  seven days after the previous one.

Clear File: Will clear out the file in memory allowing you to start a new one.

Name File: Adds a file name to your new database file or changes an old one.

Latest Annual Earnings Database:

Select the first row cell by clicking on it and enter the latest year in the Year cell and in the Earnings cell the earnings for that year.

It is important to have the latest year in the top row with each preceding year immediately below it.


Viewing Graphs

Latest entries in the file are shown first with the date for that data point shown under its bar.

Exit: Returns to Value Trend Indicator.

Printer: Will print graph on your printer.

Back: Data shown on each screen has a maximum of 26 points or 26 weeks. If there is more data in the file than 26 weeks then pressing Back will scroll back to show the previous 26 weeks until the end of the data is reached.

Forward: If data has been scrolled back then pressing Forward will scroll to the beginning of the data.

TwoD Chart: Shows data in a two dimensional graph.

ThreeD Chart: Shows data in three dimensions.


Value - Is defined as the actual worth of an asset based on its annual earnings.


Price - Is defined as what an investor is willing to pay for an asset and at times this bears no relationship to the Value or Worth of the asset.


Annual Earnings - Are what is left after deducting all costs and expenses from all income for one full year.


How to View - This Window in full size upper right box shows up and down arrows, if not, click on it. Help-Always on Top should show check mark, if not and this document is made smaller, clicking on the VTI program will hide this one which will still be running and using memory.

Always close this document by double-clicking on upper left box or use File-Exit.

Tip: For best view of any program the grid size should be set as follows: From Windows Control Panel choose Desktop and in the Sizing Grid set Granularity to 0 and Border Width to 2.