Anthony Bolton, the great British investor, does not have a favourite valuation measure because he likes to look at a range, believing it dangerous to focus on only one. Note that for all the measures listed below he looks at them both on an absolute basis and on a relative basis.
Absolute values are particularly useful at market extremes to avoid being sucked into a share at times of great exuberance.
The measures:
Price-earnings ratio.
He normally looks at the ratio of price to predicted earnings for the current year, and for the next two years. He is particularly looking for companies that are priced at less than 10 times the earnings in two years from now.
Cash flow yield well above prevailing interest rates.
Free cash flow as a percentage of market capitalization. Looking for a high cash flow calculated after paying for changes in working capital and capex as a percentage of the amount investors are paying for the shares. This is both a useful input to valuation estimations and for financial solvency consideration.
Enterprise value (EV) to gross cash flow
or EV/EBITDA.
EV is the market value of the company’s shares plus its net debt
Gross cash flow is before deduction of interest
EBITDA – Earnings before deduction of Interest, Tax, Depreciation and Amortisation
EV is adjusted down to the extent that there are minority interests and pension fund deficits.
This is a measure examined by companies when valuing a prospective acquisition, it is therefore useful if you are interested in anticipating potential take-over bids.
Prospective free cash flow per share. Next year’s estimated FCF.
Price of shares relative to sales per share, and EV to sales
Particularly useful for loss-ma

The first is excessive debt.  Ignoring risk in the balance sheet risk can lead to some bad investments. The companies within your portfolio with weak balance sheets - high borrowings - are the ones that will depress portfolio returns when the economy or an industry goes through a rough patch.
Even if they do not go bust, they may find that their bankers force them to make disposals of divisions to bring down their debt levels.  Unfortunately, prospective buyers will often spot they are a forced seller and the price received is reduced to levels below what the company and investor thought they were worth.
Given that an investor has to pay as much attention to avoiding disasters as to picking winners then sidestepping highly geared firms is one way to hold fewer losers.
As well as straight-forward debt you should take into account pension fund deficits and the value of redeemable convertible preference shares where the likelihood of conversion is slim.
Also consider the debt maturity profile: what has to be repaid this year, next year, and so on.
Debt covenants may be onerous for shareholders so check them out.
Some companies select year-end dates when their seasonal cash flows are at a high point.  In these cases, the analyst should look beyond the absolute debt levels at the year-end and consider the debt through the year.
The amount paid in interest for the year may be of some help here – if it seems high relative to the year-end debt and prevailing interest rates then, perhaps the debt levels for much of the year were much higher than those reported at the year-end.
Half-year balance sheets often have raised debt levels so it is worth looking at a few years-worth of those.
As regular readers know I regard Piotroski type analysis of financial distress risk, which focuses particularly on the trend in key accounting variables, as useful for getting a handle on the likelihood of the company struggling.
I’m not saying that I will never own a company with a weakened balance sheet – look at Smiths News - but that I will do so with his eyes open and then pay special attention to its progress (I’m expecting Smiths News to reduce its debt dramatically over the next 12 months given its great cash flow).
Cash generation
Will the business genera

Investors need to prepare for meetings with those managers charged with the stewardship of shareholder money. Having good prior knowledge of the publicly available information allows intelligent probing of company performance, business conditions and divisional ups and downs at the meeting.
For AGMs I usually prepare 5-6 key questions to ask in the formal meeting. These are about the issues facing different parts of the business.
In framing the questions I try to be sympathetic to the difficulties and dilemmas facing managers on the front line. I try never to be condemnatory or confrontational - after all they have tough decisions to make.
Furthermore, a demonstration that I don't understand those complexities by crudely complaining about outcomes will not lead to the informal and open discussion I need after the formal meeting.
Pre-meeting preparation
Review your written justification for the investment you made all those months/years ago and subsequent updates in that narrative.
This should have information on earnings going back a decade, strength of the balance sheet and cash flow generation data. It should also contain a discussion on strategic position and quality of managers (competence and integrity) as well as a consideration of operational risk and financial risk at times of stress. It is for these factors that you are seeking more insight at any meeting with directors.
They feed into your estimates of future cash to be generated for shareholders and thus estimates of intrinsic value.
It always useful to see data for at least a complete business cycle.  Often, less than 10 years of  data as inadequate and misleading because this will not cover enough variety of business conditions.
Update the data you have on director dealings in the company’s shares - this is a possible lead indicator of an improving or deteriorating business.  Trades by chief executives or finance directors are often more significant than those by divisional directors.
Also update the table on s

If you have any questions on trustworthiness or competence, then avoid the company.   The people running the firm must have the highest integrity and openness.  They must be candid and not prone to hyperbole.  You must feel that managers are giving a truthful and balanced view of the business.
They must be willing to discuss the minuses as well as the pluses – because all businesses have both.
And they must be managers who under-promise and habitually deliver a bit more than they indicated.  Be very wary of those who promise great advances because they are unlikely to deliver.
“You can’t make a good deal with a bad person” (Warren Buffett).  The purchase of shares is a deal: you must be reassured that stewardship of the company is in good hands.
If there are blemishes on their character, then be wary because people rarely change.  If managers are unethical and dishonest no amount of corporate governance checks (e.g., outside directors) or accounting probes will reveal the truth; there are simply too many ways for managers to pull the wool over the eyes of investors.  They can get away with spin and falsehoods for many years.
Tip: unreliable types 

Recovery shares and others that are currently out-of-favor will produce the best returns because buying them is the opposite of going along with the herd. The stock market takes things to extremes.  Your job, as an investor, is to take advantage these excesses.
By spending time looking for recovery shares you are forced to go against the herd. This is an uncomfortable thing to do for most people who feel much more confident doing what the herd’s doing.  If the press, brokers and everyone else is telling them that Tesla is a good company, then they want to believe that Tesla is a good company.
An indicator that the herd has gone in a particular direction is when many brokers or bulletin board writers are excitedly talking about and recommending buying a certain share.
It’s usually best to have a contrarian spirit.
Common sense says that joining with the excited ones would be a bad move because if the market in general is optimistic the share is probably already fairly or over-priced.
On the other hand, there are occasions when the market gets too pessimistic on things, focusing on the short term and missing the longer-term dynamics of a business.
Often an ideal situation is where things have
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Anthony Bolton is widely acknowledged to be the greatest British investor of his generation. Peter Lynch, the leading American investor, described him as one of the best investors on earth.  He was a contrarian-value investor, who searched for out-of-favor, under-researched shares with potential that others have missed.  He found most of these in the small and medium capitalisation company sectors.
These undervalued and unloved shares were often found where things had gone wrong (but where redemption is likely) or where the company was going through a period of change.
He looked for situations where he believes that investor sentiment about a company is likely to improve in the medium term.
Bolton managed his funds with an above average risk profile. His investors were asked to live with a greater degree of volatility than the average fund.  The kind of medium-sized companies he invested in would often, in a recession,  fall further than the large companies.
So, while his approach did very well in the medium and longer term a follower of his philosophy has to accept that there will be uncomfortable periods.
He has a remarkable record.  The fund he ran at Fidelity, Special Situations, for 28 years between 1980 and 2007 produced a return that averaged 19.5%.  This beat the benchmark FTSE All-Share Index by 6% pa.   A £10,000 investment at launch was worth £1,480,200 by the end of 2007.
It is difficult, if not impossible, to find someone who has a bad word to say about Anthony Bolton as a person.  Unfailingly courteous, he is described variously as modest, genial, collegial and a great listener.
He has an air of quiet efficiency, of deliberateness in his actions, a manifestation of a very orderly mind; he reminds many people of a quintessential professor with a deep intellectual well and agile mind.
Peter Lynch says that he is ‘cool’ in the very best, most British sense of the word – passionately unflappable, intensely calm.  He accepts that he is a fairly unemotional sort of person but counts this as a virtue because emotional people generally make poor fund managers.
What you can learn from Bolton:

• How to look for good value among the unloved, over-looked reaches of the stock market, by taking a contrarian stance
• What makes an excellent company
• What valuation metrics to use
• The concept of the investment thesis
• How to manage a portfolio
• The personal attributes a good investor needs

I’ll discuss these issues in future newsletters. First a short biography.
The making of a great British investor
Bolton ended up in investment by chance.  He had a con
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Flexibility: It is important to remain flexible and open-minded about the different types of investments you might include in your portfolio. There is no one type of security that is always best.  There are good times to buy bonds and good times to buy blue-chip equities, or cyclical companies or other investments.
If a particular type of security is currently very popular with investors then it is usually a bad time to hold it.
And always keep the flexibility of mind to think that there are times to sit on cash.  Holding cash allows you to take advantage of investment opportunities.
If you have an area of investment, say oil shares, that has done well for you in recent years then it may be the time to ask whether this is a good place for you to be in the future. Look around and ask, “What is depressed in price today?  Oil shares may have been bargains two or three years ago, but they may not be now, and it would be foolish to stick with them.
Tip: Look for those securities that performed worst in the recent past and assess whether they are now bargains.
Patience
Buying shares with a long-range view in mind requires patience because it frequently takes the market quite a while to catch up and revalue what you’ve bought.  These shares can continue to be neglected for several years.
Benjamin Graham said that it would often take three or four years for Mr Market to appreciate the companies he bought into.
Warren Buffett and Charlie M……………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

Warren Buffett, Charlie Munger, John Templeton and all the other great investors spend(t) a great deal of time trying to understand the social, economic and political dynamics of countries around the world. These must be considered by investors when estimating future earnings and the risk attached to those earnings – bargains cannot be identified without this.
All have observed first-hand throughout their lifetimes the power of allowing free-enterprise to release the entrepreneurial spirit and witnessed the stifling effect of extreme socialism and other forms of authoritarianism.
This can lead to nationalisation (or even confiscation) from which the investor is unlikely to receive fair value.  Controlled economies may also impose price controls and other distortions in the economy that dissuade entrepreneurs from creating wealth.
See the roots of historical shifts
Warren Buffett is a keen student of American entrepreneurial history and is forever quoting statistics on the phenomenal growth of living standards flowing from free enterprise combined with the need to support the less fortunate.
John Templeton looked for governments that set their economies on path toward capitalism and free markets.   After graduating from Oxford in 1936 he visited India and Hong Kong. Both were very poor, with people dying on the streets.
When he returned years later, he noticed a dramatic change in Hong, but not in Calcutta; a change he attributed to the difference between enterprise and socialism.  The government in India had a tendency to regulate everything so there was little progress; whereas in Hong Kong the government kept its distance, allowing businesses wide latitude.
The result was that the standard of living multiplied ten-fold over fort………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

Warren Buffett says that you should be diversified, but not to “mediocrity”. To lower risk it is essential to split your fund between at least five companies and possibly as many as 20, or 25 if you are full-time professional investor. Beyond that you are diversifying outside of your best ideas, the true bargains. Also, it is very difficult to keep track of dozens of companies. You might end up with only superficial knowledge of each.
John Templeton would say that the only people who should not diversify are those who are right 100% of the time; few investors are right more than two-thirds of the time – he included himself in this assessment.
Templeton offered a guideline: every investor should have at least 10 shares. Even if you are extremely careful in your share selection you cannot predict the future.  A major oil spill, an unexpected technological advance by a competitor or a government dictat can remove half the value from the company.  In addition, you may not have spotted serious internal problems when you first undertook the analysis.
Thus you must diversify – by company, by industry, and by risk.
For the fund I’ll be running next year full-time (one open to small investors and institutions) I expect to diversify to at least 16 companies to avoid these Templeton dangers and to benefit from a wide range of great business models. But I’ll be surprised if the portfolio is split more than 25 ways – there just aren’t that many good ideas out there.
Be bottom-up
Buffett and Templeton are/were both bottom-up analysts, examining shares at a company level first. If that leads to a concentration in a particular country that year, then so be it.
This concentration may appear to
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It is important that you do your own research, that you investigate before investing.  Understanding what makes a company successful is vital. How does the business work? What is its performance over time and how does that compare with competitors? What stimulates sales activity?  What pressures might prevent a growth in sales?
In answering these types of questions, you increase accuracy in judging why the company is currently out of favour and whether a poor situation is temporary, or the company will be consumed by it.
Both John Templeton and Warren Buffett spent a great deal of time studying an industry, the competitive position of the firm and personal qualities and competence of the management.
Home-in on the key value drivers for the industry, e.g., with miners it is reserves, with retailers it is profits and competitive strength.
When researching a company spend as much time researching its competitors as the company itself.   Indeed, the best information comes from competitors rather than directly from the company. Competitors put a great deal of effort into competing and thus develop a deep knowledge of the weakness and strengths of the opposition. Ask various company executives which company in their industry they would invest in, other than their own.  They are generally optimistic about the prospects for their own firm and so may give a less than frank assessment. But if you ask about a competitor within thirty seconds you’ll have a fulsome analysis.
An indicator that the firms in a particular industry are under-priced is an increase in merger and acquisition activity; if they are buying each other at bid premiums of 50% or more perhaps share prices are too low.
Also, companies buying
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