David Bianco Presents: 20 Guiding Principles For Investing In The Stock Market

david biancoDavid Bianco

Photo: CNBC

David Bianco has made some epic stock market calls during his career.Last September, he predicted that the S&P 500 would rally 15 per cent from then through January.  Many on Wall Street that he was nuts.  But he couldn’t have been more accurate.

So, his wisdom may suit you well.

Bianco’s brand new 84-page U.S. equity strategy report includes his 20 Equity Strategy Principles: Principles and rules of thumb that guide our equity strategy.

Some of them are a bit complicated, so we did some translating.

Above all, it's about cash flows

'The value of a stock is the present value of all its future free cash flows. Do not rely on any valuation methodology that does not reconcile with this concept.'

Source: Deutsche Bank

Stocks and the US economy are not the same thing

'S&P is not US GDP. Long-term S&P EPS growth ≠ US GDP growth. The S&P 500 is global. EPS growth is a function of retained EPS and incremental returns.'

Source: Deutsche Bank

Normalized profits can explain short-term movement, and profit margins are not mean reverting

'Perception of normalized EPS can drive short-term S&P 500 performance, but actual EPS through the cycle will drive most S&P 500 long-term performance. S&P 500 margins exhibit cyclicality, but not secular mean reversion. Assess normal EPS with rigorous fundamental analysis, be leery of simple shortcuts.'

Source: Deutsche Bank

True profits are somewhere between GAAP profits and pro forma profit

'True EPS is usually between GAAP and pro forma. True earnings will equal FCF when no investment is made for growth. At steady-state: EPS = FCF/sh. = DPS

Prefer EPS yield over FCF yield, unless difference besides investment recurs.'

Source: Deutsche Bank

Stocks are real assets

'Equities are real assets. Long-term growth will equal inflation when EPS=DPS. Fair PE on normalized steady-state EPS: 1 / a fair long-term real return on investment. EPS and DPS yields are real; compare them to real interest rates.'

Source: Deutsche Bank

Secular interest rate declines are good for stocks

'A secular interest rate decline is good for stocks, but a cyclical decline is bad.'

Source: Deutsche Bank

You can count on mean reversion on most things

'Uncertainty is a very uncertain variable. Mean reversion is a fair assumption.'

Source: Deutsche Bank

A price-earnings ratio greater than the cost of equity is justified by economic profit growth

'Only economic profit growth justifies a PE greater than 1/real CoE. Consider long-term growth potential along with the investments required to support it.'

Source: Deutsche Bank

Slow GDP growth is best

'GDP growth affects the fair PE only to the extent that it affects the ability of a company to earn returns above its cost of capital. Slow GDP growth often best.'

Source: Deutsche Bank

There's nothing wrong with seeking both growth and value

'Value investors seek stocks with normalized earnings greater than market expectations. Growth investors seek stocks with economic profit growth potential greater than market expectations. No rule against seeking both.'

Source: Deutsche Bank

Don't panic

'The market has predicted 9 of the last 5 recessions. Avoid panic selling.'

Source: Deutsche Bank

Manmade disasters are worse than natural disasters

'Natural disasters are less market damaging than manmade disasters.'

Source: Deutsche Bank

Respect the Fed

'Investor panic subsides when policy setter panic begins. Respect the Fed's firepower, but its arsenal will be exhausted if inflation (ULCs) is a problem.'

Source: Deutsche Bank

Don't follow the herd

'Flows follow returns, not vice versa, so stay return focused and don't follow.'

Source: Deutsche Bank

Be patient

'Lack of patience is the market's most reliable inefficiency.'

Source: Deutsche Bank

Theory first

'Seek truth with scientific method: Theory first, then observation & experience.'

Source: Deutsche Bank

Trends don't last forever

'Trends will continue until they don't. Valuation doesn't matter until it does.'

Source: Deutsche Bank

Price-earnings ratios are to be considered differently at the sector and stock levels

'Confront market/sector PE extremes, but respect industry/stock PE extremes.'

Source: Deutsche Bank

The market is a pretty good pricing mechanism

'The market is an imperfect price mechanism, but superior to all others. Those who improve its function earn gains slowly, those who don't can lose suddenly.'

Source: Deutsche Bank

There's more to diversification than just increasing the number of assets

'Diversification comes from the correlation of stocks, not the number of stocks.'

Source: Deutsche Bank

Here's everything

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.