Hello,

I have assessment..

Step 1 : Calculate the following ratios for the latest five years using the O-S Checklist Approach, an Excel template . For an overview of the approach, read our article, ?Overcoming Cognitive Biases: A Heuristic for Value Investing Decisions,?

Step2 : Comment on whether the company has durable competitive advantage (aka Wide Moat).

can you do it for me plz .

Agilent Technologies, Inc. (NYS: A) Exchange rate used is that of the Year End reported date As Reported Annual Balance Sheet Report Date Currency Audit Status Consolidated Scale Cash & cash equivalents Short-term restricted cash & cash equivalents Short-term investments Cash & cash equivalents & short-term investments Accounts receivable, net Finished goods Work in process Raw materials Purchased parts & fabricated assemblies Inventory Other current assets Current assets of discontinued operations Total current assets Land Buildings & leasehold improvements Machinery & equipment Software Total property, plant & equipment Less: accumulated deprection & amortization Property, plant & equipment, net Goodwill & other intangible assets, net Goodwill Other intangible assets, net Long-term restricted cash & cash equivalents Long-term investments Other assets Non-current assets of discontinued operations Total assets Accounts payable Employee compensation & benefits Deferred revenue Short-term debt Income & other taxes payable Accrued expenses Accrued restructuring Standard warranty accruals All other accrued expenses Other accrued liabilities Other accrued liabilities Current liabilities of discontinued operations Total current liabilities Senior notes Long-term debt Long-term debt Senior notes Retirement & post-retirement benefits Deferred tax liabilities Deferred revenue & extended warranty Deferred compensation Minority interest Restructuring Standard warranty accruals Other long-term liabilities Other long-term liabilities Other long-term liabilities Total liabilities Common stock Treasury stock at cost Additional paid-in capital Retained earnings (accumulated deficit) Unrealized gain (loss) on equity securities Foreign currency translation Unrealized gains (losses) on defined benefit plans Unrealized gains (losses) on derivative instruments Accumulated other comprehensive income (loss) Total stockholders' equity Non-controlling interest Total equity As Reported Annual Income Statement Report Date 10/31/2014 USD Not Qualified 10/31/2013 USD Not Qualified 10/31/2012 USD Not Qualified 10/31/2011 USD Not Qualified 10/31/2010 USD Not Qualified 10/31/2009 USD Not Qualified 10/31/2008 USD Not Qualified 10/31/2007 USD Not Qualified 10/31/2006 USD Not Qualified Yes Millions 3028 983 585 487 1072 417 5500 120 1341 1054 410 2925 1824 1101 2899 667 159 505 10831 475 395 435 397 1702 2762 422 644 5530 6 9807 8967 6466 17 156 -516 9 -334 5298 3 5301 Yes Millions 2675 899 552 514 1066 343 4983 131 1330 1019 398 2878 1744 1134 3047 916 139 467 10686 432 401 439 330 1602 2699 294 802 5397 6 9607 8723 6073 7 425 -341 91 5286 3 5289 Yes Millions 2351 923 509 505 1014 341 4629 142 1475 882 383 2882 1718 1164 3025 1086 109 523 10536 461 387 420 250 375 1893 2112 554 792 5351 6 8707 8489 5505 424 -537 2 -111 5182 3 5185 Yes Millions 3527 860 452 446 898 284 5569 138 1271 833 370 2612 1606 1006 1567 429 117 369 9057 472 424 389 253 299 1837 1932 1932 329 643 4741 6 8535 8265 4456 -6 452 -331 1 116 4308 8 4316 Yes Millions 2649 1550 869 338 378 716 385 6169 137 1268 793 377 2575 1595 980 1456 494 6 142 449 9696 499 395 358 1501 330 3083 2190 2190 477 710 6460 6 8038 7904 3444 -88 3228 8 3236 Yes Millions 2479 14 595 285 267 552 321 3961 97 1210 779 365 2451 1606 845 655 167 1566 163 255 7612 307 336 285 26 169 1123 1516 1388 498 581 5106 6 7627 7552 2760 -185 2506 - Yes Millions 1405 24 770 331 315 646 363 3208 91 1147 758 350 2346 1522 824 646 228 1582 206 743 7437 308 409 280 128 200 1325 1514 611 324 1104 4878 6 7470 7410 2791 -178 2559 - Yes Millions 1826 735 313 44 286 643 467 3671 83 1160 828 394 2465 1664 801 736 1615 731 7554 323 432 249 522 137 1663 1500 587 141 429 4320 6 6469 7117 2172 408 3234 - Yes Millions 2262 692 285 51 291 627 377 3958 75 1023 863 388 2349 1574 775 468 1606 562 7369 378 414 225 390 51 32 28 20 131 1538 1500 288 182 72 58 11 39 1 32 395 3721 5 4525 6605 1534 29 3648 - 10/31/2014 10/31/2013 10/31/2012 10/31/2011 10/31/2010 10/31/2009 10/31/2008 10/31/2007 10/31/2006 Currency Audit Status Consolidated Scale Products revenue Services & other revenue Total net revenue Cost of products Cost of services & other costs Total costs Research & development expenses Selling, general & administrative expenses Gain on sale of Palo Alto & San Jose site Total costs & expenses Income (loss) from operations Interest income Interest expense Interest income Interest expense Minority interest loss Rental income Investment impairments Investment gains Government grants Gain on sale of assets Currency gains (losses), net Income from foreign sales corporation tax study Loss on redemption of debt & amortization of issuance costs Other income (expense), net Total other income (expense), net Gain on sale of network solutions business, net Other income (expense), net Income (loss) before taxes - United States (U.S.) operations Income (loss) before taxes - non-U.S. operations Income (loss) before taxes U.S. federal taxes - current U.S. federal taxes - deferred Non-U.S. taxes - current Non-U.S. taxes - deferred State taxes - current State taxes - deferred Provision (benefit) for income taxes Equity in net income of unconsolidated affiliate (including gains Income (loss) from continuing operations Income (loss) from discontinued operations, net Income from & gain on sale of discontinued operations of Co.' Income (loss) from discontinued operations of Co.'s semiconduc Income (loss) before accounting changes Net income (loss) Weighted average shares outstanding - basic Weighted average shares outstanding - diluted Year end shares outstanding Income (loss) per share from continuing operations - basic Income (loss) per share from & gain on sale of discontinued op Income (loss) per share - discontinued operations - basic Net income (loss) per share - basic Income (loss) per share - continuing operations - diluted Income (loss) per share from & gain on sale of discontinued op Income (loss) per share - discontinued operations - diluted Net income (loss) per share - diluted Cash dividends declared per common share Total number of employees Number of common stockholders As Reported Annual Retained Earnings Report Date Currency Audit Status Consolidated Scale Previous retained earnings (accumulated deficit) Cash dividends declared Spin-off of Co.'s semiconductor test solutions business Adjustment to initially apply ASC 740, "income taxes" Adjustment to correct initial application of Financial Interpretat Retained earnings (accumulated deficit) As Reported Annual Cash Flow Report Date Currency Audit Status USD Not Qualified USD Not Qualified USD Not Qualified USD Not Qualified USD Not Qualified USD Not Qualified USD Not Qualified USD Not Qualified USD Not Qualified Yes Millions 5686 1295 6981 2673 715 3388 719 2043 6150 831 9 113 -81 -117 763 646 12 -11 260 -117 2 -4 142 504 333 338 334.966 1.51 1.49 0.528 21400 28341 Yes Millions 5534 1248 6782 2576 671 3247 704 1880 5831 951 7 107 8 39 820 859 24 48 77 -24 3 7 135 724 341 345 332.299 2.12 2.1 0.46 20600 30054 Yes Millions 5659 1199 6858 2608 646 3254 668 1817 5739 1119 9 101 16 45 998 1043 6 -144 41 -22 1 8 -110 1153 348 353 346.473 3.31 3.27 0.3 20500 33750 Yes Millions 5482 1133 6615 2473 613 3086 649 1809 5544 1071 14 86 33 88 944 1032 -1 -6 28 -11 10 20 1012 347 355 346.382 2.92 2.85 18700 39669 Yes Millions 4464 980 5444 1976 538 2514 612 1752 4878 566 20 96 132 70 163 529 692 -40 37 145 -141 12 -5 8 684 347 353 346.144 1.97 1.94 18500 41457 Yes Millions 3566 915 4481 1692 497 2189 642 1603 4434 47 29 88 19 -226 233 7 -20 26 20 6 10 -4 38 -31 346 346 346.148 -0.09 -0.09 16800 43761 Yes Millions 4804 970 5774 2030 548 2578 704 1697 4979 795 113 123 30 -100 915 815 39 -33 114 -3 22 -17 122 693 693 363 371 349.845 1.91 1.91 1.87 1.87 2495 45871 Yes Millions 4505 915 5420 1928 523 2451 685 1700 4836 584 172 91 5 -460 1130 670 71 -127 91 -5 3 -1 32 638 638 394 406 370 1.62 1.62 1.57 1.57 2500 48254 Yes Millions 4125 848 4973 1799 516 2315 655 1660 121 4509 464 178 69 5 18 1 14 2 -2 15 13 163 627 1 95 -9 4 91 901 1437 1816 54 3307 431 441 408 3.33 4.21 0.13 7.67 3.26 4.12 0.12 7.5 14500 50558 10/31/2014 USD Not Qualified 10/31/2013 USD Not Qualified 10/31/2012 USD Not Qualified 10/31/2011 USD Not Qualified 10/31/2010 USD Not Qualified 10/31/2009 USD Not Qualified 10/31/2008 USD Not Qualified 10/31/2007 USD Not Qualified 10/31/2006 USD Not Qualified Yes Millions 6073 176 65 6466 Yes Millions 5505 156 6073 Yes Millions 4456 104 5505 Yes Millions 3444 4456 Yes Millions 2760 3444 Yes Millions 2791 2760 Yes Millions 2172 -74 2791 Yes Millions 1534 2172 Yes Millions -1463 -310 1534 10/31/2014 USD Not Qualified 10/31/2013 USD Not Qualified 10/31/2012 USD Not Qualified 10/31/2011 USD Not Qualified 10/31/2010 USD Not Qualified 10/31/2009 USD Not Qualified 10/31/2008 USD Not Qualified 10/31/2007 USD Not Qualified 10/31/2006 USD Not Qualified Consolidated Scale Net income (loss) Less: income from & gain on sale of discontinued operations of Less: income (loss) from discontinued operations of Co.'s semic Less: income (loss) from discontinued operations Income (loss) from continuing operations Depreciation & amortization Accelerated amortization of interest rate swap gain (due to earl Share-based compensation Excess tax benefit from share-based plans Deferred taxes Excess & obsolete inventory & inventory related charges Translation gain from liquidation of a subsidiary Non-cash restructuring & asset impairment charges Net loss (gain) on sale of investments Loss (gain) on sale & undistributed equity in net income of Lum Net loss (gain) on sale of assets & divestitures Net pension curtailment & settlement gains Other adjustments Accounts receivable, net Inventory Accounts payable Employee compensation & benefits Income taxes & other taxes payable Interest rate swap proceeds Other current assets & liabilities Other assets & liabilities Net cash flows from operating activities of continuing operation Net cash flows from operating activities of discontinued operat Net cash flows from operating activities of discontinued operati Net cash flows from operating activities of discontinued operati Net cash flows from operating activities Investments in property, plant & equipment Proceeds from the sale of property, plant & equipment Proceeds from (net investment in) lease receivable Purchase of investment securities Proceeds from the sale of investment securities Purchase of securities classified as availabe-for-sale Proceeds from the sale of available-for-sale securities Proceeds from the sale of Lumileds Proceeds from sales of assets & divestitures, net Proceeds from divestitures Net proceeds from sale of discontinued operations Payment to acquire equity method investment Purchase of other investments Change in restricted cash, cash equivalents & investments, net Increase in restricted cash Payment of loan receivable Proceeds (purchases) of short-term investments, net Purchase of minority interest, primarily Yokogawa Analytical S Purchase of non-controlling interest Acquisition of businesses & intangible assets, net of cash acqu Net cash flows from investing activities of continuing operations Net cash flows from investing activities of discontinued operat Net cash flows from investing activities of discontinued operati Net cash flows from investing activities of discontinued operati Net cash flows from investing activities Issuance of common stock under employee stock plans Treasury stock repurchases Payment of dividends Distribution on spin-off of subsidiary (Co.'s semiconductor test Redemption of convertible debentures, net Capital contributions to subsidiary (Co.'s semiconductor test so Proceeds from credit facility Repayment of credit facility Proceeds from long-term debt & senior notes Issuance of senior notes Debt issuance costs Repayment of senior notes Repayment of debts Purchase of non-controlling interest Proceeds from debts & credit facility Repayment of debts & credit facility Excess tax benefit from share-based plans Cash distribution to minority interest in consolidated joint ventu Net borrowings (payments) related to notes payable & short-te Net cash flows from financing activities of continuing operation Net cash flows from financing activities of discontinued operati Net cash flows from financing activities Effect of exchange rate movements Net increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of year Yes Millions 504 384 -22 96 -1 -132 79 23 -1 -10 10 -119 -99 50 9 -60 711 -205 14 1 2 -25 -4 -13 -230 188 -200 -176 1099 -9 -1000 87 -87 1 -97 -31 353 2675 Yes Millions 724 372 85 -2 31 48 3 -1 3 3 14 -100 -27 16 -17 1152 -195 2 12 -21 -25 -21 -248 161 -900 -156 597 -5 -250 -3 2 -554 -26 324 2351 Yes Millions 1153 301 74 -158 30 1 -4 2 5 19 -52 -31 -54 -58 1228 -194 80 5 -6 -2257 -2372 100 -172 -104 399 -3 -250 -1 -31 - Yes Millions 1012 253 72 38 30 10 -6 2 -1 9 11 -208 -35 24 65 -16 1260 -188 18 16 1 1545 -98 1294 304 -497 -1500 -1693 17 878 2649 Yes Millions 684 202 66 -109 30 26 -2 -127 -166 -51 113 17 35 718 -121 7 38 205 10 -1313 -1174 299 -411 747 -5 -29 601 25 170 2479 Yes Millions -31 162 71 28 54 39 -6 -16 2 193 47 -7 -86 -105 43 20 408 -128 1 -30 94 45 16 -10 -2 -14 71 -157 325 -325 748 -5 657 23 1074 1405 Yes Millions 693 693 201 82 -53 24 -25 8 4 2 -1 -44 -14 -21 -10 45 -135 756 756 -154 14 -256 150 33 -14 -172 -399 -399 211 -1001 510 -510 16 -774 -774 -4 -421 1826 Yes Millions 638 638 191 139 -134 21 8 -2 -13 -1 2 22 -21 -13 13 132 29 -42 969 969 -154 12 13 14 3 -344 -456 -456 375 -1944 598 -5 -4 -980 -980 31 -436 2262 Yes Millions 3307 -1816 -54 1437 170 94 -19 38 40 -11 -901 -114 -23 5 8 -55 56 -101 -72 -70 -51 431 7 196 634 -185 207 974 2510 -5 -1584 50 25 -104 -50 1838 -6 -36 1796 547 -4235 -300 -19 700 -700 1500 -25 -16 -2548 140 -2408 14 36 2226 Cash & cash equivalents at end of year Net cash paid for income taxes Cash paid for interest 3028 131 142 2675 - 86 111 3527 22 95 2649 48 89 2479 113 88 1405 210 88 1826 86 85 2262 156 55 10/31/2005 USD Not Qualified Yes Millions 2226 25 2251 753 306 63 353 722 298 423 4447 84 1328 862 396 2670 1797 873 362 650 419 6751 344 542 247 474 57 71 41 10 179 150 1936 383 131 76 54 34 22 5 29 351 2670 5 290 5878 -1463 -49 4081 - 10/31/2005 USD Not Qualified Yes Millions 4207 932 5139 2034 583 2617 738 1603 4958 181 72 27 10 29 18 7 7 6 5 7 9 73 254 40 124 -12 3 155 42 141 186 327 327 494 500 503.6 0.29 0.37 0.66 0.28 0.37 0.65 17320 58070 10/31/2005 USD Not Qualified Yes Millions -1790 -1463 10/31/2005 USD Not Qualified Yes Millions 327 -186 141 186 9 -12 84 26 -8 -42 -18 8 29 2 21 17 122 -5 83 643 256 899 -139 54 22 8 -13 -22 6 -25 -64 -173 -27 -200 198 -290 -684 -4 -780 -8 -89 2315 2226 75 44 5 Minute QuickScan Date: Basic Quality Standards Company Name Ticker Question 2 Question 3 3 to 5 years Mkt Cap Equity Book Tangible Activities? 10%? Ratio 12% since most businesses lends between 8% and 12% Year 2014 2013 2012 2011 2010 - - - - - 86.00 96.00 Net Income Interest 113.00 107.00 101.00 Long-Term Debt - - - - - Total Equity - - - - - Invested Capital ROIC - - #DIV/0! - - - #DIV/0! #DIV/0! #DIV/0! #DIV/0! 2014 2013 2012 2011 2010 0 0 0 0 0 2 Equity Growth Rates: Year BVPS 4-year 3-year 2-year Growth rate Growth rate Growth rate 0.00 0.00 1-year Growth rate 0.00 0.00 3 EPS Growth Rates: Year 2014 2013 2012 2011 2010 EPS 1.49 2.10 3.27 2.85 1.94 4-year 3-year 2-year 1-year Growth rate Growth rate Growth Growth rate rate -0.06 -0.19 -0.32 -0.29 4 Sales Growth Rates Year 2014 2012 2011 2010 0.00 Sales (Revenue) 2013 0.00 0.00 0.00 0.00 Sales Growth Rates: 4-year 3-year 2-year 1-year Growth rate Growth rate Growth Growth rate rate 0.000 0.000 0.000 0.000 5 Operating Cash Flow (OCF) and Free Cash Flow (FCF) growth rates Year 2014 2013 2012 2011 2010 OCF 0.00 0.00 0.00 0.00 0.00 CAPEX 0.00 0.00 0.00 0.00 0.00 FCF 0.00 0.00 0.00 0.00 0.00 OCF Growth Rates: 4-year 3-year 2-year 1-year Growth rate Growth rate Growth Growth rate rate 0.000 0.000 0.000 0.000 FCF Growth Rates: 4-year 3-year 2-year 1-year Growth rate Growth rate Growth Growth rate rate 0.000 0.000 0.000 0.000 6 Gross Margin (>40% is sign of durable competitive advantage; = industry or sector average). (Industry: ... ...%; Average of competitors: ... ...%) Year 2014 2013 2012 2011 2010 0 0 0 0 0 Operating Profit 0.00 0.00 0.00 0.00 0.00 Operating Margin #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! Sales 8 Net Margin (> 20% => competitive advantage; = 10% indicator of competitive advantage; must not be strong company; low probability of bankruptcy. F-Score between 0 and 2 => weak company; high probability of failing. 1 #DIV/0! #DIV/0! #DIV/0! Altman Z Score: Current Assets Current Liabilities Total Aseets Operating Income Market Cap Total Liabilities Retained Earnings Sales X1 X2 X3 X4 X5 = Working Capital / Total Assets =Retained Earnings/Total Asets = Operating Income/Total Assets = Market Capitalization / Liabilities = Sales / Total Assets 5,500 0 0 0 0 0 0 0 Ratios Score #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! Total #DIV/0! Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5 Z High probability of bankruptcy 1.8 caution; moderate probability of bankruptcy 2.7 proceed with caution Z > 3 => safe; bankruptcy unlikely. This article was downloaded by: [University of New Brunswick] On: 05 August 2015, At: 07:42 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: 5 Howick Place, London, SW1P 1WG Journal of Behavioral Finance Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/hbhf20 Overcoming Cognitive Biases: A Heuristic for Making Value Investing Decisions a Eben Otuteye & Mohammad Siddiquee a b University of New Brunswick Fredericton b University of New Brunswick Saint John Published online: 27 Jul 2015. Click for updates To cite this article: Eben Otuteye & Mohammad Siddiquee (2015) Overcoming Cognitive Biases: A Heuristic for Making Value Investing Decisions, Journal of Behavioral Finance, 16:2, 140-149, DOI: 10.1080/15427560.2015.1034859 To link to this article: http://dx.doi.org/10.1080/15427560.2015.1034859 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the \"Content\") contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use of the Content. This article may be used for research, teaching, and private study purposes. Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http:// www.tandfonline.com/page/terms-and-conditions THE JOURNAL OF BEHAVIORAL FINANCE, 16: 140-149, 2015 Copyright The Institute of Behavioral Finance ISSN: 1542-7560 / 1542-7579 online DOI: 10.1080/15427560.2015.1034859 Overcoming Cognitive Biases: A Heuristic for Making Value Investing Decisions Eben Otuteye University of New Brunswick Fredericton Mohammad Siddiquee Downloaded by [University of New Brunswick] at 07:42 05 August 2015 University of New Brunswick Saint John Investment decisions are subject to error due to cognitive biases of the decision makers. One method for preventing cognitive biases from inuencing decisions is to specify the algorithm for the decision in advance and to apply it dispassionately. Heuristics are useful practical tools for simplifying decision making in a complex environment due to uncertainty, limited information and bounded rationality. We develop a simple heuristic for making value investing decisions based on protability, nancial stability, susceptibility to bankruptcy, and margin of safety. This achieves two goals. First, it simplies the decision making process without compromising quality, and second, it enables the decision maker to avoid potential cognitive bias problems. Keywords: Value investing, Margin of safety, Cognitive biases, Heuristics INTRODUCTION Value investing is an investment paradigm proposed by Benjamin Graham (Graham and Dodd [1934], Graham [2006]). According to Graham and Dodd [1934], \"an investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.\"1 There are three essential components of this denition to take note of. First, an investment must be based on thorough analysis; second, it should have an assurance of safety of principal; third, it should entail an expectation of satisfactory return. Benjamin Graham further proposed the concept of \"margin of safety\" as the cornerstone principle for operationalizing this denition of investment. Margin of safety is a measurement of the degree to which an asset is trading at a discount to its intrinsic value. It is pretty straightforward to see how \"margin of safety\" relates to Benjamin Graham's denition of investment. Thorough analysis enables the investor to obtain an estimate of the Address correspondence to Eben Otuteye, Professor of Finance, Faculty of Business Administration, University of New Brunswick, Singer Hall, 7 Macauley Lane, Fredericton, NB E3B 5A3, Canada. Email: otuteye@unb.ca intrinsic value of the asset and buying it at a substantial margin of safety ensures safety of principal as well as reasonable expectation of satisfactory return. Since intrinsic value is difcult to calculate accurately, margin of safety provides a cushion against making any poor decisions. Currently the most prominent practitioner of value investing is Warren Buffett. Besides Buffett, there is a signicant number of money managers all over the world who identify themselves as value investors.2 Buffett [1984] gave a list of nine successful value investors all of who trace their education and training in value investing to Benjamin Graham. Highlighting the roots of their investment style, Buffett referred to these outstanding portfolio managers as the \"Superinvestors of Graham and Doddsville.\" One interesting feature that Buffett pointed out from these \"superinvestors\" is that no two of them managed their portfolios the same way. All these prot\u0013g\u0013s and disciples of e e Benjamin Graham went off to different places, buying and selling different securities, yet each ended with a stellar performance. Each one had his own unique way of successfully operationalizing what Graham had taught. What value investors have in common is that their investment operations are rooted in Graham's denition of investment, with the concept of \"margin of safety\" playing a central role in their investment decision making. One way in particular Downloaded by [University of New Brunswick] at 07:42 05 August 2015 OVERCOMING COGNITIVE BIASES that Warren Buffett and Charlie Munger distinguish their style of investing from other disciples of Benjamin Graham is that they place a lot of emphasis on the quality of management and the strength of the moats protecting the companies they are interested in buying. Thus the Buffett-Munger style is a blend of Philip Fisher's quality of management approach with Graham type \"cigar butt\" investing. Since 1959 quality of management has become one of the most important criteria for Buffett-Munger.3 The idea that value investing could be operationalized in a variety of ways was somewhat acknowledged by Graham and Dodd. In explaining their denition, Graham and Dodd noted that \"the phrases thorough analysis, promises safety, and satisfactory return are all chargeable with indeniteness, but the important point is that their meaning is clear enough to prevent serious misunderstanding.\" (Graham and Dodd [1934], p. 55; italics in original). It is the indeniteness of the key aspects of the denition that makes it possible for people to practice value investing in diverse ways and still achieve comparable results that are all superior to the market average. Academic research has shown consistently that value investing outperforms other investment styles.4 In the standard academic literature, a value portfolio is typically dened as one with low price-earnings ratio, low market value to book value ratio, low price to cash ow ratio, or some other similar price-denominated metric (Fama and French [1992, 1998], Chan and Lakonishok [2004]). As Athanassakos [2011] pointed out, this is a limited view of what a value portfolio is. This perspective of value investing is quite different from value investing as practiced by the disciples of Benjamin Graham. It is clear from Buffett [1984], based on the variety of ways in which each of those value \"superinvestors\" approached their portfolio selection process, that Benjamin Graham's system is more of a paradigm and a philosophical mindset to investing than a set of techniques for portfolio selection based simply on some price ratios. The purpose of this paper is to develop a systematic approach for making value investing decisions in a way that will avoid cognitive biases. We discuss the role of heuristics in investment decision making in the context of cognitive biases and bounded rationality. We argue that having a prespecied decision making algorithm such as the one we present here has the benet of minimizing the chances of cognitive biases interfering with the investment decision. The motivation for developing a system for value investing is twofold. First, we believe that Benjamin Graham's guidelines for successful investing can be implemented if stocks are selected on the basis of protability, sound cash ow management, long-term nancial stability, and margin of safety. Secondly, having such a system specied in advance and applied systematically will reduce the effect of potential cognitive biases. What is required for that decision making system to be successful is that it must be built 141 on elements that will ensure that the three essential components of Benjamin Graham's denition of investment are fullled: robust analysis, assurance of preservation of principal, and satisfactory return. We propose a simple heuristic that incorporates the key tenets of value investing as propounded by Benjamin Graham. The thrust of the quantitative aspect of the heuristic is that it helps to identify and select common stock of companies that (i) have good history and prospects of continued protability, (ii) are nancially stable, and (iii) are priced signicantly below their intrinsic values. These quantitative indicators will then be supported with qualitative evaluation of management's integrity and candor by reviewing past annual reports, press releases and other relevant communication, especially responses to situations where management is in error or at fault for some reason. We hypothesize that a consistent and disciplined application of such a heuristic will generate common stock portfolios whose returns will outperform the market average over long periods of time. Furthermore, by specifying the process in advance, one can avoid the impact of cognitive biases if the process is applied with discipline. To facilitate easy discussion, we call this heuristic the O-S heuristic.5 The paper makes a number of contributions to the value investing and cognitive biases literature. First, it attempts to give some clarity as to what constitutes value investing when it comes to implementation. It does this by developing a heuristic that is rooted in core variables of interest to value investors. The paper also demonstrates the simplicity and power of value investing by showing how a simple heuristic based on very familiar nancial ratios and data from public sources can be used to make effective portfolio selection decisions. Using the premise that a disciplined application of pre-specied decision rules is a safeguard against cognitive biases, a simple heuristic that can deliver the desirable outcomes is certainly a valuable tool to have. We highlight the point that effective value investing decisions can be made despite potential cognitive bias problems. The rest of the paper is as follows: It begins with a discussion of the role of heuristics in judgment and investment decision making. This is followed by a synoptic overview of the origins and development of value investing. A description of the O-S heuristic, the rationale behind it, and how it is applied in value investing is then presented followed by summary and conclusion. BOUNDED RATIONALITY, HEURISTICS AND BIASES IN INVESTMENT DECISION MAKING Psychologists have shown that in an environment with limited knowledge and limited capacity to process information, individuals tend to resort to satiscing algorithms to make decisions (Gigerenzer [1997]). These mental shortcuts are Downloaded by [University of New Brunswick] at 07:42 05 August 2015 142 OTUTEYE AND SIDDIQUEE also referred to as heuristics.6 If one is interested in improving the quality of the value investing decision-making process, then a viable approach will be to develop some type of heuristics as a decision support system for the stock selection process. Kahneman and Tversky are pioneers in the study of heuristics in making intuitive judgments. In a series of papers (Tversky and Kahneman [1974, 1983], Kahneman and Tversky [1973, 1982]), they showed that the use of heuristics makes complex problems tractable. However, they also demonstrated through a number of experiments that in many instances the use of heuristics leads to systematic, predictable, and repeated errors in judgment. In particular, they showed that the use of intuition in making statistical inference leads to outcomes that are inconsistent with the principles of probability and statistics (Tversky and Kahneman [1974]). Their research and publications gave rise to the cognitive biases literature. The use of heuristics within the Kahneman and Tversky school of thought carries the risk of making systematic errors in judgment. These systematic errors in human judgment have come to be known as cognitive biases. Cognitive biases lead to distorted judgments, which eventually lead to poor decisions. The deluge of research in this school of thought has led to the discovery and classication of a long list of cognitive biases that plague decision makers including investment decision makers.7 Kahneman and Tversky extended their research on intuitive statistical judgment to decision making under uncertainty. They eventually developed Prospect Theory as a model of decision making under uncertainty (Kahneman and Tversky [1979]). Behavioral economists have since upheld Prospect Theory as a better representation of investment decision making than Expected Utility Theory, which has traditionally been the model of choice.8 In a recent summary of the anthology of the work by Kahneman, Tversky, and their research collaborators, Kahneman [2011] pointed out that the cognitive process in decision making boils down to two systems: System 1 and System 2, originally introduced by Stanovich and West [2000]. System 1 is intuitive, makes decisions usually by association, operates at the unconscious level and is fast. System 2, on the other hand, operates at the conscious level, uses logic and reasoning, and is slow. Both systems work together all the time, but unless System 2 puts the brakes on System 1 or System 1 voluntarily defers to System 2 (in cases where System 1 itself perceives the situation as complex), the decision maker will end up with System 1's decision. However, System 1 does not always recognize complex situations as complex and goes ahead to make a decision anyway. The problem is that System 1's outcome normally does not stand up to reason and logic and is almost invariably out of line with the laws of probability. One way to make sure that decisions adhere to logic and rationality is to specify in advance what the decision making process is. That slows down System 1 and then System 2 gets the chance to dominate the decision-making process and we are able to get rational outcomes. System 1 still gets to participate in the decision-making process by supplying the relevant associative components but System 2 controls the process and the outcome. The way our paper relates to this is that by creating a heuristic that we have empowered to be the judge, we slow down System 1 and we are able to get System 2-dominated outcomes. At the root of market equilibrium models of traditional nance is the assumption of the rational decision maker. This rational person is presumed to be capable of arriving at an optimal decision, regardless of the amount of data that needs to be processed, the complexity of the problem, or the time frame for making the decision. This stylized homo economicus is no doubt very different from the real world homo sapiens or what Thaler [1999] calls the \"quasi-rational investors\" who are actually engaged in day-to-day investment decision making. This dichotomy between the rational economic decision maker of traditional nance and the error-liable (possibly error-prone) person in behavioral nance is nicely summarized by Statman [1999, p. 20]: \"Standard nance people are modeled as 'rational,' whereas behavioral nance people are modeled as 'normal.'\" The concept that the rationality of decision makers can be limited by the large amount of information they have to work with, their own cognitive and computational abilities, and limited time was developed by Herbert Simon [1957]. He referred to that limitation to rationality as bounded rationality. In the context of Simon's [1957] bounded rationality, decision makers do not make optimal decisions but rather make \"satiscing\" decisions within their data processing and cognitive limitations. One tool that facilitates the process of making satiscing decisions is the use of heuristics. Two questions arise from this observation of limited abilities to make globally optimal decisions. First, are there effective shortcuts for making decisions? Second, are the decisions that are made using these shortcuts of the same quality as the optimal decisions that would have been made in the absence of these limitations? With regard to the rst question, the answer from psychologists studying this phenomenon is that, yes, decision makers do use mental shortcuts to make their decisions. The answer to the second question is a bit problematic. While the heuristic-based decision can be seen and empirically examined, the optimal decision is only a concept that is never observable. Therefore, it is impossible to compare the actual decision outcomes. However, the consensus of psychologists and other behavioral scientists is that heuristic-based decisions will be inferior to the corresponding globally optimal (albeit unobservable) decisions. Gigerenzer and Gaissmaier [2011] dene heuristic as \"a strategy that ignores part of the information, with the goal of making decisions more quickly, frugally, and/or Downloaded by [University of New Brunswick] at 07:42 05 August 2015 OVERCOMING COGNITIVE BIASES accurately than more complex methods\" (p. 454). We use the term heuristic in this paper to mean an informal expeditious decision tool. It is generally understood that an effective way to keep cognitive biases from dominating one's investment decision is to focus on the investment decision process more than the desired outcome.9 Thus condence in the expected outcome of your investment decision is based on the condence you have in the process and the data. As Benjamin Graham put it, \"you are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right\" (Graham [2006], p. 524). Focus on data and reasoning amounts to focus on process. Thus a way to rein in any hidden cognitive biases is to develop a working heuristic in advance and apply it with strict discipline. The writings of Benjamin Graham and speeches by Warren Buffett indicate that this approach is an important element in their process of making investment decisions. It is important to specify the decision process and the underlying algorithm or heuristics in advance and to apply them with consistent discipline so as to minimize the effect of cognitive biases in investment decision making. This is because of evidence that when decisions are made on the y, new information, expectations, and other emotional and perceptual inuences can distort our ability to stay on track to make unbiased judgments.10 VALUE INVESTING AND MARGIN OF SAFETY It is widely accepted that value investing as an investment philosophy evolved in the early 1930s, when Benjamin Graham, then a lecturer in Finance at Columbia Business School, wrote Security Analysis (co-authored with David Dodd) in 1934. Bierig [2000] narrated the evolution of value investing from the writings, speeches, lectures, and practices of Graham and his disciples. Kwag and Lee [2006] traced back the root of value investing to the 1920s, although Graham and Dodd published the rst edition of Security Analysis in 1934 and The Intelligent Investor in 1949. Prior to Graham, Roger W. Babson, an American entrepreneur and theorist, used a valuation method to determine what he termed \"normal\" value by applying a suitable multiplier to average earnings. His investing philosophy was fundamental based, pretty close to today's value investing. He wrote Enduring Investments in 1921 long before Graham and Dodd's Security Analysis in 1934. G. C. Selden wrote Psychology of the Stock Market in 1912 based on years of study and experience as a fellow at Columbia University. Selden [1912] introduced the \"They\" theory of the market, which is basically \"Mr. Market,\" the market metaphor introduced in Graham's The Intelligent Investor, in 1949. We conjecture that Graham might have been inuenced by the writings of Babson and Selden. 143 While Graham himself did not use the term \"value investing\" in describing the investment paradigm that he developed, that phrase became the common terminology by which that approach to investing is known. In the mainstream academic literature, the term value investing is used mainly to imply an investment portfolio that is based on selecting stocks with low price to earnings ratio, low price to cash ow ratio, or other similar price-related ratios. Value investing is also usually contrasted with \"growth investing.\" The traditional approach is that stocks that have high prices relative to some other nancial metric are classied as growth and those that have relatively low prices compared with those nancial indicators are classied as value. Dening value merely by ratios such as earnings-toprice (E/P), book-to-market equity (B/M) (Fama and French [1992]), cash ow to price (C/P) (Chan and Lakonishok [2004]), and dividend yield (D/P) (Fama and French [1998]) is of little use in explaining how value investing works, since practitioners of value investing typically do not follow this simplistic approach. Other examples of the common classication include Dhatt, Kim, and Mukherji [1999], who examined the value premium of stocks in the Russell 2000 Index by forming portfolios based on P/E, P/ S, and M/B ratios. In contrast to the traditional academic denition of value, the legendary value investors and their modern disciples do not use these metrics as the sole basis for making their portfolio decisions. At best, they are used as preliminary screeners. Athanassakos [2011] refers to the use of P/ E, P/B, and similar ratios in categorizing value stocks as the na approach. As he rightly noted, from a value ve investor's perspective, a stock is not classied as \"value\" until is has undergone the type of company analysis that value investors use. Bourguignon and de Jong [2003] also take issue with the traditional method of distinguishing between value and growth saying that distinction rests on ambiguous grounds. Rather than follow the traditional academic denition of value using low P/E or other similar price-related ratios, we endeavor to come up with a comprehensive system for value investing by analyzing the writings and thinking of legendary value investors like Warren Buffett. While the term \"value investing\" has become associated with Warren Buffett, it is interesting to note that he considers that terminology a misnomer: \". . .we think the very term 'value investing' is redundant. What is 'investing' if it is not the act of seeking value at least sufcient to justify the amount paid? Consciously paying more for a stock than its calculated valuein the hope that it can soon be sold for a still-higher priceshould be labeled speculation (which is neither illegal, immoral nor in our viewnancially fattening).\"11 Downloaded by [University of New Brunswick] at 07:42 05 August 2015 144 OTUTEYE AND SIDDIQUEE In the book The Essays of Warren Buffett: Lessons for Corporate America (Cunningham, [2001]), Buffett reiterated the same. He emphasized the distinction between price (what an investor pays) and value (what he gets) in carefully separating investment from speculation thus emphasizing the role of margin of safety in the value investing paradigm. The dening characteristic and the operational pivot of value investing is the concept of margin of safety. In Graham and Dodd's [1934] original discussion of margin of safety, it is described as the degree to which an investor is protected from a fall in stock price due to a decline in earnings of the company. Margin of safety is the anchor for ensuring the safety of principal and satisfactory return that Graham and Dodd stipulate as essential for an operation to qualify to be called investment. Value investors take margin of safety very seriously. In the words of Buffett, \"If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success.\"12 Margin of safety is the nal step in the value investor's decision making process. While margin of safety can be quantied once the intrinsic value is estimated,13 the other elements of Benjamin Graham's paradigm are not easily quantiable. Instead, they are a mindset or disposition rooted in practical economically and nancially sound reasoning derived from Graham and Dodd's denition of investment. In that context, not every aspect is directly amenable to mathematical formula or calculation. This feature allows value investing to be practiced in a variety of ways that are not identical but consistent with each other. In this paper we use the term \"value investing\" in the spirit of what we believe to be Benjamin Graham's proposed style of investing. That approach requires an adequate margin of safety on the value of shares of companies whose fundamentals meet some core nancially prudent criteria that will not only preserve the principal but also yield satisfactory return. A HEURISTIC FOR MAKING VALUE INVESTING DECISIONS Our goal is to develop a simple but rigorous process for making stock selection decisions. The key requirement of the process is that it must conform to Graham and Dodd's [1934] denition of investment. We believe that an investment decision-making system designed on that basis will be robust and yield satisfactory (above average) returns with little risk. In this context, risk is dened not as volatility of stock prices but rather as the chances of losing the principal. The robustness of the system simply means that the heuristic should be applicable to stocks in a wide range of industries, markets, and economic climates (all phases of the economic cycle). For purposes of discussion we call this heuristic the \"O-S Heuristic.\" A key motivation for developing the O-S heuristic is to provide a system for investors to rein in the tendency for their \"animal spirits\" to interfere with their rational decision-making process. As Montier [2010] pointed out: \"Focusing on process seems to lead to better decisions. The same is true in investment. Focusing upon process frees us up from worrying about aspects of investment which we really can't control - such as return. By focusing on process we maximize our potential to generate good long-term returns.\" (p. 210) The philosophical underpinning of the O-S heuristic is that it is possible to create a simple value investing decision-making tool using criteria based on earnings potential, nancial stability, and fair valuation. Furthermore, application of this tool will help the user to develop a consistent and disciplined approach to value investing decision making that will avoid cognitive biases and yield satisfactory results. A major requirement of our heuristic is that it must be a tool that even investment novices can use and still produce satisfactory portfolio returns. In other words, the skill or temperament of the user is irrelevant. The system takes care of itself. It is important to note also that the process can be implemented using only publicly available data (such as nancial statements at money.msn.com or nance. yahoo.com). The way the O-S heuristic works is that once an investor identies a company he or she is interested in or a company has come to the investor's attention for whatever reason, the investor will pass the company through a number of screens. At the end, the investor will make one of three decisions: (i) reject the stock, (ii) put it on a watch list, or (iii) buy it. If a company is not investment worthy, then the decision to reject it will be made immediately at the stage that the screening criteria point to that. A company will be put on the watch list if all the nancial metrics are sound as revealed by the screening criteria but the stock price fails to meet the margin of safety criterion. Failing the margin of safety criterion means either the stock is selling above the intrinsic value or there is not sufcient margin of safety to classify it as a safe investment. A recommendation to buy a stock means that all the nancial metrics are sound and the \"price is right\" (i.e., it is selling at a price that gives a good margin safety which we dene as market price at least 20% below the intrinsic value). The O-S heuristic has four parts: the \"5-Minute QuickScan,\" \"Value Indicators,\" \"Valuation and Margin of Safety,\" and \"Susceptibility to Bankruptcy,\" all of which we explain in this section. OVERCOMING COGNITIVE BIASES Downloaded by [University of New Brunswick] at 07:42 05 August 2015 Screening Criterion # 1: 5-Minute QuickScan The 5-Minute QuickScan is a preliminary screening tool to determine if a company is worth taking through all the screening criteria. It is actually a device for us to limit our analysis to only companies that meet some minimum desirable criteria. Basically, what we are saying is that we are not interested in all stocks traded on the stock markets. We are only interested in a certain segment of the market (the good quality segment), and the 5-Minute QuickScan is the tool by which we select the types of stocks we want to analyze. We emphasize that in using the heuristic we are not necessarily aiming at having every good company in our portfolio. However, we want only good companies (by value investing standards) in our portfolio. This implies that in some situations we may miss good investments. But that is ne with us, as long as the portfolio we end up with has only nancially sound value stocks. In the words of 145 Benjamin Graham [2006], \". . . a conservative approach may carry with it the rejection of really attractive investment opportunities. Such a possible disadvantage is inherent in the role of the defensive investor, and he must accept it philosophically\" (p. 139). The criteria for the 5-Minute QuickScan and rationale are shown in Table 1. The 5-Minute QuickScan criteria are ratios that are commonly known to be indicators of value, protability, and nancial stability. They include ratios such as P/E ratio, return on equity, and debt equity ratio. We focus on mid to large cap stocks and exclude the small caps. The rationale for excluding small caps is that we want to create a tool that anybody, even novices, can use safely to make investment decisions. According to Graham [2006], the O-S heuristic is geared toward the defensive investor more than the enterprising investor. While there is evidence that small caps tend to outperform their large cap counterparts, it is our opinion that investment in small caps requires much deeper insight into investments and we are Table 1 Five-Minute QuickScan Screening Criteria Criterion/Question Decision Rule Rationale 1 This is to check whether the company's ticker symbol has a .OB (NASDAQ bulletin board stock) or .PK (pink sheet) extension Reject if the ticker has either .OB or .PK extension. 2 Is the company's market capitalization below $500 million? Include only companies with market cap > $500 million 3 Recent IPO Reject if the company does not have at least 5 years of public trading data. 4 3 to 5 years of positive EBIT? Include only companies with positive operating prot for at least 3 years but preferably 5 years or more. 5 3 to 5 years of cash ow from operating activities? Include only companies with positive cash ow from operating activities for at least 3 years but preferably 5 years or more. Accept only companies with at least 3 continuous years of ROE > 10%. If one of the past three years has ROE 10% 7 5 years of Debt/Equity ratio 0 for the past 3 years. Information about .OB or .PK shares tends not to be up to date or always reliable. Although .OB companies have to le regular forms with the SEC, they are still not as safe as stocks listed on the major exchanges. The original intent of setting up this heuristic is to design a system that investment novices can use and not lose money. For that clientele we felt it advisable to limit them to well established companies and this criterion increases the chances of that. Same reason as criterion # 2 - to limit the search to relatively well established companies with a reasonable (5 years) public trading history. A critical indicator of future protability is a track record of past protability. Operating prot is regarded as a sign that this company can sustain itself through its business operation and also an indicator that it may have a sound business model. This shows that the company is able to end up with positive cash ow of its own. Rationale similar to criterion # 4. ROE is an indicator of protability and a 3 to 5year track record is an indicator that the protability has been sustained in the past. 146 OTUTEYE AND SIDDIQUEE margin less than 10% is interpreted as the company being in a highly competitive environment. x. Free Cash Flow (FCF) Margin: FCF margin greater than 10% is considered a sign of durable competitive advantage. Financial Strength and Financial Stability Screening Criterion # 2: Earnings Strength, Earnings Stability and Moat Indicators Downloaded by [University of New Brunswick] at 07:42 05 August 2015 uncomfortable recommending this tool for small cap investing given that our goal is to make it widely accessible.14 Once a company passes the 5-Minute QuickScan screen, the analysis proceeds to Stage 2, called the \"Value Indicators\" worksheet, which has two segments: (a) Earnings Strength, Earnings Stability,15 and Moat Indicators; and (b) Financial Strength and Financial Stability. This category is subdivided into two parts: short-term nancial health and long-term nancial health. The \"moat\" is a metaphor created by Warren Buffett to describe the idea of a company that has competitive advantage over its competitors in the industry, which is one of the key desirable characteristics that he wants from a company. A company with durable competitive advantage is classied as having a wide moat. While the idea of a moat is not hard to capture conceptually, the concept does not lend itself easily to nancial quantication. However, if a company has a durable competitive advantage, that should be revealed in prots that are persistently above average. Protability and Moat Indicators There are ten items on this checklist. We use ve years of nancial statement data to apply the screens. The items and the qualication requirements are presented below: i. Return on Invested Capital (ROIC): ROIC must be at least 10% in each of the past ve years. ii. Equity Growth Rate: The annual compounded equity growth rate (measured by the rate of growth of book value per share) must be at least 10% for the past ve years. iii. Rate of Growth of Earnings per Share (EPS): The annual compounded EPS growth rate must be at least 10% for the past ve years. iv. Sales Growth Rate: The annual compounded rate of growth of sales must be at least 10%. v. Operating Cash Flow (OCF) Growth Rate: The annual compounded rate of growth for OCF must be at least 10%. vi. Free Cash Flow (FCF) Growth Rate: The annual compounded rate of growth for both FCF must be at least 10%. vii. Gross Margin: A gross margin greater than 40% is classied as an indicator of durable competitive advantage. viii. Operating Margin: First we nd the average operating margin for the industry or a core group of competitors. Then we look at the company's operating margin, which must be above the average of the industry or its competitors. ix. Net Margin: Net margin greater than 20% is considered a sign of durable competitive advantage and net A. Short-term Financial Health There are four indicators in this section: i. Current Ratio: Current ratio has to be at least 2. ii. Quick Ratio: It has to be at least 1.5. iii. Interest Coverage Ratio: Interest coverage ratio has to be at least 5. iv. Operating Cash Flow Ratio: OCF ratio has to be at least 1. B. Long-term Financial Health There are three indicators in this section: i. Leverage Ratio: Leverage ratio (measured by Debt to Total Assets) has to be less than 0.5 except utilities for which leverage ratio equal to or less than 1.0 is acceptable. ii. Debt to Equity Ratio: Debt-Equity ratio has to be less than 1. iii. Long-Term Debt to Operating Cash Flow Ratio: This ratio is used to measure how long it will take to pay off long-term debt using OCF and it has to be three years or less. Screening Criterion # 3: Company Valuation and Margin of Safety Once a company is accepted based on the outcomes of earnings potential and nancial strength, we then proceed to the valuation phase. Here we estimate the intrinsic value of the company using two valuation models: the P/E Ratio approach and the Discounted Free Cash Flow (DFCF) approach. A. P/E Ratio Valuation: The intrinsic value (V0) of the stock is determined as V0 D V10/(1Ck)10, where V10 D (Avg(P/E))*E0*(1Cg)10, and where Avg (P/E) D 10-year average P/E ratio for the company (with obvious outliers and negative P/E ratios excluded); E0 D Latest full year (12-month) EPS; g D Rate of growth of earnings, obtained as lowest of (the four-year EPS growth rate, the four-year Book Value per Share growth rate, or analysts' estimate of the next ve years' EPS growth rate), i.e., g D Min [four-year EPS growth rate, four-year Book Value per Share growth rate, analysts' estimate of the next ve years' EPS growth rate]; OVER