It all began in 2000. A professor with an MBA and a PH.D in Accounting published a report in the Journal of Accounting Research. A paper so ground-breaking, people began to sit up and take notice of him. His years of research had revealed an investing strategy that he’d proven to outperform the market.
In fact, many of today’s famous investors are in awe of him. Because in 2008, when the world stock markets plummeted, his investment formula beat every other legendary Wall Street investor’s strategies.
In 2010, The American Association of Individual Investors – An investment advisory to 300,000 Americans-reported that this Professor’s investment formula was the only formula out of 56 that achieved positive results in 2008.
His formula returned 32.6% in 2008, while the other top investment strategies and share picks the Association used, averaged -41.7%.
Today, I’m going to share this legendary Professor’s investment strategy in complete detail and show you how I used it to uncover your next profit-opportunity.
But first, who is this Professor?
Introducing the Millionaire Maker with an investment strategy so powerful…
His name is Professor Joseph Piotroski.
Like I mentioned earlier, Professor Piotroski’s research paper in 2000 showed he created a proven investment formula guaranteed to outperform the markets.
In fact, his research paper proved that if investors had bought a specific type of share that passed his personally designed tests, they’d have gained a 23% average yearly return over 20 years.
That means, a R100,000 investment would have turned into R6.2 million! This formula was so powerful; it would’ve doubled the S&P 500’s returns over the same time.
So what was his secret?
Well the first thing Professor Piotroski’s strategy does is focus on companies with very low price to book (P/B) ratios.
In some cases, a low P/B ratio could mean a company is in financial distress, and that’s why it’s trading so cheaply. But, it also could mean a company is a solid business that is being unfairly judged or overlooked.
So to find out which companies are worth buying, Professor Piotroski developed a 9-point scoring system on top of looking at companies with low P/B ratios.
With each test a company passes, it earns one point. And the main goal is to ONLY buy companies that score 8/9 or 9/9.
It goes like this: Score 1 point for every test a company passes.
So how can you use Professor Piotroski’s 9-point scoring system to uncover your next profit-opportunity?
At first, this stock selecting system looks somewhat vague and complicated. To make it easier to understand, I broke it up into three parts:
Part one = Profitability
Part two = Liquidity
Part three = Operating efficiency.
Let’s start with profitability
To check if a company selected is profitable and able to generate cash, I use Test 1 to 4 when looking at its last financial results.
These four tests help me identify and eliminate companies that are burning cash and helped pinpoint the profit-opportunity.
Part #2: A company must be able to manage and decrease its debt
To see if a company has the ability to meet its financial obligations, I used tests 5 to 7 on the company. These three tests show me if a company is riddled with debt or if it’s able to pay short and long-term debt and generate enough internal income.
And part #3 – Liquidity is best analysed using Piotroski’s tests 8 and 9. A company must use its assets efficiently to generate revenue. It shows me if the company is growing its profits and how efficiently it uses its assets to generate sales revenue or sales income.
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