How Selma detects if investments are cheap or expensive aka measuring the over- or undervaluations

Updated 1 month ago by Marco Barmettler

 Nobody can forecast the future of financial markets. That’s why Selma does not rely on forecasts of any human experts. Instead, Selma makes investments based on accurate numeric data and proven models.
In a nutshell: Selma monitors the prices of global stock markets and sells things that are getting too expensive and buys things that are currently cheap. Selma does this to reduce risks and generate additional returns. If all stock markets are too expensive, Selma shifts a share of your investments from stock markets into precious metals.

Example: If Swiss company stocks are cheap and Japanese companies expensive, Selma would automatically buy more Swiss stocks and reduce Japanese investments until their prices are back to a normal level (see how Selma checks if something is cheap or expensive).

Why does Selma track if investments are cheap or expensive?

Selma automatically detects whether the investment products in your mix are cheap or expensive for two reasons:

  1. to lower the risk you’re taking
  2. to take opportunities in markets that are currently at an attractive value

How often does Selma measure over- and undervaluations:

Selma checks the valuations of all major stock markets globally at least once a quarter, so when companies release their latest earnings figures. If this creates the need for changes in the investment mix of the portfolios, they will be done automatically.

What does Selma measure:

  1. The daily prices of the stock markets
  2. The profits created by companies and how they have been growing in the past
  3. The interest rates that companies currently pay and what interest rates they paid in the past.

How Selma checks if something is cheap or expensive (in detail)

An out-of-the-box example

Imagine you’re buying strawberries at the market.

Assume the usual price for one kilogram of 🍓 is CHF 5.00.

When you are shopping for your weekly 🍰  you would include more strawberries when they cost CHF 3.00 and less when they cost CHF 7.00. Eventually if they cost CHF 10.00 you probably wouldn’t include any strawberries.

In a similar way Selma approaches the stock market 📈

Selma checks the price you need to pay for investment products that give you access to stock markets. To know if the prices are fairly valued, Selma sets them in comparison to the profits generated by the companies included. In that way, Selma calculates how much you are paying for every dollar of company profits generated.

If the “normal price” is 20x the yearly profits the companies earn, the price would be cheap when you can invest at a price 10x the company profits. However, when the price is 30x the annual profits, it is expensive. As profits in companies can vary quite a lot from year to year, because of special effects and how the economy is doing, Selma compares the average profits of the last ten years to the current price of the investment product, instead of just using last year's profits.

In financial lingo: Selma uses the Shiller CAPE Ratio to compare the actual price of a stock market index with how much profits its companies generate.

Selma does not evaluate the price of every single company in the index, but rather takes a broader perspective on the entire market, e.g. on the Swiss market, European market, US market, etc…

When everything is expensive: going into precious metals 🪙

Sometimes all major stock market indices can be very expensively valued. Then, Selma invests less into all of them, and puts the remaining money into precious metals (gold and silver). You can think of this as a safety valve, that should add some protection to your portfolio against a major worldwide stock market correction.

Selma portfolios always include at least a 5% share in precious metals, as a protection against market crises and inflation. This share can be scaled up to 25%, in case all stock markets are too expensive according to the Shiller CAPE Ratio.


How did we do?


Powered by HelpDocs (opens in a new tab)