Valuation envelopes and the rational approach to investing.

One of mye favourite trading books is John A Bollinger’s book from 2001, “Bollinger on Bollinger Bands”. In the preface he has a note on Rational Analysis that is the combinantion of Fundamental and Technical Analysis as shown in this figure.

Bollinger Bands are driven by volatility. In chapter 6 of the book Bollinger mentions the Valuation Envelope, that is driven by dividends.

The methodology behind the dividend valuation methodology is explained in videos and articles on the Investement Quality Trends, IQT homepage. The book by Geraldine Weiss and Janet Lowe (1990) and the one by Kelley Wright (2010) are reccomended reading for those interested in the methodology.

Note that the dividend valuation model applies to Blue Chip stocks as defined in the IQ Trends newsletter. Some are added and other deleted from the list based on their quality measures. The method should not without modification be applied to other types of stocks.

For cyclical stocks, earnings, E have risen relatively more than the price, P at the top of the cycle and opposite at the bottom of the cycle. That means that cyclical stocks tend to have relatively low P / E at the top and relatively high or negative P / E at the bottom of the cycle. More about cyclical stocks in Peter Lynch’s book “Beating the street”.

Litterature:

Geraldine Weiss and Janet Lowe (1990): “Dividends Don’t Lie: Finding Value in Blue-Chip Stocks”

Geraldine Weiss and Gregory Weiss (1995): “The Dividend Connection: How Dividends Create Value in the Stock Market”

Kelley Wright (2010): “Dividends Still Don’t Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market”

Hugues Langlois and Jacques Lussier (2017): “Rational Investing: The Subtleties of Asset Management”

Peter Lynch (1994): “Beating the street”

Semantic links:

John Bajkowski (April 2004): The Weiss Approach: Finding Value in Dividend-Paying Blue Chips

Forbes Interview with Geraldine Weiss: Dividend Stocks Pay Off

David Crosetti: Dividends Don’t Lie (Part 1): Geraldine Weiss And Valuation Metrics