Case Studies
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Historical Trend: FireRock’s Performance Case Study
On April 11, 2007, FireRock Research opened a case study portfolio as a proof of concept against the performance of the S&P 500 Index. This study allowed us to showcase the explosive potential that the FireRock Element® will have as a tool in the financial market.
Purchases in the portfolio were made using the FireRock Element®. The companies that were selected for the portfolio all had FireRock Element® percentiles below 66% and were given consideration to buy. Sells were made based on Elements™ along with leveraging specific related economic stories in timing with the market. Stocks with FireRock Elements® flagged above 100% were companies to be avoided.
During the summer market correction of 2007, the FireRock Element® saved the portfolio from major losses as you can view on the chart below.
(FireRock Performance April 11, 2007-October 31, 2007)
Performance Data - 04/07-10/07
Click on the image to enlarge
The FireRock Element® case study allowed us to avoid all financial stocks prior to the sub-prime difficulties in the summer of 2007. The portfolio had a concentration of mining and commodity stocks, allowing us to avoid financials all together. This approach allowed us to outperform by a large margin over the S&P 500 Index as it was up only 7%. FireRock’s porfolio performance relative to the S&P 500 ended up at 33% as our portfolio was officially closed on October 31, 2007.
If you have questions about the FireRock performance portfolio, contact us.
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The Origin of the FireRock Element®: The Creation of the Psaras Ratio
The Psaras Ratio was the first of 10 financial ratios developed, that ultimately led to the generation of the FireRock Element™. The Psaras Ratio was originally developed by analyzing the purchases of Mr. Warren Buffett on behalf of Berkshire Hathaway for the years 1972 to 2006. This ratio evaluates management performance in its ability to allocate resources and manage debt.
The Psaras Ratio integrates two key concepts of value and growth investing as follows:
• Price to Earnings Ratio (PE) = Value
• Return on Equity (ROE) = Growth
The Psaras Ratio = PE/ROE (or Value divided by Growth)
Upon analysis of Mr. Buffett’s purchases from 1972-2006, 48 of 52 purchases came in with a Psaras Ratio of less than 1.0. By contrast, similar analysis of 500 random stocks showed that fewer than 15% were less than 1.0.
The following link provides a snapshot of the original analysis with the Psaras Ratio, in which 93% of purchases came in at less than 1.0.
Download and view all 52 purchases here 
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The Origins of the System: Explanation of the FCF vs. DJIA Backtest
FireRock Research was created, in part, by analyzing the investments of Mr. Warren Buffett on behalf of Berkshire Hathaway from 1972–2007. From this analysis, Mr. Psaras has determined which quantitative and qualitative factors appear likely to influence Mr. Buffett’s investment decisions. Quantitative factors such as “Price to Free Cash Flow” and “Net Profit Margin,” along with qualitative factors such as “Return on Capital” and “Return on Equity” were specifically identified as key performance indicators by a variety of methods.
For instance, to evaluate the importance of “Price to Free Cash Flow” as underscored by Mr. Buffett’s investment choices, Mr. Psaras undertook a backtest of the “Dow Jones Industrial Average” (DJIA) from 1950-2007. In this backtest, “Free Cash Flow” (FCF) was calculated by taking a company’s cash flow per share and subtracting its capital spending per share from it. He then created two portfolios for a side-by-side comparison and invested $10,000 into each.
The first portfolio (DJIA) would buy the entire list of DJIA stocks on the first trading day of each year and subsequently sell the entire list on the last trading day of that year. The second portfolio (FCF) would buy only the stocks in the DJIA that exhibited a “Price to Free Cash Flow” of 15 or less on the first trading day of each year and then sell those stocks on the last trading day of that year. All earnings from each of the two portfolios were serially re-invested on the first trading day of the following year, and this sequence was repeated for each of the 58 years in question (1950 - 2007).
The results of this analysis are presented in the following link, and are summarized as follows. The average gain for the Free Cash Flow (FCF) Portfolio was +22.77% per year over 58 years, compared to an average gain of the DJIA Portfolio of just +7.82%, over 58 years. The DJIA Portfolio was worth $679,027 at the conclusion of 58 years of serial re-investment. By contrast, the FCF Portfolio was worth $974,617,645 at the conclusion of 58 years of serial reinvestment. These results underscore the power of Free Cash Flow in selecting investments with greater intrinsic growth and value.
Download and read about FCF vs. DJIA here 
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Frequently Asked Questions, click here
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