Value investing

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Robert T
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Value investing

Post by Robert T » Wed Mar 24, 2010 4:37 am

.
In the preface to the Sixth Edition of Graham and Dodd’s Security Analysis, Seth Klarman says the following:

On what is value investing:
  • “Value investing, today as in the era of Graham and Dodd, is the practice of purchasing securities or assets for less than they are worth - the proverbial dollar for 50 cents. Investing in bargain-priced securities provides a “margin of safety” - room for error, imprecision, bad luck, or the vicissitudes of the economy and stocks market.”

    “Value investors demonstrate their risk aversion by striving to avoid loss.”
At odds with academia (EMH): Klarman goes on to say:
  • “…the Efficient Market Hypothesis (EMH), holds that security prices always and immediately reflect all available information, an idea deeply at odds with Graham and Dodd’s notion that there is great value to fundamental security analysis. The Capital Asset Pricing Model (CAPM) relates risk to return but always mistakes volatility for risk. Modern Portfolio Theory (MPT) applauds the benefits of diversification in constructing an optimal portfolio. But by insisting that higher expected return comes only with greater risk, MPT effectively repudiates the entire value-investing philosophy and its long-term record of risk-adjusted investment out-performance. Value investors have no time for these theories and generally ignores them.”

    “…Academics and many professional investors have come to define risk in terms of the Greek letter beta, which they use as a measure of past share price volatility: a historically more volatile stock is seen as riskier. But value investors, who are inclined to think about risk as the probability and amount of potential loss, find such reasoning absurd. In fact, a volatile stock may become deeply undervalued, rendering it a very low risk investment.”
Which is right? Are these two views really “deeply at odds”? As index value investors, what are we to conclude? (seems to be a significant enough issue to warrant consideration).

My take:

1. At the individual security level – I tend to agree with Klarman’s view. Value investing is ‘buying dollars for fifty cents”. There are (some) inefficiencies in individual security pricing that can result in these ‘bargain’s. However three points:
  • (i) It’s very difficult to identify these bargain securities: as Swensen says (in Pioneering Portfolio Management): “Investors willing to implement value-based oriented programs require unusual skill, intelligence and energy. Without a significant edge relative to market participants, investors face likely failure."

    (ii) There are relatively few opportunities: many successful value investors (e.g. Klarman, Greenberg) hold concentrated portfolios (few holdings), and

    (iii) Holding on to these securities requires significant patience, and courage of conviction - attributes that relatively few possess. Glenn Greenberg summarizes this well in the Sixth Edition of Security Analysis: “If Graham and Dodd are so widely read and respected, why are there so few disciplined practitioners of their advice? I believe the answer lies in three human traits: aversions to boredom, a tendency for emotions to overwhelm reasons, and greed”. ….. “If it all seems self-evident, like Polonius’s speech, that’s because such wisdom has stood the test of time and it has become part of our lexicon as investors. Yet few people endeavor to walk the walk be researching businesses intensively, sifting through many dozens to find those worthy of capital. Few people are willing to concentrate their investments in a small number of businesses that they know thoroughly and believe will grow their net worth at an attractive rate over the long-term. Many days this work is just plain boring. Other days (and sometimes months), the market totally ignores your handful of precious stocks. A portfolio of predictable, reliable businesses does not make you the most exiting person at the cocktail party, nor does it give you flashy sales promotion material. I have come to believe the quest for rational investing is appealing only to a handful of us. But at least we sleep well at night and live well by day – and our clients do as well.”
2. At the ‘asset class’ level: I tend to agree with the risk-reward (‘academics’). As Swensen also says (in Pioneering Portfolio Management): “Historically, naïve value strategies (“purchasing stocks with a low ratio of price-to-earnings or price-to-book”) have delivered superior rates of return while exposing investors to relatively high levels of fundamental risk.”….”Deep value portfolios contain lower-quality, fundamentally riskier assets. Returns ought to be higher to compensate for greater underlying risk.” So IMO the historical ‘naïve’ FF value premium reflect ‘compensation for greater underlying risk.”

Is it possible to identify good “dollar for fifty cents” managers? Difficult to do IMO. Here are three who try to practice the Graham and Dodd approach to value investing:
  • 1. Fairholme: Discussed before. In addition Berkowitz was the only mutual fund manager included as a commentator in the Sixth Edition of Graham and Dodd’s Security Analysis. IMO of all the commentators his section was the easiest to understand – simply, clear, and relatively convincing. Berkowitz also emphasizes the ‘don’t lose’ philosophy.

    2. Longleaf: Discussed in Swensen’s book. From their website “A company's market price generally must be 60% or less of our appraisal to qualify for investment.” (so a dollar for 60 cents approach). “We hold concentrated portfolios for two main reasons. Concentration lowers our risk of losing capital because we limit the portfolios to our very best ideas, and we know the companies we own and their managements extremely well.”

    3. First Eagle: Bruce Greenwald was also included as a commentator in the Sixth Edition of Security Analysis (not a mutual fund manager but is the research director at First Eagle). From their website “Our insistence on a substantial margin of safety, healthy balance sheets and clear business models enables the avoidance of risk and the allowance to generate positive absolute returns over time.”…”loyal followers of Ben Graham”.
In the spirit of comparing a “dollar for fifty cents” approach to value investing with a simple portfolio of value indexes (or as Swensen describes it “The naïve strategy of purchasing stocks with low ratios of price-to-earnings or price-to-book represents mindless contrarianism.”), I have added a portfolio of Fairholme, Longleaf, and First Eagle funds to my earlier comparisons. Here’s the portfolio (tried to keep it to 75:25 stock:bond, and 50:50 US:Intl): Longleaf-Fairholme-First Eagle

Robert
.

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Post by james22 » Wed Mar 24, 2010 5:33 am

Nice, thanks.
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Post by denialmark » Wed Mar 24, 2010 5:42 am

Value investing is an investment paradigm that derives from the ideas on investment and speculation that Ben Graham & David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis. Although value investing has taken many forms since its inception, it generally involves buying securities whose shares appear underpriced by some form of fundamental analysis. As examples, such securities may be stock in public companies that trade at discounts to book value or tangible book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios.
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Post by dumbmoney » Wed Mar 24, 2010 7:50 am

With all the index funds/ETFs available nowadays, picking individual stocks seems antiquated. The "asset class" is the unit of active management.

Trying to figure out whether European stocks are cheaper than U.S. stocks, for example, seems like a better use of time than trying to find the perfect stock.
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Re: Value investing

Post by ddb » Wed Mar 24, 2010 8:32 am

Robert T wrote:My take:

1. At the individual security level – I tend to agree with Klarman’s view. Value investing is ‘buying dollars for fifty cents”. There are (some) inefficiencies in individual security pricing that can result in these ‘bargain’s. However three points:
  • (i) It’s very difficult to identify these bargain securities: as Swensen says (in Pioneering Portfolio Management): “Investors willing to implement value-based oriented programs require unusual skill, intelligence and energy. Without a significant edge relative to market participants, investors face likely failure."

    (ii) There are relatively few opportunities: many successful value investors (e.g. Klarman, Greenberg) hold concentrated portfolios (few holdings), and

    (iii) Holding on to these securities requires significant patience, and courage of conviction - attributes that relatively few possess.
I think that items (i) and (ii) pose the biggest problem to investors looking to benefit from a GD (Graham/Dodd) Value strategy. First, let's accept that basically no "amateur" investors have the time or skill to implement a true value strategy. Such a strategy requires a tremendous level of research and intimate knowledge of companies being considered as investments. The book isn't nearly 700 pages for no reason!

Second, let's accept that there are many professionals who may be able to successfully implement a value investing strategy (Michael Burry, for example, if you believe what Michael Lewis writes in his new book). These professionals face some issues:

1. If the professional wishes to maximize profit for himself (or herself, but the rest of this thread will be written with the male gender), he will create a hedge fund and take 2 and 20 from investors. In this case, only accredited investors can invest, so the typical retail investor has no access.

2. If the professional wishes to to offer his strategy to a more diverse group, then a mutual fund or separate account strategy would be implemented. This can work out great for 5-10 years, but the invariable success of the strategy will lead to too much money coming in, and having to get away from the concentrated nature of the portfolio. OR, the manager has to close the fund to new investors, but by that point there are usually too many assets to effectively maintain the same strategy anyway. Plus, during the inevitable periods of vast underperformance (waiting for prices to correct), investors will flee the fund, forcing liquidations of positions at inopportune times.

Look at Fairholme fund (FAIRX) - $13 billion in assets across 70 positions. Are we really to believe that Mr. Berkowitz has 70 great investing ideas? Based on the fund's 2001 Annual Report, the fund contained approximately $29 million (yes, million) across 20-ish positions.

- DDB
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Re: Value investing

Post by ScottW » Wed Mar 24, 2010 8:54 am

ddb wrote:Look at Fairholme fund (FAIRX) - $13 billion in assets across 70 positions. Are we really to believe that Mr. Berkowitz has 70 great investing ideas?
Did you look at portfolio turnover by accident (which is 71%)? I'm only seeing 21 stocks, which is consistent with previous years. I agree that the growth in assets under management is cause for concern, particularly since they seem reluctant to close the fund.

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Post by Snowjob » Wed Mar 24, 2010 9:08 am

I've chosen to invest 50% passive market cap weighted stock and bond indexes and 50% active, balanced value funds. The active funds provide the value tilt, and I hope not an in ordinate amount of risk. Portfolio ER should be moderate ~.6ish

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Re: Value investing

Post by ddb » Wed Mar 24, 2010 9:24 am

ScottW wrote:
ddb wrote:Look at Fairholme fund (FAIRX) - $13 billion in assets across 70 positions. Are we really to believe that Mr. Berkowitz has 70 great investing ideas?
Did you look at portfolio turnover by accident (which is 71%)? I'm only seeing 21 stocks, which is consistent with previous years. I agree that the growth in assets under management is cause for concern, particularly since they seem reluctant to close the fund.
No, I relied on Morningstar data, which show 70 holdings. Probably wasn't very smart of me. A glance at the 2009 Annual Report shows something like 36 holdings (Morningstar counts all distinct holdings, but I separated into "ideas", i.e. they owned 12 separate issues of DOW commercial paper - I counted it as one).

Still, $13 billion of assets does not a nimble fund make!

- DDB
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Post by Riprap » Wed Mar 24, 2010 9:32 am

Has the quality of financial reporting deteriorated over time making it more difficult to find truly undervalued companies? In other words, is the balance sheet, income statement, statement of cash flows, GAAP, etc. the same today as it was in Graham and Dodd's time? I think one would have to be especially savvy (and cynical) in today's world of creative accounting and deceit to be able to glean information from public reports. I also wonder if some of the top executives have an incentive to distort the financial picture to take advantage of thier compensation package. Heck, a basic discussion of the SP500 P/E ratio and the numbers behind it gets murky and confusing very quickly.

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Post by etarini » Wed Mar 24, 2010 10:55 am

I would have thought that the quality/accuracy of available information would have been quite poor prior to the Depression and the creation of the SEC; the kind of disclosure we take for granted just wasn't common. I wonder if the overall quality of public securities information didn't reach a peak in the 50s or 60s and has been declining ever since. The recent report on Lehman Brothers is an example. I'm not saying the game is rigged, but there are strong financial incentives for firms to present information in the most attractive way (can you say EBITDA?), which makes assessing valuations quite difficult at times. But Graham-Dodd didn't say it was easy to find undervalued companies; they said it should be possible.

Report Details How Lehman Hid Its Woes
"It is the Wall Street equivalent of a coroner’s report — a 2,200-page document that lays out, in new and startling detail, how Lehman Brothers used accounting sleight of hand to conceal the bad investments that led to its undoing."
http://www.nytimes.com/2010/03/12/busin ... ehman.html

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Post by SP-diceman » Wed Mar 24, 2010 11:02 am

On what is value investing:
Buying stocks in March 2009.
(heh, heh)


Thanks
SP-diceman

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Post by Robert T » Wed Mar 24, 2010 8:57 pm

.
On valuation metrics: One of the “lessons learned in the decade” from Grantham’s January 2010 Quarterly letter is: “The two time-tested investment tools, value (P/E ratios and P/B ratios) and price momentum, are now much more heavily used and not so reliable as they once were, say from 1977 to 1997.” Glenn Greenberg in his commentary in Security Analysis says: “We and other investors today tend to focus on cash flow after capital expenditures (free cash flow), instead of earnings, to evaluate investment merits of a business. One advantage of this approach is that it helps shortcut a good many games that management can play in reporting profits.” From Klarman: “Most value investors today analyze free cash flow.” And from Berkowitz: “To value equities, we at Fairholme begin by calculating free cash flow."

On asset class efficiency: Another one of Grantham’s lessons learned in the decade. “Asset classes really are more inefficiently priced than individual stocks on average, and therefore offer greater opportunities for adding value and reducing risk.” This is also implicitly indicated by Klarman (for stocks:bonds): “In the absence of compelling opportunity, holding at least a portion of one’s portfolio in cash equivalents (for example, US Treasury bills) awaiting future deployment will sometimes be the more sensible option.” And it reminds me of Samuelson’s Dictum. From a Schiller paper”Samuelson has offered the dictum that the stock market is ‘‘micro efficient’’ but ‘‘macro inefficient.’’ That is, the efficient markets hypothesis works much better for individual stocks than it does for the aggregate stock market. In this article, we review a strand of evidence in recent literature that supports Samuelson’s dictum and present one simple test, based on a regression and a simple scatter diagram, that vividly illustrates the truth in Samuelson’s dictum for the U.S. stock market data since 1926.” I take this to mean relative pricing (e.g. 'naive' value vs growth) is more efficient than absolute pricing (e.g. overal market).

On risk: These from First Eagle may be of interest. Rob
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Post by Riprap » Wed Mar 24, 2010 11:24 pm

Rob,

Thanks for the excellent information. Are you aware of some sort of metric, ratio, rule of thumb etc. one would use to measure the relative attractiveness of free cash flows between two or more companies? After a little study, I can see the benefit of this approach. Free cash flow per share per price per share for example?

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Post by Kenster1 » Wed Apr 07, 2010 11:05 am

Robert -- again great info.

Let me add a couple more materials....

Fidelity International - Perspective on Value Investing:
https://www.fidelitypartners.co.in/asse ... _nov09.pdf
Equity markets around the world continue to be driven by the two powerful emotions of greed and fear, leading many an investor to chase the most talked-about ideas without perhaps as much consideration for the underlying fundamentals and therefore overlooking some great investment opportunities just because these do not find favour with the market.

At the same time, far away from the day-to-day clamour of the stock markets, there is a school of investors who quietly work on a disciplined approach to stock picking, making sure that they are buying into low expectations and keeping valuations on their side. Investing to them is not just buying stocks, but using stocks as a conduit for buying into businesses.

This is the essence of Value Investing. This edition of the Perspective takes a look at the concept of Value Investing, its usefulness as an investment style and addresses some of the common misconceptions associated with it.
Brandes: Good Companies versus Good Investments:
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Post by jimkinny » Wed Apr 07, 2010 11:44 am

Isn't the word value a term loaded with a lot of connotations that imply good things? Value stocks/indexes have more risk and therfore the reward of ownership is derive not from underpricing of the stocks but the assumption of more risk.

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Post by Rodc » Wed Apr 07, 2010 12:21 pm

jimkinny wrote:Isn't the word value a term loaded with a lot of connotations that imply good things?
Yes, unlike their counter parts: growth stocks. ;)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Post by Mark6275 » Wed Apr 07, 2010 12:22 pm

Good mail.

I can't see that asset class-based investing has in any way been topped. In all meta research, an AA based approach will contribute 75 - 95% of the total returns, meaning irrelevant where you execute that capital, almost all the performance will come from the strategic asset allocation.

Finding value may well be possible on a bottoms up model (overlooked stocks and tactical asset allocation overlays certainly have their place) but hoping for "an active manager at 50c" is not very likely!

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Post by Kenster1 » Wed Apr 07, 2010 12:34 pm

jimkinny wrote:Isn't the word value a term loaded with a lot of connotations that imply good things? Value stocks/indexes have more risk and therfore the reward of ownership is derive not from underpricing of the stocks but the assumption of more risk.
Depends on how you look at it. Read the Fidelity paper on value investing I linked above -- it talks about the common misconceptions of value investing.

Let me give you an example:

Compare Microsoft in 1999 to today. Today I see Microsoft as a stronger company - great reviews so far of Windows 7 and a more diversified and deeper product base with Enterprise penetration in areas such as Exchange/Messaging, SQL Server, Server 2008 (R2), Forefront Security, Bing Search, etc. You may not have heard of TMG unless you work in a related field but TMG--Threat Management Gateway is a Microsoft product that is seeing increasing interest in the corporate marketplace due to this new age of multi-layered security protections. Then there's also their expansion into Unified Messaging or Unified Communications with their OCS. They also have a bulked up a suite of System Center products for OS & App deployments, monitoring and data protection. They've also bulked up their technologies for Application and Desktop virtualization. They're also improving upon their remote access technologies. Furthermore, in this day and age of electronic documents stored everywhere --- their Sharepoint document collaboration product/technology has also been extremely popular.

Today - Microsoft to me is a stronger, deeper and more diversified company than in 1999-2000 but yet you're telling me that because of it's lower P/E and P/B today than it was in 1999 --- that Microsoft is now a riskier investment than in 1999-2000?

There's a misconception here as value investing is different the way it is practiced by passive investors who are doing it via indexing or quantitatively. A number of Value investors are buying Microsoft today but yet it is not a low P/B and low P/E stock that would land in the value indexes. That's an example of the differences.

Furthermore -- another example are the Royce Funds who are value investors and they have really good returns over the past 3, 5 and 10 years. We can incorrectly conclude that because they are VALUE investors, they are buying nothing but low PE and PB stocks and taking on more risk. But look at their funds --- on the M* chart, their funds do not fall into the low P/E, P/B "value" regions --- they are more blendy and in fact a bit growthy. Their practice of value investing is more Buffett like in that they focus more on durable-quality firms with strong balance sheets, high free cash flow and high returns on cost of capital. Like the Microsoft example -- they will buy such a quality firm when the price is right.

Therefore the idea of "risk" in value investing is quite different depending on your perspective and how you implement it. (See Robert's opening post on this).

Now if you don't believe in taking that active-management chance then that's fine too and can do it passively where a bulk of low PE/PB stocks are bought and the key here is to have a very diversified basket of stocks in the asset class because you're just buying any company that meets the value metrics. So large basket is good here. Different ways to try to get to the same destination --- that's the way I feel at work too when you work with different managers on pieces of a project who have different ideas and directions on getting to the same destination.
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Post by bhmlurker » Wed Apr 07, 2010 1:46 pm

Cash flow by itself is an insufficient gauge. A heavily indebted company can easily have the same cash flow as another company with no debt.

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Post by Kenster1 » Wed Apr 07, 2010 1:55 pm

bhmlurker wrote:Cash flow by itself is an insufficient gauge. A heavily indebted company can easily have the same cash flow as another company with no debt.
Correct -- I don't think any value investor nor value index uses Cash Flow as the sole metric to search for value companies.
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Post by wander » Tue Jun 14, 2011 6:20 am


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few thoughts

Post by larryswedroe » Tue Jun 14, 2011 7:19 am

First to add to what was said earlier--at one point if my memory serves Fairholme held just TWO stocks.

Second, we only hear about the SUCCESSFUL "value" investors, the ones that have records like Buffett. But there are thousands of others that have tried the same strategy and fail. We never hear about them.

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Post by partisan » Tue Jun 14, 2011 8:44 am

I have mentioned before I have an "active" small value portion of my portfolio that I implement. What this means is large/mid cap/bonds/foreign is held in index funds or mutual funds with an asset allocation mindset.

For the small value portion I invest in a Graham Dodd style, net-net companies, or companies selling for less than working capital. It has provided some wonderful returns for me over the years but I think it's tough for most people to implement for the following reasons.

1) It's tedious and boring for most, on average I'll probably read the financial statements for 30-40 companies before finding one I'll consider for deeper research. Of those deeper ones I might only buy a handful.
2) Once a purchase is made it's extremely boring, I do nothing but sit with the position possibly for years. I think most people who like to dabble with individual stocks like the activity aspect, activity destroys returns.
3) An indepth knowledge of accounting is required, I have no problem parsing financial statements, making adjustments etc. This skill is outside of most people's realm of knowledge.
4) It's hard to invest like this emotionally, many "deep value" companies have a lot of problems that's why they're selling cheap. A lot of companies I invest in are left for dead but if I can invest in a company trading for less than cash and with positive cash flow I will bite the bullet.

The obvious question to this is what is my edge, why can't professionals do this?

I tend to invest in small caps, and I mean small outside of professional money management's grasp. One company has a market cap of $7m, a professional can't touch this, others are in the $20m-60m range.

I also invest in international small caps, this is a very under touched, under researched part of the market. While these companies are small and most people are afraid of them I prefer them, the financial statements are simple and management is accessible. It's easy to call up a CEO or CFO and ask a question, this isn't possible with GE or Coke, but I've done it with more than one holding.

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Re: few thoughts

Post by ScottW » Tue Jun 14, 2011 9:36 am

larryswedroe wrote:First to add to what was said earlier--at one point if my memory serves Fairholme held just TWO stocks.
I don't think that's correct. Before starting Fairholme he worked at Smith Barney for a couple of years managing a portfolio for a handful of wealthy clients. During this time, in 1994, he owned just Berkshire Hathaway and Fireman's Fund Insurance Co. That was a few years before he left the firm to start Fairholme.

His prior year annual reports are no longer available on his website, but I think he's normally kept 15-20 stocks for the fund. Consider how much it has grown in assets, he's either going to start adding stocks, or go after larger caps. Of course, if his performance doesn't recover, the "large asset base" problem will resolve itself.

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Post by Stryker » Tue Jun 14, 2011 11:05 am

partisan wrote:I have mentioned before I have an "active" small value portion of my portfolio that I implement. What this means is large/mid cap/bonds/foreign is held in index funds or mutual funds with an asset allocation mindset.

For the small value portion I invest in a Graham Dodd style, net-net companies, or companies selling for less than working capital. It has provided some wonderful returns for me over the years but I think it's tough for most people to implement for the following reasons.

1) It's tedious and boring for most, on average I'll probably read the financial statements for 30-40 companies before finding one I'll consider for deeper research. Of those deeper ones I might only buy a handful.
2) Once a purchase is made it's extremely boring, I do nothing but sit with the position possibly for years. I think most people who like to dabble with individual stocks like the activity aspect, activity destroys returns.
3) An indepth knowledge of accounting is required, I have no problem parsing financial statements, making adjustments etc. This skill is outside of most people's realm of knowledge.
4) It's hard to invest like this emotionally, many "deep value" companies have a lot of problems that's why they're selling cheap. A lot of companies I invest in are left for dead but if I can invest in a company trading for less than cash and with positive cash flow I will bite the bullet.

The obvious question to this is what is my edge, why can't professionals do this?

I tend to invest in small caps, and I mean small outside of professional money management's grasp. One company has a market cap of $7m, a professional can't touch this, others are in the $20m-60m range.

I also invest in international small caps, this is a very under touched, under researched part of the market. While these companies are small and most people are afraid of them I prefer them, the financial statements are simple and management is accessible. It's easy to call up a CEO or CFO and ask a question, this isn't possible with GE or Coke, but I've done it with more than one holding.
As Partisan has shown, there's more than one way to practice Graham & Dodd investing and still be successful at it.

In the 1972 book, "Super-money" by Adam Smith, on pages 190-191 the author has this to say:

"After our Omaha session, I participated in a seminar with about twenty leading money managers. I brought up Graham.
"That old stuff," said one of the managers. "Graham is all right, but it's really just a lot of platitudes, interspersed with forty-year-old industrial gossip."
Then, after this particular four-day seminar, I reported the discussion on Graham to Warren. He took it for granted that Graham would be, as it were, selling at a discount, but his loyalty was undiminished.
"Graham's teachings," he wrote, "have made a number of people rich, and it is difficult to find any cases where those teachings have made anyone poor. There are not many men you can say that about."

Another near forty years after the above was written, and long after his death, Benjamin Graham still has many loyal followers, of whom I'm proud to be one of them.

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Post by dnaumov » Tue Jun 14, 2011 3:20 pm

partisan wrote:I tend to invest in small caps, and I mean small outside of professional money management's grasp. One company has a market cap of $7m, a professional can't touch this, others are in the $20m-60m range.

I also invest in international small caps, this is a very under touched, under researched part of the market. While these companies are small and most people are afraid of them I prefer them, the financial statements are simple and management is accessible. It's easy to call up a CEO or CFO and ask a question, this isn't possible with GE or Coke, but I've done it with more than one holding.
I am curious and have a few questions:

What's your rate of winners to losers? How many individual investments have lost 50% or more in value compared to how many have gained over 50%?
For how long have you been doing this and what have your returns been like?
How many individual SCV stocks do you hold on average?
What are your sell triggers?

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Random Musings
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Post by Random Musings » Tue Jun 14, 2011 3:58 pm

The link from the OP is not available anymore.... Shame.

RM

partisan
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Post by partisan » Tue Jun 14, 2011 9:14 pm

dnaumov wrote:
partisan wrote:I tend to invest in small caps, and I mean small outside of professional money management's grasp. One company has a market cap of $7m, a professional can't touch this, others are in the $20m-60m range.

I also invest in international small caps, this is a very under touched, under researched part of the market. While these companies are small and most people are afraid of them I prefer them, the financial statements are simple and management is accessible. It's easy to call up a CEO or CFO and ask a question, this isn't possible with GE or Coke, but I've done it with more than one holding.
I am curious and have a few questions:

What's your rate of winners to losers? How many individual investments have lost 50% or more in value compared to how many have gained over 50%?
For how long have you been doing this and what have your returns been like?
How many individual SCV stocks do you hold on average?
What are your sell triggers?
I've been doing this since 2007, my IRR is slightly less than 10% I don't have the spreadsheet available on this computer but I can update this thread tomorrow. Since I started the total return for that portion of my portfolio is 40%+.

As per individual issues it follows the usual pattern, for every five stocks one is a total loser, three perform on average and one is a clear winner. Recently I had one issue drop 50% in a day with a bankruptcy filing. I sold most of my position which in hindsight I regret as the bankruptcy distribution will be greater than my cost basis originally. I have one issue that's down 38% that I'm still holding, a bio tech selling for less than cash, I'm probably stupid for not selling but it's part of the learning process I guess.

Overall my winners have far outpaced my losers, that said these are crappy businesses and each time I buy I wonder if it'll end up as a total loss.

I have a few that I'm still holding up over 50% but I usually end up selling out early with a 30-40% gain. I sell when the stock reaches net current asset value. I've slowly changed my style and hold some of the companies that have improving businesses. Selling at net current asset value seems to have limited my returns a bit, most of these businesses begin to improve and the stock continues higher. I've also had a few close calls where I will ride the stock to NCAV and sell and then the stock has proceeded to drop 30-50% usually a quarter or two later as a result of a poor management decision (bad acquisition, take under, layoffs).

I currently hold 14 issues like this. If you're interested the best approach is probably a statistical approach selecting a basket of net-net type of stocks and selling when it reaches NCAV.

The stocks are insanely volatile, I had one recently that reported terrible earnings, fell 15% in a day. I just held because it's still selling for slightly more than cash over the next month it rose back to right around my purchase price. If I would have panicked I would have locked in a loss, but patience is key, conviction is key as well.

fundtalk
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Post by fundtalk » Wed Jun 15, 2011 7:34 am

1. I miss Robert T posting here. One of the better posters. SGENX has remained an excellent fund, LLPFX has been medicore and FAIRX has begun to crash badly. Interesting to watch when you don't have money involved.

2. Fairx has always had a concentrated portfolio, but I don't think it was ever limited to two stocks. I do seem to remember it having about of a third of assets in Berkshire at one point.

3. Fairx was up 0.16% yesterday. Ouch. I guess a value investor could buy FAIRX at this point...any takers?

fundtalk
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Post by fundtalk » Wed Jun 15, 2011 11:18 pm

And fairx drops 2.12% today...will be interesting to see how this one ends up.

Bongleur
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Post by Bongleur » Sun Jun 19, 2011 11:55 pm

partisan wrote: I've been doing this since 2007, my IRR is slightly less than 10% I don't have the spreadsheet available on this computer but I can update this thread tomorrow. Since I started the total return for that portion of my portfolio is 40%+.
How does that compare to a simple slice & dice rebalanced index portfolio? Seems like a LOT more time & effort. Can you estimate your risk vs indexing?
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

Stryker
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Post by Stryker » Mon Jun 20, 2011 5:01 am

Bongleur wrote: Seems like a LOT more time & effort.
For U.S. equities there's at least one free site I'm aware of that does a net-net screen on a daily basis.

For international stocks, although I haven't used it, my understanding is that for a fee you can screen for the same data using Bloomberg.

partisan
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Post by partisan » Mon Jun 20, 2011 8:10 am

Bongleur wrote:
partisan wrote: I've been doing this since 2007, my IRR is slightly less than 10% I don't have the spreadsheet available on this computer but I can update this thread tomorrow. Since I started the total return for that portion of my portfolio is 40%+.
How does that compare to a simple slice & dice rebalanced index portfolio? Seems like a LOT more time & effort. Can you estimate your risk vs indexing?
Sure it's a ton more time, but I actually enjoy this a lot, so I don't see it as a problem.

As for risk, I measure risk as the possibility for a permanent loss of capital, which if you're buying companies for less than liquidation value the risk is very low this is your margin of safety. The corollary is that an investor's risk is very high in the case of something like a NetFlix or Pets.com where if they had to liquidate equity investors would get nothing. The best way to think about investing like this is credit analysis, I am evaluating the credit worthiness of my equity position in relation to the rest of the capital structure. I shy away from companies with debt for this reason.


If you were a big enough shareholder you could initiate liquidation, or at least propose it to the board. I've actually held a company where this happened, it was selling for less than working capital, a hedge fund force liquidation and the liquidation value was more than 2x the market price. Liquidation came as dividends, so the stock was trading at $3, they paid a $3 dividend and said after the dividend they still had about $3+ in assets, paid another $2.50 or so. The stock still trades and there is another $.40-.60 that needs to be distributed once European operations are wound down.


As to Stryker's comment:

Here are the US net-nets: http://www.grahaminvestor.com/screens/g ... av-screen/

The best way to find them internationally is Screener.co I had a free sub for a while generated a ton of spreadsheets and have been going through them one by one. Once I run out I'll probably subscribe again and generate a new list.

Of course if someone has access to Bloomberg or FactSet that will work as well. All you need to do is calculate net assets - total liabilities > market cap.

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Random Musings
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Post by Random Musings » Mon Jun 20, 2011 10:49 am

Larry Swedroe wrote:
First to add to what was said earlier--at one point if my memory serves Fairholme held just TWO stocks.
In 1994 (for a short period of time), Berkowitz held only shares in Berskshire Hathaway and Fireman's Fund Insurance Co. However, at that time, he was working for Smith Barney Investment Advisors. Before that, he worked for Lehman, Merrill Lynch (fixed income) and SPI (consulting).

Fairholme (named after a street he lived on in London) was established Dec, 1999.

Fairholme has 28 people on staff, primarily admin and compliance - they outsource most of their research to consultants. Similiar to how the Oracle of Omaha does it.

RM

MarginOfBuffett
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Post by MarginOfBuffett » Mon Jun 20, 2011 11:43 pm

Kenster1 wrote:
bhmlurker wrote:Cash flow by itself is an insufficient gauge. A heavily indebted company can easily have the same cash flow as another company with no debt.
Correct -- I don't think any value investor nor value index uses Cash Flow as the sole metric to search for value companies.
Incorrect -- When computing cash flow from operations, GAAP requires that interest expense be subtracted out. Therefore, a company with more debt, holding all else equal, will have to pay a higher interest expense to service that debt, and holding all else equal, will have a lower comparable operating cash flow.

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