Feeds:
Posts
Comments

Archive for February, 2013

One of my favorite Benjamin Graham quotes:

Chairman: … One other question and I will desist. When you find a special situation and you decide, just for illustration, that you can buy for 10 and it is worth 30, and you take a position, and then you cannot realise it until a lot of other people  decide it is worth 30, how is that process brought about – by advertising, or what happens? (Rephrasing) What causes a cheap stock to find its value?

Graham: That is one of the mysteries of our business, and it is a mystery to me as well as to everybody else. [But] we know from experience that eventually the market catches up with value.

Benjamin Graham
Testimony to the Committee on Banking and Commerce
Sen. William Fulbright, Chairman
(11 March 1955)
About these ads

Read Full Post »

Last May in How to beat The Little Book That Beats The Market: An analysis of the Magic Formula I took a look at Joel Greenblatt’s Magic Formula, which he introduced in the 2006 book The Little Book That Beats The Market (now updated to The Little Book That (Still) Beats the Market).

Wes and I put the Magic Formula under the microscope in our book Quantitative Value. We are huge fans of Greenblatt and the Magic Formula, writing in the book that Greenblatt is Benjamin Graham’s “heir in the application of systematic methods to value investment”.

The Magic Formula follows the same broad principles as the simple Graham model that I discussed a few weeks back in Examining Benjamin Graham’s Record: Skill Or Luck?. The Magic Formula diverges from Graham’s strategy by exchanging for Graham’s absolute price and quality measures (i.e. price-to-earnings ratio below 10, and debt-to-equity ratio below 50 percent) a ranking system that seeks those stocks with the best combination of price and quality more akin to Buffett’s value investing philosophy.

The Magic Formula was born of an experiment Greenblatt conducted in 2002. He wanted to know if Warren Buffett’s investment strategy could be quantified. Greenblatt read Buffett’s public pronouncements, most of which are contained in his investment vehicle Berkshire Hathaway, Inc.’s Chairman’s Letters. Buffett has written to the shareholders of Berkshire Hathaway every year since 1978, after he first took control of the company, laying out his investment strategy in some detail. Those letters describe the rationale for Buffett’s dictum, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Greenblatt understood that Buffett’s “wonderful-company-at-a-fair-price” strategy required Buffett’s delicate qualitative judgment. Still, he wondered what would happen if he mechanically bought shares in good businesses available at bargain prices. Greenblatt discovered the answer after he tested the strategy: mechanical Buffett made a lot of money.

Wes and I tested the strategy and outlined the results in Quantitative Value. We found that Greenblatt’s Magic Formula has consistently outperformed the market, and with lower relative risk than the market. Naturally, having found something not broke, we set out to fix it, and wondered if we could improve on the Magic Formula’s outstanding performance. Are there other simple, logical strategies that can do better? Tune in soon for Part 2.

Read Full Post »

Update 2: I think the Corner of Berkshire or the Reddit Security Analysis threads are money. I’m leaning towards Reddit because it’s free, but shout me down. I’m going to stick the link into the menu at the top of the page and then loiter there.

Update: I’d also like to hear your thoughts on the best forums (on any subject) from which I can shamelessly steal.

Folks, I’d like to hear your opinions on the best value investing forums on the web. The bigger the community, the more frequent the posting, and the freer the better. If none exist, then I plan to set one up.

Read Full Post »

From Montier’s most recent piece, Hyperinflations, Hysteria, and False Memories (.pdf) (via GMO):

In the past, I’ve admitted to macroeconomics being one of my dark, guilty pleasures. To some “value” investors this seems like heresy, as Marty Whitman¹ once wrote, “Graham and Dodd view macro factors . . . as crucial to the analysis of a corporate security. Value investors, however, believe that macro factors are irrelevant.” I am clearly a Graham and Doddite on this measure (and most others as well). I view understanding the macro backdrop (N.B. not predicting it, as Ben Graham said, “Analysis of the future should be penetrating rather than prophetic.”) as one of the core elements of risk management.

¹. Martin J. Whitman, Value Investing: A Balanced Approach, John Wiley & Sons, 1999.

Read Full Post »

Robert Prechter’s prediction of a 100-year bear market reminds of this great story told in the introduction to my 2003 copy of Philip A. Fisher’s Common Stocks and Uncommon Profits and Other Writings. Phil’s son Kenneth L. Fisher recounts a story about his father that has stuck with me since I first read it. For me, it speaks to Phil Fisher’s eclectic genius, and quirky sense of humor:

But one night in the early 1970’s, we were together in Monterey at one of the first elaborate dog-and-pony shows for technology stocks – then known as “The Monterey Conference” – put on by the American Electronics Association. At the Monterey Conference, Father exhibited another quality I never forgot. The conference announced a dinner contest. There was a card at each place setting, and each person was to write down what he or she thought the Dow Jones Industrials would do the next day, which is, of course, a silly exercise. The cards were collected. The person who came closest to the Dow’s change for the day would win a mini-color TV (which were hot new items then). The winner would be announced at lunch the next day, right after the market closed at one o’clock (Pacific time). Most folks, it turned out, did what I did – wrote down some small number, like down or up 5.57 points. I did that assuming that the market was unlikely to do anything particularly spectacular because most days it doesn’t. Now in those days, the Dow was at about 900, so 5 points was neither huge nor tiny. That night, back at the hotel room, I asked Father what he put down; and he said, “Up 30 points,” which would be more than 3 percent. I asked why. He said he had no idea at all what the market would do; and if you knew him, you knew that he never had a view of what the market would do on a given day. But he said that if he put down a number like I did and won, people would think he was just lucky – that winning at 5.57 meant beating out the guy that put down 5.5 or the other guy at 6.0. It would all be transparently seen as sheer luck. But if he won saying, “up 30 points,” people would think he knew something and was not just lucky. If he lost, which he was probable and he expected to, no one would know what number he had written down, and it would cost him nothing. Sure enough, the next day, the Dow was up 26 points, and Father won by 10 points.

When it was announced at lunch that Phil Fisher had won and how high his number was, there were discernable “Ooh” and “Ahhhh” sounds all over the few-hundred-person crowd. There was, of course, the news of the day, which attempted to explain the move; and for the rest of the conference, Father readily explained to people a rationale for why he had figured out all that news in advance, which was pure fiction and nothing but false showmanship. But I listened pretty carefully, and everyone he told all that to swallowed it hook, line, and sinker. Although he was socially ill at ease always, and insecure, I learned that day that my father was a much better showman than I had ever fathomed. And, oh, he didn’t want the mini-TV because he had no use at all for change in his personal life. So he gave it to me and I took it home and gave it to mother, and she used it for a very long time.

Common Stocks and Uncommon Profits and Other Writings is, of course, required reading for all value investors.

Read Full Post »

In March 1976 a Mr. Hartman L. Butler, Jr., C.F.A. sat down for an hour long interview with Benjamin Graham in his home in La Jolla, California. Hartman recorded the discussion on his cassette tape recorder, and transcribed it into the following document. There are many great insights from Graham. Here are several of the best parts:

On the GEICO disaster unfolding at the time: 

It makes me shudder to think of the amounts of money they were able to lose in one year. Incredible! It is surprising how many of the large companies have managed to turn in losses of $50 million or $100 million in one year, in these last few years. Something unheard of in the old days. You have to be a genius to lose that much money.

On changes in his investment methodology, a subject we cover in detail in Quantitative Value:

I have lost most of the interest I had in the details of security analysis which I devoted myself to so strenuously for many years. I feel that they are relatively unimportant, which, in a sense, has put me opposed to developments in the whole profession. I think we can do it successfully with a few techniques and simple principles. The main point is to have the right general principles and the character to stick to them.

I have a considerable amount of doubt on the question of how successful analysts can be overall when applying these selectivity approaches. The thing that I have been emphasizing in my own work for the last few years has been the group approach. To try to buy groups of stocks that meet some simple criterion for being undervalued-regardless of the industry and with very little attention to the individual company. My recent article on three simple methods applied to common stocks was published in one of your Seminar Proceedings.

I am just finishing a 50-year study-the application of these simple methods to groups of stocks, actually, to all the stocks in the Moody’s Industrial Stock Group. I found the results were very good for 50 years. They certainly did twice as well as the Dow Jones. And so my enthusiasm has been transferred from the selective to the group approach. What I want is an earnings ratio twice as good as the bond interest ratio typically for most years. One can also apply a dividend criterion or an asset value criterion and get good results. My  research indicates the best results come from simple earnings criterions.

We looked at the performance of Graham’s simple strategy in Quantitative Value. For more see my overview piece, Examining Benjamin Graham’s Record: Skill Or Luck?

In Quantitative Value we identify several problems with Graham’s simple strategy and examine several other strategies that outperform Graham’s simple strategy.

Hat tip to Tim Melvin @timmelvin

Read Full Post »

Sponsored Content

When it comes to Canadian small caps, a lot of gems are outside the mines.

Acclaimed stock picker Guy Gottfried made that point in October 2011 at the New York Value Investing Congress. In his presentation, Gottfried asserted that investors in the Canadian market are “obsessed with resource stocks.” That means attractive equities outside the resource realm are often ignored.

Gottfried has followed his own advice – with exceptional results.

In 2011, Guy Gottfried threw The Brick at investors, and they thanked him when the retailer’s shares climbed 118% over the next year.

The Brick illustrates how Gottfried examines stocks. The furniture and appliance chain is a Canadian institution. However, it nearly went bankrupt before being recapitalized in 2009 by outside investors.

Yet even as its turnaround was clearly succeeding, Gottfried felt The Brick was “stigmatized by investors.” Gottfried was impressed by the company’s new management, capital allocation and balance sheet, not to mention its bargain valuation. From those criteria and more, Gottfried concluded The Brick was a “high-quality and extremely well-run business that trades at an undeservedly cheap price.”

He was right about that – and many other small cap stocks. The six stocks that Gottfried has recommended at his various VIC appearances have gained an average of 63%.

Guy Gottfried is the founder and head of the Toronto-based Rational Investment Group. He’ll share his latest high-conviction ideas at the 8th Annual Spring Value Investing Congress in Las Vegas, on May 6th and 7th.

The Congress is expected to sell out, and people are encouraged to register early. Those who sign up by Monday, February 18th will save $1,700. Go to www.ValueInvestingCongress.com/GuyGottfried. The discount code is S13GB5.

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 4,774 other followers

%d bloggers like this: