Chroma Investing » 80-20 Investing

Value Investing Ideas – Companies Passing my Custom Screens

chroma — Tue, 23 Aug 2011 05:49:06 +0000

New Chroma Investing Feature

I promised that I was going to be adding more value investing features to this website. One of them is going to be a weekly list of companies that pass a few of my custom value investing stock screeners. Each week I will highlight a different custom Value Investing screen I use when deciding to do further research on a company. This week I will highlight the 80-20 Screener;

80-20 Value Investing Screen

80-20 value investing Screen 8-19-11

I have attached a screen shot of part of my custom 80-20 Value Investing stock screener using Stock Investor Pro screen which is comprised of the following value investing elements:

Low Price to Book Value

1. Price to Book ratio in the bottom 20% of stocks screened. I have documented the low price to book strategy in the past.

High Piotroski F-score

2. a Piotroski F score of 7 or better. ( I will be high lighting this study in an upcoming article, that will be a must read article!) This helps weed out some of the worst companies.

Low growth in assets

3. The annual growth in total assets should be in the lowest 20% of companies screened (currently negative double digit asset growth). Studies have shown that companies with the lowest 20% of growth in assets outperformed the market as a whole.

Pass the Z-score

4. A passing score on the appropriate Altman Z score. That means above 3.o for Manufacturing companies and 2.6 for other companies.- This is for downside risk protection since the Z score helps warn of potential bankruptcies.

Good Net Current Asset Value

5. Net Current Asset value equal to or greater than 1.25 times market cap. I am looking for companies with assets close to NCAV.

Current Price Earnings Historically Low

6. Ratio of current P/E to 7-10 year P/E is less than 1. I borrowed the next two criteria from James Montier.

Low Price to Sales

7. Price to Sales ratio less than 1.

The purpose of this to aggregate multiple value investing criteria

Value Investing Ideas

I have not yet investigated any of the stocks on this list, but I intend to begin to evaluate at least one of the stocks a month beginning in the next couple of weeks, so please return.

Highlights of this weeks value investing screener.

Benchmark Electronics BHE is a new entry to this list and worth a look.

Several of these stocks trade with almost no volume or have very very limited financial information. Some of those include Chai-na-Ta Corp. CCCFF, Elegant Illusions EILL, Sonics& Materials SIMA.

Satyam Computers SAYCY is an Indian company that had a very large accounting scandal, so unless the issue of assets has been resolved satisfactorily, may be a false positive to passing the screen.

Good luck on your research, if you choose to take these companies to the next level of research. If you do, please report the results here.

Disclaimer: I do not currently have any holdings of any of the companies listed on the screener. I may without notice buy one of these equities, if I find it fits my investing needs. Nothing in this post or this website should be construed as investing advice. I am merely expressing my opinion and sharing what interests me in the value investing arena. Please do your own research.

Warren Buffett’s advice in a Crisis

chroma — Mon, 08 Aug 2011 18:04:32 +0000

Given the downward trend in the market the past couple of weeks, I thought it was appropriate to re-quote some of Warren Buffett’s famous sayings that apply to time like these. We are, after all, value investors. Volatility is our friend, and nothing about this downturn was unexpected except the timing. Our government continues to be ruled by an unruly mob, who are more interested in their own self aggrandizement than making the hard choices necessary for long term prosperity. I am referring, of course, to both parties behavior. It does not bode well in the long term for the dollar as I have said repeatedly. Whether or not this is a repeat of 2008, I cannot say. But in these times it is good to remember Buffett.

Buffett Quotes

“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful. ”

“Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down. ”

“The most common cause of low prices is pessimism – some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer. ”

Conclusions

I know I have been quoting Warren Buffett, but another analogy, that comes from Ben Graham may be more in order and that is of Mr. Market. Mr. Market is panicked right now and he is starting to hand out bargains. Because he is panicked doesn’t mean we need to be. My equity portfolios are down like everyone else’s, but I have had nearly a third in cash in my IRA in cash and 80% in cash in the two investing accounts for Chroma Investing: the Small Investor Portfolio and 80-20 Investing Portfolio.

Take another look at your watchlist and you may see investing opportunities that did not exist a few weeks ago. That is what I am doing.

3 Must haves for your Value Investing Notebook

chroma — Wed, 03 Aug 2011 00:59:42 +0000

Everyone should keep some sort of value investing notebook. You don’t need to kill trees and put it in an old fashion three binder like I do, but you do need to keep track of several aspects of your investing endeavor. As individual value investors our time is a precious commodity, we can’t afford to repeat work that has already been completed.

I actually keep several investing notebooks for ChromaInvesting. I will outline what I like to keep in my Notebook below.

Value Investing Screener Results

I like to keep a list of stocks that have passed my value investing stock screening criteria.

I have several criteria I use and I keep a list for each one. For example, I have a custom screener that I use for 80-20 Investing.

I re-screen each week and then put the results in a blue 3 ring binder. Yes, I know there are newer ways to store information, but this is what works best for me. I set up the screener in Stock Investor Pro.

Another example of a stock screen I will keep in my investing Notebook is a screen of Magic Formula Stocks.

It is important to keep the screen results, because many of these companies will not pass further scrutiny and you will need to return your screener lists for further research.

Research on Potential Investments

Some companies will make it through your screening process and you will commitment a certain amount of time compiling your investment thesis and accompanying financials on this company. The first tool I use for this is OSV spreadsheets. You can quickly get a whole bunch of information on the stocks that pass your screens. It may not work for some ADR’s and OTCBB stocks. At this point Two things can happen.

First, while the company has attractive qualities in some area, you do not want to buy the equity now. It may that the price is too high, or the debt. Some factor that you can record in your notes on that company. If you return to that company later, you can refer to your notes and return to the reasons that you did not invest and see if circumstances have changed. Many of these stock will go on your Watchlist.

Second, You want to buy shares in the company in which case the research you have done becomes part of the

Stock Portfolio Notebook

To me it is important to keep this information separate. You always want to have your investment thesis and research handy for stocks you own. You can easily refresh your mind on what your expected catalyst is or what your risks are. Being able to refer to your investment thesis is important when your company’s stock price is being hit hard, or conversely rising. You will need to understand if the downdraft is a time to sell, reinvest or hold. If the stock rises suddenly, is that part of your investment notion, has it hit your fair value. If so, you might sell.

But to track all this information it is not enough to have a quick note in your brokerage account or on google finance. You need your Value Investing Notebook.

Disclosures: I do not have any financial relationship with aaii.com the maker of Stock Investor Pro but I am a paid member of the first and I purchased the second because I find them valuable as I hope you will. I loved Jae Jun’s Old School Value spreadsheet so much that I became an affiliate even though I am a mac guy. I like Jae’s product so much I got a PC emulator for my computer just to use it.

Best Value Investing Screeners

chroma — Wed, 20 Jul 2011 19:49:11 +0000

When you are a small time value investor starting out on your investment road, you can’t afford to spend lots of money on expensive tools to help you evaluate companies, but there are some inexpensive or free tools that I will be highlighting in coming weeks. One place to start is finding a good stock screener. A stock screener sorts through a specific stock universe and filters based on criteria that have been selected. For example, this might be screening stocks based on low price to book ratio. Or you might use a screen on more complex criteria, such as a screen based on Phil Town’s Rule #1 Investing.

The best place to find value investing screeners is to start at AAII.com. This is the website of the American Association of Individual Investors. To get access to the company names of the stocks that pass their dozens of screens you will need to join. The yearly membership is a mere $25, a great value! But you can go to the aaii screeners and begin to look through the various choices they have for free. This shows recent performance and as far back as 10 years. I have included a snapshot of the overview page.

AAII.com stock screener overview

This page you can see without joining to check out the various types of screeners they have which include Buffett type stocks, Dividend stocks, Dogs of the Dow, Philip Fisher type stocks, Piotroski F score stocks. There are value investing screeners, momentum screeners, growth screeners and combos.

AAII also includes the screening criteria, so you can see exactly what they are including to get the passing companies. Stock screeners are good starting places for a value investor, but it is not as simple as buying a stock that is on a screener you like. You will need to do your own due diligence. The several reasons for this include, outdated financial reports, a massive change in products or services offered, lawsuits, allegations of fraud (a common problem with Chinese companies that make some of the screens).

A great value investing screen like the Piotroski F score may not be performing well (down over 10% year to date) and that may influence whether you want to invest in that system now. Personally, under-performance is always a something that I like to look at and see if their is an investment opportunity.

More Value Investing Stock Screeners

Follow this link to get more information on Value Investing screeners.

Disclaimer: I do not benefit financially from recommending aaii.com. In fact I pay to be a member and I pay them for other services.

Real Returns are the only Returns that Matter

chroma — Mon, 28 Feb 2011 01:28:35 +0000

Recently, I was at the Motley Fool website. I use their CAPS as one the sources for common knowledge, like Yahoo finance message board. But that is another post. I like their breezy style and subscribe to their Hidden Gems service. I decided to check out how they compare their returns to their benchmarks. To me, no one would bother comparing to a bench mark unless you are thinking seriously of buying an index fund. And, if, over time you discover your returns are not as good as that, then you should buy an index fund and save yourself the effort. But most investment services, newsletters do compare themselves to some benchmark like the S & P 500.

I have long maintained that the only return that matters is total return. What this means is, simply, if I have an investment account of $10,000, at the end of the year how much did I make on that $10,000. I mean how much did I really make. That means I have dedcut commissions and fees. It doesn’t matter if I had 80% cash the whole year or whether I was fully invested., It doesn’t matter whether I made all my gains from dividends or capital gains after taxes, it only matters how I am able to profit from all capital I have at my disposal in a real way then compare that to inflation. Since we have been in a low inflation lately the last has been much less important. Although I expect to be MUCH more important in their near future.

Back to Motley Fool. I have posted their service returns list for today below. At the bottom you will see a little note called “How Performance is calculated”, that I am convinced very few people actually read. I have included the unabridged text at the end of this posting, in case you would like to peruse it further. I will admit that I may have misunderstood something in their disclaimer. And if someone from the Fool sends me an email or comment, I will correct whatever error I have made in the body of my post. My goal is to be accurate.

Motley Fool Returns 2-27-11

Here is what I take away from the Fool disclosure:

1) Currently the Fool changes how they calculate their returns, depending on the service. That doesn’t make any sense. For example on the Rule Breakers service they exclude dividends from both the S & P 500 and their Rate of return calculation. For the Dividend Investor, unsurprisingly they includes Dividends for both. The Fool does say they are implementing a time weighted rate of return formula. All rates of return should be simple to understand, and reflect the total return of a portfolio for a specified period of time.

2) They don’t measure cash. “The total return is calculated using a time-weighted rate-of-return formula” after they use a simple rate of return for each individual stock, is how the Fool currently measure returns on their “Real Money” portfolios. This is overly complicated and inflates the returns since cash is not taken into account. The amount a portfolio has in cash is important to Total returns. Cash is an asset and in times of uncertainty, a great one to have in abundance. But having a large cash position will keep your returns down when the market is rising. For example in my 80-20 portfolio, I had only one stock traded in the last year. I made more than 50% on that investment, but my total return was only 5% because, I was in cash most of the year for the entire portfolio. It doesn’t matter how right you are if you are only right once a year, with a small portion of a portfolio.

3) Some of their services aren’t real money, only theoretical. There has been a lot of research showing that while some ideas work great in theory, once you begin investing, the returns are significantly lower. My 80-20 portfolio is real money, and used some good theory like the Piotrsoski F-score and discounted NCAV value as it’s basis. But cash doesn’t earn anything these days, so my theoretical returns were fantastic, but my real returns were worse than the S & P 500.

4) The Fool’s record isn’t great. Even if you buy that you must compare to a benchmark their services haven’t by and large done well. Of the nine services they list, four performed worse or the same as their benchmark. But two out of three of their real money portfolios are performing worse than the S & P 500. Remember my comment about indexing. Perhaps there should be some consideration of that at the Fool.

My purpose isn’t to pick on the Motley Fool. I haven’t canceled my Hidden Gems service even though it was one of the worst relative performers listed. Why? Because I don’t follow everything they say. Nor should you. The only suggestion of theirs I have followed I made nearly 50% on in less than six months.

My purpose is to make sure you have your eyes open. When talking about what the returns are on your portfolio make sure they are real, not theorectical and that they include the trade off from capital gains and dividends, trading costs and the cost holding a lot of cash.

The complete Text of the:

The Motley Fool Investment Return Calculations Disclosures

The Motley Fool is in the process of implementing time-weighted, annualized total return calculations for all of its services. Below are descriptions of the various methodologies that are currently being used by each service.

Real-Money Portfolios – Million Dollar Portfolio, Motley Fool Pro, Hidden Gems
The Motley Fool’s real money portfolios that are included in this table are Million Dollar Portfolio’s Charter Portfolio, Motley Fool Pro, and Hidden Gems’ real-money portfolio. The total return is calculated using a time-weighted rate-of-return formula. The returns of the individual stocks are calculated using a simple average, excluding dividends. Dividends are included for both the total portfolio return and the benchmark, the S&P 500 Total Return Index.

Stock Advisor
Total average returns are the average of all individual stock recommendations (active and sold) and the average of the S&P 500 Total Return Index, starting from the end of the day we make each recommendation. Both the stock and benchmark returns include reinvested dividends.

Rule Breakers
The total average return is calculated by taking an average of all the returns for the stock recommendations. When a stock is sold, returns for that stock are tracked through the sale date and on the S&P 500 going forward. Dividends are not included in the return calculation for the individual stocks, the total average return, or the benchmark, the S&P 500 (SPX).

Inside Value and Income Investor
The total average return is calculated by taking an average of all the returns for the stock recommendations currently on the scorecard. Dividends are included in the return calculation for the individual stocks, the total average return, and the benchmark, the S&P 500, as measured by the SPDR S&P 500 ETF (SPY), with closing prices adjusted for dividends.

Global Gains
The total average return is calculated by taking an average of all the returns for the stock recommendations currently on the scorecard. Dividends are not included in the return calculation for the individual stocks and the total average return. Dividends are included for the benchmark, the S&P 500, as measured by the SPDR S&P 500 ETF (SPY), with closing prices adjusted for dividends.

Motley Fool Options
The return calculation assumes that a cash investment of nearly equal size is made in each position recommended. In the case of option positions that are established with margin, a cash investment equal to 30% of the required buying power is made. The total performance is calculated using a time-weighted rate-of-return calculation. The stated return is calculated by averaging the returns of both co-Advisors. The returns of the individual recommendations are calculated using a simple average, excluding dividends. Dividends are included for both the total portfolio return and the benchmark, the S&P 500 Total Return Index.

Pareto’s Principle – A Name for an Old Rule

chroma — Wed, 04 Aug 2010 07:03:50 +0000

I have often referred to what I called the 80-20 principle, the common idea that 80% of the results come from 20% of the work. I have set up a portfolio to test the theory called the 80-20 portfolio. Who knew this was an actual economic concept and not just an old wives tale. It turns out this rule was actually developed by an Italian economist named Vilfredo Pareto. Around 1906 Pareto discovered that roughly 80% of the wealth in Italy was owned by 20% of the people. When he turned to other countries, he found that the percentage was roughly the same. The real result is actually a range. Sometimes 90% to 10% in others 70%-30%. But the principle is still valid. There is an important concentration of results to inputs. Most interesting to me is that the Pareto Principle is an example of a power law. I won’t get into Power laws now, but they have appeal in appreacing the concepts of Long tail events. Perhaps I need to rename my 80-20 portfolio to Pareto’s Peanuts.

Portfolio Updates

chroma — Tue, 04 May 2010 05:14:32 +0000

This is a quick update on the status of both portfolio’s for their first month. From here on, I will only update quarterly, because a shorter time frame than that seems silly.

Small Investor Portfolio

Current Positions

DUCK up 27.2%

IFON down 13.2 %

Closed Positions

ORXE up 31.% including commissions.

This is all well and good, but I did not completely deploy capital so where is this portfolio really?

Started with $2000. Value of account before additions and other amounts, including commissions paid is $2204.88 for a total of 10.2% gain in approximately one month. Also made one monthly deposit of $200. Also received Choice Trade promo offer of $50 as discussed in my posts about choosing an online broker. Total account value today is $2454.88

80-20 Portfolio

Closed positions

HAST up 57%

Opened account with $5000 Account is worth $5285.75 including commissions paid but not additions. That is 5.7% up on the portfolio for the month. I have added my monthly amount of $300, so the actual current total is $5585.75. There are no current positions in this account.

The S & P 500 gain in the same period is 3.06% although given my investments perhaps a better comparison is the Russell Small Cap index was about 6.9% A one month result and the subsequent comparison to an index is really very silly, since it is too early to compare anything to anything else.

Avoiding Confirmation Bias

chroma — Thu, 29 Apr 2010 18:41:00 +0000

As I have mentioned previously, one of the points of the 80-20 Portfolio is to incorporate some of the research of Behavioral Finance into an Investing Strategy. One of the behavioral traps we go through is something called Confirmation Bias. In short, this is when you look at facts that agree with your investing thesis as confirmation of that strategy. This is a slippery slope and one that we all fall into even if we are aware of it.

I first learned about this concept when reading Nassim Taleb’s book The Black Swan. He called confirmation bias “naive empiricism”. He said, “You take past instances that corroborate your theories and you treat them as evidence.” Further he writes, “I am saying that a series of corroborative facts is not necessarily evidence. Seeing white swans does not confirm the nonexistence of black swans.” He cites a study by P.C. Wason. In the experiment subjects were given a three number sequence of 2,4,6 and asked what rule would generate this sequence. “Their method of guessing was to produce other three-number sequences, to which the experimenter would respond “yes” or “no” depending on whether the new sequences were consistent with the rule. Once confident with their answers, the subjects would formulate the rule.” The problem is that most people will say something like 8,10,12. And the answer would be yes. After a couple of confirming examples you would announce that the rule was add 2 to the number before it, in succession. But the correct answer is actually any ascending numbers. I failed this example when I read it one of James Montier’s writings when he posed the question to the reader. I was reading about the problem and still fell for it.

How to prevent confirmation bias in our approach to investing? Taleb directs us back to Karl Popper and his concept of “falsification.” We should attempt to prove false the ideas we are using. Again Taleb, “We can get closer to the truth by negative instances, not by verification!“ Popper, Taleb says leads the way out of our darkness, he “…introduced the mechanism of conjectures and refutations, which works as follows: you formulate a (bold) conjecture and you start looking for the observation that would prove you wrong. This is the alternative to our search for confirmatory instances. If you think the task is easy, you will be disappointed—few humans have a natural ability to do this.” In the Wason study, the way to figure out the proper rule would have been to submit numbers that declined, alternated, etc. To prove what the actual rule was by ruling out as many of the opposites as possible. It is only by figuring out what doesn’t work that you figure out what does.

The interesting idea to ponder is that if you are naturally a contrarian, like I am, you will be instinctively drawn to contrarian investing ideas, like value investing. These ideas make more sense to me, than say momentum investing. But, am I really just looking for investing ideas that confirm my pre-existing biases? Perhaps.

It may also be why, even though I consider myself a value investor, I have not felt compelled to be bound by some rules that seem to appear in the blogsphere. Investing is ultimately a path, not a destination, this is just another pot hole to avoid.

Investing Regret

chroma — Wed, 28 Apr 2010 02:34:16 +0000

I had a dose of Investing regret the other day. I have posted about my terrific gain on HAST for the 80-20 portfolio. Right after I sold it at $7.17/share, the price dipped. But then it soared. Then it had a spectacular rise to over $9.00/share. I was, of course, bummed that I had not gone for the ride, but I nevertheless felt good about my decision to sell. The point of the 80-20 portfolio was to remove emotion and other behavioral traps that might reduce my investing gains. That might sound contradictory, but it is not. I stated that my selling strategy would be to sell on a 50% gain. Once I had achieved a 57% gain, I sold. My goal had been achieved and the continued rise of the stock was not part of my investment process. Moreover, I could no longer safely keep the stock in my portfolio because I had no investment thesis that supported keeping it. I am not saying there wasn’t an investment thesis that supported it, just that I don’t have one. Moreover I am testing an investment strategy in this portfolio, so had I kept the stock it would have been as product of emotion, not of sound investing practice.

Today as the market dropped over 2%, HAST dropped over 17% to exactly the price sold at last week. Regret comes and goes. I have moved on to other investment prospects.

HAST – Hasting Entertainment – 80-20 Portfolio – SOLD

chroma — Tue, 20 Apr 2010 16:42:56 +0000

Just a quick update on HAST. I sold all 110 shares at $7.19 this morning for a total, minus the $4.50 Zecco commission, of $786.40. While the 57% increase on this investment in less than three weeks is unexpected in its quickness, it is too early to say whether the 80-20 strategy is worthwhile. I have not had a chance to find another purchase for 80-20 Portfolio, although I have identified several candidates. None have pasted all the criteria. There seems to be a large difference in how I am calculating the Piotroski F score and how Stock Investor Pro calculates it.

Also, remember that this profit in HAST is only a 5.7% increase in the 80-20 portfolio. Now obviously if I could make 5% a month, every month I would be quite, pleased. But I don’t have those kind of expectations.

Disclosure: I have no current positions in HAST.

Chroma Investing » 80-20 Investing

Value Investing Ideas – Companies Passing my Custom Screens

New Chroma Investing Feature

80-20 Value Investing Screen

Low Price to Book Value

High Piotroski F-score

Low growth in assets

Pass the Z-score

Good Net Current Asset Value

Current Price Earnings Historically Low

Low Price to Sales

Value Investing Ideas

Related Posts:

Warren Buffett’s advice in a Crisis

Buffett Quotes

Conclusions

Related Posts:

3 Must haves for your Value Investing Notebook

Value Investing Screener Results

Research on Potential Investments

Stock Portfolio Notebook

Related Posts:

Best Value Investing Screeners

More Value Investing Stock Screeners

Related Posts:

Real Returns are the only Returns that Matter

Related Posts:

Pareto’s Principle – A Name for an Old Rule

Related Posts:

Portfolio Updates

Related Posts:

Avoiding Confirmation Bias

Related Posts:

Investing Regret

Related Posts:

HAST – Hasting Entertainment – 80-20 Portfolio – SOLD

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