How to Pick a Value Investing Conference

The first thing to do is start with value. This is not  a surprise statement on this website. As always, value is in the eye of the investor. What is a great value?

Start With Your Assets

What? Yup, Start with your assets. If you are small time value investor, or a young person just beginning to invest, you may have very little money to invest. You may be struggling to pay off credit card debt or scrimping to save up your first bit of capital to invest. Or you may be flush with a retirement fund or come into a big inheritence that you have decided you can invest better for yourself.

If your total capital is only $2000 it doesn’t make any sense to spend $2000 attending a value investing conference no matter how great it is. On the other hand a conference such as the American Association of Individual Investors conference which is only a couple of hundred dollars may be a great way to kick start your early investing efforts. In particular investing conferences are terrific avenues for asking questions, clarifying investing ideas and meeting like minded individual investors.

On the other hand, if you have a portfolio of $500,000, spending  a few thousand dollars to attend a great event like the upcoming Value Investing Congress, won’t hit your underlying capital and may actually provide insights that can energize your investing process.

What Value Investing information are you looking for?

Value Investing conferences are essentially tools to help educate yourself as an investor. Look through the websites of the investing conferences you are interested in to see who is speaking and what topics they are covering. Some of the topics at upcoming value investing conferences include: Value Investing today, Finding Outstanding Investments, Global Value Equity Investing, Emerging Markets: Overheated or Alluring?, Sustainable Investing: Not Just for Hippies Anymore, and this tongue twister: How to Decipher Financial Statements,  Avoid Value Traps, and Pick Investment Winners. There is a lot of variety at investing conferences so you need to figure out what you are interesting in learning, what can complement and expand your investing knowledge. Only you can assess what you know and what  you don’t know.

Value Investing Conferences can also focus on practical investment knowledge, such as actionable equities analysis or investing case histories. All knowledge is not the same. After some investing conferences you walk away with value investing strategies and others with specific stock picks from great investors. There is no right answer, it will depend on what you are looking for.

Who is speaking at the Value Investing Conference?

Another important factor influencing your decision to attend an investing conference is who is speaking. At next year’s Value Investor Conference in Omaha several of the speakers are best selling authors as well as fund managers. I have read Robert Hagstrom’s The Warren Buffett Way, he is now a portfolio manager at Legg Mason. Pat Dorsey used to be director of Equities Research at Morningstar when he wrote the book, the Little Book that Builds Wealth, part of that popular investing book series.

If you like to hear the superstars of Value Investing speak, it is hard to beat the Value Investing Congress. Next month hedge fund manager Bill Ackman, who I have profiled recently, Joel Greenblatt, author of one of my favorite investing books, How to be a Stock Market Genius (yeah I know it is a dumb title, but it is a really good book) The Little Book that Beats the Market and his most recent book the Big Secret for the Small Investor. And if you don’t know him from his books you may know he is founding partner of Gotham Capital and phenomenal investor.

The most important thing to remember about investing conferences is that they are not THE answer to value investing, but they are a fantastic tool to learning or refining you knowledge of Value Investing.

If you want more information on any of the conference go the Value Investing Conference page.

Disclaimer: I am a media partner with Value Investing Congress.

Related Posts:

• Value Investing Conferences – Investing Resources
• Greenblatt, Ackman & Value Investing Masters speak at the Value Investing Congress
• Save $1400 Learning about Value Investing
• Value Investing Congress Discount Ends
• Investing Conference for Beginning Investors – AAII

We all have some advantages over other investors. Are you a good at analyzing financial records? Are you patient? Do you have intimate knowledge of the biotech industry? You get the idea. These are all advantages that one person could have over another investor.

Before we turn to Klarman’s next point, let me point out some great investor’s “edges.”

-Monish Pabrai has reminded me that checklists aren’t just good for surgeons and airline pilots. I am still developing a comprehensive checklist.

-Warren Buffett- Mental discipline. “Be greedy when other are fearful,” is easy to say, much harder to live when you are uncertain. Think March 2009 when most investor’s were soiling themselves.

-Joel Greenblatt- Probably has two edges. Mechanical Investing ( such as Magic Formula Investing) probably has some merit. Figuring out which criteria are currently important is your edge. He also reminds us about the importance of special situations, especially spin-offs and the oddities involved in mergers (although not Merger Arbitrage).

-Benjamin Graham- cigar butt stocks. Despite the ongoing positive investing results from Net Net stocks, some people can not invest in such “Ugly” companies. That has often been my edge. Apparently, I like warts when I invest.

-Seth Klarman- Complexity. He is a master investor because he and his team analyze the difficult to analyze and discover where the market has mis-priced something, usually significantly. If you can master the detail and complexity you are in good company. Everyone thinks they can do this, I am not one of them.

-George Soros – reminds us that investors behavior affects other investors decisions in ways that affect price. That brings us to Klarman’s next point in his 2010 letter.

“There is a second element in designing a sound investment approach: you must consider the competitive landscape and the behavior of other market participants.” So, it is not enough for you to have an edge to be a successful investor, according to Klarman, you must see how others are behaving in the markets. Not everyone  will be like us, value investors, some will be speculators, others Technical Traders. The point is if you aren’t clear what the rest of the people investing against you are doing, you can be hurt by them. Klarman uses a football analogy. If your opposition is defending against the run: Pass. Even if you have great running back. This may seem obvious. But as humans we tend to be seduced by the herd, the trend, the momentum. Whatever you want to call it. Value Investors are ultimately contrarians with a refined attitude. We need to remember, if too many people are afraid of something, it is worth a look. And if everyone you know loves something, tread with caution.

“When observing your competitors, your focus should be on their approach and process, not their results.” This could have been said by James Montier. Klarman says we shouldn’t replicate other investors portfolios, but “looking for opportunities where they are not.” Is it in housing debt or Greek equities. Talk about fearful places to look. There are opportunities in investing that you have to search out. Here a few investment ideas that Klarman alludes to, and you ignore Klarman at your own peril.

-Bond prices don’t just fall when they fall below BBB- High grade bond funds are often forced to sell in that situation- possible buying opportunity.

-A mortgage security will be downgraded when it can’t return par to bondholders. This will cause a rash of selling. Forced sellers are at a disadvantage to you. Know your edge.

-When a stock suspends dividend, some  funds must sell. Look at the fundamentals. Perhaps their is opportunity.

-Does the value of a stock change when it is deleted from an index? To index funds, that stock must be sold, even though the value may not change. Obvious. Yes. Opportunity, if you don’t have to sell. Also yes.

-Finally a significant drop in a stock price can be enough to make investors bolt for the door. Momentum and Technical traders can lose their edge here. Don’t assume the market knows better.

If Klarman is pointing out anything, it is the inefficiencies that can benefit someone with an investing edge that the seller of that investment doesn’t have.

If you liked this post, please go the share button, and share it with your friends. Or comment.

If you want to read a long excerpt of the 2010 Klarman letter I have referred, to which only briefly touches on the them I have discussed, please follow the link to My Investing Notebook. The letter is worth reading in its entirety.

Related Posts:

• 20 Things You Need to Know about Value Investing
• Why You may Want to Invest for Yourself
• 3 Must haves for your Value Investing Notebook
• Greenblatt, Ackman & Value Investing Masters speak at the Value Investing Congress
• Underperformance in a Fund, Time to Invest?

In the original version of his book Greenblatt proposed a very simple idea. Simple does not mean dumb. It means simple to understand, but also intuitive. Its appeal was that even I could understand it at first glance. I will distill this down to my target audience: small and beginning investors. The idea was to take the universe of stocks with a market of $50 million or more and grade them based on two criteria. I told you it was simple. Greenblatt makes adjustments from the standard ideas he represents. You can read either version of the books appendices to understand his thinking in this regard. The first criteria is Return on Capital (ROC) or precisely as Greenblatt defines it: EBIT/(Net Working Capital+Net Fixed Assets). The second is Earnings Yield or in the Magic Formula: EBIT/Earnings Yield. Higher is better in both cases. In true mechanical investing form, the idea is to take the grades on these two criteria and sum them giving you a total number. Rank the top 30-50 companies and buy a limited portfolio of these companies. Sell the losers a day less than a year, Hold the winners a day past a year (for tax reasons).

The reason I was initially awed by this was that Greenblatt said that his extensive back testing had shown that it averaged more than 30%/ year from 1988-2004. A staggering return. I recently read the updated version and an interesting thing happened since 2004. The returns have declined. A lot. It now stands at only 23.8% from 1988-2009. The last five years have been so weak that it dragged down the return for the previous 16 years. So the question I proposed in my title. Does the Magic Formula work? The real answer is I don’t know. I sure would love for it to work. It would sure make my investing decision easier. But as Greenblatt himself said the Magic Formula’s period’s of under-performance will scare people off from using it enabling it to continue as a viable investing strategy.

I am of two minds. The first is that I am distrustful of back testing. What has worked well in back testing has not always worked out as well in the light of real money investing. The second is that it is also hard not to recognize the powerful influence of mean reversion. It is hard to know if the the Magic Formula theory’s returns are declining because of mean reversion. But one must consider it apossibility. A final thought on the Magic Formula. If the mean reversion applies to the MFI theory in and of itself (instead of as measured against other investment strategies) then now would be an excellent time to buy into the strategy because it is likely to return to its former glory.

Related Posts:

• What is Value Investing?
• Value Investing Criteria that Works- Low Price to Free Cash Flow (FCF)
• Beginning Value Investor Terms – Exchange Traded Fund (ETF)
• Top 5 Value Investing Tips
• Greenblatt, Ackman & Value Investing Masters speak at the Value Investing Congress

The first account I set up was the  Small Investor Portfolio. I started it with $2000. I will add $200/month to the account. It is meant to replicate what a beginning value investor or a value investor with a small amount of capital might be able to do on his own.  You can see the three stocks I have purchased for this portfolio already by looking at IFON, DUCK and ORXE.

This fund will be  primarily an asset valued portfolio relying heavily on Net Net stocks and other asset valuation strategies in the vein of Benjamin Graham. The stocks should have at least a 33% discount to Net Current Asset Value or some other Margin of Safety from intrinsic value.   I will create a spreadsheet to track the financial information that I glean from a companies financial statements. I will also read the latest 10k and 10Q’s looking for trouble or problems. Finally, I will do a little scuttlebutt research to see if I can see if there is a sig alert (for non Los Angelinos, that is when one or more lanes get shut down on a freeway) for the company. The Small Investor Portfolio will rely  heavily on analysis both quantitative and qualitative. I will take my cue mostly from asset valuation focused investors like Ben Graham and not from future earnings oriented investors like Warren Buffett. I will not be doing any Discounted Cash Flow analysis or looking for Owner’s Earnings growth. The strategy will be to identify these cigar butt, stocks that are discounted from their Intrinsic value and purchase them with a Margin of Safety. Unlike some other value investors I will include ADR (foreign stocks listed on an American exchange) and Penny stocks that trade on the Pink sheets or over the counter. The stocks should have a positive net income. The exceptions will be companies with positive operating income, with one time charges offs or discontinued operations. The other exception to positive Net Income will be biotech or pharma stocks with huge upside potential.  I will hold the stocks until I have reached the stocks intrinsic value or the circumstances surrounding the company change significantly enough to warrant a reevaluation of the company. If my estimation of the company’s value changes significantly in a negative manner, then I will sell the stock. In some cases I will utilize some special situation stocks in the manner outlined by Joel Greenblatt in his book You Can be a Stock Market Genius. I will explore these situations as they come up. And although ORXE was a NCAV stock, I consider it a special situation stock. With only $2000 to start, the small investor portfolio will be a Focused portfolio containing initially no more than 4 stocks. As the account grows with profits or the monthly capital additions I will expand this to at most 8 positions, and begin to increase the dollar amounts as the account grows. If the opportunity is there I will try to remain 80% invested at all times, retaining 20% in cash for new opportunities that come up, particularly if the market declines. If the Net Net and special situations dry up, I will stay in cash or reevaluate the investment strategy. This will be a long only portfolio. I will avoid financial stocks because I do not know how to evaluate their assets in a meaningful way.

The concept for the 80-20 investing portfolio is simple. Set up a few simple established value investing principles, make them stringent and then buy every stock that passes the criteria. So while the value investing criteria may be similar to the Small Investor Porfolio the strategy is not.  Some of these criteria  are concepts I have not yet covered in this blog, but I will post about them in the ensuing weeks. The criteria will include a combination of the following:

1. Price to Book ratio in the bottom 20% of stocks screened.

2. a Piotroski F score of 7 or better.

3. The annual growth in total assets should be in the lowest 20% of companies screened (currently negative double digit asset growth).

4. A passing score on the appropriate Altman Z score.That means above 3.o for Manufacturing companies and 2.6 for other companies.

5. Net Current Asset value equal to or greater than market cap.

6. Ratio of current P/E to 7-10 year P/E is less than 1.

7. Price to Sales ratio  less than 1.

There is no margin of safety per se. I think that by combing the different criteria that have been tested over the long term and then adding criteria that should minimize the down risk suck as Altman Z score, I am hoping that I have built in a margin of safety into the criteria itself.

In the future I will introduce a system for Hedging downside risk by using LEAPs or long term Asset Protected securities. This is the flip side to long positions. More about this in a future post. Thus this will be a long and short (although only using options) portfolio.

The strategy is buy as many of these positions as you can.  If I run out of cash, I will only replace a position in the portfolio with a better position. Since intrinsic value will be more difficult to calculate, I will hold the stock until the stock appreciates 50% and sell. If it declines or fails to meet my sell price I will sell at two years.

All the analysis has gone into the set-up. I will not be doing heavy analysis for this portfolio. In fact, apart from verifying that the company passes the criterias, I will do NO analysis. I will make sure that a company passes all the quantitative criteria and that is it. This will be a mechanical trading system in a similar to the magic formula investing strategy. Because I am expecting that more stocks will need to be purchased for this system to function, I have established the 80-20 Account with $5000. I will add $300/month to this account.

You might ask why I am not combining both criteria. It is simple. I am experimenting. There is some research that suggests that we are our own worst enemies in investing, that emotion, and poor decision processes will hinder our investment performance. I want to test these theories in a real and concrete way.  With 80-20 Investing I want to remove ego and emotion and see if it is possible to make money in a more simple way. Some of the Net Net companies don’t pass the risk thresholds I have set. But I am not sure that means that they are statistically worse investments. I am attempting to discover for myself what really works.

Related Posts:

• Best Value Investing Screeners
• Warren Buffett’s advice in a Crisis
• Extra Investing returns by Investing Like Warren Buffett
• Portfolio Updates
• HAST – Hasting Entertainment – 80-20 Portfolio – SOLD

Unfortunately, the reality of the service is not as good as the concept. I think it turned out to be a poor investment  of $79.50 which is the discounted price I paid for the service for a year.

While the concept has promise, their track record was not great, or as they themselves said in their year end summation, “There is no avoiding this point: on the surface, our performance was poor in 2009. For the full year (we bought our first stock on Jan. 23), we returned about 12.1%. This vastly lags the overall S&P 500 total return of 26.5%.” I agree. For an Opportunistic Investor 2009 was a great year.  And 12.1% is not a great performance in any year yet alone a year with so many opportunities as 2009. Interestingly, they complain that the biggest drag on their returns was their, “… cash position, which averaged around 60%-70% of the total portfolio for most of the year, and currently sits at about 50%.” I often hold large cash positions while I am looking for stellar opportunities. I am not sure that I buy the argument.

Ultimately, though it is the quality of the analysis and why they are taking positions that seems somehow unsatisfying. The editor’s don’t feel confident in their choices, almost like they have to pick something, so this is the choice this month. Not because it is a fat pitch, that is worth swinging at.

Disclaimer: I have paid for Opportunistic Investor and have no other financial relationship with Morningstar. I have an affiliate relationship with Amazon. If you are considering buying a book from them, please use my link, so I get my $.04. If you add up all the pennies I have made, well it doesn’t amount to anything actually.

Related Posts:

• No Related Posts

1) Net Net Stocks- My favorite investment technique. Old Ben Graham was almost all right this past year, at least on the NCAV stocks I invested in, before Chroma Investing and since.

2) Buffett is right Management is important.  Of course you want them to be ethical, but as he has said you want management whose interests are aligned with shareholders. Two of my least profitable investments VXGN and GSIG were problems exclusively because of poor management.

3) I’d rather invest my own money than trust someone else to do it for me, even if it is more work. For many investors this is not true. They will be better served with an index fund or trying to hitch their star to one of the very few exceptional investment managers like Seth Klarman or Joel Greenblatt.

4) When you do well in investing you can do very, very well indeed. Warren Buffett has also famously said that if he had a million dollars to invest he could guarantee a 50% return. My returns since Lehman brothers failed have been exceptional to me, well over 100%. I am most happy that I was able to continue to make money as the market slide down from October to March. And doubly happy I was not afraid in March and April to pick up bargains.

5) Always cover your ass. Or watch out for what can bite your investment in the back side. Preservation of capital is paramount. If something changes about a company, including new information is revealed that is negative, don’t be afraid to change your investment position.

6) Don’t assume that your success is all skill. So, while I am happy that I made money since Lehman, I am also aware that some of my success is undoubtably luck.

7) Don’t slavishly follow any investment guru. I followed Klarman into an investment if Facet (FACT), and because it was a NET NET stock.  But I was fortunate enough to avoid the costly mistake he made in RHIE, a position from which he recently exited.

I love investing, particularly the figuring out what is going to work. The fall has been a confusing time for me when I mostly stayed out of any new investments because I was convinced the market was due for a correction. I may still be right on that, but I wasn’t for the entire fall, and probably missed out on some deals.

9) Diversifying your portfolio accross many asset classes is only a good idea if you are willing to your money over to other money managers or you happen to be an expert in losts of investment vehicles.

10) The Efficient Market Theory is the single stupidest idea I have ever heard of. It still makes me laugh that anyone EVER took it seriously. It goes hand in hand with the other dumbest idea I ever heard, which is that humans act rationally. Thank God we have behavioral Finance and the Austrian School.

Not much of a list, but I am not sure that lists, per se, have all that much value. And I am a value investor after all.

Related Posts:

• New Investing Resource – Value Investing Books
• Warren Buffett’s advice in a Crisis
• 3 Must haves for your Value Investing Notebook
• Top 5 Value Investing Tips
• Greenblatt, Ackman & Value Investing Masters speak at the Value Investing Congress

Magic Diligence is another site devoted to the Magic Formula Investing strategy. Magic Diligence proposes to review the Magic Formula List weekly and give tips on the best companies from the list to invest in. It has a pay service element.

The last link is essentially a list of Magic Formula stocks.The list is updated weekly and should be a good alternative for anyone interested in this system of investing. He uses different criteria for his screener, by introducing a liquidity requirement and a higher minimum Market cap amount ($100) You can find the site here. Note this site has not be updated for a couple of weeks as of this posting.

Greenblatt is an interesting, witty guy and a phenomenal investor. Although I do not subscribe to the Magic Formula Investing Strategy, in an effort to present new investors with various viewpoints, I have included these links. After all the idea is to find companies worth investigating. This may be the ticket for you.

Disclaimer: If you purchase the book through this blog. I will receive approximately $.50. I have not actually made any money this way, but I thought it better to disclose the fact, in case someone actually did buy a book at Amazon. I no longer have an affiliate relationship with Amazon.

Related Posts:

• Chroma Investing Links July 2011
• Value Investing Checklists
• An aid to Empirical Finance Research
• New Investing Resource – Value Investing Books
• Warren Buffett’s advice in a Crisis

Related Posts:

• No Related Posts

P/E or Price Earnings Ratio is the single most discussed concept there is in stock investing. That doesn’t mean it is the most important. Because a mind numbing number of people discuss Paris Hilton doesn’t make her important. O.k. maybe I have gone too far. P/E is more important than Paris Hilton. It is just overused and its limitations are not always understood by novice investors.

First, what is P/E or Price to Earnings ratio? This is the relationship of share price to earnings per share of that stock. Or more precisely it is Price per share /Annual Earnings Per Share. EPS is expalined in the EPS post.  Earnings Yield is the opposite of Price Earnings. It is used by some investors to calculate potential future return of a stock  because it is expressed as a percentage. Joel Greenblatt used Earnings yield in his famous magic numbers equations. The idea with P/E is to relate what the price of a stock is to how much the company is actually earning. This number is then compared to other stocks. The common wisdom is that a low PE means the stock is cheap and that a high PE means the stock is expensive. There is some research that suggests that buying low P/E stocks over time will result in a better returns (Stocks for the Long Run pg. 112). This is often true, but not always. Some industries have traditionally maintained higher PE’s than others. Tech stocks for example often have what would seem to be obscenely high PE’s. Many insurance or reinsurance companies have low PE’s. So while a general look at PE may be useful it often needs to be tempered with other comparisons within its industry or in relation to historical averages.

While many investors use PE as their primary metric for judging value of a company, it is not one I use with much frequency. It is still an important investing term to understand.

Related Posts:

• Mutual Funds – Beginning Value Investor Terms
• Margin of Safety – Beginning Investor Terms
• Beginning Investor Terms – 10k
• Beginning Investor Terms – Price/Book ratio
• Why You may Want to Invest for Yourself

Perspective comes with time. But if you are starting out how can you possibly gain the perspective. Borrow someone else’s. There are gobs of great investors that will tell you how great they are on their websites. A few great investors have written books that are worth reading. Joel Greenblatt and Seth Klarmann come to mind. Spend some time reading and digesting the methodology. Pick it a part and decide what works for you and what doesn’t.

There are not as many great deals in the stock market right now as there were in March. I have said this before, and it is doubly true now. That doesn’t mean there aren’t any, they may be harder to find. And they disappear faster. So if you are just starting out, or don’t have a lot of capital to invest yet. This is a good time to develop your investing system, which means you can’t just rely on books. Do you like the idea of buying a dollar for 50 cents. Then the value investing approach will fit you well. Do you believe in Charlie Munger’s advice to buy great companies at fair prices? Follow that path. There are various methods for making money.

Discover what your competitive advantage is. Do you have some expertise that gives you a unique perspective on an industry. Start with that industry. Don’t assume you don’t have one because you are just starting out or have just a little bit to invest. Your small portfolio may be your biggest advantage right now.

A good thing to be watching right now are special situations, particularly going private deals that involve reverse splits. But you have to ready to go. If you find a great deal don’t hesitate. Earlier in the week a reverse split came up with Fansteel Inc. (FELI) but by the time I learned about it the price had already zoomed up and it was no longer a deal worth investing in.

And be patient. Don’t assume you have missed the boat because the market has risen so quickly. The market ebbs and flows in fits and starts. There will be other deals that come along.

Related Posts:

• No Related Posts