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Value Investing for beginning & small time investors and the value investing strategies of Graham & Klarman

Top 5 Value Investing Tips

Posted on | July 29, 2011 | No Comments

Value Investing is a mind set that guides you in your investing decisions. It does not involve technical analysis or trend following trading. Value Investing is fundamentally about buying a stock because you think the market has made a mistake and is undervaluing a company right now.  The following is a simplified version of what is important in value investing. If your investing style is not value investing then these tips won’t apply to you. As an individual value investor you will pick and choose from a plethora of investing tools that help you form your investment philosophy.

 1. Do your own research

While a blog, stock screener or newsletter may give you a good idea to investigate, you should not rely on anyone else’s analysis. You may not realize that their investing bias is different than yours or that that some of their financials have errors or even have typos. There is a lot of information that can kill a good idea. Make sure you have tried to kill your good idea before you invest your cash. Benjamin Graham and Joel Greenblatt have different ways to getting down to the value investing highway. You will need to chart your own. This does not mean you have to read every 10K or 10Q, but you need to have a methodology for your value investing research.

2. Have a margin of safety

There are numerous ways to value a company or analyze whether or not you should buy it. Whether you use Low Price to Book, Discounted Cash Flow or  some other value investing metric, Graham’s concept of Margin of Safety never goes out of style. You will often be  wrong in your analysis and having a margin of safety will help protect your downside risk. Preserve your capital first, accumulate capital second.

3. Know when to sell

Before you buy an equity you should have an exit strategy. If you believe a stock is worth $30 but is trading for $15, your exit strategy might be to sell when it reaches $30. Or it might be to reevaluate the company and see if the fundamentals have changed and to recalculate the companies value. Make sure you know when you will sell if you are wrong about your investment idea. Will you sell if a stock drops 20% or 50%?

4. Don’t be a trader

Don’t buy and sell too often. This is vital. It is one of the chief reasons that a value investor can lose money or trim profits. Their is a lot of research that shows that not just indivdual investors suffer from this problem, but professional money managers as well. Value Investing is not day trading or weekly trading, it is a long term strategy that seeks to arbitrage the present market price against the higher long term value of a company.

5. Don’t buy hot stocks

Value Investing is fundamentally a contrarian method of investing. If the crowd is buying it, you should avoid it. This will help you avoid investing in bubbles like the current bond market.

 

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Howard Marks Memo on the U.S. Debt

Posted on | July 25, 2011 | No Comments

One of my favorite speakers at the Value Investing Congress, my favorite Value Investing Conference, in May was the well known value investor in the behavorial finance tradition, Howard Marks. He recently wrote one of his infamous memos to his Oaktree Clients. This one puts sovereign debt in the bullseye. The United States in particular. You can download Howard Marks memo. I won’t say too much about his memo, other than you should read it. His logic is persistent as always. If you are not clear on the problems with our national debt, and the imminent issue of the debt ceiling, you definitely want to read this memo.

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Free Value Investing Resources- Graham and Doddsville

Posted on | July 22, 2011 | No Comments

 The Super Investors of Graham and Doddsville was a famous article written by Warren Buffett in the 1980’s describing value investors, in the Ben Graham tradition, who disproved the efficient market theory. In that tradition, I am pointing the way to a free newsletter entitled: Graham and Doddsville  that  is produced by the students of the Columbia Business School and distributed free. You can download the Spring 2011 issue. In the issue they feature a profile on Michael Price.

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Greenblatt, Ackman & Value Investing Masters speak at the Value Investing Congress

Posted on | July 21, 2011 | No Comments

The Value Investing Congress is being held in New York on October 17 & 18th. It is a great value investing conference to learn from experienced investors with different approaches some general philosophical and some actionable. My readers are entitled to a $1900 discount if you purchase your pass by July 29th. I am very excited to be going because they have a superstar line up of guru investors presenting. I am particularly interested in hearing Joel Greenblatt, since I have read all three of his books and I have a sort of a love/hate relationship with him. No not personally. I don’t know the man. But I will have more about Greenblatt in an upcoming profile on him, that I will try to complete in the next week or so. If you are interested, go to the Value Investing Congress website to learn more. The value of this Value Investing conference is not limited to beginning investors, but investors both experienced and just starting out. For my small time investors, this is not appropriate but only because of the expense.

The confirmed speakers are

Bill Ackman, Pershing Square
Leon Cooperman, Omega Advisors
James Chanos, Kynikos Associates LP
Adam Weiss and James Crichton, Scout Capital Management
Alexander Roepers, Atlantic Investment Management
Joel Greenblatt, Gotham Capital
Guy Gottfried, Rational Investment Group
Michael Kao, Akanthos Capital Management
Whitney Tilson & Glenn Tongue, T2 Partners

I can say that Michael Kao and Guy Gottfried were both very popular speakers at the last Value Investing Congress I attended in May. I am also curios to hear Jim Chanos speak, since he is a legendary short seller. Finally, Whitney Tilson is always good for the T2’s long and short actionable idea. If you decide to go be sure to use my Value Investing Congress discount coupon N11CI4

If you would like more information about this Value Investing Conference, or any other, please go to my Conference page which has the most up to date information on Value Investing Conferences.

Disclosures: I am a media sponsor of  the Value Investing Congress.

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Best Value Investing Screeners

Posted on | July 20, 2011 | No Comments

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

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.

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Carmageddon, Greece and Investing Strategies

Posted on | July 15, 2011 | No Comments

I live in Los Angeles. Tonight the powers that be have decided to close down, for the weekend, the 405 freeway, one of the busiest in the world. This has locally been dubbed Carmageddon. Up to 500,000 vehicles daily use the section of Freeway being closed, and there are not many good alternatives to transverse this north-south route. The same powers that be have suggested that people stay home for the weekend, and avoid the freeway. Nice, unless you happen to be at your job and can’t drive home before the closures begin. Like me.

The non frustrated part of me has looked at this as an analogy. I think that some clear parallels for human behavior can be seen between a disruption in traffic and investing markets. In some ways Carmageddon is like a market that is going to seize up, but you know it in advance. So imagine that you are in September of 2008 and you know that the market is going to stop working. All the liquidity, or traffic, is going to disappear. Most people, most rational investors, would do what the man says and stay away from the 405. They would exit their positions and wait for the freeway to open, again. But that makes two assumptions. First, that the person is rational and second, that they can avoid the freeway closure.

To address the first assumption, I want to use an example in the news: Greece. Greece is going to default on its debt. I state it like the 405 Freeway is closing. And, as far as I am concerned, they are equally likely. Greece has defaulted repeatedly in the past. In this case the past history of a country’s default record is a good indicator of the future. Plenty of investors are putting good money into lots of investments that are potentially devastated by Greek default. And yet they won’t make a change in their investment strategy. They assert if they are not fully invested they can lose out on the next upswing. They know the freeway is going to close and drive toward it anyway, hoping that they will be the one to get through, that it is somehow an opportunity for them to avoid traffic. We humans can talk ourselves into any story we want.

Let’s assume you are unlike most investors: rational. I can avoid the freeway tonight when they are closing the onramps, but how do I avoid the fallout from Greece defaulting? I don’t know what the fallout will be. I can not avoid a Carmageddon if I don’t know how to, if I can’t avoid going with the rest of the traffic. How can I profit from it? I can make guesses, but I don’t actually have a good handle on how bad it will get. Will there be contagion that extends beyond the obvious players? Greek default or pseudo default will probably drop the price of the Euro, but in relation to what? The dollar has its own upcoming woes, with the debt ceiling issue weighing in at least Moody’s mind, if not any one else’s. Remember in a crisis all assets are correlated. When the freeway is closed no one gets through.

I am, of course, reminded of what Warren Buffett said years ago. The best investments would be ones that you could make and if the stock market closed for a year, when they reopened, it would still be swimming along. O.k. so that is a paraphrase. But the principal is the same. It seems a time to be defensive. I am looking for something that is unlikely to take too big a hit when the sovereign debt crisis blows up. Companies with cash and not too much debt. Basically, all the lessons we learned in 2008-2009 that many investors seem to have forgotten.

Disclaimer: I am film and television Producer, not a certified professional investment adviser. As always, you should make your own decisions and figure out what you think, before you invest.

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Underperformance in a Fund, Time to Invest?

Posted on | July 14, 2011 | No Comments

A recent article in Bloomberg on fund under performance has led me to consider the question: if you are going to invest in a fund isn’t the best time to invest in when it looks like a good value, that is, it is beaten down? That all depends.

Studies have shown that individual investors often under perform even when they invest superior performing funds. The reason is easy to understand. They buy high and sell low. When a fund manager has been doing well they buy in often at the top of that funds price and when he is doing poorly, they sell, selling at the worst time because the price is low.

The problem with this thinking is that the top performing managers will under perform the market, and sometimes badly. In the article, it speaks about Bruce Berkowitz of Fairholme Capital, and that one of their funds “fell 12 percent through June 9, ranking it last among 870 diversified U.S. stock funds with at least $500 million in assets.” The S & P 500 during the same period gained over 3%. Berkowitz was named Morningstar’s fund manager of the decade and here is dead last, opportunity anyone? In a theoretical sense it would be great time to invest in the Fairholme Fund. A manager with a great track record is getting hammered, so you might want to jump in now.

But herein lies the problem for me. Fairholme Fund has 74% of its equities investments in Financial Stocks. And I don’t trust the entire industry. It is too opaque to evaluate well, and nearly impossible to value assets, and what is on and off balance sheet. The fund seems overly risky to me. So, while I do believe trolling in the murky waters of the currently poor  performing fund managers should be part of the standard value investing bag of tricks. You still have do your due diligence and ask why is this beaten down, in the same way you would ask of a company who’s share price is in the toilet. Sometimes there are good reasons for the relatively cheap price.

You could easily say, dude, the man has outperformed the market in a really bad decade. And you would be right. But was he lucky? Was he taking risk that wasn’t apparent? He seems to me to be doing it now.

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What are your Investing Goals?

Posted on | July 12, 2011 | No Comments

We all have investing goals, but they can differ in substantial ways depending on when we are investing, how much capital we start with or add to our investments. It is important to determine our investing goals and write them down. O.k. you don’t have to write them down if you don’t want to, but the act of writing them down will force you to think about what direction you want to head.

In many ways you must start with life goals to evaluate your investment goals. What kind of life do you want to lead? Are you an alternative lifestyle enthusiast or buttoned down American Dreamer? There is no right answer. But start with who you are and what you want out of life before turning to your investing goals.

IF you are young, the most important thing you can have as your goal is to set aside some money to invest for the future. You may be interested in capital appreciation.  The principle of compounding can often do more than the work of a good fund manager over the long haul. If you are older, you may be more concerned with capital preservation. You don’t want to lose a third of your nest egg if another down turn comes if retirement is on your horizon.

Depending on your life style, you may need to factor in other investing ideas. If you believe, that over the long term the US dollar will lose value vs a large number of other currencies either through inflation, or defacto currency devaluation, you should also consider what this means if you part of your future goals is international travel. How will that effect your investing. There are a lot of what if’s. If we spend all our time trying to make a killing we will miss achieving our real goals, which may, on reflection be easier to achieve that we originally considered.

This is a post without answers, because only you can decide what you want. Please share either some life goals and how investing will help, or investing goals and why they are important?

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Einhorn and a Macro Evaluation

Posted on | July 11, 2011 | 4 Comments

Greenlight capital, run by David Einhorn, released their quarterly letter to its partners last week. In light of what is going on in Europe today, it seems his scathing analysis of the macro world couldn’t be more on the money. You can download the Greenlight partner letter here. Of course it is interesting to note that Greenlight struggled this past quarter, underperforming the market at large. I obtained this partner letter from Santagels Review, or more specifically from Steven Friedman. They are a great source of information on all things Hedge Fund.

I think that it is a very difficult time to invest in the United States. It is clear that many asset classes are overvalued, I am holding relatively large cash positions, which seem more wise every time there is a market scare. I am not a macro investor, but given the unprecedented nature of our governmental policies, the ongoing sovereign debt crisis in Europe, I don’t believe you can ignore the Macro completely. What are you doing with your investments? And why?

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More James Montier via EuroshareLab

Posted on | July 8, 2011 | No Comments

After reading my recent post on James Montier’s latest GMO white paper, Tim duToit of Euroshare contacted me and informed me of his resource page for all things James Montier. In my ongoing fandome of Montier I have included the link to James Montier resource page. Tim also has a page devoted to book recommendations by Montier. So visiting Tim’s site is a sort of two for one on Montier.

Here is a gem I found on a link to a January 2011 Bloomberg article I had missed. “U.S. Treasuries are among the most overvalued assets and investors buying them are poised to lose money,” Montier was quoted as saying. He goes on, “You are not compensated for the long-term risk of holding bonds.”  If you love Montier or behavioral finance, check it out.

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