Chroma Investing » Investing Tips

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.

Top 5 Value Investing Tips

chroma — Fri, 29 Jul 2011 19:07:27 +0000

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.

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

chroma — Thu, 21 Jul 2011 18:28:44 +0000

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.

What are your Investing Goals?

chroma — Wed, 13 Jul 2011 03:34:29 +0000

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?

Chroma Investing Links July 2011

chroma — Wed, 06 Jul 2011 15:20:51 +0000

I haven’t posted recommended investing links in a while. But, first I wanted to highlight a couple of links that I have removed. Not because they aren’t worth your time but because the authors have shut down the sites or not updated to the point where it seems shut down. These include Valuehuntr.com (shut down), Thefallibleinvestor.com (not updated in over a year), Myvalueidea.blogspot.com (not updated in over 9 months). Publishing a value investing blog without any compensation can not be sustained over time, unless you really love it. Even then the demands of our vocations must be answered before the love of our avocation. I am sorry that these sites are done.

I would like to highlight the following investing sites:

Inoculated Investor- Ben runs a terrific site and I am surprised that I didn’t add his blog to my links earlier. Inoculated Investor has become my go to site for notes on Value Investment conferences or meetings that he attends.

Greenbackd.com- This is not a new recommendation, but it seems Toby has restarted posting again after a 6 month break. This is definitely one of my favorite blogs. I am excited that he has begun to post again.

Value Investing Checklists

chroma — Sat, 30 Oct 2010 06:46:53 +0000

Monish Pabrai famously discusses the importance of having an investing checklist. While he has been coy about what is on his checklist, proprietary information or some such notion, Jae Jun over at Old School Value has shared his investing checklist with us. You can find his website (highly recommended) and his checklist here. I am not sure it is actually a checklist as much as a profile on how Jae invests. It is still valuable for thinking about what is is important in your investing process.

There is a fair amount of research that shows the value of checklists. I think they are valuable because help short circuit the human brain in a way that it wants to work against us. Namely, that our species is supremely overconfident. A checklist can remind us that we are not infallible, that we do make mistakes, and not to be too sure about our decisions. It is useful to begin to develop your own checklist for investing and Old School Value has given you a head-start.

Individuals Can Beat the Market – the Study

chroma — Sat, 13 Mar 2010 05:37:15 +0000

Nod to Miguel at Simoleon Sense for pointing the way to the empirical research paper Can Individual Investors Beat the Market? by Coval. Hirshliefer, and Shumway (2005).

Individuals, even small investors, beating the market is what this site is all about. This study points out that previous studies showing that individual investors underperform the market, are misleading. It demonstrated that SOME individual investors can consistently out perform the market and their investing peers. It did not test specific strategies, just that some investors could outperform the worst performing investors by 8%.

While I could quibble about some aspects of this paper, why bother, it gives credence to an important notion, that it is worthwhile for an individual to attempt to get market beating returns through individual effort.

An aid to Empirical Finance Research

chroma — Tue, 02 Mar 2010 04:37:14 +0000

I am a fan of empirical evidence that supports investing strategies. This sounds like an obvious statement, but many people don’t care, or at least that is how seems if you view their actions. I have previously highlighted evidence that could potentially enhance returns like Low price to book, and help protect against loss like the Altman Z score.

I have discovered a blog that sifts through Finance Studies to look for papers that can help with investing. The blog is called the Empirical Finance Research Blog. While it may sound dull, it is actually a terrific resource. The writer reviews financial papers and then evaluate them for practical investing on a scale of 1 to 10, 10 being the best. He also lays out his proposed investment strategy based on the research. One of the best aids I have found. I have one complaint. And it is selfish. The blog posts irregularly. His last post was from January.

MNDO – Mind C.T.I. Why you must mind the details

chroma — Wed, 06 Jan 2010 06:32:33 +0000

I was reviewing a stock, Mind C.T.I. Ltd (MNDO), because it came across a screener as a Net Net opportunity. I wondered why it had so recently turned up.

MNDO is an Israeli company that, “a leading provider of convergent end-to-end billing and customer care product based solutions for service providers as well as telecom expense management (call management) solutions.”

As usual I went to Morningstar TTM and latest year information including 3rd Quarter (Q3) Balance sheet info. Mind had $34.6 million in current assets and just $6.9 million in total liabilities for a Net Asset Value of $27.7 Million. MNDO has a little over 19 million shares making per share NCAV value (unadjusted) of approximately $1.45/share. So far, so good.

Then I went to the latest 6k, which is a form used for “reports by foreign issuers.” MNDO has just issued a special dividend of $.80/share in December. So the NCAV value isn’t $1.45/share it is closer to $.62/share. MNDO is no longer a Net Net company. Does that mean it is not worth investing in? I can’t tell you. But this example points out why you must read the SEC paperwork yourself. In this case Morningstar Q3 balance sheet was accurate, but no longer current. In MNDO’s case it made a very big difference and it is clear why it recently appearted on the screener I was using.

Mind C.T.I. needs further evaluation to see if it is worthwhile on either Discounted Cash flow basis or Low price to book basis. Both of these require more research, which I will try to do this week.

Disclaimer: I obviously did not purchase shares of MNDO, because it has not met my investing criteria so far. That does not mean it won’t in the future. Make sure you always do your own research and don’t make investment decisions based on something someone else tells you.

Chroma Investing » Investing Tips

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:

Top 5 Value Investing Tips

1. Do your own research

2. Have a margin of safety

3. Know when to sell

4. Don’t be a trader

5. Don’t buy hot stocks

Related Posts:

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

Related Posts:

What are your Investing Goals?

Related Posts:

Chroma Investing Links July 2011

Related Posts:

Value Investing Checklists

Related Posts:

Individuals Can Beat the Market – the Study

Related Posts:

An aid to Empirical Finance Research

Related Posts:

MNDO – Mind C.T.I. Why you must mind the details

Related Posts: