18 February 2016
Hi there folks,
In this post I’d like to discuss the methods and tools one can use in order to seek out potential value investments. I’ll also discuss the different approaches a number of Super Investors have employed in order to uncover value.
Famed value Investor Walter Schloss liked to buy companies selling cheap and so would regularly comb borrowed copies of Value Line to find stocks selling at new lows, preferrably 2-3 year lows. By scouring these lists Schloss could often find unloved stocks which the market was very pessimistic toward. He knew that this negative investor sentiment would result in a mispricing of the assets or true earnings power of a given company. By buying a diversified basket of these companies and allowing reversion to the mean to take place(Schloss’ typical holding period was 4 years) he was able to achieve an astounding long-term record(20% compound annualized return over a 49 year period)
Here is a link to a 3 year low list for those who wish to test out Schloss’ approach;
Another well known Value Investor, the late great Sir John Templeton believed that one should scour markets globally in order to find value. He is quoted as saying;
“People are always asking me where is the outlook good, but that’s the wrong question…. The right question is: Where is the outlook the most miserable?”
Templeton understood that the global flow of capital results in bull markets in certain countries as capital flows in and conversely bear markets in others as capital flows out. By always looking where the outlook was worst he was able to buy up stocks on the cheap and hedge his market risk(Templeton Growth Fund posted a 13.8% annualized average return from 1954 to 2004 vs 11.1% for the S&P) Whenever I hear of a crisis emerging in a particular country I check to see if any of the stocks effected may offer value. By scouring lists of foreign ADR’s and GDR’s one can uncover some interesting investment opportunities which can be purchased upon major stock exchanges. Here is a useful website to help you;
Investors such as Mohnish Pabrai and Guy Spier employ the method of cloning or ‘coat-tailing’ as Buffett called it. By examining the holdings of super investors with long-term records of outperformance one can quickly zone in on companies which are either selling at a deep discount to intrinsic value or which may possess a durable competitive advantage of some kind.
To find out what stocks many super investors are currently holding I recommend referring to this website;
Legendary Value Investor Joel Greenblatt is well known for investing in spin-off situations as part of his stratergy(Gotham Capital averaged 50.0% per year from 1985-1994 without a single down year, After returning the capital to shareholders Greenblatt continued to invest his own money and from 1994-2005 achieved a compound annualized return of 30%). In 1994 Greenblatt invested in AXP after Lehman Brothers was spun off,he calculated that after the Lehman stock was subtracted AXP was selling at just 9x earnings and that the stock offered long-term franchise value.
To keep abreast of potentially attractive spin-off situations I suggest periodically checking this site for ideas;
Stock screens offer a useful way to narrow down the list of potential investments by filtering out those which are of little interest or which offer little to no value. This saves wasting time having to trawl through thousands of companies(Unless you’re like Buffett, in which case your bedtime reading is a stock almanac!) so you can focus your efforts on analysing companies instead.
Here are some useful stock screening tools;
http://markets.ft.com/screener/customScreen.asp – FT’s global equities screener is my favorite because of it’s global coverage and large amount of criteria selection for screening. They also provide Buffett and Graham type screeners here;
For deep value screening in the ilk of Ben Graham I suggest the following;
There are a number of other useful resources for finding investment ideas. Value Investors Club(VIC) which was initially set up by Joel Greenblatt offers a platform for investors to write up an investment thesis on a particular security, both long and short. The analysis on here is often very good and one can quickly glean a lot about a company or situation from reading the write-up. http://www.valueinvestorsclub.com/
Corner of Berkshire and Fairfax(COFB) also offers some great value. The fundemental analysis for the various companies discussed is very high quality, it makes life much easier when you have 50-100 smart people digging into a given issue and uncovering the pertinent information reqired to value the investment prospects.
Buffett is famous for saying that he doesn’t let macro-economic events effect his investment approach but it’s pretty clear that he is abundantly cognizant of them. I think it’s always good to have an ear to the ground even if you don’t necessarily let it tell you what direction to take. If you wish to read more on business and credit cycle theory I suggest examining the work of the following professors;
Prof. Nikolai Kondratieff – Russian born economist, he examined huge amounts of historical economic data and found long-wave economic cycles present in capitalist systems.
Prof. Joseph Schumpeter – German born economist, he coined the phrase ‘creative destruction’ and showed that within each ‘Kondratieff Wave’ an old market or sector is destroyed as technological advancement renders it obselete.
Prof. Hyman Minsky – American born Economist who developed the ‘Financial Instability Hypothesis’. He remarked ‘Stability is destabalizing’ and argued that the capitalist system is inherently volatile but with an overall upward trend, like running up the stairs but occasionally slipping.
Prof. Irving Fisher – American born Economist, developed the ‘debt deflation’ theory of business cycles. Fisher argued that business cycles are driven by credit cycles and that recessions are caused by a contraction in the volume of credit.
I also think this site provides some interesting historical macro-economic charts and data that may offer some value to those wishing to study long-term