“What works in Investing”. VALUE INVESTING

THE SUPERINVESTORS OF GRAHAM-AND-DODDSVILLE.

Buffett contributed to the Columbia Business School Magazine, Hermes the article, “The Superinvestors of Graham-and-Doddsville”. 

This reviews the very long run investment performance of investors educated in the search for value.

This cognition, the value approach, is unparalleled in how many investors it has successfully served, compared to other approaches – technical analysis, sector rotation, momentum, and so on.

• As evidence of this, Warren names disciples of the value approach – Walter Schloss, Tom Knap and Ed Anderson of Tweedy Browne, Bill Ruane of the Sequoia, Rick Guerin of Pacific Partners, and Stan Perlmeter of Perlmeter Investments. 
• Today, there is a new line-up of younger value orientated 11 investors contributing to Buffett’s case – Bill Miller, Chris Davis, Bruce Berkowitz, Seth Klarman to name a few. 

As Buffett says “the idea of buying dollar bills for 40 cents takes immediately with people or it doesn’t (grab a person right away, no matter how much you talk to a person and show him records).” 

We believe Warren Buffett’s genius is his ability to judiciously (as opposed to opportunistically) transcend investment philosophies in search of the answer to the question asked , “What works in Investing”. 



STANDING ON THE SHOULDERS OF THE GIANTS

We aim to stand on the shoulders of the above-mentioned giants using investment philosophy and process wholly based on buying stocks at a margin of safety to our view of intrinsic value.

• PREFER TO BUY HIGH QUALITY COMPANIES

While we enormously prefer to buy high quality companies with wide moats protecting excess profitability, there are of course occasions when the market bids up quality beyond fair value, negating the types of opportunities sought out by Buffett and Munger.

• MEDIOCRE COMPANIES WITH EVEN LARGER MARGINS OF SAFETY

In these instances, we walk in the footsteps of classic value investors like Walter Schloss, sifting through less advantaged (or more mediocre) companies in search of even larger margins of safety to our view of intrinsic value.

• IN SEARCH OF EXCESS RETURNS, AVOID BUYING RISK AND BUY VALUE.

What we refuse to do is to buy risk instead of value in search of excess returns.  

The Pricing Game versus the Value Game

http://www.valuewalk.com/2017/10/a-pundits-paradise/

Bargains in Bonds and Preferred Stocks: How to profit from these bargains?

Bargains in Bonds and Preferred Stocks

The field of bargain issues extends to bonds and preferred stocks which sell at large discounts from the amount of their claim.

It is far from true that every low-priced senior issue is a bargain (there are default risks on non payment of interest and/or  principals).

The inexpert investor is well advised to eschew or stay away these completely, for they can easily burn his fingers.

There is an underlying tendency for market declines in this field to be overdone; consequently the group as a whole offers an especially rewarding invitation to careful and courageous analysis.

In the decade ending in 1948, the billion-dollar group of defaulted railroad bonds presented numerous and spectacular opportunities in this area.

Bargain-Issue Pattern in Secondary Companies (2): How to profit from these bargains?

Bargains in stocks of Secondary Companies

If secondary issues tend NORMALLY to be undervalued, what reason has the investor to hope that he can profit by such a situation?

For if this undervaluation persists indefinitely, will he not always be in the same position market wise as when he bought the issue?

The answer here is somewhat complicated.

Substantial profits from the purchase of secondary companies at bargain prices arise in a variety of ways.

1. First, the dividend return is high.
2. Second, the reinvested earnings are substantial in relation to the price paid and will ultimately affect the price.  In a five- to seven-year period these advantages can bulk quite large in a well-selected list.
3. Third, when a bull market appears, it is most generous to low-priced issues; thus it tends to raise the typical bargain issue to at least a reasonable level.
4. Fourth, even during relatively featureless market periods a continuous process of price adjustment goes on, under which secondary issues that were undervalued may rise at least to the normal level for their type of security.

An illustration of performance of undervalued securities (bargains companies)

Performance of two groups of undervalued securities selected at the beginning of 1940.

(Reference:  pp 689 and 690 of Security Analysis, by Graham and Dodd, 1940 Edition)

                                               (Excluding Dividends Received)

                                         Market Price                            Market Price

                                         Dec 31, 1939                           Dec 31, 1947

Group A 

10 Stocks

Total                                 120 5/8                                    449

Group B

10 Stocks     

Total                                  115                                         367 7/8

Total of Both Groups        236                                         817 
                                                                                         INCREASE 246%

Observations and Inferences/Conclusions

This performance is superior not only to that of the Dow-Jones list but to that of the growth-stock list as well.

Allowance should be made for the fact, that nearly all the smaller companies benefited more from the war than did the bigger ones.  

The figures, thus, prove without a doubt that under favourable conditions, bargain issues can yield a handsome profit.

His experience over many years led Benjamin Graham to assert that the average results from this area of activity are satisfactory.

Purchases of Bargain Issues

A bargain issue is defined as one which, on the basis of facts established by careful analysis, appears to be worth considerably more than it is selling for.

This includes:

• bonds and preferred stocks selling well under par, as well as
• bargain common stocks.

To be as concrete as possible, a suggested guide is an issue is not a true "bargain" unless the indicated value is at least 50% more than the price.

How to detect a bargain common stocks?  What kind of facts would warrant the conclusion that so great a discrepancy or bargain exists?

There are two tests by which a bargain common stock is detected.

1.   By method of appraisal.  

• This relies largely on estimating future earnings and then multiplying these by a factor appropriate tot he particular issue.
• If the resultant value is sufficiently above the market price - and if the investor has confidence in the technique employed - he can label the stock as a bargain.

2.  By the value of the business to a private owner.

• This value also is often determined chiefly by expected future earnings - in which case the result may be identical with the first method (the method of appraisal).
• In the second test more attention is likely to be paid to the realizable value of the assets with particular emphasis on the net current assets or working capital (current asset - current liabilities).

How do these bargains come into existence?  How does the investor profit from them?

1.  LOW POINTS IN THE GENERAL MARKET

At low points in the GENERAL MARKET, a large proportion of common stocks are bargain issues, as measured by the above standards.

[A typical example would be General Motors when it sold at less than 30 in 1941.  It had been earning in excess of $4 and paying $3.50, or more, in dividends.]

It is true that current earnings and the immediate prospects may both be poor, but a level-headed appraisal of average future conditions would indicate values far above ruling prices.

The wisdom of having courage in depressed markets is vindicated not only by the voice of experience but also by application of plausible techniques of value analysis.

2.  EXISTENCE OF MANY INDIVIDUAL COMMON STOCK BARGAINS AT ALMOST ALL MARKET LEVELS

The same vagaries of the marketplace which recurrently establish a bargain condition in the general market list account for the existence of many INDIVIDUAL BARGAINS at ALMOST ALL market levels.

The market is always making mountains out of molehills and exaggerating ordinary vicissitudes into major setbacks.  

A mere lack of interest or enthusiasm may impel a price decline to absurdly low levels.

There are two major sources of undervaluation:

(a) currently disappointing results and

(b) protracted neglect or unpopularity.

[Example of the first type (a):  In 1946, Lee Rubber & Tire Company, aided by the bull market and by steadily rising earnings, the stock sold at 72.   In the second half of 1947 the reported profits fell off moderately from the previous year's figures.  This minor development apparently generated enough pessimism to drive the shares down to 35 in early 1948.  That price was much less than the working capital alone (about $50 per share) and no greater than the amount actually earned in the previous five years.]

[Example of the second type (b):  During the 1946-47 period the price of Northern Pacific Railway declined from 36 to 13.5.   The true earnings of Northern Pacific in 1947 were close to $10 per share.  The price of the stock was held down, in great part, by its $1 dividend.  It was neglected, also, because much of its earning power was concealed by conventional accounting methods.]

The Intelligent Investor
Benjamin Graham

Charlie Munger's opinion of Benjamin Graham's deep Value Investing

Why Charlie Munger Hates Value Investing

When Charlie Munger ( Trades , Portfolio ) came to Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) in the late '60s, Warren Buffett (Trades, Portfolio) was still running the business and investing how his teacher, Benjamin Graham, had taught him to - by buying a selection of cigar butt type companies and holding for many years.

Unlike Buffett, who had essentially grown up under Graham's wing, Munger had no such attachment to the godfather of value investing. Instead, Munger seems actually to dislike deep value investing:

"I don't love Ben Graham and his ideas the way Warren does. You have to understand, to Warren - who discovered him at such a young age and then went to work for him - Ben Graham's insights changed his whole life, and he spent much of his early years worshiping the master at close range. But I have to say, Ben Graham had a lot to learn as an investor. 

"I think Ben Graham wasn't nearly as good an investor as Warren Buffett is or even as good as I am. Buying those cheap, cigar-butt stocks was a snare and a delusion, and it would never work with the kinds of sums of money we have. You can't do it with billions of dollars or even many millions of dollars. But he was a very good writer and a very good teacher and a brilliant man, one of the only intellectuals - probably the only intellectual - in the investing business at the time." - Charlie Munger, The Wall Street Journal September 2014

When he arrived at Berkshire, Munger actively tried to push Buffett away from deep value toward quality at a reasonable price, which he did with much success.

All you need to do is to look at Buffett's acquisition of See's Candies in the late 1960s to realize that without Munger's quality over value influence on Buffett, Berkshire wouldn't have become the American corporate giant it is today.



A love of high quality

Munger always had a fascination with buying high-quality businesses, and in the early days, his style differed greatly from that of Buffett. He always placed a premium on the intangible assets of a company, those assets that had no financial value to other companies but were worth billions in the right hands.

"Munger bought cigar butts, did arbitrage, even acquired small businesses. He said to Ed Anderson, 'I just like the great businesses.' He told Anderson to write up companies like Allergan ( AGN ), the contact-lens-solution maker. Anderson misunderstood and wrote a Grahamian report emphasizing the company's balance sheet. Munger dressed him down for it; he wanted to hear about the intangible qualities of Allergan: the strength of its management, the durability of its brand, what it would take for someone else to compete with it. 

" Munger had invested in a Caterpillar ( CAT ) tractor dealership and saw how it gobbled up money, which sat in the yard in the form of slow-selling tractors. Munger wanted to own a business that did not require continual investment and spat out more cash than it consumed. Munger was always asking people, 'What's the best business you've ever heard of?'" - "The Snowball: Warren Buffett and the Business of Life" by Alice Schroeder

Munger understood that it's these businesses where big money is made as the high returns on capital, and a nonexistent need for capital investment ensures shareholders are well rewarded over the long term.

For example, in his 1995 speech, "A Lesson on Elementary, Worldly Wisdom As It Relates to Investment Management & Business," Munger said:

"We've really made the money out of high-quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the big money's been made in the high quality businesses. And most of the other people who've made a lot of money have done so in high quality businesses. 

" Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return -even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive-looking price, you'll end up with a fine result. 

" So the trick is getting into better businesses. And that involves all of these advantages of scale that you could consider momentum effects."

Buffett added some meat to this statement at the 2003 Berkshire Hathaway meeting:

"The ideal business is one that generates very high returns on capital and can invest that capital back into the business at equally high rates. Imagine a $100 million business that earns 20% in one year, reinvests the $20 million profit and in the next year earns 20% of $120 million and so forth. But there are very very few businesses like this. Coke ( KO ) has high returns on capital, but incremental capital doesn't earn anything like its current returns. We love businesses that can earn high rates on even more capital than it earns. Most of our businesses generate lots of money but can't generate high returns on incremental capital - for example, See's and Buffalo News. We look for them [areas to wisely reinvest capital], but they don't exist."

These quotes do a great job of summing up Munger and Buffett's investment strategy. Even though there are thousands of pages of investment commentary from both of these billionaires, their investment style can be summed up with the simple description of quality at a reasonable price, and the above quotes show exactly why they've both decided this style is best.

By: GuruFocus

http://www.nasdaq.com/aspx/stockmarketnewsstoryprint.aspx?storyid=why-charlie-munger-hates-value-investing-cm774232

Good Investing - Buy great companies at reasonable prices and holding them for the long term

Being able to think independently is the best way to invest successfully.

There are two ways to value investing.

1.  Graham type value investing (Classic Value Investing).

One approach involves buying shares in beaten-up companies whose share prices had become depressed and looked cheap.

Occasionally, some investments would pay off, but more often than not they didn't.

These shares can be cheap for a reason; they are shares of bad or mediocre companies.

You are unlikely to get a great tasting wine when you buy a cheap bottle of wine.

2.  Buying growing high quality companies at reasonable prices  (Growth Investing)

The better investing is about investing in great companies buy buying their shares at reasonable prices and holding on to them for a long time.

Great companies generate high levels of profits or cash flows on the money they invest.

The investor's job is to buy the shares of these companies when their share prices offer you an acceptable return on your investment.

Combining quality companies and a reasonable purchase price, and adding in the factor of time, put one well on the way to a successful investing career.


Portfolio Management

You do not need to know everything about a company to be a successful investor.

In fact, too much information can be bad for you.

If you have a company's latest annual report and its current share price you have all the information you need to invest profitably.

From this information, you can work out

• whether the company is good or bad, (Is it a quality business?)
• whether it is safe or dangerous,  (Is it a safe business? ) and 
• whether its shares are cheap or expensive. (Are its shares cheap enough - are they good value?)

The investor armed with annual reports and a thorough approach, can gain an advantage over many analysts.

Doing in-depth analysis for companies you are considering as investments will empower you with knowledge and understanding about a company which less diligent investors will not be aware of.

Investors do not need to own lots of companies.

A portfolio of 10 to 15 companies spread across different industries is sufficient to get good, diversified investment results.

You must be confident in trusting your own judgement whilst ignoring the huge amount of noise and chatter that goes on in the investing world.

Three common approaches employed in the stock market: Value investing, Growth Investing and Technical Investing

There are essentially 3 types of investing employed in the stock market, namely:

1. value investing
2. growth investing
3. technical investing.

Value investing was taught by Benjamin Graham.

Growth investing was shared by Philip Fisher.

Warren Buffett started off as a strict value investor of Benjamin Graham type.  He has since incorporated a lot of Philip Fisher's teaching into his investing.

In effect, Warren Buffett teaches that value and growth investing are essentially different sides of a same coin.  What is investing if not value investing, that is, buying something for less than its intrinsic value?

Value investing and growth investing are most suited for those with a long term investing horizon.

Most successful long term investors are essentially value investors.

They hold long term portfolios that have compounded in values over a long period of investing.

Technical investing are employed mainly by those with short term focus in their investing.  

The majority of traders in the market are technical "investors".




Additional notes:

Fundamental analysis is both qualitative and quantitative.

In fact, in my practice, qualitative is the more important analysis.

The ability to understand the business ensures that you are investing in a great company within your circle of competence.

Some combine the fundamental with the technical, and feel that they have an edge when doing so.

Personally, technical analysis has played little role in my investing so far.

Trading and portfolio management from a value investing point of view.

Portfolio Management

Portfolio management is described as an on-going process that is never complete. 

While certain businesses may be fairly stable, its prices will fluctuate over time, and so the investor must constantly monitor the situation. 

Value investors are not into buying certain industries or business ideas without regard to price, and so price changes are a fundamental factor that drive portfolio decisions.

The portfolios need to be somewhat liquid. 

Investors are advised not to purchase their entire positions at one go, but rather to leave room to buy in at cheaper prices should the stock go down. 

A good test for an investor is to consider whether he would indeed buy more of the stock were it to drop; if he is not, he is probably speculating and should not be buying in the first place!

The Decision of When to Sell 

Determining when to buy a stock is usually a much easier decision for a value investor, since the stock at that time is trading below what the investor considers an adequate margin of safety. 

But when the stock is trading within the range of values the investor believes it to be worth, what is the investor to do? 

We can argue against selling after percentage gain thresholds or price targets have been reached.   

Instead, the investor should compare the investment to available alternative investments:

• It would be foolish to sell if there were no better investments and the stock was still undervalued, but 
• it would be foolish not to sell if there are better bargains around!

Read also:

• 
  
• Your investments using Mutual Funds or Money Managers
• Trading and portfolio management from a value investing point of view
• Value Investor's Opportunities in Distressed Securities
• Value Investing Opportunities in the Banking Sector
• Look at FUNDAMENTALS and POTENTIAL CATALYSTS when making investment decisions
• Where to look for Investment Opportunities
• Business value cannot be precisely determined. Make use of ranges of values
• Central elements to a Value Investing Philosophy
• The Philosophy of Value Investing and Why It Works
• Philosophy of value investing. Need to have clear strategies too
• How Wall Streets can create investment fads? The Junk Bond Market of mid-1980s
• Understanding these changes in the investment world allows investors to earn superior returns
• What's good for Wall Street is not necessarily good for investors
• Speculators, Investors and Market Fluctuations

Look at FUNDAMENTALS and POTENTIAL CATALYSTS when making investment decisions

Look at Fundamentals

Value investors who paid attention to fundamentals (e.g. strong businesses masked by unprofitable divisions, or companies trading at discounts to cash etc.) reaped enormous profits.

Look for potential catalysts

Investors should look for potential catalysts when making investment decisions.   Catalysts are events that cause a stock's value to be recognised, thus resulting in immediate returns to investors who purchased at a discount. 

• A liquidation is an example of a catalyst, and there are some companies where such events have returned generous - and quick - positive results for investors (e.g. during bankruptcy events, where securities generally trade at a discount to their recoverable values).
• Share buybacks and asset sales also represent partial catalysts, as they can cause a stock to inch closer to its underlying value.  More importantly, such events signal that management is interested in returning value to shareholders, which bodes well for the future.

Some areas where value investors can indeed find value include: 

• liquidations, 
• complex securities (i.e. securities institutions can't purchase because they don't fit set categories), 
• rights offerings (often offering prices lower than current market value), 
• spinoffs (as they are usually sold by holders of the parents, thus depressing prices immediately) and 
• risk arbitrage (depending on the market's mood, as sometimes the market's exuberance can erode returns).

Read also:

• 
  
• Your investments using Mutual Funds or Money Managers
• Trading and portfolio management from a value investing point of view
• Value Investor's Opportunities in Distressed Securities
• Value Investing Opportunities in the Banking Sector
• Look at FUNDAMENTALS and POTENTIAL CATALYSTS when making investment decisions
• Where to look for Investment Opportunities
• Business value cannot be precisely determined. Make use of ranges of values
• Central elements to a Value Investing Philosophy
• The Philosophy of Value Investing and Why It Works
• Philosophy of value investing. Need to have clear strategies too
• How Wall Streets can create investment fads? The Junk Bond Market of mid-1980s
• Understanding these changes in the investment world allows investors to earn superior returns
• What's good for Wall Street is not necessarily good for investors
• Speculators, Investors and Market Fluctuations

Where to look for Investment Opportunities

Where to find Investment Opportunities

Sometimes, there are so many value investments available that the only constraint on the investor is a lack of funds. 

Most times, however, investors find it difficult to find value investment opportunities. Investors can spend a lot of time reading through financial reports, research reports, and other financial news and end up finding nothing but fairly valued opportunities. 

Therefore, it is important that the investor look in the right places.

A few of the places for finding investment opportunities include 

• the new-low lists, 
• the largest percentage-decliners lists which are published by major news sources, and also,
• companies whose dividends have been cut or eliminated can also be unduly punished by the market, leaving investment opportunities. 

Of course, just because a stock shows up on one of these lists does not make it a buy; one still has to go through the valuation process in order to determine whether it trades at a discount to its fair value.

Is the management buying or selling the company's stock?

Investors should look at what management is doing with respect to the company's stock. 

Nobody knows the business as well as management does, and so if management is buying that is often a good sign for the stock.

Why? Why?  Why has a stock been performing poorly?

Investors are also encouraged to consider why a stock has been performing poorly (and therefore may make for a good investment). 

If an investor can pinpoint this reason, he can be more comfortable that he may have found value. 

If this reason cannot be found, it is possible that the investor is missing some information which the market knows (important lawsuit pending, competitor coming out with similar product etc.).

Read also:

• 
  
• Your investments using Mutual Funds or Money Managers
• Trading and portfolio management from a value investing point of view
• Value Investor's Opportunities in Distressed Securities
• Value Investing Opportunities in the Banking Sector
• Look at FUNDAMENTALS and POTENTIAL CATALYSTS when making investment decisions
• Where to look for Investment Opportunities
• Business value cannot be precisely determined. Make use of ranges of values
• Central elements to a Value Investing Philosophy
• The Philosophy of Value Investing and Why It Works
• Philosophy of value investing. Need to have clear strategies too
• How Wall Streets can create investment fads? The Junk Bond Market of mid-1980s
• Understanding these changes in the investment world allows investors to earn superior returns
• What's good for Wall Street is not necessarily good for investors
• Speculators, Investors and Market Fluctuations

The Philosophy of Value Investing and Why It Works

What is Value Investing?

The terms used to describe value investing don't require any accounting or finance background.

Value investing is described as paying 50 cents for a business worth $1. 

Warren Buffett's analogy using the maximum allowable weight of a bridge is used to illustrate how this margin of safety works:

"When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing."

Margin of Safety (buying at a discount) is of utmost importance

What allows value investors to apply a margin of safety while most speculators and investors do not?

Again using a Buffett analogy to illustrate this:

A long-term-oriented value investor is a batter in a game where no balls or strikes are called, allowing dozens, even hundreds, of pitches to go by, including many at which other batters would swing. Value investors have infinite patience and are willing to wait until they are thrown a pitch they can handle—an undervalued investment opportunity.

Value investors do not buy businesses they do not understand, nor ones that they find risky. For example, they will avoid technology companies and commercial banks. 

Value investors will also invest where their securities are backed by tangible assets, to protect them from downside risk.

Because the future is unknown (e.g. a business worth $1 today might be worth 75 cents or $1.25 tomorrow), there is little to be gained by paying $1 for this business.

The margin of safety (buying at a discount) is therefore of utmost importance. 

Value investors gain an advantage when many:

• do not buy with a margin of safety, 
• remain fully invested at all times, and 
• trade stocks like pieces of paper with little regard to the underlying asset values.

Read also:

• 
  
• Your investments using Mutual Funds or Money Managers
• Trading and portfolio management from a value investing point of view
• Value Investor's Opportunities in Distressed Securities
• Value Investing Opportunities in the Banking Sector
• Look at FUNDAMENTALS and POTENTIAL CATALYSTS when making investment decisions
• Where to look for Investment Opportunities
• Business value cannot be precisely determined. Make use of ranges of values
• Central elements to a Value Investing Philosophy
• The Philosophy of Value Investing and Why It Works
• Philosophy of value investing. Need to have clear strategies too
• How Wall Streets can create investment fads? The Junk Bond Market of mid-1980s
• Understanding these changes in the investment world allows investors to earn superior returns
• What's good for Wall Street is not necessarily good for investors
• Speculators, Investors and Market Fluctuations

Philosophy of value investing. Need to have clear strategies too.

Buffett's first two rules of value investing:

1) Don't Lose Money

2) Never Forget Rule #1

While it is easy to say these rules, by themselves they don't help investors. 

The future is uncertain. 

These are always unknown:

• future GDP growth rates, 
• inflation rates, and 
• other relevant factors to stock price returns. 

Furthermore, stocks are junior securities to debt and other firm obligations, making their future values even more uncertain. 

Stocks are certainly not risk free.

The investors need to have clear strategies, which they can follow, that will help them follow the above rules of Buffett's.

Read also:

• 
  
• Your investments using Mutual Funds or Money Managers
• Trading and portfolio management from a value investing point of view
• Value Investor's Opportunities in Distressed Securities
• Value Investing Opportunities in the Banking Sector
• Look at FUNDAMENTALS and POTENTIAL CATALYSTS when making investment decisions
• Where to look for Investment Opportunities
• Business value cannot be precisely determined. Make use of ranges of values
• Central elements to a Value Investing Philosophy
• The Philosophy of Value Investing and Why It Works
• Philosophy of value investing. Need to have clear strategies too
• How Wall Streets can create investment fads? The Junk Bond Market of mid-1980s
• Understanding these changes in the investment world allows investors to earn superior returns
• What's good for Wall Street is not necessarily good for investors
• Speculators, Investors and Market Fluctuations

Various Value Investing Strategies - a Review

Many value investing strategies to employ in the market place:  Stocks 1. Net-net of Benjamin Graham eg. Poh Kong in 2009 2. Deep value investing in secondary issues (but beware of value traps). eg. KAF before 2014 3. Buying blue chips at bargain at certain market sell down period. eg. 1998, post SARS, 2008/2009 4. Buying growth stocks at reasonable price (GARP). eg. PetDag in 2005 5. Special situations: Arbitrage, M&A, turnarounds, bankruptcy restructuring. e.g. turnarounds HaiO in 2005/6, GCB in 2009, Latexx in 2008, acquisition of MOX 6. Joel Greenblatt magic formula investing: Screen for stocks with high ROIC and high EY Bonds High quality bond with good yield sold at below par value. Low quality (junk) bond with good yield available at severely discounted value. eg. Plus Bonds before being redeemed by the government bailout, RBS bond yielding 8% available at a discount to par. Cash Stay with cash if you have nothing better to buy. Your default mode.

The Psychology of Investing. Emotions affect people's behaviour and ultimately market prices.

The emotions surrounding investing are very real.  These emotions affect people's behaviour and ultimately, affect market prices.

Understanding the human dynamic (emotions) is so valuable in your own investing for these two reasons:

1. You will have guidelines to help you avoid the most common mistakes.
2. You will be able to recognise other people's mistakes in time to profit from them.

We are all vulnerable to individual errors of judgement, which can affect our personal success.

When a thousand or a million people make errors of judgement, the collective impact pushes the market in a destructive direction.

The temptation to follow the crowd can be so strong that accumulated bad judgement only compounds itself.

In this turbulent sea of irrational behaviour, the few who act rationally may well be the only survivors.

To be a successful focus investor:

• You need a certain kind of temperament.
• The road is always bumpy and knowing which is the right path to take is often counterintuitive.
• The stock market's constant gyrations can be unsettling to investors and make them act in irrational ways.
• You need to be on the lookout for these emotions and be prepared to act sensibly even when instincts may strongly call for the opposite behaviour.
• The future rewards focus investing significantly enough to warrant our strong effort.

Investor Mistakes (Short-lived Growth)

So called value stocks are stocks that have low price to book ratios, and growth stocks are stocks that have relatively high price to book ratios.

Many studies demonstrate that value stocks outperform growth stocks, perhaps because investors overestimate the odds that a firm that has grown rapidly in the past will continue to do so (Short-lived Growth).

Prem Watsa 2011 (Good Video)

Published on 7 Dec 2015

In addition to acting as a guest speaker on February 16, Mr. Prem Watsa, Chairman and CEO, Fairfax Financial Holdings Ltd. has invited Dr. Athanassakos and a group of his Value Investing MBA and HBA students to attend the Fairfax annual meeting of shareholders on Wednesday, April 20, 2011 at 9:30 a.m. in Toronto, Ontario, Canada. After the annual meeting, students will have an opportunity to meet Mr. Watsa and his team.

Mr. Watsa is the Chairman and Chief Executive Officer of Fairfax Financial Holdings Ltd., a financial services holding company, which he took over in 1985. The company, through its subsidiaries, is engaged in property and casualty insurance and reinsurance, as well as investment management. Mr. Watsa is a Chartered Financial Analyst, a graduate of the prestigious Indian Institute of Technology with a degree in Chemical Engineering and a holder of an MBA from the Ivey Business School at Western University. He is a member of the Board of Trustees of the Hospital for Sick Children, a member of the Advisory Board for the Ivey Business School and a member of the Board of Directors of the Royal Ontario Museum Foundation, as well as Chairman of the Investment Committee of St. Paul’s Anglican Church.

Fairfax has been one of the few companies to escape the ravages of the great recession of 2008 as Mr. Watsa and his team had anticipated the credit crisis and had taken the necessary steps to protect Fairfax . Mr. Watsa, also known as the Buffett of the North, had discussed his fears about the markets in a key note speech he gave to The Ben Graham Center of Value Investing First Annual Symposium on Value Investing on May 25, 2007. His key note speech can be viewed here.

For more on Fairfax Financial Holdings Ltd., see www.fairfax.ca

A good video to share on Value Investing (Richard H Lawrence)

The speaker has shared a lot of his experience and knowledge, and has been very generous in answering many questions in this video.



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1.  Invest in superior company.
2.  Good management.
3.  Buy when stocks are down.  Be a contrarian.
4.  Invest for long term capital gains.

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Surround yourself with the right people who share your philosophy.  (The DNA of the firm).

Discipline, procedure and process.   Set up the tools.  (e.g. monitor the 52 week low levels.  Pricing power.  Score risk.  What would you do when you meet a big bear market?)

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Deliver the results to the investors.

Time weighted returns (NAV return in the fund).  Capital weighted returns (Investor's return).

Must learn to manage your partnership in the bear market.  The best opportunity in bear market gives you excess return over the next 7 years.  Control the level of your asset under management to ensure his stocks have the muscle to get through a severe bear market.

Control greed.  Don't allow greed to get into your way.

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6 Tenets of his model:

1.   Pricing power:  

How do you calculate this?  Able to price your profit to ensure no erosion of margin irrespective of input cost rising or falling despite facing a lot of competition.   .

Look at Margins -  Gross profit margin.  Cash gross profit margin (EBITDA margin).  Low variability of cash gross profit margin.


2.   Cash flow:

Cash flow from operation:  Net Income + D&A + other non cash items.

Free cash flow = CFO - maintenance Capex  (business in steady state)

Cash flow of the corporate structure.  (e.g. Apple has all its cash in overseas countries and has to borrow in US to pay off dividends and buy backs.domestically)

Working capital cash flow:  Negative working capital cash flows.

Company must know how to manage the FCF.   Give dividends.  Reinvest for growth.


3.   Invest in High profitability company.  

600 out of 1000 companies are probably mediocre profitability companies.  Eliminate them.

Focus on the ones with the highest profitability in the 400s.

Stay with the best of the best, and you should be able to outperform.

(I don't believe in the WACC.  DCF can be difficult to use and garbage in and garbage out.)

What is an acceptable level of profitability?

Above industry average (NOT THE BEST ANSWER).

Better to look at this through the DUPONT MODEL.   Asset turnover.  Net profit margin. Financial leverage.   Can check the reasons why these factors are not high.  Very good model.

Margin gone up.  Asset turnover gone up.  Financial leverage gone down.  VERY GOOD.
Those where ROE is high due to high finanical leverage.  NOT SO GOOD.

EBIT / NET OPERATING ASSET transfer into high ROE,  allows you to look at the quality of the management.


4.   Need to be prepared for a bear market.

Don't like cyclical companies.  Volatility of margins.  Sales slow, interest cost goes up and profit margin drops.  A whole waste of time and pain to get into these stocks.

Better stay with companies with stable earnings that can get through bear markets.  Even when you invested on a wrong day, you will still be alright.

5.  Sustainability of EPS growth.  Don't invest for change of PE.  INVEST FOR EARNINGS GROWTH.

SUSTAINABILITY EPS GROWTH and DIVIDENDS - CONTRIBUTE TO 80% OF RETURNS.

Companies with EPS growth -  look for low cyclicality of business, ability to increase market share, good companies usually grow market share during a bear market or recession, low cost, large number of customers and suppliers.  All these are low risks to your investing.


6.   Valuation (Benchmarking)

His Formula:

(ROE + normalised Earnings growth over next 3 to 4 years) /4 = target PE
e.g. (30 + 14 /4) = target PE of 11. 

Comparing a group of 15 companies and score them 1 to 15, ranking them.


John Neff: (Earnings growth + Dividend yield) / PE.  Discards the stocks with the worse number.

De-emotionalise the process which is incredibly emotional.

These are powerful instruments for rebalancing your portfolio.



Track the key numbers in your portfolio.