vinod1

Value Investing - Tools and Techniques for Intelligent Investment by James Montier

Minor quibbles Buffett as some kind of once in a lifetime "We" believe someone like Buffett happens once in mankind history. God-like Superman Duh! Buffett is son of God (Ben Graham). :) :) :) :) Vinod

SD, Agree on the sanity check. I think we disagree due to differences in what is meant by a bubble. To me that means a near unambigous and demonstratable overvaluation. Take S&P 500 in 2000, at its peak of 1500 its dividend yield of 0.9% and normalized PE's in the 40's the expected real return on stocks in the long term is less than the return available on TIPS which at that time were having a real yield of 4.5%. This to me is a clear and demonstratable case of a bubble. Take the present situation, using any of the most commonly used methods of estimating fair value for S&P 500, leads to a fair value range in the 850-1000. With nominal treasury yields in the 3-4% range and TIPS real yields around 2%, the expected returns on stocks over the very long term is much higher than bonds. It looks a little expensive but no where near the bubble range. Vinod

Sanjeev, you are absolutely right on this count, but if the odds are in your favor in whatever instrument you choose then it is NOT speculating, in the negative sense of the word. Thus I would agree with twacowfca: But again remember folks that we are looking for bubbles (mostly) because of recent history. Every overbought market does not a bubble make. Agree. From what I am reading in the financial press S&P 500 at 1500 (in 2007) - Overvalued but not a bubble S&P 500 at 1000 (late 2008) - bubble burst S&P 500 at 666 (March 2009) - ??? S&P 500 at 1000 (Sept 2009) - Bubble S&P 500 at current value is being called a bubble purely because of the path it took (666 -> 1000). I did not hear people saying it is in a bubble when it first fell to 1000. Except if you argue that the financial crisis altered the long term value of businesses, this does not make sense. Vinod

If rate of increase of book value is greater than the rate of return on equities, does this not indicate that insurance business providing additional value over just plain investing? Book Value increased roughly about 26% from end of 1986 to end of 2008. Equity performance has been mentioned in various contexts as around 20% (but I did not calculate this number). Based on this I would assume that insurance business adds value compared to just plain investing by HW. Vinod

Grantham's implementation of this is GMO Quality Fund, the top holdings (as of 9/30/09) of which must be what he considers the most attractive. Microsoft Corp. 6.6% Johnson & Johnson 6.3% Wal-Mart Stores Inc. 5.6% Oracle Corp. 5.4% Procter & Gamble Co. 5.3% Coca-Cola Co. 5.1% Pfizer Inc. 4.8% Cisco Systems Inc. 4.1% Exxon Mobil Corp. 4.0% Chevron Corp. 3.8% PepsiCo Inc. 3.6% Google Inc. (Cl A) 2.8% QUALCOMM Inc. 2.5% International Business Machines Corp. 2.4% Abbott Laboratories 2.2% Total 64.5% Vinod

All the funds excepting three are emerging market funds in various forms. More of an indication of asset-class exposure rather than an indication of alpha. Vinod

I do not think there is any error in your scenario analysis of TIPS. I have pretty much written the same about TIPS in the past on this board. Here are a few additional points 1. If you are looking for absolute valuation of TIPS, you might think of a real 3% yield as being very attractive. TIPS are very unlikely to be able to maintain a real yield greater than 3% for any sustained period of time. There are both theoretical and empirical reasons (based on the last 60+ odd years of data on inflation protected bonds from several countries) why this should be so. 2. To get deflation protection you need to buy TIPS close to par or else you would lose the deflation protection. 3. To really tailor your portfolio of TIPS to match the above you need to buy individual TIPS not TIPS funds. 4. You can buy from treasury direct only in a taxable account since most custodians of retirement accounts would not allow you to purchase from TD. 5. I-Bond is good when you get a decent real yield comparable to TIPS. The main advantage is that you can redeem it at any time after one year and your principal would not fluctuate. It is almost like a inflation protected savings account! The downside is that they have changed the max amount you can buy to a ridiculously small amount ($5000 per year per person I think) and also the real yield is pretty low compared to TIPS. Vinod

This is what Graham has to say on Macro Mechanical forecasting systems sound vaguely plausible on the basis of a priori reasoning and rely for its convincingness on the fact that it has worked for a number of years past. The necessary weakness of all these systems lies in the time element. It is safe and easy to prophesy, for example, that a period of high interest rates will lead to a sharp decline in the market. The question is “How soon?” There is no scientific way of answering this question. They are not truly scientific, because there is no convincing reasoning to support them and because, furthermore, really scientific (entirely dependable) forecasting in the economic field is a logical impossibility.

IMHO I do not think bottom up value investing in the style of Graham/Buffett ignores macro. It ignores macro in the sense of basing investments on macro calls as in - avoiding US stocks because USD is expected to go down, avoiding stocks because of expected economic problems, buying chinese stocks because of expectations of rapid economic growth, avoiding Japanese stocks because of poor demographics, etc. It considers macro as in not assuming profit margins to return back to peak of 2007 for consumer sensitive stocks, not assuming sales to show rapid increase due to likely poor GDP growth, etc. I do not think Buffett/Graham ever ignore this kind of Macro input into their stock valuation. Vinod

I found "Risk Arbitrage" by Guy Wyser Pratte to be pretty useful. It has a concise history of how markets have evolved in the Arbitrage field and goes into the basic issues along with several examples from Author's experience. I have not worked through all the examples yet, but it is on my to do list. Vinod

Thanks for your comments. I have added the complete notes in pdf format as well. Vinod

I skimmed through the 1st and 4th editions as well but I liked the 2nd edition the best. Do you have any particular topic in mind that is dealt with in better detail in the 4th edition? Thanks Vinod

If anyone is interested you can view my notes to Security Analysis at http://vinodp.com/documents/investing/security_analysis_index.html I have read Security Analysis several times but did not seem to retain most of what Graham is saying. So about an year back I started going through the book and tried to summarize what he is saying in each chapter. By trying to summarize, it forced me to slow down and really think through the ideas that Graham is conveying. It took me a little over an year to go through the whole book - often re-reading the same chapter again and again and until several of the examples are deeply ingrained in my memory. One of the most surprising things that I noticed is that Graham seldom tried to value a stock! He is more interested in determining why a stock should not be worth less than a certain amount. So instead of saying, I think the stock is worth $40-$80, he is more interested in determining if a stock should not be worth at least $30. His comments on emerging market bonds and why some of the debt of emerging market companies may be safer than the debt of their respective governments even though in theory it should not be the case, is simply far too advanced compared to what is currently being taught in the CFA curriculum. His comments on Bond Insurers and the problems that it could lead to is stunning. His bond equivalent valuation of equity is another very practical tool that is highly applicable in the current environment. Vinod

As PIMCO's Paul McCulley writes in this months commentary you can guess an economist's expectation of inflation vs deflection and what action should be taken, based on the economic theory he subscribes to. All we need is to identify if the economist belongs to Austrian or Monetarist or Keynesian school and there is no need to read the commentary as the arguments fall along the familiar pattern. http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2009/July+2009+Global+Central+Bank+Focus+McCulley.htm Vinod

"It was little short of nonsense for the stock market to say in 1937 that General Electric Company was worth $1,870,000,000 and almost precisely a year later that it was worth only $784,000,000. Certainly nothing had happened within twelve months’ time to destroy more than half the value of this powerful enterprise, nor did investors even pretend to claim that the falling off in earnings from 1937 to 1938 had any permanent significance for the future of the company. General Electric sold at 647/8 because the public was in an optimistic frame of mind and at 271/4 because the same people were pessimistic. To speak of these prices as representing “investment values” or the “appraisal of investors” is to do violence either to the English language or to common sense, or both." - Ben Graham, Security Analysis Some things never change. Vinod

Hi Parsad - Thanks a lot. Vinod

Did anyone get a hard copy of FFH 2008 annual report? I did not get from my brokerage firm so I sent letter to FFH but still did not get one. I followed up with another letter to FFH but still there is no response. FFH website has this statement Shareholders may request a copy of our audited financial statements free of charge by writing to the Corporate Secretary at 95 Wellington Street West Suite 800 Toronto, Ontario, Canada M5J 2N7 Is this address correct? Anyone has a suggestion on how to get a printed copy of 2008 AR? Thanks Vinod

"The arguments for and against ultimate inflation are both unusually weighty, and we must decline to choose between them." - Ben Graham, Security Analysis Vinod

1. What discount rate is used for valuation and what variables/data does he use to determine this? Given that inflation in India is persistently higher compared to developed countries and more prone to upward surprises, does he make any adjustment for this in his estimate of discount rate? 2. Does he use any data sources in addition to Corporate annual reports for his research? Is there something like a valueline that summarizes several years of historical data? 3. Does he have any position sizing limits to limit the maximum size of a single position or sector? 4. Does he try to structure the portfolio into various strategies Net-Nets, Arbitrage, Turnarounds, Inevitables, etc? If so could he eloborate on the various strategies? Vinod

Thank you! I only scanned the report but I am having trouble reconciling their IV estimate of only 107K while using a 1.7 book multiple for Insurance. I am not sure if they missed the investments but this does not sound right. Vinod

The only thing I can think of is a non-dollar denominated Sovereign Inflation Protected Bond. Something like the ETF, WIP may provide this protection. But it does not have options, so it would not be possible to lever up with a small amount of money. Klarman also mentioned about having bought a low cost inflation protection investment, so his portfolio may provide some guide. Vinod

You can add in the occasional asset/license sales by Govt but that is usually not a significant factor for US. Vinod

All Govt spending (every single dollar spent by Govt) has to be supported by one of the following 1. Taxes 2. Debt (T Bills, T Notes, T Bonds sold) 3. Printing Money Deficit is by definition funded by 2 & 3. The Govt has to fund the $1.6 trillion via #2 and #3 this year. Vinod

I do a somewhat similar check for stocks over 10 year periods, but I try to check how much earnings have increased as a result of retained earnings rather than use the market values. A stock can start the measure period at an expensive level and end the period deeply undervalued, in which case it fails this test. Vinod