KCLarkin

Disruptor versus cash cow is probably the wrong way to look at this. You remember Buffett's famous "short horses" speech: http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm Most "disruptive" tech stocks aren't great long-term investments. But there is a combination of economic castle, moat, and reinvestment opportunities that is very powerful. You are better off looking for the next Copart or Costco or McDonalds or Starbucks or Precision Cast Parts rather than speculating on biotechs. Why? Because these "boring" companies generate enough cash flow to sustain their growth. Their growth is fairly predictable. They are less susceptible to disruption. To rephrase, focus on business model innovation rather than technical innovation.

If you plot this relationship, you will see that risk goes up dramatically as PE increases. If you pay 50x (2% yield) and interest rates increase 1% (to 3% yield), then your stocks drop 34%. At a more "normal" 20x, the drop is only 16% for a 1% rise in rates. Theoretically, the risk premium should increase at lower interest rates to compensate for the higher risk. This risk premium puts a limit on the rational multiple you will pay.

I use Fast Graphs frequently. It is a quick way to find out whether a company is cyclical, slow grower, compounder, etc. It is also a good way to quickly spot mis-pricings.

I get ValueLine free from the local library. Check if you can get access from your library. I get Morningstar reports free from my broker. I get S&P reports from my broker too, but they aren't as detailed.

http://www.efficientfrontier.com/ef/402/mep.htm

Let's assume that by IRR, you mean ROE. In which case: Company A needs to retain 50% of earnings to grow 10% per year. So you get 10% growth + 2.5% initial dividend yield Company B needs to retain 100% of earnings to grow 10% per year. You get 0% yield. The ROE determines your maximum sustainable growth rate. So Company A could potentially grow 20% per year (if they could find enough projects with 20% IRR). If Company B grew 10% per year forever, you would never get a single cent in dividends or buybacks. -- BTW, if the discount rate is 10%, the growth at company B is creating no value. And it shouldn't be trading at 20x.

http://money.cnn.com/2016/04/30/investing/warren-buffett-berkshire-hathaway-shareholder-meeting-amazon/

I don't really know. But I was surprised by how active Graham and Buffett were in their "cigar butt" investments: http://www.businessinsider.com/benjamin-graham-was-the-first-shareholder-activist-2016-6

Are you saying Graham was hands-off? According to Dear Chairman, he was an early activist.

This is my point. You are implicitly applying an equity risk premium to cash and bonds. You need to risk-adjust your discount rate.

I can't comment on your question. But I don't agree with your logic. Assume that you have a holding company that owns $100M worth of 10 year U.S. bonds (yielding 1.5%). Your pre-tax earnings are $1.5 M. Slap a 10x multiple on these earnings. Now your $100M bonds are only worth $15 M.

I don't subscribe to CNBC, but here is my favorite talking head: This is from 2013.

Wes Gray gives a good summary of the momentum effect in the last Masters of Business podcast. That's probably a good place to start. Actually, the Cliff Assness episode is good too, IRC. He talked about momentum crashes (the dark side of momentum investing). There are also plenty of blog posts on momentum: http://investorfieldguide.com/2014512two-ways-to-improve-the-momentum-strategy/?redirect=true

Aren't the central banks keeping long-term rates low? If all the central banks ended QE, wouldn't one possibility be that all interest rates rise, say, 2%? The 10-2 spread wouldn't change. But banks would be more profitable because deposits would no longer be pegged at 0? Interest rates are so low that the proper market clearing rates for insured deposits is negative. But there is psychological barrier against negative interest rates so banks cant charge -1%. -- I can't predict future interest rates, but I am pretty sure current central bank policy punishes financials (and savers and pensions). It benefits borrowers. Maybe I'm not very smart, but I don't see how artificially low interest rates can benefit both the borrowers and the lenders.

It's a bit poisonous because it is really a trading book. I disagree with the whole premise of the book. But this book could be helpful: When to Sell: Inside Strategies for Stock-Market Profits The Art of Execution (not really momentum but discusses tactical strategies) Most of the momentum stuff I've read is more academic and less practical. Like this: Cliff Asness: value and momentum everywhere http://faculty.chicagobooth.edu/tobias.moskowitz/research/jf_12021_tmcomments.pdf

Buffett's concern isn't the EU. The problem is the common currency. You can't have sovereign nation states with a common currency. One solution is a United States of Europe. Since Britain isn't part of the common currency, Brexit is not relevant. It doesn't solve any of the problems for Britain or the EU.

This might be an opportunity for some consolidators (Constellation Software, Cimpress) to buy assets in UK and Europe.

Thanks. Wells is on my watch list (already a full position). I think the moves in the financials are appropriate given interest rates though.

Is anyone seeing any interesting dislocations? Everything on my watchlist looks pretty orderly. Nothing even close to February lows.

This is true. That's why I recommend this strategy for quality growing stocks. Not cyclicals or cigar butts. If a growing stock goes from cheap-fair-cheap (or cheap-expensive-cheap), then you still own a cheap, growing stock. You haven't lost anything (except a bit of opportunity cost). And the rewards can be spectacular. An example of this is Wells Fargo. In retrospect, I wish I had sold at $55 (13x). I actually sold a bunch at $55 but had second thoughts and repurchased. So I've had a temporary drawdown. And I missed an opportunity to redeploy. But I haven't really lost anything. I'm happy to hold it at $47 (11x, 3.2% dividend). You also need to use judgement. I knew that Apple was never going to get "expensive". I sold Apple at $123 when it was clear that the momentum was gone even though it still looked cheap. A real-time case study in my portfolio is MSM. This jumped from $56 (15x) to $78 (21x) in 5 months. It's now back down to $72 (19x). You could make a strong argument that it is now fairly valued or even over-valued. But I'm willing to bet MSM will benefit from both business momentum and multiple expansion when the manufacturing sector returns to growth. I'm willing to miss the opportunity to sell at $78 to see the hand play out. I'll only know in retrospect whether this was a mistake or not. -- This actually works for cigar butts and cyclicals too but the definition of "expensive" is different. And you need to react quickly to signs of weakness. Jet Blue was very expensive at the end of 2014 even though it was only at 8x 2015 earnings. At $16, it was almost 2x book value (which is insanely overvalued for such a lousy, commodity industry). It promptly went to $27. A really conservative, deep value investor might have bought JBLU at $6 in 2013. And sold at the end of the year for $8.54. That's a very nice 40% return. A more aggressive value investor should have sold before $12 (1.5x book). This would be a 100% return in a single year (from $6). But by letting momentum work for you, you could have earned 350% return. Of course, nobody sells at the peak. But you could have got $22 or $23, AFTER it was very clear that that the business and stock momentum were gone. You would have earned a 267% return. -- This is just a simple momentum overlay. You don't sell just because a stock is fair value. Or even expensive. You sell when the stock is overvalued (or fairly valued) AND the business or stock momentum falters. Selling is a dark art. Do what works for you. Buy early, sell early works for many great investors. But don't be afraid of momentum just because you are a "value investor". -- Caveat: We are potentially in the later innings of this market cycle. I wouldn't be too greedy now. But don't get blinded by your own conception of "overvaluation". Hussman has been complaining about overvaluation since 2009!

The issue with this approach is that you are selling stocks that are going up to buy stocks that are going down. You are fighting momentum. Fundamental momentum and market momentum. Anyway, selling is a dark art. Focus on buying great companies at good prices and you don't need to be perfect at selling.

It isn't timing the market (all stocks). It is timing your entry and exit points (in a single stock). I am suggesting the opposite of speculation. If you buy a stock when it is cheap and sell it when it is fairly valued, most of your return is from multiple expansion. If you buy at a good price and hold through periods of excessive optimism, my strategy allows you to earn the profits of the underlying business. Buy a stock at 15x earnings, hold stock for 10 years, EPS grows 15% per year, your return is 15% per annum. The fact that you could have sold at 30x earnings at some point in that run is meaningless. You might have had a nasty drawdown but this was still a big winner. Now, if you want to really juice your returns you can try to trade the stock. I'm just suggesting that, if you trade the stock, you let momentum do some of the heavy lifting. Value investors buy too early and sell too early. Don't be too eager to take profits in a great company bought at a good price. -- Obviously, this approach doesn't fit the Ben Graham types. But you should spend some time looking into the research on momentum, trend following, behavioural finance. As Munger says, Graham had a lot to learn about investing.

This isn't market timing. If you think about the Mr. Market analogy, market volatility gives you two opportunities to profit. You can buy when Mr. Market is depressed. Or sell when he is euphoric. If you read the academic studies, it is very clear that momentum exists. So if you are holding a great company, bought at a sensible price, that is now "fully valued", it is a mistake to sell too quickly. Once they get rolling, I've had many stocks that go way beyond my rational expectations. Both business momentum and stock momentum take the stock price higher than I could imagine. -- But once you start getting nosebleeds, put the stock on a shorter leash. Don't sell just because the stock looks overvalued. Sell because the stock looks overvalued AND is showing weakness. You won't get the top price, but you avoid the perils of selling too early or taking a "round trip". You need to have the discipline to sell with prejudice when an overvalued stock starts looking weak. Don't "wait till it get's back up" before you sell. Or convince yourself that it is now cheap because it is trading 10% or 20% below all time highs. This is a trap. As you implied, overvalued stocks tend to overshoot on the downside once they start falling. -- As an example, look at UNP. This is a stock that typically traded at 14-17 times earnings. A value investor might have sold at $80 when it started looking expensive (~18x) in 2013. It then went on an epic run to almost $125 (21x). Then it dropped quickly to $67 (12x). And then bounced back to $90 (17x). With a high quality company like this, I would hold my nose when it was only mildly expensive. But after it got excessive, I would sell aggressively if the stock started to break down. Home Depot is another example. A typical value investor would have sold at $52 in 2012 when it hit ~20x. It is now $127. -- It is a great strategy. Especially if you only use it on great businesses that you are willing to hold. Don't be in a rush to take a profit on a great company.

I was doing some work on TSCO (Tractor Supply not Tesco). I went on VIC to see if there was a writeup. The only writeup is from 2001. The stock was trading at 6x forward earnings. The author, Bill67, made a great trade (not clear when he sold but he was out for a "long time" as of October 2003). Since that write-up TSCO has compounded (according to FASTGraphs): EPS @ 23.9% TSR @ 40% A $10,000 investment in 2001 is now worth $1,657,726.53 and pays a $14,000 dividend every year. If Bill67 had just bought TSCO and held on, he would have one of the greatest investment records of all time. But like many on this site, he'd already went looking for the next puff. -- Interestingly, Charlie479 (who is a famous VIC author who was eventually seeded by Greenblatt) commented on the TSCO writeup: Even a great investor can have one of the greatest compounders of the past 20 years in the palm of his hands and completely miss it. -- The other interesting thing about this compounder is that it had modest (but improving ROIC) and a boring business. This is a common thread in long-term compounders. TSCO, Alimentation-Couche Tard, Stella-Jones... These are all boring businesses. Everyone wants to buy the next Amazon or Microsoft. Nobody is looking for the next Tractor Supply Company. I don't think compounders are over-rated. But you need the judgement to recognize them and the discipline to hold on even when the stocks become volatile or overpriced. Anyway, compounders aren't easy to find (especially early). But Mr. Market does put them on sale fairly often. If Bill67 and Charlie479 were only looking for compounders, they might not have missed this one.

To find "compounders", you need a qualitative assessment of the reinvestment opportunities. Backtests are quantitative. Finding a compounder that you can understand with high ROIIC, long runway, strong moat, and fair price is extremely rare.