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What does Value Investing mean to you


Uccmal
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I got thinking about this via the thread on Tre, with Myth's comment of wading through crap to find the hidden deals.

 

Types of value:

1) There is cigar butt investing which is what Myth is alluding to.  Probably due to lack of time, with two little kids, and a full time job in addition to investing I find this the least lucrative method.  If I go through my past holdings I find a large assortment of really crappy companies with low liquidity, in cash strapped industries.  Very few with more cash on the balance sheet than the stock price.  Maybe I was investing at the wrong time.  Anyway, it seems to be probability based.

 

2) Bizzarely obscure companies in strange industries.  For this I refer to Irwin Michael of ABC funds who seems to relish in this type of security.  He gets good returns, excepting 2008/2009, but very few others do, including me.  This appears to be probability based as well.  Credit to Irwin for finding SSW though which has been one of my greatest hits over the past 3 years.

 

3) I do best at finding great companies at low/but not by any means, net-net pricing.  This requires patience as well.  Times like this past winter and spring put these out of reach.  Into this I would put GE (today), RIMM, WFC (today), BBY (today), BAC (today), RBS.PR.P (today), FFH (today), MTL, SSW (today), CFX (not today).  I especially like companies that are generating free cash, and have low PE multiples.  For this one doesnt not need to look hard but needs the patience to wait for cheap times and possible ride your stock down with a market slump.  I find it easier to stomach the churn when I know I can dump the stock without too much pain.

 

Thoughts,  Wont debate my choices in number 3) which have been debated to death.

 

 

 

 

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I like to invest from a 'businessman perspective'... I think the quote below explains my point:

 

WEB -- "There is no distinction in our minds between growth and value. Every stock is a value stock to us. The potential growth of the company is simply one factor that we consider." Munger chimed in: "All intelligent investing is value investing."

 

Rgds,

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I have always had a portfolio of mixed ideas.  I have enjoyed buying and then holding really good businesses that get inexpensive every once and a while (JNJ, BRK, etc..).

 

I then have a decent percentage of capital invested in other ideas i.e. warrants, preferreds and common stocks of smaller businesses.  However, this is not a buy and hold area of my portfolio.  For example, I have been in an out of various preferred securities numerous times in the last 4 years. 

 

Then I always have excess cash, because I never know when I will have a chance to take advantage of public or private opportunities.

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For me it is option 3 as well, especially misunderstood and/or unloved ones. Just makes the most sense for me and it suits my personality, being slightly risk averse. Not that the other options are riskier per sé, it just seems easier to take hits on a portfolio of high quality stocks and the possiblity of being severely wrong is lower. Also, I lack the experience for the other options and I think you have to grow into them over the years while obtaining more knowledge & expertise. After all, I am just getting started.

 

When looking at value investing from a broader angle I believe it has to suit your personality as a whole to become successful. It just feels like the normal thing to do for me. I can't understand why other people can't grasp the concept of value investing and keep buying high & selling low. 

For example, as a kid (12-15y old) I used to buy rare games from friends and internet sites and sold them back on ebay to double or triple my money. I always insisted on having a 'margin of safety' and wouldn't buy anything only to get a 20% return (which would have been just a few bucks ;)) because I had to invest time in putting the thing up for auction, go to the post office, pay a fee to ebay,... 

In warehouses or other stores, I always compare prices automatically and the quantity and quality I get in return. Just a simple habit a lot of people don't seem to have. I could probably think of plenty of situations and habits that I bet other value investors have as well.

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I am a big fan of doing the opposite of what is hot on CNBC.

 

I also like extreme pessimism about industries that the "conventional wisdom" says will never recover. I tend to root around there.

 

I like to look at everything that could go wrong with an out-of-favor company and after coming to the conclusion that only a once-in-a-lifetime black swan could kill it...I jump in with both feet.

 

The most important aspect after all of that is patience and ignoring the media rabble.

 

 

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Though Buffett has made comments that he would manage $1mm today like he did in the early BPL days, I sincerely believe he would be more Munger-like than he was back then. I was just re-reading my favorite parts of the Snowball this weekend, and multiple times throughout the book Buffett is quoted saying that the "time is the friend of the wonderful business, but the enemy of a mediocre one". I just don't believe he would buy a Berkshire, Dempster, or Sanborn today UNLESS he had the ability to liquidate them. Net-Nets are just as dangerous as buying a tech company unless an investor can liquidate it. Parsad, I've picked up on that in your past comments that you like to get your hands dirty in those types of situations - I am extremely envious of someone in that position, as I would love to be very active in those types of investments.

 

All that to say, I very much tend toward option #3 for the core of my portfolio then employ special situation techniques for the other part of my portfolio in order to generate somewhat market-neutral returns. I hope to one day add Buffett's third category of "Controls"!!  ;D ;D

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I find that I'm most comfortable with #1 or #2.

 

I prefer net-net investing, I as well have limited time (job, kid etc) and it's easy to just skim a filing for a net-net and determine if I want to look further or pass.  I can do this during downtime moments pretty quickly.  Eventually I'll find something worth a closer look.

 

The biggest reason I like net-net's is the margin of safety, if I can invest for less than liquidation value in a company with positive operating cash flow I feel like that's the most responsible thing to do with my money.

 

While I like and prefer that approach I do have to admit I've made the most money buying good companies with warts. I've made steadier returns with net-net's but no 5/10 baggers, whereas I've had a 5 bagger and 10 bagger buying a good company cheap.  I've done well with spinoffs as well too.  I also like to buy hidden champion companies if possible when they hit a bump and the price is low as long as the business isn't impaired.

 

The problem for me is good companies cheap doesn't happen often, so while I wait for the rare opportunity I dig through net-net stocks to bide the time.

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Uccmal - Fully agree re: Irwin Michael and a good number of his ideas.  I've picked a few dogs from his picks.  I think Seaspan is the only one that hasn't blown up in my face.

 

Value Investing for me is all about understanding value first and then deciding against price.  This is a science followed by an art.

 

I think of the science of value as how close you are to cash in the bank.  $10bn in cash on the balance sheet is easily valued at $10bn.  As you get further away from cash in the bank, the value of what you have needs to be estimated and that's best done in a scientific manner.  Estimates of discounts and premiums in relation to historical, current, and future financial statements are what can give you a comfort level on intrinsic value.  Some of this is easy (short term investments or high turnover inventory) and some is really hard (value of Coca Cola's brand, value of future earnings, value of the iPhone business in 2007 or in 2011).  When you get better at this, you are more able to calculate value.  I think I'm 5-10% good at this.  Meaning I think I can improve by a factor of 10-20x.

 

The art of value investing is in deciding when to buy or sell.  When is the market signalling that you should buy a security?  It's not a scientific decision.  It's more of an art form and like any art form it can't truly be perfected.  It's all about style.  My style today is akin to a concentrated hoarder.  I buy the same security too early and too often and I rarely sell.  My investments and I are long-time friends.  I think that my style could be improved with more patience on the buy side.  I'm working on this.  Like any art form, having the discipline to practice and improve will lead to mastery.

 

 

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I am open to buying anything as long as I get it at good discount. From your list,

 

1) Can spot and get good price time to time but it's difficult to get them consistently. One more problem is that you need to be more careful with value trap in this situation if not holding a basket.

 

2) Very rarely.

 

3) Majority of portfolio here( Not exactly all of your names but idea is same). I am not sure why lot more people don't use them because time to time you do get no brainers in this pool.

 

 

Some additions,

 

4) I went through 60% companies listed in nasdaq one by one during that last 2 years and prepared a list of companies I would consider owning if price was right. List mainly has less known companies. Have been able to use it only few times so far but they were profitable.

 

5) During the mini panic, I do sell cheap to buy cheaper. Many years ago, I was not good with this but with time I have imporved.

 

 

I prefer to always keep  10-15% cash to take advantage of crazy valuations. I try to average in and average out because it keeps me in check and makes my emotions less of a factor once I am sure about the valuation range. I need to get bit better at deals coming to me.

 

I would like to improve on number 4 by making the list bit bigger in coming years. I am also guilty of buying early and selling early but when I see very good chance of good returns over the years then can not stop initiating a position. I think averaging in works better for me because I often intiate some positions bit early based on valuation. As far as selling early goes, I think I will continue selling early and have no problem with it.

 

Last but most important for me is that I enjoy the process.

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I try not to categorize myself as a specific type investor. I look to pay a fair price (or preferably a very cheap) price for great (or potentially great) businesses that have somewhat predictible growth for several years out. I try to always ask myself the question of would I buy the entire company if I had the $, and ask myself if I'd sell the entire company if I owned it when considering selling stocks.

 

As Buffett says, value and growth go together. What is not intelligent investing to me is buying stocks for the sole reason of momentum, just buying stocks because other people/fund are buying them and hoping they'll continue to go up. IT seems way to difficult to do well over the long term doing that.

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Value investing=buying $1 of value for $0.50.

 

This is what it is to me.  There are many ways to find 50c dollars (special situations, net-nets, GARP, forced selling of debt and illiquid securities) but that's all it is at the end of the day.  This applies to everything: stocks, bonds, derivatives, cars, coins, antiques, currencies, etc. 

 

You try to figure out what a reasonable value is for something and then pay only half of that value as to include a margin of safety.  You then resell that something at the original reasonable value. 

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I am basically a #3.  I particularly like local and regional banks, the big ones (WFC, BAC etc) are too hard to tell if their resrves are adequate.  On the local ones I can use "home town" knowledge to get a good idea of their reserves.  I do however have some WFC, but only because they bought out a local bank. I try to practice patience, I watched one local bank for 25 years before it got to a price I was comfortable buying it at.

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I am basically a #3.  I particularly like local and regional banks, the big ones (WFC, BAC etc) are too hard to tell if their resrves are adequate.  On the local ones I can use "home town" knowledge to get a good idea of their reserves.  I do however have some WFC, but only because they bought out a local bank. I try to practice patience, I watched one local bank for 25 years before it got to a price I was comfortable buying it at.

 

Some patience. Not for holding the purchase before reaching the good price but just watching it for 25 years.

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This is an interesting question.

 

To me, value investing means buying a dollar for fifty cents. This limits the downside, and gives you at least one double on the upside. You get extra doubles if the value of the business doubles while you're waiting for the gap between the IV and the market price to close.

 

In my experience, stocks always return to their intrinsic values; overpriced stocks fall, and underpriced stocks rise, and it always seems to happen. It rarely happens quickly, but it always happens.

 

It’s important to understand that value investing is dynamic; that the frontiers are always moving.

 

Roughly speaking, there have been four approaches to buying a dollar at a discount:

 

1. Net cash is more than the share price.

2. Net current assets are more than the share price.

3. Book value is more than the share price.

4. NPV of future cash flows is more than the share price.

 

The last, of course, is Warren’s big contribution to the craft. At the time he purchased See’s, most value investors were buying stocks at a discount to book value. To pay several times book, and much more than 10x EPS was heretical, and more than a few observers wondered if Warren wasn’t straying from the rules.

 

With See’s, Warren moved the frontier of value beyond easy mechanical measures, and into more difficult-to-determine measures of value.

 

Of course, that’s why the circle of competence is so important. It takes a great deal of industry-specific knowledge to see around the corner the way he does.

 

IMHO, this last type of value investing is about “analysis by anecdote.” You collect a pile of stories about businesses and industries, and then apply them artfully. Collecting the stories is hard, applying them successfully is even harder.

 

With his investment in BAC, Warren hinted at this when he explained that the BAC investment had much in common with his investments in Amex and GEICO. In each case, the customer base was solid, even if the balance sheet wasn’t.

 

My two cents.

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Value investing=buying $1 of value for $0.50.

 

This is what it is to me.  There are many ways to find 50c dollars (special situations, net-nets, GARP, forced selling of debt and illiquid securities) but that's all it is at the end of the day.  This applies to everything: stocks, bonds, derivatives, cars, coins, antiques, currencies, etc. 

 

You try to figure out what a reasonable value is for something and then pay only half of that value as to include a margin of safety.  You then resell that something at the original reasonable value.

 

I agree. My new allocation strategy though is based on only investing in situations with maximum upside and holding large amounts of cash. It will take me some time to get there, but I look forward to transitioning my portfolio.

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In my mind I categorize any investment into one of the following

 

1. Exceptionals - These have two properties: (a) Businesses which are virtually certain of increasing IV over a 10 year period. (b) Businesses that can survive a 5 year period representing depression like conditions. These businesses have very low levels of business risk either due to the nature of the business itself or due to the owner/operator. If you buy these at reasonably prices, the only question is whether you are getting 5% or 10% or 15% returns, the chance of loss of capital even inflation adjusted is very low. I do not think it is consistently possible to make above 20% returns on a portfolio of these investments.

 

2. Deep Value - All other businesses that do not meet the criteria above. The quality of the businesses within this category varies of course. These can be net-nets, discount to net asset values, discount to sum of parts, distressed turnarounds, etc. These would give an opportunity to earn really high rates of return.

 

I try to balance between the two though not in equal proportions. My belief is that if we ever encounter near depression conditions, investments of type #2 above are going to be wiped out. Investing complete portfolio with little cash levels purely in type #2 involves some kind of "willing suspension of disbelief" that ignores risk of severe economic stresses for an extended period of time.

 

The above classification helps in position sizing, portfolio allocation and cash levels.

 

Going through 1700 Value Line stocks I made a list of about 120 potential candidates of type #1 that I am in the process of digging deep into. So far I only have about a dozen candidates that I am comfortable to label as type #1 (and most of it involves piggybacking on Buffett's comments and portfolio a.k.a drinking the kook aid).

 

Nothing original here, all the above has been copied from various investors. From Seth Klarman to Myth.

 

Vinod

 

 

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So far I only have about a dozen candidates that I am comfortable to label as type #1 (and most of it involves piggybacking on Buffett's comments and portfolio a.k.a drinking the kook aid).

 

It's probably not hard to guess some of these, but would you mind sharing?

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Definitely #3 for the majority of my portfolio.

 

I've used a basket approach or ETF when an industry or security type (pfds, tax-free muni's) is under-valued.

 

Some of my best gains have come from 'blood in the streets' / bad news situations.

 

An area for personal improvement is to keep more cash reserves and take some profits sooner.

 

 

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I like to think about my investment approach like this: my goal is a superior risk-adjusted return. No point in making all the effort if you're happy with a fair equity return.

 

My return on capital (equity or debt) is a function of two variables: price and value. My alpha can therefore be driven by either an increase in value, an increase in valuation (price) or a combination of the two.

 

I therefore think of my investments as either "good, special or ugly". A "good" investment exhibits such strong intrinsic returns that the appreciation in the underlying value will satisfy my return requirement with no change in valuation. Your expected return is effectively equal to the business' long-term IRR. Think of an early investor in Berkshire: you buy at book and sell at book. Other than that you are mostly patient and ensure that the business does not loose whatever trait allows it to generate superior risk-adjusted returns. Time is your friend here as you just wait for the compounding effect to kick in.

 

An "ugly" business is exactly that. The cigar butts, crashed IPOs, orphan equities; the unloved assets at trough valuation. You buy a dollar for C50 (or less) and wait for the cycle to turn, for the reversion to the mean. You wait for an increase in valuation, for pricing to get back to $1 (or more) for $1. Time is the enemy here as your IRR is directly dependent on the time that it takes for valuation to normalize. Given that catalysts are far and between for these situations, you can make the most money if you are able to unlock the value yourself through activism or a take-private.

 

Special situations incorporate a change in both value and valuation. This includes the reorgs and distressed situations, the merger arbs, spin-offs, restructurings and all other businesses that are or will be subject to material changes. This can also include less exotic situations such as management changes, sales or acquisitions of significant assets etc. This is really my bucket for everything that's not clearly driven by either the compounding engine of a high quality business or the forces of mean-reversion/cyclicality.

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