Value Investing - do cheap stocks outperform?

[Taggart]

Saturday, January 16, 2010
TONY MARTIN
Special to The Globe and Mail

Knowledge is investor's key

In the article, when Ryan Morris says:

"It's extremely unlikely you'll find something that's cheap that a lot of people know about and like."

Taking a quick scan at his value picks at Reuters, he got the above right. Personally, I couldn't invest in most of his picks because I found the debt/equity ratio way to high, but that's just me. Other than that, he's made some interesting equity choices both in the U.S. and Europe.

Also good to see, with his credentials that he can still make mistakes, with the occasional clunker value trap like R.H. Donnelley. At first, I confused with this with a former favourite from many years ago, R.R. Donnelley & Sons.

Apparently, Ryan Morris manages an investment partnership in New York.

[Taggart]

For the one or two others scouring the bushes lately for profitable Canadian net-net stocks, good luck to ya. I've just spent the last two days looking and didn't even come up with one. Seems I may have to search farther afield.

[NormR]

For the one or two others scouring the bushes lately for profitable Canadian net-net stocks, good luck to ya. I've just spent the last two days looking and didn't even come up with one. Seems I may have to search farther afield.

Danier (DL) fits the bill (although not at 66% of Net Net). But yes, these days, the fishing is better elsewhere. Try Japan which has a bunch. In December there were 740 net nets worldwide (25 in Canada), 256 were profitable (8 in Canada). If I remember, I'll run my Net Net screen again later this week.

[Taggart]

For the one or two others scouring the bushes lately for profitable Canadian net-net stocks, good luck to ya. I've just spent the last two days looking and didn't even come up with one. Seems I may have to search farther afield.

Danier (DL) fits the bill (although not at 66% of Net Net). But yes, these days, the fishing is better elsewhere. Try Japan which has a bunch. In December there were 740 net nets worldwide (25 in Canada), 256 were profitable (8 in Canada). If I remember, I'll run my Net Net screen again later this week.

I spoke too soon. I forgot about the Toronto Venture Exchange. As for Japan, I'm restricted to whatever's on the NYSE, AMEX, and Nasdaq (not the OTC pink sheets) exchanges. At first I checked the financial statements for Japanese stocks through Reuters. That didn't work, since it's all in yen. Then I remembered Morningstar. From what I can see, it looks like they've already done the conversion to USD. Will have to look closer when I have time. The hunt continues.

[Taggart]

Charles Brandes - 10 Core Beliefs

[augustabound]

Funny, I just looked at that this morning.

[bbsj]

Charles Brandes - 10 Core Beliefs

Brandes had a small part of our university pension fund, and over the past 5 years lost most of it. They had large positions in Countrywide financial, Washington Mutual, GM, Citicorp, Bank of America etc.

It is easy to write publicity material, but only results count.

[Norbert Schlenker]

So cynical, bbsj. Reread core beliefs II, IX, and X again.

And again.

Once more.

[Taggart]

Charles Brandes - 10 Core Beliefs

Brandes had a small part of our university pension fund, and over the past 5 years lost most of it. They had large positions in Countrywide financial, Washington Mutual, GM, Citicorp, Bank of America etc.

It is easy to write publicity material, but only results count.

I'm not disputing what you say regarding your university pension fund, but looking at Brandes Instl International Equity I BIIEX at the U.S. Morningstar and his fund has beat the MSCI EAFE index over the last ten years.

[Taggart]

Norm wasn't kidding when he said in this article today regarding net-net stocks, "You really have to look at them individually".

I was checking out this Globe article a few days ago, from June 2007, and every one of the stocks on the list turned out to be either a total disaster or mediocre at best. Perhaps it's time dependent.

[NormR]

I was checking out this Globe article a few days ago, from June 2007, and every one of the stocks on the list turned out to be either a total disaster or mediocre at best. Perhaps it's time dependent.

It's not clear what the globe was doing ...

Mr. Graham defined this screen as working capital minus all obligations, including preferred stock. It takes current assets, minus current liabilities, to find a potential liquidation value for a company. We're seeking stocks that trade at or under net current asset value.

Did they define Net Net as Current Assets - All Liabilities or as Current Assets - Current Liabilities?

Anyway, check all data from Net Net screens as they have a way of attracting database errors.

[Taggart]

I was checking out this Globe article a few days ago, from June 2007, and every one of the stocks on the list turned out to be either a total disaster or mediocre at best. Perhaps it's time dependent.

It's not clear what the globe was doing ...

Mr. Graham defined this screen as working capital minus all obligations, including preferred stock. It takes current assets, minus current liabilities, to find a potential liquidation value for a company. We're seeking stocks that trade at or under net current asset value.

Did they define Net Net as Current Assets - All Liabilities or as Current Assets - Current Liabilities?

Anyway, check all data from Net Net screens as they have a way of attracting database errors.

I had a laugh when I just re-read Buffett's thoughts on net-nets on page 8 of John Train's "Money Masters".

"This technique was immensely profitable for Graham and his investors, but does not really satisfy Buffett, who finds such mechanical investing all too similar to filling out an application for group life insurance."

[DenisD]

Here's a stock screen for Ben Graham fans. The description of the screen and ranking system is here.

I ran the screen at http://www.stockscreen123.com from 31/3/2001 to 5/2/2010. The screen holds 20 companies for six months. Slippage is 0.5%. Not sure if dividends are included or not

[Taggart]

Value investing, Australian style.

Kerry Packer

[newguy]

There's no Graham threads outside of the archives?
Anyway I thought some people would get a laugh out of this.
Six Graham style stocks

Lululemon’s...The share price, as measured by P/E, is expensive, but the company’s exciting growth potential provides an advantageous investment opportunity. Buy.
....
POT shares sell at a bargain price of 18.6 times forward 12-month EPS. Buy.

newguy

[kcowan]

There's no Graham threads outside of the archives?
Anyway I thought some people would get a laugh out of this.
Six Graham style stocks

I thought the Ben Graham style involved low risk long term holds.

I held TEF for five years then gave up. I was holding AMOV at the same time (and still hold it).

I hold LLL but I also hold AAPL! Not for Ben Graham, these are momentum/growth stocks.

[newguy]

I hold LLL but I also hold AAPL! Not for Ben Graham, these are momentum/growth stocks.

That's why I said 'get a laugh out of this'

newguy

[Mike Schimek]

That's why I said 'get a laugh out of this'

Anyone who knows Graham well knows that some of the stocks in that list would never fit his criteria.

I don't get how guys like that can get away with it. Maybe folks that don't know much about Graham but heard lots of good things about him and figure if this guy is investing with a philosophy Graham would approve of, it must be safe. (from another thread's ideas, MDs who don't have time to do their due diligence come to mind ).

What was interesting about the market meltdown we went through over the past couple years is that it seems like many of the stocks that have bounced back the most are the ones that most closely fit Graham's criteria.

The simplest Graham criteria I've come across seemed to be: Price to Book multiplied by historical P/E should be less than 22.5. Although it wasn't mentioned, I think his version of price to book would exclude goodwill and intangibles, or at least take a very hard, skeptical look at them.

[scomac]

What was interesting about the market meltdown we went through over the past couple years is that it seems like many of the stocks that have bounced back the most are the ones that most closely fit Graham's criteria.

If you mean that the crap came back the most, then you wouldn't be too far wrong as Graham often described what he did as cigar butt investing.

The simplest Graham criteria I've come across seemed to be: Price to Book multiplied by historical P/E should be less than 22.5. Although it wasn't mentioned, I think his version of price to book would exclude goodwill and intangibles, or at least take a very hard, skeptical look at them.

That sounds like the approach that NormR espouses. There's nothing wrong with that, but it isn't really what Graham did for the most part. He loved to dig for net/net situations; IOW businesses that could be had for less than the working capital excluding goodwill and intangibles. In this day and age, that's a pretty tough corner of the market to play in, alternating between slim pickings and potential or otherwise train wrecks.

[NormR]

The simplest Graham criteria I've come across seemed to be: Price to Book multiplied by historical P/E should be less than 22.5. Although it wasn't mentioned, I think his version of price to book would exclude goodwill and intangibles, or at least take a very hard, skeptical look at them.

That sounds like the approach that NormR espouses. There's nothing wrong with that, but it isn't really what Graham did for the most part.

See the Rules for Defensive Investors in Graham's Intelligent Investor. Net Nets had largely vanished (apart from microcaps) later in Graham's career.

[scomac]

That sounds like the approach that NormR espouses. There's nothing wrong with that, but it isn't really what Graham did for the most part.

See the Rules for Defensive Investors in Graham's Intelligent Investor. Net Nets had largely vanished (apart from microcaps) later in Graham's career.

Indeed. I stand corrected. It has been a long, long time since I last read The Intelligent Investor.

[NormR]

Indeed. I stand corrected. It has been a long, long time since I last read The Intelligent Investor.

Tisk Tisk, time for a refresher.

[Taggart]

Comprehensive listing of articles and books related to Walter Schloss.

[Taggart]

Investor Tip: Buy at 'Maximum Pessimism'

[Taggart]

The Wall Street Journal

JUNE 19, 2010

So That's Why Investors Can't Think for Themselves

By JASON ZWEIG

"From February through May, the Dow Jones Industrial Average gained more than 1000 points in an almost uninterrupted daily march upward. Then came the "flash crash" of May 6 and day after day of losses through May. Now, in mid-June, the market has been up six of the past seven days.

What accounts for these sudden moves? Why do investors so often seem to resemble a school of fish, all changing direction together?"