SATURDAY, MAY 14, 2011
Trucking Down the Long Value Highway
By LAWRENCE C. STRAUSS | MORE ARTICLES BY AUTHOR
Gotham Asset's co-chief of investment spells out his magic formula for locking in long-term value.
google.com
From the article:"...What are some key tenets of your philosophy?
I emphasize two principles. One is to buy cheap; the ratio we use is price-to-cash flow. We want to get a lot of earnings, and we want to get a lot of cash flow for the price that we are paying. The second metric we use is return on tangible capital. We simply say that if you open a store and you invest $400,000 on the inventory and displays and it spins out $200,000 a year, that's a 50% return on capital. In The Little Book That Beats the Market, I brought up an example of a store called Just Broccoli, where it cost $400,000 to open, for the inventory and building the store. But it only earned $10,000 a year -- a 2.5% return on capital. We tend to go for businesses that can reinvest their money at good rates of return on the tangible capital invested...."
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"...We're in the zone of fair value. So, even though we say that the market looks cheap, based on our work, I think the market is, at worst, fairly valued. That means 6% to 8% annual returns going forward from here. It could mean the market drops 25% next week, or it goes up 25%. But over time we're in the range of fair value....".
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"...The way we make money as a group is that we don't pay a lot for anything, and most of the stocks we buy have low expectations. So if the future is a little better or a lot better than the low expectations -- it doesn't have to be great -- you have the chance for asymmetric returns on the upside. And, hopefully, you don't lose much on the ones that don't do better than the low expectations, because you didn't pay much for them in the first place...."
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In the article he references his free web site:
magicformulainvesting.com
Maybe those 8% preferreds where I have been parking money is good enough if expectations are for 6%-8% returns based on his Zone Of Fair Value.
EKS |
