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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (12342)	4/15/2001 5:32:07 PM
From: TimbaBear	Read Replies (1) \| Respond to of 78751

"...Several successful value investors who've provided historical data on what works in investing believe book value is a significant metric. That would be Dreman, O' Shaughnessy, Tweedy Browne, maybe Graham...." There are many folks happy with whatever metric works for them, it still does not justify the use for me. What do I care about "retained earnings" from previous years? I want to know what the company is doing today with its resources. Do you know how many companies I have analyzed that had a "low price to book" that were just garbage? Negative NetNet valuations, negative cash flow...junk. What good are "retained earnings" if they are frittered away? "...Tracking book value over a period of years is an indication how value is kept and built up in the business - whether that value is capital assets, inventory, intangibles...." I agree with the principal, but don't agree that this is how it really plays out. If one tracked the increase in NetNet value over time, it would reflect the same thing you hope is being done by book value, but IMO more truly. Now, I've seen some messages here over the week-end(I just got back and read them) which seem to indicate that the poster believes that somehow using NetNet is a static thing. For myself only, let me say that I use NetNet as a benchmark for evaluating current price. One of many. To that benchmark I would add a premium for the profitable, going business concern. Whether I cap that premium at a multiple of NetNet or a multiple of Free Cash Flow, is another matter entirely. "...My opinion is that Graham and Buffett do stand by the the investor...." So, if I use their methodology and lose money, they or their estates will re-imburse me? Not in this lifetime! I stand alone when it hits the fan, just like all investors. "....It seems to me the multiple net-net tactic is a result of looking at the basic net-net strategy and concluding there either aren't currently enough stocks that reside therein and/or the stocks that are there look like cigar butts..." You're close here....it is more that I looked at that strategy and realized that I wasn't adding in the other values of a going, growing, profitable business concern. I was just arriving at NetNet valuation. How much is a dollar of Free cash flow worth to the person who buys the stock?....I think it's worth about $16....that's today's dollars for today's earnings. How much is a dollar of dividend worth to the person who buys the stock? What if you have a company that has two dollars of free cash flow and a dollar of dividend? If it's undervalued today, how do you know? If it's over-valued tomorrow, how do you know? If it's undervalued today, do you buy it, or wait for it to get cheaper? It is the responsibility of the individual investor to either educate themselves enough to derive their own answers or to hire someone who does it for them (like mutual funds).

To: Paul Senior who wrote (12342)	4/15/2001 11:23:29 PM
From: Q.	Respond to of 78751

If the only stocks trading at deep discounts to net-net are cigar butts (and I've found that's largely true in today's market), that might indeed lead you to the correct conclusion that today's stocks are priced more richly than in Graham's era, when he bought the titans of industry for 2/3 net-net. Doesn't mean that you'll make the most money by staying in cash, though. As for backtesting, I wish I could afford the tools to do it. O'Shaughnessy reported quite a lot in his book, but he just used simple one- and two-parameter screens. If you want to buy only low p/b stocks with high one-year-relative strengths, which was one of his more successful screens, that's good. It's as fancy as his criteria got. I wish I could backtest more elaborate criteria, because I'd guess you can do a lot better than his basic one- and two-parameter screens. BTW, nice grub on post #12345. Bet you didn't even notice it.