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

To: Paul Senior who wrote (16339)	2/2/2003 5:12:23 PM
From: Dale Baker	Read Replies (1) \| Respond to of 78523

You state that price-BV is "part" of the equation, yet you seek "The" normative issue for differentiating a true value investment. Do you have empirical evidence that PB is the Holy Grail? And that "value" is defined at least in part by low price to book value. Yet for investors here who define themselves as value investors, there doesn't seem to be all that much emphasis being placed on book value. At least sometimes, more important considerations seem to be the use of stops, selecting or avoiding certain sectors, or limiting selections by market cap. or float. Buying up versus averaging down. Or sometimes emphasizing the determining of hidden values with a business or the seeking out of information not available to the general public. Not that these are not significant aspects to investing, but they do not seem to be closing in on 'a' or 'the' normative investment model that I'm seeking. I'm not much good at absolute normative philosophies. My basic view is a medium-size portfolio should pick 30-40 good stocks you believe in for plausible reasons then trade them carefully and intelligently. I see people buying stocks that just get slaughtered in the wrong market climate, based on normative ideological criteria. Unless your time horizon is Buffett's "close the markets for ten years, I don't care", ideological rigidity does not seem to be the magic key to great returns. The irony is that the market is not perfect, and any Magic Bullet criterion will be discovered and copied so widely that it loses value. You are looking for certainty and direction on a shifting ice floe, shaped and battered by thousands of different forces simultaneously. How is that for rambling?

To: Paul Senior who wrote (16339)	2/3/2003 11:36:06 AM
From: Bob Rudd	Read Replies (1) \| Respond to of 78523

Perhaps because of exposure to Buffett's take on it, I tend to view EMH based research as not adding much value. Most of the time the conclusions are obvious or irrelevant. One of the best attempts to answer "The big investing puzzle' was 'What works on Wall Street" which ranked P/B in the middle in terms of risk adjusted returns. Stock buybacks lower book as do charges, yet the former can imply prosperity and rational allocation of capital and the latter may drive the price below intrinsic value. I think most of us on this thread are aware of the 'science' aspect that low P/B, PE, PEG and various other ratio's are usually less likely to have priced in expectations unlikely to be met. An interesting question is whether one should blindly follow a low multiple strategy or look deeper at qualitative issues and/or red flags that might indicate that the apparently 'attractive' low multiple is anything but. Most of us seem to go well beyond simplistically buying low multiples...so in the final analysis it comes down to a combination of methodology and judgement...both of which are imperfect and will continue to be so.

To: Paul Senior who wrote (16339)	2/3/2003 5:57:38 PM
From: Don Earl	Respond to of 78523

Paul, <<<Yet for investors here who define themselves as value investors, there doesn't seem to be all that much emphasis being placed on book value.>>> I typically use some kind of book value ratio when running screens, but the problem I run into more often than not is book value is often skewed. A company that capitalizes big chunks of current expenses as assets can accrue impressive book values over a period of time without having anything worth diddly in an arms length transaction. Intangibles can also throw the ratios way out of wack, especially in situations such as AOL where acquisitions were made with stock swaps at the top of the market. I think most of us automatically disregard goodwill when crunching numbers, but that can also throw off the calculations in circumstances where an acquired business actually represents a good value in a market tested arms length transaction. The baby gets thrown out with the bath water. A few examples come to mind. As I recall, we both had stock in what used to be S3 some years back. Book value was around $6 and the stock eventually hit a low under $2. Tucked away in their assets was a 17% stake, at cost, in a semiconductor factory in Taiwan. Two years after the bottom, the stock was trading over $35 and their investment in the chip factory was worth twice as much as the entire company. Around the end of 1999 Carmax, which was a Circuit City tracking stock, was trading around $2 at a good discount to book. The company was still losing money at the time, but had a decent track record for growth and increasing profitability. I seem to recall mentioning it here at the time, and although there didn't seem to be much interest, the stock eventually went over $30. On the flip side, I recall mentioning Eagle Geophysical, which also didn't seem to get much interest. It was trading at less than .1 of book, went bankrupt, and the stock was canceled. I suppose if there's a point to any of this, it's that book value is probably worth screening for, but is useless without a ton of DD to get a feel for how accurately it reflects true shareholder equity. My guess is Warren Buffet doesn't run screens for companies trading at a discount to book, then starts entering market orders to buy a few million shares based on Yahoo profiles.<g> Something I ran across over the weekend and thought was interesting. icmasset.com Click the "Special Publications" link and pull up the "Wall Street Transcript Interview with Jim Simmons". It's an older article, with some outdated stock picks, but the strategies he outlines gives an interesting slant on a lot of the value investing techniques I've seen discussed here from time to time. In a lot of ways it looks like kind of a hybrid of what you and I use, and is probably fairly close to what I've seen James Clarke mention using for his own personal account. I don't know if that makes it "the" system or "a" system, but I think it's worth reading. FWIW, it's probably easier to read by printing it out than fooling around with the PDF display.