Value Investing 101

Saturday, August 19, 2006

Let them go by

On the first of August I wrote about how it's important to not swing at every pitch. The pain really come's when you see that stock go by shoot up. I talked about General Motors(GM) and now I bring another example. Bebe Stores Inc (BEBE), it cought my attention when retail's were getting pounded because of high gas prices (less money for spending,etc) .I have seen plenty of young teenagers with BEBE in fron of their shirts but never really knew that BEBE was publicly traded. Took a quick look at the balance sheet.....very very strong. Current assets were more than all of it;s liability.It's revenues have been up since the company went public in 98'. It has $25 dollars in cash flow alone! and it;s founder is still runing the show.So I look at a list I keep about old notes and I see BEBE. I go to Yahoo Finance and my o my its up more than 20%. I didn't buy because I thought there were better positions out there, which by the way are doing fine. This is one examples of many . Not all stocks that I let go by go up, some have done horrible while others just throttle along. I am not killling myself deep inside because I know the market is not going to go anywhere and sooner or later I will find a winner.

Thursday, August 17, 2006

Finding value

Value Investing is no easy task. As a value investor, it takes great efficient analysis to determine whether a security is undervalued. So what makes value investing tough?
#1. There's 100's of thousands of stocks
#2. Your up against some tough competition's (MBA's who make a living looking for value)

of course there's other reasons like the Efficient Market Theory (all available information about a security is reflected in its price) but I find these 2 reasons to be the cause. So where do we look?

Without using a screener here's some great tools. A great # of value legends get interested in the stock only after its price has dropped so why no look in the bin? Looking in the 52 week low list is a great place to search. Here's a link that provides a list of companies http://www2.barchart.com/low?&what=all&force=low%2easp

A quick at the list ( try clicking full list) I see that the New York times (NYT) and Dominion Homes (DHOM) are hitting new lows. What you re looking for is a lead nothing else. You need to find out WHY the stock is hitting a new low. Last week I checked the list and United Parcel Service (UPS) was hitting new lows, I asked why? And UPS had announced that their 3rd quarter numbers will be lower due to less days in the quarter. A quick look at the rest of the 10-Q and numbers were up. What about UPS the stock? The week of earnings release it lost 15% creating a wonderful buy oppurturnity.

Another great place to find leads is http://www.magicformulainvesting.com/ each day this screen of "undervalued" stocks is updated. Registration is free and once registered you cans search according to market cap. The site is based of the book The Little Book That Beats The Market by Joel Greenblatt. It is a value oriented book that is geared so that even kids can understand it. Basic point of the book is using a earnings yield (opposite of p/e) or e/p and holding a stock for exactly 1 year one could outperform the market. There is more to the book like ROA ,etc. I personally found it a fun read but that's as far as I would go.

Finally, another great place is using "value searches". MSN Money has at least 5 of them. Try typing in "invest like warren buffett" or "invest like Benjamin graham" and a couple articles with pre-built search criteria will follow.


Wednesday, August 16, 2006

Just in case you have not seen the Warren Buffett interview on PBS, it is now available on Google Video for free. http://video.google.com/videosearch?q=warren+buffett
About half the video is before he announced his plans to give his money to the desired foundations (mainly the Bill and Melinda Gates). The series is divided into 3 parts and about 55 minutes long. Buffett does talk about stocks and why he was sitting on 40 billion cash (at the time of the interview). Warren's interview with Charlies is unique because Warren is a real private guy. By that I mean, he has thousands of fans but rarely makes any public appearances. By far the most intriguing part of the interview is how much fun he has and how empty his daily schedule book is.

Sunday, August 13, 2006

Avoiding the noise of Wall Street is one of the hardest things to do...
Everytime you turn on the television there is a good chance a stock ticker will be shown. Especially when you go to Bloomberg and CNBC. Adding to the noise are radio shows, the internet, your broker calling you,etc.... All this noise makes you want to jump at every stock tip out there. I will be the first to admitt that being a value investor is well boring. It takes great discipline to not jump at every oppurturnity (or not swing at every pitch). So how can you avoid the "noise"

This is soemthing that has helped me in the past. I used to be "addicted" to the stock market. I had my eyes glued on it almost 24 hours/day. Unfortunately I would swing at every pitch and never really had a way of approach the market. Whatever "X" said on tv I would buy it. Then I read about Value Investing, etc. But the trader in me couldnt resist looking at my positions. So I discovered Investopedia.

Nowww what I do is create a "speculating portfolio". This is a very affective way to be in the noise and avoid all the noise. Let me explain... all you have to do is sign up at Investopedia. Join a competetion. Everytime you hear a stock tip or you feel like "day trading" add it to the "speculating portfolio" and play around with it. This allows you to be in the noise without being in the noise.

Reading is essential to improving one's knowledge. With the internet we have unlimited access to information. I have made it a habit of reading as much as I can. I read the local newspaper everyday (not just the sports section) and a book, no matter how busy I am. A great place to read from the most popular value investor is by going to the Berkshire Hathaway website. Here you will be able to read about some guy by the name of Warren Buffet(sarcasm) and his thoughts.Tons of information is found on the annual letters. Not only do you read from the master's words himself but it's free!,all you need to have is Adobe software.

Saturday, August 12, 2006

By far my favorite website to research stocks is Morningstar.com. Morningstar has tons of information and most of it is free! But they have a few hidden gems that might not be in the front page but can be very useful to a value investor.

Hidden Gem #1- Index Returns
Using the index returns we can see which type of stocks are out of favor.
Small Caps =Morningstar Small Cap TR
Mid Caps =Morningstar Mid Cap TR
Large Caps = Morningstar Large Cap TR


Looking at 13 week performance (3-months), we see that small stocks (represented by Small Caps) are out of favor (lagging by -10.21).On a 3 year horizon we see that Large Caps (10.23)are behind both Small (16.40) and Mid Caps (16.96).


Hidden Gem #2- Market Valueation Graph

The Market Valuation Graph is a quick way to tell if the market is undervalued or not. It has short term and long term views. Best advice is to get in when it's green.

Bottom Line- take a look at these tools to narrow your search a bit and to see if maybe right now stocks are a bit undervalued or overvalued

Thursday, August 10, 2006

Yesterday British Authorities foiled a terrorist plot to blow up American planes. It was all over the news. so what does this have to do with value investing?

Simple. Looking back to 9/11 stocks that day the Dow dropped 2,000 points! before returning to pre 9-11 levels. Not so bargains became bargains in a blink of a eye.

so whats the point you say?

The point is that it is important to keep a nice cash reserve for special situations. Fortunately the Brits were able to prevent another terrorist attack.

Their is no exact % of how much cash is a good amount. 10-20% is a good rule of thumb but it is up to you. Investors and Value Managers always have a nice cash reserve. Warren Buffett was sitting with $40 billion cash (he has $150 million coming in each day into Berkshire Hathaway)

-Bottom Line - keep some cash for special situations

Like a handyman, a value investor has his tools. As a value investor, luckily for us the tools were established over 50 years ago.
The first tool we have is Security Analysis by Benjamin Graham and David Dodd. This book was the first to establish a clear cut way on how to analyze and value a company. I must warn you that Benjamin Graham has a very academic style of writing so it is best advised to take his books slowly.
The second tool is also provided by Benjamin Graham. The Intelligent Investor was the first book that really set forth the attitude and mental framework that comes along as being a value investor. The latest edition contains commentary by Jason Zweig in which he helps clarify some of Graham's principles.
A modern book and not so well known value investing book is The Five Rules for Successful Stock Investing:Morningstar's Guide to Building Winning in the Market. This book is very easy to read and more up to date on today's companies and market conditions.

These 3 "tools" alone will help you be a better investor. Re-reading these books will help you stay focused on the principles of value investing.

Thanks to the Internet we also have tons of information that makes the process much easier. Sites like Morningstar provide 10 years of free data!

The other tools I can think of is office tools. A simple calculator which allows the use of exponents, paper and pen will do the trick

Wednesday, August 09, 2006

Investopedia.com is a free stock market simulator that is a great way to meet other people also to keep track a watch list. You can think of it as "fantasy stock market". You are given $100,000 in fake money and from there you can do whatever you want (short & options included).

Say for example you think UPS is a great stock at current levels (mid 60's). But you just have this little feeling that its not a good buy or you want to wait to dropp below your margin of safety. One way to use Investopedia is to buy a peice of a share and watch it maybe once a week.

If you have a group of buddies and want to see how you guys fair up in different styles, Investopedia is a great place to flex your muscles by creating your own competetion with your own set of rules.

I have no affiliation with Investopedia. And I do own shares of UPS