All the Devils Are Here, Altman Z-score, Bethany McLean, catalyst, Clinton Cards, How to Make Money in Value Stocks, Luddites, Margin of Safety, Oddball Stocks, Pink Floyd, Piotroski, stock screener, Stockopedia, Total Produce, value investing, value investing bloggers, Warren Buffett
How could I resist taking a look when the book mentions Wexboy twice?! Maybe it will divert attention from my last book reference(s)… OK, Jeez, I’m kidding! At least I think so, bit hazy on some adventures! 😉 Quoting a Pink Floyd lyric was nice too – somewhat cancelled out by following up with a 50 Cent (sorry, Fiddy Cent) quote…
Well, I can thoroughly recommend the book! In fact, it’s the most recent & enjoyable I’ve finished. [Shortly after ‘All the Devils Are Here‘. I always overlap, so I’ve a few other books on the go – including, to my shame, a Jeffrey Archer. At least it’s a fascinating speculation about George Mallory. McLean & Nocera‘s book is essential reading, and nicely traces the financial crisis directly back to ‘innovation‘ & political neglect/deregulation in the mortgage industry.]
‘…Value Stocks‘ wraps up in a rather brief 70 pages. Upon reading, this brevity is actually a big plus. Too many finance/value investing books fail to hold a reader’s attention – they gloss over the details and/or offer no practical ‘how to‘ advice, or bury the reader in an avalanche of formulas & footnotes. Value Stocks gets the balance just about right though, and is much more than just a value investing primer. They do get off to a rather unfortunate start, though: Value Investing is defined in terms of ‘buying nickels for dimes‘..! Surely some mistake, buddy?! Isn’t that the definition for growth investing? 😉
Part 1 covers the background/history and the case for value investing, with plenty of reference to famous value investors & quotes (and further reading in each section). It includes a nice dig at fund managers, echoing my recent comments on traditional asset managers. Part 2 digs into some of the key financial & operating ratios, and takes a stab at how you’d calculate intrinsic value. Including a reference appendix that laid out the actual formulae, and perhaps some worked examples, would have been helpful.
I love their division of value investors into Hunters (fundamental stock pickers) & Farmers (quantitative portfolio investors). Clearly a lead-in for the rest of the book (and Stockopedia’s screening services), but a good characterization nonetheless. Their use of Buffett‘s quote ‘start at the As‘ is particularly apt for Hunters, highlighting their patient brute force approach – just like looking in a mirror for me! Or maybe it just highlights that I’m a f***ing Luddite…
Part 3 surveys the main approaches to value investing, with an emphasis on quantitative strategies. In the ‘Buying bargains on the move‘ section, they include a quote from my series on catalysts. Yes, a catalyst (perhaps an activist investor) can definitely add new momentum to a stock, or might even arrest a decline into a value trap… Piotroski, Altman & Lakonishok are introduced here also, and are a nice prep for: Part 4, which covers Risk, Diversification & Margin of Safety. This might perhaps be the most impressive part of the book for me. Far too many books gloss over this with the usual platitudes, but there’s a strong focus on risk here, and on their site. Quite right too!
Analysis & selection of stocks isn’t tremendously hard to learn, and you certainly don’t need to be a genius… What’s difficult is avoiding, or at least managing, the disasters! This is the real key to superior, or mediocre, long-term returns. Don’t take my word for it. Buffett never discusses DCF analysis, but constantly reminds us what’s really important with quotes like: ‘The first rule is not to lose. The second rule is not to forget the first rule‘. Value Stocks cites another good one: ‘Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing‘.
I was impressed recently to see Nate from Oddball Stocks detail some disasters. He even names names! I may writeup something similar, but the thought of including specific companies leaves me feeling bloody nauseous. I definitely want to learn the lessons…but totally forget the stocks/companies! My real disasters were companies with too much leverage (on/off balance sheet, and/or contingent), poor/negative cashflows, or both. Value or cheapness too often means sweet f***-all when saddled with these particularly nasty attributes.
Difficult stocks & situations can also be v alluring to value investors. This is a failing of mine too, and something to fight. They may not be as toxic, but are often far too challenging, time consuming and downright nerve-wracking for what they offer. Vast swathes of retail stocks seem far too difficult to me, particularly due to their nasty habit of going under in the blink of an eye… Look at Clinton Cards: Recent results, they generated GBP 48.0 mio of operating cash, vs. 1.2 m of interest and 3.2 m of capex, and still went under 1.5 months later?!
Why, oh why? When there’s always something just as cheap and far easier to buy into… To quote WB ad nauseum: ‘I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over‘. I think I’ve become (painfully) a little better at avoiding these disasters, or limiting them to a 1-2% speculative portfolio bet (and perhaps avoiding buying them all the way down…). And now I’ve written about some v cheap/promising stocks I hold. It will be interesting to see if some public scrutiny helps or hurts me in managing a bad apple…?!
The final Part 5 of Value Stocks suggests some v good sources for value investing ideas & commentary, including bloggers like Wexboy & other (UK) bloggers. Actually, the list pretty much overlaps with my Blogroll – so please enjoy a click or two! I thoroughly enjoyed the whole book – it’s well-written, breezy and generally strikes the right balance between overview and detail. Clearly, there’s an implied pitch for Stockopedia’s services here, but for anybody new to value investing this book’s probably an incomparable gem. So, good show chaps!
Let’s take a little look at their screening tools also… Regular readers might chuckle here – yeah, screening tools & attributes are pretty lost on me! I guess I’ll always be a Hunter, and the main thrill for me is in the actual hunt… [Think of the money as somewhat notional, and you’ll do better as an investor – it tamps down the fear & greed a bit!]. Well, I guess the hunt keeps me busy, at least…
But I was impressed for a couple of reasons: First, the team there sent me a screen snapshot for Total Produce (TOT:ID/LN). There are years of data (reliably sourced from Thomson Reuters). They also provide the key risk measure ratios, which I believe is fairly rare for UK sites – they put me in a bit of a tizzy pointing out TOT’s poor Altman Z-score! I don’t think it represents a genuine risk, in this case, but it grabbed my attention – enough to put it on my to-do list to reverse-engineer TOT’s score to examine it more closely.
There’s also a lot of helpful pop-ups on all the ratios, providing further info/explanation. What really interests me though was the ability to easily access TOT’s sector peers, and to compare its valuation ratios vs. the sector & market. This is gold! I always have plenty of ideas to consider, I’ll inevitably review & collate a company’s figures myself if I’m interested, but identifying a stock’s peer group and relative valuation can be a god-awful challenge. Sure, if you’re cheap (like me!), you might not want to pay for general data – but the opportunity for better insight, or even one new idea, could be worth a lot of money…
Now, to wrap up – here was a fond gem from my wife the other day: ‘I don’t get it – you’d literally lie down in the street & cry if you lost a twenty, but you don’t even blink if you lose 5 grand on your portfolio…WTF?!‘