A Very Simple Formula For Figuring Out How Many Stocks To Hold

Johnny HopkinsInvesting Strategy Comments

Here at the Acquirer’s Multiple we believe your equally weighted portfolio should consist of 20-30 stocks generated from our Deep Value Stock Screens.

In general terms, holding more stocks leads to greater diversification, and lower volatility, but is harder to manage and requires more purchases. Fewer stocks reduces the number of purchases, but leads to great volatility, and magnifies the impact on the portfolio of an unexpected event.

So, it was interesting to find an article by Boris Marjanovic, the Managing Director at A North Investments (ANI), who has arrived at a similar conclusion using a very simple formula for figuring out how many stocks you should hold.

Here’s an excerpt from his article:

Studies say the magic number is at least 20 to 30 stocks. I myself prefer to use the 1/N rule as it takes into account investors’ subjective risk tolerances.

The denominator “N” is the maximum percentage (of your equally-weighted portfolio) that you can afford to lose if one of your stocks goes bankrupt. For the typical investor, it’s about 5% – the equivalent of owning 1 / 0.05 = 20 stocks. If you happened to be a more conservative investor, it might be 1% or even lower, in which case you should own at least 1 / 0.01 = 100 stocks.

You can read the complete article here.

It Appears To Be Time For Value Stocks To Shine Again

Johnny HopkinsValue Investing News Comments

Recent article at The Street says, it appears to be time for value stocks to shine again. The trend reversal is likely to last for years, rather than weeks or months.

Here’s an excerpt from that article:

Traditional “value” investing used to mean buying near the bottom of a stock’s yearly price range and when its price/earnings multiple was depressed. It often also went along with collecting a nice yield.

“Growth” investors were more focused on rapidly rising sales and profits. They were usually willing to pay above-average multiples while chasing shares at or near the top of their recent annual peaks.

Neither technique is always best. There are occasional periods when both do well, or badly. However, traders most of the time seem focused on one style to the detriment of the other. The graph below illustrates the mood swings in place from near the top of 2000’s Internet/tech bubble through last Friday, June 9.

Tech stocks imploded after March 2000, triggering around a seven-year pivot toward more mundane issues. Lots of money was made in value-priced stocks even as technology shares were contracting.

Last week saw the value/growth relationship fall to near its lowest level in 17 years. Contrarian thinkers with reasonable time horizons should take it as a signal to be shunning high-fliers and loading up on out-of-favor names.

You can read the full article here.

 

Athanassakos Rebukes Another Bogus Study That ‘Proves’ Value Investing Doesn’t Work

Johnny HopkinsGeorge Athanassakos Comments

George Athaassakos recently wrote a great article that illustrates why most studies that ‘prove’ value investing doesn’t work, are not entirely accurate.

Here’s an excerpt from that article:

A new study from Arizona State University, titled Do Stocks Outperform Treasury Bills?, is turning heads and gives ammunition to those who oppose active management to further bash stock pickers.

The study, by ASU professor Hendrik Bessembinder, found that over the long run individual stocks have done poorly even though the stock market as a whole has prospered. The researcher found that the typical stock has not even outperformed one-month U.S. Treasury bills, in the long run. The study shows that the stock market has performed well primarily due to the strong performance of a limited number of stocks that have done very well. In fact, only 4 per cent of stocks accounted for most long-run stock market performance, according to the study. Based on these findings, the researcher concludes that a low-cost index mutual fund is less risky and can produce better risk-adjusted returns in the long run than actively managed portfolios.

In my opinion, the authors of such papers and others who reach similar conclusions about active management lack a thorough understanding of what active managers do. In fact, such findings are not inconsistent with what value investors have talked about and what I teach in my value investing course at Ivey. Let me explain.

There are two kinds of value investors: Those who invest opportunistically and buy and sell based on the stock price vs intrinsic value, and those who invest for the long run and buy and hold. The former investors follow Ben Graham

A new study from Arizona State University, titled Do Stocks Outperform Treasury Bills?, is turning heads and gives ammunition to those who oppose active management to further bash stock pickers.

The study, by ASU professor Hendrik Bessembinder, found that over the long run individual stocks have done poorly even though the stock market as a whole has prospered. The researcher found that the typical stock has not even outperformed one-month U.S. Treasury bills, in the long run. The study shows that the stock market has performed well primarily due to the strong performance of a limited number of stocks that have done very well. In fact, only 4 per cent of stocks accounted for most long-run stock market performance, according to the study. Based on these findings, the researcher concludes that a low-cost index mutual fund is less risky and can produce better risk-adjusted returns in the long run than actively managed portfolios.

In my opinion, the authors of such papers and others who reach similar conclusions about active management lack a thorough understanding of what active managers do. In fact, such findings are not inconsistent with what value investors have talked about and what I teach in my value investing course at Ivey. Let me explain.

There are two kinds of value investors: Those who invest opportunistically and buy and sell based on the stock price vs intrinsic value, and those who invest for the long run and buy and hold. The former investors follow Ben Graham to the letter and look for severely underpriced neglected stocks, while the latter group of investors have evolved over time to invest in high-quality stocks with sustainable competitive advantage, an approach Warren Buffett follows.

In a similar fashion, broadly speaking, there are two kinds of companies in the markets: Companies that operate in a free entry market (that is, minimal or no barriers to entry) and those that operate within barriers to entry and enjoy a high degree of sustainable competitive advantage.

In a free entry market, companies tend to earn a return on capital that is close to their cost of raising funds. Many of these companies have a hard time even making a return close to their cost of capital. Close to 90 per cent of companies operate in a free entry market. It is very hard to create value in the long run in a free entry market. The most efficient companies do, but the rest do not.

Companies, however, that enjoy barriers to entry and have sustainable competitive advantage do create value in the long run. A buy-and-hold strategy would work here. This is exactly what good quality investing is all about, and this is how Mr. Buffett has been investing in recent decades. That is why the preferred holding period for Mr. Buffett is infinity. But Mr. Buffett was not like this in his early years. He was more opportunistic. Even though in the long run the free entry companies may flatline in terms of value creation, in the short run, an opportunistic investor can make a lot of money. And Mr. Buffett did. He made most of his money in his early years, when he was opportunistically targeting the 90 per cent of the companies that operate in a free entry market. One can now start to understand why the researchers at Arizona State University found what they found.

If 90 per cent of companies do not create value in the long run, most individual stocks would not return much over long periods, consistent with the study’s findings. Most of the uptrend in the stock market would be because of the 10 per cent of companies that in the long run create value.

The performance of two Canadian companies can help illustrate the argument.

One company is Dorel Industries Inc., a diversified manufacturer of car seats, children’s furniture and bicycles, a company operating in a free entry market, and the other is Stella-Jones Inc., a company in the railway-ties and telephone-pole business that enjoys a large degree of competitive advantage. Dorel has had a return on capital that has been at or below its cost capital over the years, whereas Stella-Jones has achieved a return on capital well in excess of its cost of capital.

What has the performance of these stocks been in the short run versus long run? In July, 2007, Dorel traded at $35; nowadays the stock also trades at about $35. Based on the ASU paper, this stock has underperformed Treasury bills and an active manager focused on the long run who had picked this stock would have failed his clients. But a long-term active manager who invests based on quality would have never picked this stock. An opportunistic value investor would – and would have traded the stock frequently. And he would have done well as the stock has fluctuated between $19 and $44 over the period, oscillating around $32.

A long-term investor following the Buffett quality approach would have bought and held Stella-Jones. Over the same period, Stella-Jones has risen from $11 in July, 2007, to around $44 today, with the stock having fluctuated between $4 and $52, mostly on an upward trend.

The ASU authors argue that active management cannot work, or it can work by luck. I beg to differ. As can be seen from the above example, an active manager could have made money in both stocks, but one in the short run and the other in the long run.

So let’s not confuse things and, more important, do not confuse investors who struggle to find out how and with whom to invest.

You can read the full article here.

Alio Gold Jumps 19% Last 5 Days – TAM Deep Value Stock Screener

Johnny HopkinsStock Screener, Stocks Comments

One of the cheapest stocks in our All Investable Deep Value Stock Screener is Alio Gold Inc (NYSEMKT:ALO).

Alio Gold Inc (Alio), formerly Timmins Gold Corp, is a Canada-based gold producer engaged in the operation, development, exploration and acquisition of resource properties in Mexico through its subsidiaries, Timmins Goldcorp Mexico, S.A. de C.V. and Molimentales del Noroeste, S.A. de C.V. (MdN). MdN owns the San Francisco Mine in Sonora, Mexico.

Alio is up almost 20% in the past five days but still remains undervalued. Here’s why.

A quick look at the company’s fundamentals shows that Alio has a market cap of $209 million. When you take a closer look at the balance sheet you will see that there is cash and cash equivalents of $39.2 million and just $1.8 million in short term debt. That equates to $37.4 million in net debt (cash minus debt). When you subtract the $37.4 million in net debt from the current market cap of $209 million that equates to an Enterprise Value of $171.6 million.

With operating earnings of $56 million (ttm) that means Alio is currently trading on an Acquirer’s Multiple of just 3.06 and a P/E of 3.92. What’s also noticeable is that the company generated $41.1 million in operating cash flow (ttm) and had $20.4 million in capex. That equates to a total of $20.7 million (ttm) in free cash flow and a FCF/EV yield of 12% (ttm).

In terms of the company’s financial strength. Alio has a F-Score of 7, a Z-Score of 6.54. and an M-Score of -4.11 so all good there.  The company also maintains healthy trailing twelve month gross, operating, and net margins of 31%, 43%, and 37% respectively.

In short, Alio is a company with a very healthy balance sheet, it is financial sound with little debt and solid free cash flows. The company is trading on an Acquirer’s Multiple of 3.06, or 3.06 times operating earnings (ttm), a P/E of 3.92, and a FCF/EV yield of 12%. That’s why the stock remains undervalued in spite of the 19% increase over the past five days.

Nice Portfolio, Shame About The Human Running It

Johnny HopkinsInvesting Strategy Comments

James Saft at the Globe and Mail illustrates how an investor’s behaviour can be one of the biggest risks facing a successful investing strategy.

Here’s an excerpt from that article:

Investors hate two things above all else: losing money and missing out. The tension between the two, the fear of loss and the fear of doing less well than one’s neighbour, drives much behaviour in financial markets.

It is psychologically painful to lose money. Psychologists Amos Tversky and Daniel Kahneman demonstrated that losing a dollar is about 2.25 times more painful than gaining a dollar is pleasurable. Holding on during market falls is hard, and looking at a supposedly evenly distributed graph of returns does little to give the average saver comfort.

At the same time, humans are animals who naturally compare what they have to what others get, not just to what they had before. Go to a Wall Street trading floor the day bonuses are announced to see how this works out in practice.

This means that investors are sensitive not simply to how they are doing relative to their goals, but also relative to the Smiths down the street. This fear of missing out, and its flipside, pain at lagging, can cause investors to take on too much or too little risk if they observe the “stock market,” often wrongly conflated with an index, going up faster than their own holdings.

You can read the full article here.

One of The Best Investing Tweets of 2017. So Far!

Johnny HopkinsInvesting Strategy Comments

One of the best blogs in our Top 50 Investing Blogs 2017 is Morgan Housel at The Collaborative Fund Blog, and one of the best investing tweets for 2017 is this one which encapsulates everything you need to know as an investor:

Know What Kind Of Investor You Are Before You Get Caught Up In The Latest Hysteria

Johnny HopkinsInvesting Strategy Comments

Josh Brown at The Reformed Broker says calm the f*** down when it comes to the latest stock market hysteria.

Here’s an excerpt from his article:

Take a step back and look at the last six months – here’s the quilt, dating back to just before the start of this year. You’d have to have been allergic to money to have missed out on this:

You can read the full article here.

Gravity Rules: End Of The Bubble Is In Sight – Dave Kranzler

Johnny HopkinsValue Investing News Comments

Dave Kranzler at Sprott Money reports that gravity rules and the end of the bubble is in sight.

Here’s an excerpt from that article:

A stock bubble can’t exist without investor greed. It starts with greed. It moves into the “bubble” phase when greed is consumed by hysteria. The U.S. stock market has moved into the “hysteria” stage. This would be the point at which the bubble has almost reached maximum inflation. The upward movement in stocks is dominated by a handful of the stocks that, for whatever reason, are moving higher at the fastest rate of levitation. The graphic [below] shows visually what “bubble to hysteria” looks like.

I reached the conclusion the stock market has moved into the hysteria stage by spending time studying the “Five Horsemen” (AAPL, AMZN, NFLX, FB, MSFT) + TSLA. Even during periods of the trading day when the Dow and SPX are go red, most or all of those six stocks remain green, sometimes moving higher while the broad indices move lower. It’s incredible to watch real-time.

“It’s not to late to catch a ride on the FANG rally” was a headline seen on CNBC last week. This is the type of hysteria that is reflected in the media at bubble peaks.

You can read the full article here.

The Investment Strategy Pioneered By Warren Buffett Is In Crisis (CNBC)

Johnny HopkinsWarren Buffett Comments

CNBC reports that Warren Buffett’s value investing long/short strategy generated a 15 percent cumulative loss in the past decade and negative returns in 6 out of the last 10 years, according to Goldman Sachs. Before that, the value strategy had a successful run of more than 70 years.

Here’s an excerpt from the CNBC article:

Wall Street is questioning the value investing strategy espoused by legendary investors such as Warren Buffett after a decade of weak returns.

The value “strategy’s poor performance has coincided with a swell of assets into passive equity investment strategies as well as quantitative and ‘smart beta’ funds,” Goldman strategist Ben Snider wrote in a report Wednesday entitled “The death of value?”

“The disconnect has led investors to question the future viability of value investing, which has been embraced by the academic literature and espoused by investors including Benjamin Graham and Warren Buffett,” he added.

Snider noted the value investing long/short strategy based on Eugene Fama’s and Kenneth French’s work generated an average annual return of 5 percent from 1940 to 2007.

“The simple strategy – buying stocks with the lowest valuations and selling those with the highest – realized a theoretical gain in seven out of every 10 years and never spent three full years below its previous high water mark,” he wrote.

You can read the full article here.

 

Jim Rogers Warns The Biggest Crash In Our Lifetime Is Coming

Johnny HopkinsJim Rogers Comments

According to Business Insider, Jim Rogers says the biggest crash in out lifetime is on its way.

Rogers said:

It’s going to be the biggest in my lifetime and I’m older than you. No, it’s going to be serious stuff. We’ve had financial problems in America — let’s use America — every four to seven years, since the beginning of the republic. Well, it’s been over eight since the last one. This is the longest or second longest in recorded history, so it’s coming. And the next time it comes — you know, in 2008, we had a problem because of debt. Henry, the debt now — that debt is nothing compared to what’s happening now. In 2008, the Chinese had a lot of money saved for a rainy day. It started raining. They started spending the money. Now, even the Chinese have debt and the debt is much higher. The federal reserves, the central bank in America, the balance sheet is up over five times, since 2008. It’s going to be the worst in your lifetime, my lifetime too. Be worried.

You can read the full article here.

If You Own A Great Stock, But The Price Isn’t Going Up, Hang On!

Johnny HopkinsStocks Comments

Great article from Ian Cassel at MicroCapClub who discusses the age old problem of owning a stock that just won’t go up even though you know it’s a great business.

Here’s an excerpt from that article:

If you knew a stock you owned today wasn’t going to go up for the next 12 months, would you still own it today?

During periods of stock price consolidation and volatility an investor is forced to dig deep, form conviction, and really understand the business. If the business continues to perform, this conviction will come in handy when the stock ultimately ascends. Many financial professionals love to point to “luck” or “naivety” on how someone could actually hold something that goes up 5-10-20-50x or more. It’s easier for them to rationalize that someone was just lucky or too dumb to know any better to sell earlier. Yes, there are certainly those that fall into this camp, but there is an equal or greater portion of successful investors that hold on because they know what they own.

You can read the entire article here.

Speaking in Toronto at The MicroCap Conference on June 27th

Tobias CarlisleStocks Comments

I’ll be speaking about my books and research in Toronto at The MicroCap Conference on June 27th. Hope you can make it:
Join us on June 27th for our annual conference in Toronto at the Sheraton Hotel! The MicroCap Conference will highlight the most attractive Canadian companies across various sectors. We will be bringing up to 45 companies in addition to expert speakers to present to the audience. June 27th will be jam-packed with company sessions, presentations, industry panels, good food, and of course plenty of time to network with other investors over drinks. The event is free for investors!
To register, please go here (The MicroCap Conference Toronto 2017) and click “Request Registration.”

This Week’s Best Investing Reads – Curated Links

Johnny HopkinsValue Investing News Comments

Here’s a list of this week’s best investing reads:

Blogs

Don’t Be Fooled By High Dividend Yields (A Wealth of Common Sense)

Satisfaction Yield (The Irrelevant Investor)

Today Is Not Just Like 1987 (The Fat Pitch)

Portrait Of A Stock Bubble – Dave Kranzler (Sprott Money)

Conversation With Jesse Felder (ValueWalk)

“I’m Very Concerned” Elliott’s Singer Says Market Risks Higher Today Than 2008 (Zero Hedge)

Mark Hulbert: This incredible shrinking stock market is bad news for this type of investor (Market Watch)

Dividends by the Numbers in May 2017 (PoliticalCalculations)

Steven Bregman On ‘The Greatest Bubble Ever’ (Passive ETF Investing) (The Felder Report)

Specialization Key to Becoming a Successful Value Investor (Validea’s Guru Investor Blog)

How to Generate Stock Ideas: An Unusual Lesson from a 1939 Book (Safal Niveshak)

Warren Buffett just confirmed the death of retail as we know it (Business Insider)

Heartland Advisors: No More Earnings on the Cheap? (Datorama)

Portfolio Rebalancing Research: Momentum And Tolerance Bands (The Investors Podcast)

A Disciplined Hand Defies the Urge to Cut Losses (WSJ)

The Value Momentum Trend Philosophy (Alpha Architect)

The Enterprising Investor: How to Outperform the Market (The Intelligent Investor)

Aswath Damodaran – What’s Next? A Sharp Surge In Stock Prices Or A Sharp Correction?

Johnny HopkinsAswath Damodaran Comments

Great article and video by Aswath Damodaran called A Tale of Two Markets: Politics and Investing!

Damodaran says, “Seldom has there been such a divide between those who believe that we are on the verge of a massive correction and those who equally vehemently feel that this is the cusp of a new bull market, and between those who see unprecedented economic and policy uncertainty and market indicators that suggest the exact opposite. Is one side right and the other wrong? Is it possible that both sides are right? Or that both sides are wrong?”.

Here’s an excerpt from that article:

The first half of 2017 delivered some good news and some bad news on this front. The good news is that notwithstanding rumors of Fed tightening, treasury bond rates dropped from 2.45% on January 1, 2017 to 2.21% on June 1, 2017, and S&P 500 companies reported much stronger earnings for the first quarter, up almost 17% from the first quarter of 2016.

The bad news is that it seems a near certainty that Fed will hike the Fed Funds rate soon (though its impact on longer term rates is debatable) and that there is preliminary evidence that companies have slowed the pace of stock buybacks.

The bottom line, and this may disappoint those of you who were expecting a decisive market timing forecast, is that stocks are richly priced, relative to history, but not relative to alternative investments today.

Paraphrasing Dickens, we could be on the verge of a sharp surge in stock prices or a sharp correction, entering an extended bull market or on the brink of a bear market, at the cusp of an economic boom or on the precipice of a bust. I will leave it to others who are much better than me at market timing to make these calls and continue to muddle along with my stock picking.

You can read the full article here.

Joel Greenblatt Says Todays Investors Can Win By Zigging When The Market’s Zagging

Johnny HopkinsJoel Greenblatt Comments

In a recent article at Bloomberg, Joel Greenblatt said, “Passive investing suits some, but isn’t discerning”, and “Investors can win by zigging when markets zag”.

Here’s an excerpt from that article:

The shift to passive strategies that hug stock market indexes is likely to continue, but that’s not all bad for active stock pickers, said Joel Greenblatt, the co-chief investment officer of Gotham Asset Management.

“When people aren’t discerning among stocks that have different fundamentals, you can create opportunities,” he said Wednesday at the Bloomberg Invest New York summit.

Greenblatt, who’s written popular investing books and has been managing money for decades, is joining a chorus of active money managers signaling the potentially distorting effects of index funds on markets. Earlier this year, Seth Klarman, who runs the $30 billion Baupost Group, said that the tilt to passive investing will make markets more inefficient. In April, the managers of FPA Capital Fund called index trackers “weapons of mass destruction” because they led investors to blindly purchase securities.

You can read the full article here.

Latest Interview: Mohnish Pabrai Says Look For Businesses With Very High Uncertainty

Johnny HopkinsMohnish Pabrai Comments

Here’s a recent interview with Mohnish Pabrai on the Steve Pomeranz Hour in which he discusses his value investing strategy and how he finds great opportunities.

Here’s an excerpt from that interview:

Mohnish Pabrai: The key trait of an investment that is likely to do well exhibits low risk coupled with high uncertainty. Because when you have high uncertainty, markets hate that and they will typically under-price companies with a lot of uncertainty.

A low uncertainty business is not going to be underpriced. What you want to look for is a business with very high uncertainty and there you can occasionally get extremist pricing and that’s the time to step in. Like Charlie [Munger] did with Tennaco when the stock dropped to a dollar. I think he sold it for fifteen dollars but then it went to fifty dollars after that. So that’s really what you want to do.

You can find the interview here. Part one starts around 9:30 minutes and part two starts around 40:00 minutes.

What Could Investors Do With 1000 Years Of Data? – Abnormal Returns

Johnny HopkinsTadas Viskanta Comments

Great article by Tadas Viskanta at Abnormal Returns, where he asked an esteemed group of independent finance bloggers; If we had a 1,000 years of market data what kinds of things would get validated?

The group included Tobias Carlisle from The Acquirer’s Multiple who said:

We get the same answers we have now but still no resolution. If we had 1,000 years of data, people would say, “Well, sure, but that data set started in the Dark Ages after the fall of Rome, through the rise of Western Civilisation and culminated with the Industrial Revolution. That’s why momentum stocks looked so strong. If we had a 10,000-year backtest, value might just start outperforming.” 10,000 years later value would still be waiting for its time. Any day now.”

You can read the full article here.

Cash-Rich Companies Are King In The Stock Market Right Now

Johnny HopkinsValue Investing News Comments

One of the things we like to focus on when selecting stocks for our deep value stock screens here at The Acquirer’s Multiple are companies with strong balance sheets.

In a recent article Business Insider reports that cash-rich companies are king in the stock market right now. The article states that shares of firms with strong balance sheets are up 11% since the start of the year, outpacing their flimsier brethren by 3.5 percentage points, according to data compiled by Goldman Sachs and Bloomberg. That’s the widest spread in 14 months for a period of that length.

Here’s an excerpt from that article:

The recent outperformance has helped the strong balance sheet group close the gap on its weaker peers, which have piggybacked off an unprecedented wave of debt financing to bigger gains throughout the eight-year bull market.

In other words, they [investors] want to buy stocks with strong balance sheets — ones with easy access to liquidity and minimal debt exposure.

Weak vs strong balance sheet
You can read the full article here.

George Athanassakos – Let’s Stop Bashing Active Management

Johnny HopkinsGeorge Athanassakos Comments

Great article by George Athanassakos, a Professor of Finance and the Ben Graham Chair in Value Investing at Ivey Business School, in which he answers two difficult questions regarding active management:

Why is it almost impossible for reported numbers to show that active managers beat benchmarks? But beyond that, what may make it actually difficult for active managers to outperform benchmarks?

Here’s an excerpt from that article:

So let’s be fair, give credit where credit is due and stop this active manager bashing. Active management is not doomed. Good active managers will survive and will keep making a good living out of active management, especially in an environment of increased volatility in the months and years ahead.

A slowdown in economic growth around the world, particularly in China, as well as a slowdown in productivity, lower population growth, aging baby boomers and lower government spending will lead to an increase in stock-market volatility. An expensive market in an environment of artificially low interest rates that have encouraged leverage both at the individual and corporate level will also contribute to rising volatility, both realized and expected. In this environment, active managers, such as value investors, will shine.

You can read the complete article here.