New book out now! The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market

Tobias CarlisleAmazon, Tobias Carlisle1 Comment

From Amazon

The Acquirer’s Multiple is an easy-to-read account of deep value investing. The book shows how investors Warren Buffett, Carl Icahn, David Einhorn and Dan Loeb got started and how they do it. It combines engaging stories with research and data to show how you can do it too. Written by an active value investor, The Acquirer’s Multiple provides an insider’s view on deep value investing.

The Acquirer’s Multiple covers:

  • How the billionaire contrarians invest
  • How Warren Buffett got started
  • The history of activist hedge funds
  • How to Beat the Little Book That Beats the Market
  • A simple way to value stocks: The Acquirer’s Multiple
  • The secret to beating the market
  • How Carl Icahn got started
  • How David Einhorn and Dan Loeb got started
  • The 8 rules of deep value

The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market provides a simple summary of the way deep value investors find stocks that beat the market.

Excerpt

Media

(If you’d like to schedule an interview, please shoot me an email at tobias@acquirersmultiple.com)

Buy The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market is out now on Kindle, paperback, and Audible.

Other Books

Warren Buffett: “Anytime That The Market Takes A Sharp Dive And You Get Tempted To Sell Or Something, Just Pull Out This Book And Reread It!

Johnny HopkinsBill Gates, Warren BuffettLeave a Comment

Here’s a nostalgic video with Bill Gates and Warren Buffett. At 2:13 Buffett says:

“This is a book that first came out in 1949, The Intelligent Investor by Ben Graham. When I read this book it changed my life. Anytime that the market takes a sharp dive and you get tempted to sell or something, just pull out this book and reread it!”

Peter Lynch Protege Joel Tillinghast: How To Avoid Value Traps

Johnny HopkinsJoel TillinghastLeave a Comment

One of our favorite investing books here at The Acquirer’s Multiple is – Big Money Thinks Small, by Joel Tillinghast. Tillinghast is a protege of value investing legend Peter Lynch. In the Foreword of the book Lynch provides glowing praise for Tillinghast saying:

“I have been an active stock picker for virtually my entire life, so it pains me when critics conveniently lump everyone into the same bucket and say “active managers cannot beat their benchmarks.” Well, I am here to tell you that is simply not true. Investors need to know that not all active managers are created equal. There are many skilled investment professionals whose funds have beaten their benchmarks over time—and Joel Tillinghast is right up there with any of them. Joel has now successfully managed the Fidelity Low-Priced Stock Fund more than twice as long as I had managed Fidelity Magellan.”

“I have been investing for over fifty years and have had the pleasure of working with and meeting some of the greatest minds in investing, from Mario Gabelli and Sir John Templeton to Warren Buffett and Will Danoff. Simply put, Joel is up there with all of them. I can say this with a great deal of confidence, not only because I’ve known Joel for over thirty years but also because I hired him at Fidelity.”

While the whole book is a must read for investors, there’s one passage in particular in which Tillinghast discusses how to avoid value traps. Here is an excerpt from that book:

“Value trap” is a common epithet for stocks that disappoint or are expected to disappoint. It implies that some investing shortcut has indicated that a security is undervalued, yet it hasn’t performed well. What I dislike about the term is that it suggests that mistakes were made, but not by me. It doesn’t tell me how I screwed up, so I can avoid repeating my mistakes. Shortcuts and DCF analyses fail because of a weak link in one of the four elements of value—(1) profitability, (2) life span (3) growth, and (4) certainty. I use a brief but demanding checklist to pinpoint vulnerabilities.

1. Does the stock have a high earnings yield—that is, a low P/E?
2. Does the company do something unique that will allow it to earn super-profits on its growth opportunities? Does it have a moat?
3. Is the company built to last, or is it at risk from competition, fads, obsolescence, or excessive debt?
4. Are the company’s finances stable and predictable into the extended future, or are they cyclical, volatile, and uncertain?

In addressing each of these questions, I examine the company’s track record. I also need a forward-looking story that explains why the statistics turned out as they did and whether and how long those factors will continue. The future could be better because of new products or increasing economies of scale, or worse because of rising competition or obsolescence.

No matter how glowing the story, I wouldn’t confidently assume that a company would enjoy superior future profitability unless it had earned a return on equity (ROE) above 10 or 12 percent in nearly all of the last ten years. I pay close attention to lousy years and special charges, which often reflect adverse factors that the story might have omitted.

This checklist does not catch every undervalued stock, but it does cull out the most common sources of disappointment. It does not guarantee that bad things can’t happen, but it does improve your odds. When I can fill my portfolio with stocks with all four qualities, I see no need to consider those with defects. Most stocks will fail this screen, but that does not mean they are not undervalued. In those cases, you must work through a full DCF, watchful of the risk of forecast error stemming from the known point of vulnerability.

This Week’s Best Investing Reads 06/22/2018

Johnny HopkinsValue Investing NewsLeave a Comment

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

100 to 1; Sales; Hedge Fund Pop Quiz (csinvesting)

Why The Next Bear Market May Feel More Painful (A Wealth of Common Sense)

Tails, You Win (Collaborative Fund)

Hostages (The Reformed Broker)

Pain Plus Reflection Equals Progress (Farnam Street)

The Geometry of Wealth (The Irrelevant Investor)

The Evil Hours (Of Dollars and Data)

The #1 Rule in Investing (Pension Partners)

Mistakes were Made. (And, Yes, by Me.) (Jim O’Shaughnessy)

The Turkey Illusion (Safal Niveshak)

Ten Lessons from Michael Batnick’s Book ‘Big Mistakes’ (Ivanhoff Capital)

Your Risk Tolerance Is An Illusion: Wait Until You Start Losing Big Money (Financial Samurai)

Inferring the Statistics of Buffett’s Alpha (Flirting With Models)

Investing Will be the Most Popular Language (Medium)

Has Berkshire Hathaway Lost Its Edge? (GuruFocus)

How to Avoid Getting Sick From Financial Markets (Bloomberg)

Hedge fund billionaire Julian Robertson: The FANG stocks are cheap (video) (CNBC)

The Voting Machine vs. The Weighing Machine (Advisor Perspectives)

Hedge funds worry about the legal risks of using “alternative” data (The Economist)

Paul Tudor Jones – Just imagine when next recession comes (video) (YouTube)

Jim Rogers Launches Artificial Intelligence ETF (EFT.com)

Trust the Process (Alpha Architect)

Decision Noise Reduction – This Is The One Thing Investment Managers Should Get Right (DSGMV)

“Bad or Good Board of Directors – You Won’t Believe What Happened Next!” (25iq)

Why Do Investors Focus on the Wrong Things? (Behavioural Investment)

Hedge Funds’ Best Ideas? Those Are Just Stocks They’re Dumping (Bloomberg)

Active Managers Move “All In” Again (Dana Lyons Tumblr)


This week’s best investing research reads:

How Can Investment Professionals Build Trust? (CFA Institute)

A Smarter CAPE Ratio to Better Forecast Expected Stock Returns (Academic Insights)

Is Your Alpha Big Enough to Cover Its Taxes? A Quarter-Century Retrospective (Research Affiliates)

Hunting for Alpha (Albert Bridge Capital)

Weighing the Week Ahead: What is Working, and Will It Persist? (Dash of Insight)

US Equity Bull Run Is Second Longest For Economic Expansions (The Capital Speculator)

CAPE of Good Hope? P/E Divergence as a Performance Signal (Economic Data)

Is it time to worry that the boom in global megacity housing prices could turn into a bust with a potential contagion across the global economy? (13D Research)


This week’s best investing podcasts:

Animal Spirits: The Mother of All Credit Bubbles (Ben Carlson & Michael Batnick)

Ben Hunt On The Unparalleled Power Of Narrative In The Financial Markets (Jesse Felder)

Buffett & Munger Q & A at the 2018 Berkshire Hathaway Shareholders Meeting (Preston Pysh & Stig Brodersen)

New Angles on Crypto, with Kyle Samani and Tushar Jain (Patrick O’Shaughnessy)

Matt Hougan, “Anyone Who Tells You They Know What’s Going to Happen in Crypto Is Probably Lying to You” (Meb Faber)

AM Stock Screener – Undervalued Fortuna Silver Mines Inc (NYSE: FSM)

Johnny HopkinsStock Screener1 Comment

One of the cheapest stocks in our All Investable Stock Screener is Fortuna Silver Mines Inc (NYSE: FSM).

Fortuna Silver Mines Inc (Fortuna) is a Canadian-based precious metals producer. Its business operations are comprised of mining and related activities in Latin America, including exploration, extraction, and processing of silver-lead, zinc, and silver-gold, and the sale of these products. The company operates the Caylloma silver, lead, and zinc mine in southern Peru and the San Jose silver and gold mine in southern Mexico.

A quick look at Fortuna’s share price history below over the past twelve months shows that the price is up 20%, but here’s why the company remains undervalued.

(Source: Google Finance)

The following data is from the company’s latest financial statements, dated March 2018.

The company’s latest balance sheet shows that Fortuna has $218 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has $40 Million in total debt. Therefore, Fortuna has a net cash position of $178 Million (cash minus debt).

Financial strength indicators show that the company has a Piotroski F-Score of 7, an Altman Z-Score of 5.63, and an Beneish M-Score of -2.81. All of which illustrate that the company remains financial strong.

If we consider that Fortuna currently has a market cap of $889 Million, when we subtract the net cash totaling $178 Million that equates to an Enterprise Value of $711 Million.

If we move over to the company’s latest income statements we can see that Fortuna has $117 Million* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 6.08, or 6.08 times operating earnings. That places Fortuna squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Fortuna generated trailing twelve month operating cash flow of $81 Million and had $45 Million in Capex. That equates to $36 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 5%.

In terms of Fortuna’s annualized Return on Equity (ROE) for the quarter ending March 2018. A quick calculation shows that the company had $563 Million in equity for the quarter ending December 2017 and $577 Million for the quarter ending March 2018. If we divide the combined total of both numbers by two we get $570 Million. If we consider that the company has $67 Million in net income (ttm), that equates to an annualized Return on Equity (ROE) for the quarter ending March 2018 of 12%.

Summary

In summary, Fortuna is trading on a P/E of 13.3, which is considerably lower than its 5Y average of 38.94**, and an Acquirer’s Multiple of 6.08, or 6.08 times operating earnings. The company has a strong balance sheet with a net cash position of $178 Million.  Financial strength indicators show that Fortuna has a Piotroski F-Score of 7, an Altman Z-Score of 5.63, and an Beneish M-Score of -2.81. The company also generates a FCF/EV Yield of 5% (ttm) and has an annualized return on equity of 12% for the quarter ending March 2018. All of which indicates that the company remains undervalued.

(**Source: Morningstar)

More About The All Investable Stock Screener (CAGR 25%)

From January 2, 1999 to November 29, 2017, the All Investable Stock Screener generated a total return of 6,765 percent, or a compound growth rate (CAGR) of 25.0 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 321 percent, or 6.4 percent compound.

AM Stock Screener – Stocks Appearing in Abrams, Greenblatt, Price Portfolios

Johnny HopkinsStock ScreenerLeave a Comment

One of the new weekly additions here at The Acquirer’s Multiple features some of the top picks from our Stock Screeners and some top investors who are holding these same picks in their portfolios. Investors such as Joel Greenblatt, Carl Icahn, Jim Simons, Prem Watsa, Jeremy Grantham, Seth Klarman, Ray Dalio, and Howard Marks.

The top investor data is provided from the latest 13F’s over at WhaleWisdom (dated 2018-3-31). This week we’ll take a look at one of the picks from our All Investable Stock Screener:

Barnes & Noble Education Inc (NYSE: BNED)

A quick look at the price chart below for Barnes & Noble shows us that the stock is down 38% in the past twelve months. We currently have the stock trading on an Acquirer’s Multiple of 5.88 which means that it remains undervalued.

(Source: Google Finance)

Top investors who currently hold positions in Barnes & Noble include:

David Abrams – 6,113,875 total shares

Michael Price – 407,854 total shares

Chuck Royce – 100,000 total shares

Mario Gabelli – 22,752 total shares

Joel Greenblatt – 20,116 total shares

T. Rowe Price: Value Investing Is Not Dead

Johnny HopkinsT. Rowe PriceLeave a Comment

Here’s a great article by Sebastien Mallet, Portfolio Manager at T. Rowe Price on the future of value investing saying:

“So getting back to the original question, “Is value investing dead?”: The answer is a firm no. The only caveat to that statement is that in this current environment, where everyone is seeking growth and value investing is out of favor, only those investors with the ability and resources to find the best stock ideas will succeed.”

Here’s an excerpt from that article:

Global Equities: Is Value Investing Dead?

Some may be saying this, while others have been more generous by saying that value investing may be moribund. I am far more positive though. You may say that is not a surprise as a “Value” investor, but I am genuinely enthused by the opportunities out there and continue to find good actionable ideas across countries, sectors, and industries.

THE LONE GUY IN THE CORNER OF THE PARTY

Of course, MSCI Value underperformance versus MSCI World index is now unprecedented in recent decades, in both its duration and magnitude, and I find myself being the guy that no one wants to speak to right now. Historically, it doesn’t look good, with the regime extending back to the end of 2006 with a performance shortfall of over 30% versus the MSCI World index. That is a two-standard-deviation event, and it is not pretty.

A large part of the “Growth” rally has been due to the strong returns of big-cap tech stocks, the “FAANGs,” which have a substantial weighting in the MSCI World index. However, as we have increasingly seen, there is evidence of a cooling off across popular technology stocks, especially with it being an extremely crowded space.

Therefore, there is more encouragement and we are starting to see the clouds part a little for value investing. But we are not reliant on a weaker performance of growth stocks, or indeed a yield curve steepening (which some have cited as a reason for value to make a comeback). Indeed, recent economic and market events (rise in volatility) have added fuel to the debate as to whether the tide could be turning for “Value.” As our last piece (Style Regime Changes—Lessons From History) indicated, though, we do not believe that there is any one particular factor or catalyst that will see value investing once again reassert itself. Instead, I have been focused on my day job of finding undervalued stocks that can potentially deliver alpha for my clients.

SEEK AND YOU SHALL FIND

I have been concentrating on what I can control, and that is strong stock picking. Even through this challenging period for value investors, I have delved deeper to find the best opportunities for the portfolio.

For example, for the first time in a couple of years, I have found compelling value propositions in the United States. The U.S. has been a longstanding underweight for our Global Value portfolio as valuations have largely been far too rich. But more recently, we have been able to buy into some attractive entry points and are now just shy of the benchmark’s 60% allocation.

In particular, as the debate around oil prices and the future of the energy sector have continued, I have taken a deeper look at some of the affected businesses in the hunt for undervalued opportunities with potential to rerate. The oil services industry is one area of the market that looks particularly cheap to me, and I have recently increased the exposure here as I identified stocks with compelling bottom-up stories.

Financial stocks account for the portfolio’s largest absolute position, and here I have stretched the longstanding overweight position as I have become more bullish on regional banking outlooks. My largest positons comprise high-quality U.S. banks, and more recently I have been finding good value in European financials, where I have identified high-growth dynamics or positive idiosyncratic stories. I also like the insurance sector with the exposure spread across U.S. and Europe. The largest position here in the U.S. is an insurance powerhouse, which enjoys leading positions across its major business lines and we believe is well positioned to benefit from rising interest rates and shifting demand for property and casualty insurance.

Across the Pacific Ocean, we have long viewed Japan as a fertile market for value names as the investing backdrop has become increasingly shareholder-friendly, with businesses making meaningful improvements to corporate governance and capital allocation policy. But, while valuations generally remain attractive, they are also becoming more divergent. Because of that, I have moved to a more neutral position in Japanese stocks and am driven by more individual investment cases. In particular, I like the consumer story in Japan so I have more domestically focused names.

FOCUS ON THE FUNDAMENTALS, BUT BE WILLING TO ADAPT

As I have stated before, patience is the perennial friend of the value investor. Given this, it is important both to stay the course through market uncertainties, but also to balance your approach to value investing. One key foundation to my approach is the ability to stay engaged with stocks during periods of distressed sentiment in order to potentially benefit from a transition to a better outlook. Here I have enjoyed some good outcomes in recent years.

Importantly, I continue to consider a longer-term view than the market, searching for attractive entry points by looking through what we view as shorter-term, cyclical pressures. In the same vein, I am swift to sell stocks that I believe have reached fair value targets.

Looking at the Value/Growth debate from a higher level, when I observe past occurrences when Value has reasserted itself, they cannot consistently be attributed to any one development in the external environment (steepening yield curves, inflation, etc.). They can play a part at particular times, but a more consistent influence on when regimes change occur are more endogenous factors, namely market dynamics and valuations.

Therefore, as a fundamental investor focusing on specific stocks, my conviction in value investing is based upon the opportunities that I observe on the ground rather than higher level sector composition considerations. At the same time, as some sky-high growth stock valuations come down, especially across the technology sector, we may see an opportunity for a turn in the value/growth cycle.

So getting back to the original question, “Is value investing dead?”: The answer is a firm no. The only caveat to that statement is that in this current environment, where everyone is seeking growth and value investing is out of favor, only those investors with the ability and resources to find the best stock ideas will succeed.

Key Risks

The following risks are materially relevant to the strategy highlighted in this material: Transactions in securities of foreign currencies may be subject to fluctuations of exchange rates which may affect the value of an investment. The portfolio is subject to the volatility inherent in equity investing, and its value may fluctuate more than a portfolio investing in income-oriented securities. The portfolio has increased risk due to it’s ability to employ both growth and value approaches in pursuit of long-term capital appreciation.

You can read the original article at T. Rowe Price here.

Li Lu: “The Market Is A Mechanism That Discovers Your Weaknesses. Any Fault/Defect You Have Will Be Magnified Infinitely, To The Point Of Complete Destruction.”

Johnny HopkinsLi LuLeave a Comment

One of our favorite investors to follow here at The Acquirer’s Multiple is Li Lu, Founder and Chairman of Himalaya Capital.  In 2015 Li Lu did a value investing lecture at Peking University titled – The Prospect of Value Investing in China, in which he provided a number of fantastic value investing insights. Here’s an excerpt from that lecture:

On this wide open main path of investing you find very little traffic and wonder where everybody is. You need only look at the ‘heterodox paths’ of shortcuts with traffic backed up for miles. Investors take shortcuts because the right and main path takes too long. In theory, value investing is a sure way to reach your goal successfully, but the biggest problem is it takes too long.

It may be the case that a company has fallen out of favor with Mr. Market and its price is therefore much lower than its intrinsic value when you buy it. Unfortunately, you don’t know when Mr. Market will come to his senses. In addition, the growth of a company depends on the efforts of everyone from top executives to frontline staff, in addition to time, persistence and some luck. It is an arduous process.

The other difficulty lies is in your ability to predict the future, as the ability to invest involves the ability to correctly make such predictions. Understanding a company or an industry means you can’t predict what state the company/industry will be in 5 or 10 years, by no means an easy task. However, before we make an investment decision, we need to know what situation the company will be in. What will happen if there is an economic downturn?

Otherwise, how can we know if the value of the company is higher or lower than the price? We need to have an estimate of the company’s future annual cash flow for the next 10 or 20 years to discount them to today’s value (present value of future cash flow). It is difficult to know what shape your company will be in, even as the founder.

You may say, ‘of course I know,’ and undoubtedly say this to your customers and investors. You may even tell your employees that the company aspires to the Fortune 500. In reality, you probably cannot predict the company’s growth more than 10 years into the future, as few can due to innumerable uncertainties. This does not mean it is a completely lost cause. You can probably predict with high degree of confidence the worst case scenario for selected companies and industries over the next ten years. They may perform better than expected. However, this skill requires relentless effort and studies, along with many years of hard work.

When you are capable of making these judgments, you have begun building your circle of competence, which must be a very tight one at first, but will expand outward as time passes.

This is why value investing is inherently a long haul. While it will definitely take you to your destination, most people are not willing to make the effort. You can spend a lot of time, yet still understand very little.

If you are a true value investor, you won’t go on a TV money show to critique the stock prices of all companies, or tell others what the stock prices should be. You won’t casually state 5000 point is too low, that a bull market is imminent, or that 4000 point is a bottoming out.

You will know that such pronouncements are outside of your circle of competence. No matter how big the circle you draw, those statements won’t fit into it, and those who set the boundaries of the circle beyond their competence are destined to be destroyed by the market at some point or somehow. As I stated previously, the market is a mechanism that discovers your weaknesses. Any fault/defect you have will be magnified infinitely, to the point of complete destruction.

You can find a copy of the entire lecture at the Himalaya Capital website here.

Howard Marks: The Route To Superior Performance Will Continue To Be Humans With Superior Insight

Johnny HopkinsHoward MarksLeave a Comment

Howard Marks has just released his latest memo titled – Investing Without People. Marks also released a short video (below) which summarizes the memo saying:

“If the day comes when intelligent machines run all the money, won’t they all see everything the same? Won’t they reach the same conclusions? Design the same portfolios? And thus perform the same? What then will be the route to superior performance?”

“Humans! With superior insight. At least that’s my hope!”

Here’s an excerpt from that video:

Hello. I’m Howard Marks. It’s after hours here at Oaktree’s Los Angeles trading desk. But this quiet room wasn’t so quiet a few hours ago.

The question posed in my latest memo is – In the future will it be like this all the time? In short, will we be investing without people? As I see it securities markets seem to be moving toward dispensing with us mere mortals and relying more and more on index investing and other forms of passive investing, quantitative and algorithmic investing, and artificial intelligence and machine learning.

There’s no doubt that computers can do an unmatched job dealing with the things that can be counted. Things that are objective and quantitative. But many other things, qualitative subjective things, count for a great deal and I doubt computers can do what the very best investors do. Exceptional investors have creativity, taste, discernment and judgment, and thus the ability to see the merit and qualitative attributes that other investors miss. Unless computers develop these things too I doubt the best investors will be retired anytime soon.

If the day comes when intelligent machines run all the money, won’t they all see everything the same? Won’t they reach the same conclusions? Design the same portfolios? And thus perform the same? What then will be the route to superior performance?

Humans! With superior insight. At least that’s my hope!

Regardless of how you lean on this subject the markets will open tomorrow morning and trading floors, including Oaktree’s, will be buzzing with people and activity. Without that buzz life around here would be too quiet for me.

You can watch a summary of Howard Marks’ memo here:

(Source: YouTube)

You can read Howard Marks’ latest memo – Investing Without People, here.

Dan Ariely: 3 Simple Tricks To Help Investors Overcome Their Internal Biases

Johnny HopkinsDan ArielyLeave a Comment

We just listened to a great podcast with Dan Ariely being interviewed by Shane Parrish at The Knowledge Project. During the interview Ariely provides investors with three tricks that can help overcome internal biases and change subconscious defaults to more of a conscious state of mind which in turn lead to better financial decisions.

Here is an excerpt from that interview:

Shane Parrish: Is there anything that you do specifically that allows you to step inside your ego a little bit [when it comes to making better decisions] that we can walk away with?

Dan Ariely:

1. One simple recommendation is to think about yourself as an advisor, not about your own interest [decision]. What would you advise somebody like you to do? When you advise somebody external then you’re not as influenced by your own biases. You can do better!

2. Another one is to think about something in the long-term. What would happen if you had to make a decision about a thousand of those things. What decision would you make? It’s sometimes easy to say, “Oh I’m making this [decision] just for one time”. But what if this was the standard decision that you would make.

3. The third one is – what would happen if this was a larger decision? Would you still make the same one?

By both thinking about it not as a one time but as a multiple time, and not as small decision but as a large decision you bring it into context that is more extensive and you’re less likely to basically give yourself a discount and say – “We’re just doing it once”.

You can listen to the entire podcast here:

This Week’s Best Investing Reads 06/15/2018

Johnny HopkinsValue Investing NewsLeave a Comment

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

Deductive vs Inductive Reasoning: Make Smarter Arguments, Better Decisions, and Stronger Conclusions (Farnam Street)

Is the U.S. Due For a Recession? (A Wealth of Common Sense)

What Do Clients Want? (The Irrelevant Investor)

User and Subscriber Businesses: The Good, the Bad and the Ugly! (Musings On Markets)

Repeating Themes (Collaborative Fund)

If You Know You Know (The Reformed Broker)

The Kelly Criterion: You Don’t Know the Half of It (CFA Institute)

Time To Not Freak Out About Debt Again (The Fat Pitch)

5 Exemplary CEO Annual Letters Worth Reading (Behavioral Value Investor)

The Future for Factor Investing May Be Different Than its Backtested Past (Alpha Architect)

Feynman’s Hack and the Map of the Cat (Safal Niveshak)

Business and Investing Lessons from Rebecca Lynn (Canvas Ventures) (25iq)

Grantham says capitalism is making this one big global risk to humanity worse (MarketWatch)

It Can Happen to Anyone (Of Dollars and Data)

None of Us Understand Probability (RCM Alternatives)

Bill Ackman’s Picks Looking Up (GuruFocus)

Learning from…“The Simpsons?” (Oakmark Funds)

Why We Need to Update Financial Reporting for the Digital Era (hbr.org)

What Computer Chess Suggests About Investing (Morningstar)

Not Even Buffett Can Escape Reversion to the Mean (Fortune Financial)

Market dynamics – the case for value remains (LiveWire)

Unicorns Are Worth Twice As Much As Last Month (Bloomberg)

Human Condition (Humble Dollar)

How stock investors can profit from this week’s Fed meeting (MarketWatch)

How Wealthy Investors Avoid Losing Money (Next Avenue)


This week’s best investing research reads:

What Is VIX Telling Investors? (Wisdom Tree)

Learning by Trading (papers.ssrn)

Style Investing in Fixed Income (Academic Insights on Investing)

Dollar-Cost Averaging: Improved by Trend? (Flirting With Models)

Market Timing With Multiples, Momentum & Volatility (Factor Research)

Buy in May and Stay Invested (Pension Partners)


This week’s best investing podcasts:

Irrationality, Bad Decisions, and the Truth About Lies: My Interview with Dan Ariely (Shane Parrish)

Animal Spirits Episode 33: The Oracle of Brooklyn (Ben Carlson & Michael Batnick)

Tim Cook’s Dashboard, with Michael Reece – (Patrick O’Shaughnessy)

TIP194: Small Cap Investing & Intrinsic Value Calculations w/ Eric Cinnamond (Preston Pysh & Stig Brodersen)

AM Stock Screener – Undervalued Image Sensing Systems, Inc. (NASDAQ: ISNS)

Johnny HopkinsStock Screener2 Comments

One of the cheapest stocks in our Small & Micro-Cap Stock Screener is Image Sensing Systems, Inc. (NASDAQ: ISNS).

Image Sensing Systems Inc develops and markets software-based computer enabled detection products for use in traffic, safety, security, police and parking applications. The company operates through two segments namely Intersection and Highway. Its Video products are sold in the Intersection segment whereas Radar products are sold in the Highway segment. The company markets its products as Autoscope video or video products and RTMS radar or radar products, which enables its end users with complete solutions for the intersection, and transportation markets. Its products are used primarily by governmental entities.

A quick look at Image Sensing Systems share price history below over the past twelve months shows that the price is up 24%, but here’s why the company remains undervalued.

(Source: Google)

The following data is from the company’s latest financial statements, dated March 2018.

The company’s latest balance sheet shows that Image Sensing Systems has $3.32 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has zero debt. Therefore, Image Sensing Systems has a net cash position of $3.32 Million (cash minus debt).

Other financial strength indicators show that the company has a Piotroski F-Score of 7, an Altman Z-Score of 6.64, and an Beneish M-Score of -2.79. All of which illustrate that the company remains financial strong, is safe, and is not an earnings manipulator.

If we consider that Image Sensing Systems currently has a market cap of $21 Million, when we subtract the net cash totaling $3.32 Million that equates to an Enterprise Value of $18 Million.

If we move over to the company’s latest income statements we can see that Image Sensing Systems has $2 Million* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 8.13, or 8.13 times operating earnings. That places Image Sensing Systems squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Image Sensing Systems generated trailing twelve month operating cash flow of $2.51 Million and had $1.34 Million in Capex. That equates to $1.18 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 15%.

Summary

In summary, Image Sensing Systems is trading on a P/E of 11.4, which is considerably lower than its 5Y average of 26.9**, and an Acquirer’s Multiple of 8.13, or 8.13 times operating earnings. The company has a strong balance sheet with a net cash position of $3.32 Million and has a FCF/EV Yield of 15% (ttm). All of which means that the company remains undervalued despite a 24% increase in its share price over the past twelve months. A view shared by Jim Simons, who currently holds 189,000 shares in the company as of his latest 13F over at WhaleWisdom (dated 2018-3-31).

(**Source: Morningstar)

More About The All Investable Stock Screener (CAGR 25%)

From January 2, 1999 to November 29, 2017, the All Investable Stock Screener generated a total return of 6,765 percent, or a compound growth rate (CAGR) of 25.0 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 321 percent, or 6.4 percent compound.

Acquirer’s Multiple Stocks Appearing in Marks, Grantham, Gabelli Portfolios

Johnny HopkinsStock ScreenerLeave a Comment

One of the new weekly additions here at The Acquirer’s Multiple features some of the top picks from our Stock Screeners and some top investors who are holding these same picks in their portfolios. Investors such as Joel Greenblatt, Carl Icahn, Jim Simons, Prem Watsa, Jeremy Grantham, Seth Klarman, Ray Dalio, and Howard Marks.

The top investor data is provided from the latest 13F’s over at WhaleWisdom (dated 2018-3-31). This week we’ll take a look at one of the picks from our Large Cap Stock Screener:

VEON Ltd (ADR) (NASDAQ: VEON)

A quick look at the price chart below for VEON Ltd shows us that the stock is down 39% in the past twelve months. We currently have the stock trading on an Acquirer’s Multiple of 8.38 which means that it remains undervalued.

(Source: Google)

Top investors who currently hold positions in VEON Ltd include:

Howard Marks – 1,678,900 total shares

Jeremy Grantham – 917,200 total shares

Mario Gabelli – 614,100 total shares

What Helps or Hurts Investment Returns? Here’s a Ranking

Johnny HopkinsInvesting StrategyLeave a Comment

Here’s a great article by Barry Ritholz at Bloomberg in which he ranks the most important factors that drive portfolio returns. Here’s an excerpt from that article:

What drives the returns of any investment portfolio?

Specifically, from the moment someone starts saving for retirement, until the day they begin to take their required minimum distribution at age 70½, what are the factors that determine just how successful that portfolio is in terms of net, inflation-adjusted returns.

This is a more challenging question than you might think. Ask professional investors, and the responses cover a gamut of inputs, ranging from corporate profits, the economy, risk, valuation, taxes, interest rates, sentiment, inflation and more.

An unexpected challenge in performing this exercise is a tendency for some elements to offset others. For example, changes in profits could be offset by widening or contracting price-earnings ratios; sentiment might offset valuation; returns tend to vary inversely with risk. Why does this matter? Because in the real world, one hand giveth while the other taketh away. This concept of cancellation matters a great deal to total portfolio returns.

And so we are left with an intricate and difficult question. This is why complex, multivariate systems are so hard to assess by traditional analysis. What follows is my attempt to identify seven broad elements that typically determine the total return of any portfolio. Note that these elements progress from the least meaningful over a course of a lifetime to the most. Any given latter item can cancel out the effect of earlier ones.

On to the list:

No. 1. Security selection: Stock picking is what many individual investors and much of the media like to focus on. It’s a rich vein to consider, with traditional elements of narrative and storytelling, winners and losers. No doubt, better stock pickers will see commensurate portfolio gains. But that is merely one element of many, and not surprisingly, subject to other factors.

Consider the universe of active stock-picking mutual funds. The range of outcomes due to skill or luck is fairly broad. However, the net gains attributable to selection on average can easily be offset by any of the following.

No. 2. Costs and expenses: The overall cost of a portfolio, compounded over 20 or 30 years, can add up to (or subtract) a substantial amount of the returns. One Vanguard Group study noted that a 110 basis-point expense ratio can cost as much as 25 percent of total returns after 30 years. That does not take into consideration other costs such as trading expenses, capital-gains taxes or account location (i.e., using qualified or tax-deferred accounts).

The rise of indexing during the past decade is a tacit acknowledgment that on average, cost matters more than stock-picking prowess.

No. 3. Asset allocation: What is the optimal ratio of stocks, bonds, real estate investment trusts, alternates and cash in a portfolio? Academic studies have proven that allocation is much more important to returns than stock selection. You can imagine all sorts of scenarios where allocation trumps selection. The greatest stock-picker in the world with a 20 percent equity exposure won’t move the needle very much.

No. 4. Valuation and year of birth: Valuations will fluctuate over the life cycle of any bull or bear market. However, for the long-term investor, valuations are less about expected returns of pricey stocks, and more about when they a) start investing and b) start to withdraw in retirement.

Much of this is a random and beyond your control. Imagine the market crashing just before your prime saving and investing years; that should have a positive impact on net returns over time. What about someone who retired in 2000, and began withdrawing capital after the market got shellacked? That will also have an impact.

Those people born in 1948 not only managed to have their peak earning and investing years (35-65) coincide with multiple bull markets and interest rates dropping from more than 15 percent to less than 1 percent. They also lucked into a market that tripled in the decade before retirement.

No. 5. Longevity and starting early: Having a long investing horizon is determined by many factors, including your longevity. How long you live is going to be a function of genetics, lifestyle and dumb luck.

But when you begin saving for retirement is not a function of genetics or health. The sooner you begin, the longer compounding can work its magic.

No. 6. Humility and learning: We all begin as novice investors. Everyone makes mistakes — even the greats like Warren Buffet and Jack Bogle. The key question is how quickly you can figure out all of the things you are doing wrong. Self-awareness and ego is a significant thread in this context. The sooner we learn to learn from our mistakes, the better our investment portfolios.

No. 7. Behavior and discipline: Nothing has a bigger impact than the behavior of investors under duress. I stumbled upon this observation early in my career as a trader; everything I have learned since has served to confirm it.

We see this again and again in the data — just look at DALBAR’s Quantitative Analysis of Investor Behavior. Investors continue to be their own worst enemies when it comes to investment performance. On average, their actions lower their returns significantly, but in the worst cases they demolish them. Even worse, behavior is (or at least should be) within their own control.

Bonus: Luck and random chance: There is a lot of random chance in investing. We often cannot tell the difference between skill and luck in stock selection. And the moment when each realize this can also be somewhat random.

This list might help you consider what changes you might wish to make in your portfolio. At the very least, you might recognize the areas you are over- and underemphasizing. Your investment returns will thank you.

You can read the original article at Bloomberg here.

Guy Spier: What Lunch With Warren Buffett Taught Me About Investing And Life

Johnny HopkinsGuy SpierLeave a Comment

Here’s a great article by Guy Spier at MarketWatch in which he discusses what his lunch with Warren Buffett taught him about investing and life. Here’s an excerpt from that article:

It’s been 10 years since I and my friend, investor Mohnish Pabrai, won the annual Glide Foundation charity auction for lunch with legendary investor Warren Buffett.

Together we paid $650,100, which, although it seemed like an enormous sum at the time, is dwarfed by the $3.3 million paid this year. My cost was around $220,000 because we split the donation — two-thirds from Mohnish, who came with his wife and two daughters, and one-third from me and my wife (our children were too young).

Why did we do it? In my book “The Education of a Value Investor,” I offer several logical, well-thought reasons. But with the perspective of a little more time perhaps it comes down to plain and simple curiosity.

Over the years 2004 to 2007 my investing had gone well. I had some money in the bank and I simply wanted to sit down and break bread with this man I revered. On some level, all I was hoping for was to get a measure of the man, to size him up in person and get a sense of how he ticks. Was he really that smart? Was I like him in any way?

As the saying goes: “If you don’t try, you’ll never know.” So I went for it.

Lessons on investing (or not?)

Even if I didn’t match up to Buffett in terms of investing prowess, there was certainly a part of me that hoped that some of his Midas touch would rub off. Perhaps I would come away from the lunch having learned the lessons on how to beat the market and become a billionaire.

But that was not to be — at least, not directly. If only because questions about specific investments were off limits according to the rules of the auction. And in any case, Mohnish and I weren’t going to take the conversation there. We wanted Buffett to be relaxed and to enjoy himself. Pushing hard into investment topics would not have been productive.

And yet, even though we were not asking, perhaps we did indeed get the most important lessons of investing and endless wealth. Because such lessons are less about specific investments, and more about life. Give a man a fish, and he can eat for a day. Teach him to fish, and you have taken care of him for a lifetime. In our case, the lunch became more about how to live your life such that you are most likely to become a billionaire. And if you don’t become so wealthy it doesn’t matter, because the journey has been so awesome.

The first distinction Buffett gave us was the concept of having an inner- vs. an outer scorecard. He asked: “Would you rather be considered to be the best lover in the world, but for you and your wife to know that, in reality, you are the worst? Or the opposite: To be considered the worst lover by the rest of the world, but for you and your wife to know that you are the best?”

Put simply, Buffett was teaching us to act with the right motivation — because it’s the right thing to do, not because of what people will think. This was something I had not really thought about until that moment, and has been absolutely key ever since. This personal value ostensibly has nothing to do with value investing, but in truth it has everything to do with it. Because buying an undervalued, out-of-favor stock is all about doing what you know is right — even if the rest of the world may disagree.

Buffett offered up another, more profound lesson: In order to see the best opportunities in life, it’s important that others also get a good deal — ideally one even better than they bargained for. Nowadays this way of negotiating is ingrained into my behavior and habits, but that wasn’t the case 10 years ago. At the time, I still had this idea that being good in business was about gaining an edge and winning more than the other guy. Taken to its extreme, you become the guy where, after you shake someone’s hand, they want to check if they still have five fingers.

But the man I met at Smith & Wollensky’s steakhouse in New York that day 10 years ago had a completely opposite mindset. I can’t tell you how startling it was for me: there was Warren Buffett, one of the richest men in the world, and all he wanted to do was serve us and please us. He told us that he was going to make damned sure this lunch was worth our while. And for the three or so hours he was with us, he enthusiastically focused on what we wanted to talk about, and shared as much as he could.

This taught me something very important. If Warren Buffett was working so hard to please me, how much harder should I work to please people around me — even if they are less wealthy, less able, less powerful?

While this question seems on the surface to have nothing to do with value investing, it may be the only thing. Because I have learned that, sooner or later, the only thing we have to go on is others’ willingness to share back to us. And, over time, their willingness will have less to do with how smart, rich, powerful, or good-looking we are.

Rather, their willingness will depend on how willing we are to deliver genuine value to them. People who give a little more than they take live in a world that is rich with opportunity. As I have worked hard to deliver value to others, opportunities have multiplied in all sorts of ways. Better people have come into my life who are willing and interested to share with me. In terms of becoming a better investor, I now have more opportunities to learn.

At the end of our lunch with Buffett, what really drove that insight home for me was when I noticed that Warren was handing the waiters what seemed to be an enormous tip. Warren’s desire to deliver generous amounts of value even extended even to the waiters. In other words, we need to keep investing in and generating goodwill.

Buffett has said: Spend time with people who are better than you, and you can’t help but improve. But the real question is how to attract those people into your life. Luckily, I had a great teacher — my friend Mohnish Pabrai. When I moved to Zurich from New York, I enthusiastically adopted a number of his approaches to business.

Whether it was through my new association with Buffett and a closer friendship with Pabrai, or through my adoption of their approaches to generating goodwill, my learning environment improved greatly. For example, after the lunch I started getting invited to events at the Berkshire Hathaway annual shareholders’ meeting that enabled me to meet and engage with some of the people who run Berkshire’s subsidiary businesses — and who themselves are an extraordinary set of people to have in one’s circle.

And although I’ve been lucky enough to have met with Warren subsequent to our lunch, I certainly can’t say that we chit-chat on the phone or hang out together. But I also have no doubt that he would return my call in short order if I had something worthwhile for him. In my case, that would most likely be a deal that is of interest to Berkshire — perhaps a European power company, or a family owned business that I had managed to interest in selling to Berkshire rather than to a European private equity fund.

Cloning Warren: My own charity lunch

A few years after our lunch with Buffett, my friend Mohnish started auctioning off a lunch with himself to benefit the Dakshana Foundation in India. Taking his cue, this year for the first time I’m auctioning a lunch with myself — also to benefit the Dakshana Foundation. By offering the opportunity for some of India’s least-privileged citizens to study at the country’s best institutions, Dakshana is creating enormous amounts of value, both in the lives of those it helps and for India. In a way, a charity lunch with myself to benefit the Dakshana Foundation closes the loop for me; so much of what I learned at my lunch with Buffett, and from Mohnish, is embodied by the Dakshana Foundation that I feel an obligation to support it.

With just over three days left in the 10-day auction, the bidding is already at $11,100. Sure, that’s far from the $3.3 million the Buffett lunch just sold for, but it’s still interesting for me to see how much people will be willing to bid for up to seven of their friends to have lunch with me. Most of all I’m looking forward to meeting the winner and treating them to an experience that (in my dreams) will top the one I had with Warren and Mohnish a decade ago.

You can read the original article at MarketWatch here.

The Long Term Problem With Growth Stocks

Johnny HopkinsValue Investing NewsLeave a Comment

There’s always lots of discussion about the performance of growth stocks versus value stocks. With this in mind here’s a great article at The Globe and Mail by George Athanassakos, a professor of finance and the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, University of Western Ontario.

Here’s an excerpt from that article:

I know what I report in this article will not make value investors particularly happy, but it will definitely make growth investors downright depressed.

There is plenty and unequivocal evidence from academic research in Canada and around the world that, on average, value stocks (defined as stocks with low price-to-earnings or price-to-book ratios) beat growth stocks (those with a high P/E or P/B). For example, in recent research I carried out using U.S. data, I found that, on average, value stocks beat growth stocks by about 6 per cent over the 1982-2013 period. The results are similar in Canada and in international markets. But do value stocks really deserve an award for being such an outstandingly performing group of stocks? My research suggests not, at least the way academics define value stocks. This is because value stocks beat growth not because value stocks produce an outstanding long-run performance, but rather because growth stocks earn terrible long-term returns.

The P/E (or P/B) multiple is a function of the growth rate of earnings going forward. Companies have low multiples because markets expect low earnings growth. Companies have high multiples because markets expect high earnings growth. The markets tend to be overoptimistic about growth for high-multiple firms and overpessimistic about growth for low-multiple firms. As a result, in theory, investors bid up (overvalue) high-multiple firms and bid down low-multiple firms.

What does the evidence show? Researchers at the Darden School of Business, rather than examining firms based on sorting by P/E or P/B (a proxy for growth expectations), looked at the actual asset growth of U.S. firms over a 40-year period and compared the stock performance of high-growth firms with that of low-growth firms. They found that low-growth firms outperformed the high-growth firms by a whopping 22 per cent, on average per year, over the four decades. But that was primarily because high growth firms experienced very low returns: These stocks tend to attract a lot of attention and a lot of trading by investors, and thus tend to become overvalued, leading to lower returns going forward.

This is consistent with findings in my recent research, which looked at this question from the P/B angle. I examined one year ahead buy-and-hold returns for value (low P/B quintile) and growth (high P/B quintile) stocks across different earnings quality quintiles, defined by net income volatility over a five-year period – the higher the volatility, the lower the earnings quality. I found that while a value premium (defined as the difference between value and growth stock returns) was evident in the total sample (6 per cent), the premium appears to be driven primarily by firms in poorer earnings quality quintiles.

The intuition for this finding is that as growth stocks, on average, tend to be bid up by investors, the less visible ones – which tend also to have poorer earnings quality – are bid up the most and end up having lower returns than the better quality growth stocks. For value stocks, there is no evidence that poor earnings quality exerts a discernible effect.

Having said that, however, there is a silver lining to the story as far as value investors are concerned. It has to do with the fact that academics do not look at (as they do not know) the actual stocks that value investors buy, they only look at stocks value investors consider a potential buy. Value investors sort stocks by P/E or P/B to find potentially undervalued stocks. They then value these stocks to determine their intrinsic value and only then make a decision using the concept of margin of safety.

Value stocks as defined by academics may not be worth buying if they do not meet that margin of safety requirement. In other words, the stocks actually chosen by value investors may have a great performance even if, on average, low P/E or P/B stocks do not.

You can read the original article at The Globe and Mail here.

Why Value Investors Shouldn’t Give Up Just Yet

Johnny HopkinsValue Investing NewsLeave a Comment

Here’s a great article by John Reese at The Globe and Mail which highlights the importance of sticking with a value investing strategy despite its recent underperformance saying:

“Investors shouldn’t abandon value investing, either. If anything, the recent decade-long drought should foretell a reckoning is coming as rising interest rates benefit value stocks.”

Here is an excerpt from that article:

While growth stocks continue to clobber value stocks, causing many investors to question their priorities, it’s not time to declare the death of value investing.

Sure, the technology-heavy Nasdaq is at yet another record high in the ninth year of a broad bull market, led by tech giants Facebook, Amazon.com, Netflix and Google parent Alphabet, not to mention Apple.

The rotation back to value stocks that many people started to anticipate two years ago has yet to materialize in the face of this relentless growth-stock rally. Instead, it seems some well-known value investors have shifted their thinking after five years of losing out.

It’s easy to see why. Without growth stocks, these investors have missed out on much of the gains over the past year. The iShares Russell 1000 Growth ETF is up more than 20 per cent in the past 12 months and 7.9 per cent year-to-date. That compares with the iShares Russell 1000 Value ETF, which is up 5.6 per cent over 12 months, but down nearly 2 per cent so far this year.

Value and growth are often seen as the opposite approaches. The former often represents companies that have mature business models with strong pricing power and steady but modest growth, such as banks, manufacturing and consumer-staples companies. Value stocks are selected based on their price relative to expectations for their prospects, which are presumably better. And they are meant to be bought and held.

Growth companies, on the other hand, are already outperforming the overall market and their peers. They tend to be trendsetters, but they aren’t always profitable and their valuations are subject to the whim of investors chasing hot stocks. Technology generally falls into this category, as do health-care and consumer-discretionary companies.

Still, even some household-name value investors, including Berkshire Hathaway`s Warren Buffett, lately have drifted into big tech stocks such as Apple, where Berkshire is the second-biggest holder as of the end of March. Mr. Buffett even acknowledged at the company’s annual shareholder meeting that he missed an opportunity to invest in Google and Amazon and he has admitted to misreading the opportunity at IBM.

Some of these stocks have taken on the characteristics of both growth and value options. Apple is no longer the pure-play growth stock it once was, with a high-risk, high-reward profile. Instead, it is a brand icon with a stable business and a long-term investment reflecting optimism for consumer spending in the future.

The current market resembles the frothy markets of the late dot-com boom in 1999 and 2000, when those who weren’t investing in hot tech stocks were missing out. There have been other times when growth outpaced value in the past, too. In the late 1960s and early ‘70s, an earlier generation of technology giants dazzled investors. The “nifty fifty” – Xerox, IBM, Polaroid and others – could only make investors richer.

But over a far longer period of time, value stocks have consistently won, outperforming about three out of every five years or so. That’s perhaps because, over the longer term, human bias is less of a factor in returns. Investors naturally gravitate to stocks perceived as “good,” in the recent past, but value investing often means uncovering hidden gems. Evaluating value stocks forces investors to consider the strength of a business compared with expectations, and humans are naturally inclined to underestimate downtrodden companies. For investors, that means missing opportunities.

Mr. Buffett hasn’t given up on his long-held bank and consumer-staples stocks, such as Wells Fargo and Coca-Cola, even though Wells has been under fire over a fake customer accounts scandal and consumer preferences are shifting away from sugary beverages such as his beloved Cherry Coke.

Investors shouldn’t abandon value investing, either. If anything, the recent decade-long drought should foretell a reckoning is coming as rising interest rates benefit value stocks.

You can find the original article at The Globe And Mail here.

Jamie Dimon: Investors Should Not Be Surprised By The Non-Linear Nature of Companies and Markets

Johnny HopkinsInvesting Strategy, Jamie DimonLeave a Comment

Jamie Dimon provides some great insights in his Annual Shareholder Letters at JPMorgan Chase. In his latest letter Dimon makes a great point regarding the non-linear nature of companies and markets. Here’s an excerpt from that letter:

Volatility and rapidly moving markets should surprise no one.

We are always prepared for volatility and rapidly moving markets – they should surprise no one. I am a little perplexed when people are surprised by large market moves.

Oftentimes, it takes only an unexpected supply/demand imbalance of a few percent and changing sentiment to dramatically move markets. We have seen that condition occur recently in oil, but I have also seen it multiple times in my career in cotton, corn, aluminum, soybeans, chicken, beef, copper, iron — you get the point. Each industry or commodity has continually changing supply and demand, different investment horizons to add or subtract supply, varying marginal and fixed costs, and different inventory and supply lines. In all cases, extreme volatility can be created by slightly changing factors.

It is fundamentally the same for stocks, bonds, and interest rates and currencies. Changing expectations, whether around inflation, growth or recession (yes, there will be another recession — we just don’t know when), supply and demand, sentiment and other factors, can cause drastic volatility.

You can read Dimon’s latest shareholder letter here.

This Week’s Best Investing Reads 06/08/2018

Johnny HopkinsValue Investing NewsLeave a Comment

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

Experience is Overrated (A Wealth of Common Sense)

The Next Fifty Years (The Irrelevant Investor)

The Psychology of Money (Collaborative Fund)

The Economy is on Fire (The Reformed Broker)

Bitcoin, Blockchain, and Money (csinvesting)

To Succeed at Value Investing, You Need to Change (GuruFocus)

‘For investors, the danger is already here,’ warns world’s largest hedge fund (MarketWatch)

“Proprietary Product Distribution” is Better than Sliced Bread (25iq)

A $220-billion manager says 2018 is good year for stock pickers (The Globe and Mail)

Cliff Asness: Free Markets, Investing And Fighting Warren Buffett (ValueWalk)

Consistency, the Playground of Dull Minds (Safal Niveshak)

Filings shed light on the secrets of ‘super investors’ (FT)

I Don’t Eat Desserts (Vitaliy Katsenelson)

Paying for Growth, and Public vs. Private Companies (Value Investing World)

Quants and Fundamentalists Unite (All About Alpha)

Six Muddles About Share Buy-Backs (The Economist)

Warren Buffett and Jamie Dimon join forces to convince CEOs to end quarterly profit forecasts (CNBC)

Contrarian Investing (Morningstar)

Machine Learning for Financial Market Prediction — Time Series Prediction With Sklearn and Keras (Alpha Architect)

Value investor Bob Olstein: Quarterly earnings estimates by companies should be ‘illegal’ (CNBC)


This week’s best investing research reads:

Inflating Equity: Inflation’s Impact on Financial Statements and ROE (CFA Institute)

Revisiting The Marshmallow Test (Sage Journals)

Short-Volatility Complex Returns, Defying Wall Street Alarm (Investor’s Business Daily)

Some Bad News for Good News — Optimistic Forecasts Create Recessions (WSJ)

The most expensive currencies in the world right now, in one chart (Business Insider)

What’s Good For Workers Is Bad For Companies (Variant Perception)


This week’s best investing podcasts:

Earning Your Stripes: My Conversation with Patrick Collison (Shane Parrish)

Ash Fontana – Investing in Artificial Intelligence (Patrick O’Shaughnessy)

Grant Williams On The Value Of Surrounding Yourself With Brilliant People And Just Listening (Jesse Felder)

Animal Spirits: Big Mistakes (Ben Carlson & Michael Batnick)

Jonathan Tepper on Buffett, Inflation, and Growth (Preston Pysh & Stig Brodersen)

Forbes: Is Value Investing For Losers? No, So Don’t Get Tricked

Johnny HopkinsValue Investing NewsLeave a Comment

Here’s a recent article at Forbes that discusses the cyclical nature of value investing and the importance of sticking with a value strategy during periods of underperformance, like the most recent one, saying:

“This cycle is deep into the “growth dominates” phase, but the last thing you should do is to discount (pun intended) the role and usefulness of a value-oriented investment approach.”

Here’s an excerpt from that article:

Stock Investors ignore these four charts at their peril

Today, I present you with a set of four charts that tell a largely untold story in today’s markets. They all compare the returns of large U.S. growth stocks to that of large U.S. value stocks. Russell, the big index provider that created the frequently used Russell 1000 Growth and Value Indexes many years ago, separates stocks according to how high their price-to-book value and expected earnings growth rate is. All the charts below compare the ETFs that track these two long-standing measures of large-growth and large-value stocks in the U.S. stock market.

Start with this one, which shows us that growth dominated value during the first five months of 2018. In fact, value was not even positive during this time. For value investors, the “market” has been a very different experience lately.

This next chart (below) shows us that over the past ten years, growth has performed much better than value, by a factor of nearly 2:1.


However, if we zoom back further into market history, we find that the preceding period, from the start of 2000 (as far back as these ETFs go) through early June 2008, it was a completely different picture … literally. Value almost never fell below its starting point, on the way to a 54% cumulative gain. Growth stocks fell more than 40% initially, and were 81% behind Value by the end of the period shown. Indeed, Growth was decidedly negative for this period of more than eight years. Ironically, that deficit nearly matches the outperformance of Growth since that time (early June 2008 through early June 2018).

Lastly, here is a look at the return over the entire period of about 18 years. Value is the clear winner, by 100% in fact.

Does that mean that value is better than growth, or even that growth is better than value? No, but it means that we should understand the difference between them, and not get caught up in the current trash-talking of value-based strategies (including those related to dividend investing) that has been getting louder as the bull market for growth continues.

KEY POINT: like everything in investing, it is cyclical. Investment markets are a constant re-evaluation of individual businesses, and the market collectively. There are opportunities to invest in stocks that offer tremendous value, but that might not be realized for years. And, there are situations that present the chance for traders to pounce on temporary mis-pricings of stocks, which I would argue is a form of value investing, even if the stocks in question are “growth” stocks.

This cycle is deep into the “growth dominates” phase, but the last thing you should do is to discount (pun intended) the role and usefulness of a value-oriented investment approach.

You can read the original article at Forbes here.

Jason Zweig: How Companies Use the Latest Profits Fad to Fool You

Johnny HopkinsJason Zweig, Value Investing NewsLeave a Comment

Here’s a great article by Jason Zweig at the WSJ which discusses how companies use the latest profits fad to fool investors:

Eighty-six years ago this week, the stock market hit its worst low. Today, with markets near all-time highs, things aren’t as different as you might think.

Then, as now, companies and investors were engaged in a massive power struggle. Then, companies were worth far more than investors thought — and would do almost anything to keep investors from unlocking the hidden value. Today, companies may be worth less than investors think — and are equally intent on preventing investors from noticing.

On June 1, 1932, the great investment analyst Benjamin Graham published an essay called “Inflated Treasuries and Deflated Stockholders: Are Corporations Milking Their Owners?”

That day, the predecessor of the S&P 500 index hit its all-time low of 4.40. The Dow Jones Industrial Average closed at 44.93. Total trading volume was 1.8 million shares.

Amid the bearish stupor, Graham detected something outrageous: Companies were cloaking their true worth from investors.

In the boom of the Roaring Twenties that preceded the 1929 crash, investors had complacently pumped billions into new stock offerings, wrote Graham, with “excessive emphasis being laid on the reported earnings — which might only be temporary or even deceptive.”

After the crash, companies were flush with cash and investors beggared. Still, leading businesses refused to liquidate their stagnant operations and wouldn’t pay out cash in extra dividends or by repurchasing their stock. This despite the fact many traded below the value of their cash per share.

The few companies that did buy back shares often first cut or skipped a dividend, spooking investors into thinking bankruptcy was looming. Financial reporting was sparse, and making the business look even worse than it was paid off — for insiders.

“Corporation treasurers sleep soundly while stockholders walk the floor,” growled Mr. Graham.

Today’s high-flying market looks like a polar opposite. But information is still power.

You can read the rest of the article at the WSJ here.