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I was shocked! A recent article by Seeking Alpha proclaims the death of value investing.
Hi. I am Dr. Scott Brown. I am the Rhodes Society co-founder along with wealth attorney Daniel Hall, JD.
Check out our cutting-edge investment club over at Rhodes Society dot org.
The bible of value investing is Security Analysis by Columbia finance professor Benjamin Graham. He printed the first edition in 1934 with less well known fellow faculty member David Dodd. They pencil out a three-point model to explain the valuation of common stock.
The first is the dividend rate and record. Zealots point out that dividend yield should be at least two thirds of investment grade bond yields according to the Graham and Dodd original recipe.
The second is the earning power in the income statement. This is measured by earnings yield which is also called the earnings per share or EPS. A company with deep value would have an EPS at least double triple A bond yields and a price no greater than sixteen times earnings.
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The third is the asset value in the balance sheet. Debt should not be greater than two-thirds liquidation book value according to the value investing bible.
Another Ben Graham strategy is to scour bargain basement lists of firms with share prices trading below net asset value. Bestselling financial author and famed value investor Mohnish Pabrai calls companies trading below liquidation value to be “net-net” opportunities. In the United States today valuations are so high that not a single firm qualifies as a deep value net-net opportunity from the Dodd and Graham filter according to GMO, a well-known investment firm. Does this mean that value investing is dead?
Friedrich Nietzsche famously stated that God is dead. The philosophical genius was not trying to draw followers away from Christianity. What he meant was that individual members of society must think for themselves rather than be led around by Dogma dictated by Church leaders.
At the time the Catholic church was the largest component of the European political economy. Nietzsche was also living during the inception of Lutheran protestant Germany.
And these two forces dictated what roads scientists could safely purse.
Doctor Nietzsche writes that freedom is won in independently deciding right or wrong on the path to determining one’s definite major purpose in life. Professor Nietzsche admitted that neither task is easy.
Socrates said much the same in a different way. He taught that a life un-examined was not worth living.
Greek society did not like him for it. He was sentenced to death as a radical.
The pinkos didn’t pick up Socrate’s message either. Marx’s partner in crime Engel felt that a life without women wasn’t worth living.
And by the way I prefer Bill and Ted’s pronunciation of Socrates. Trust me.
The American pronunciation is wrong.
Panayiotis Theodossiou is a finance professor and Dean of the Faculty of Management and Economics at the Cyprus University of Technology. He is also an expert on Socrates.
And when he says Socrates in Greek it doesn’t sound anything like what comes out of our American mouths.
Both of these “think for yourself” philosophers described the introspective philosophy of famed value investor Warren Buffett exactly.
The danger with the deep value filters employed by such financial professionals as GMO is that the dogma of value investing obscures true independent analyses. Esteemed value investor Mohnish Pabrai explains that such intensive stock research can be injurious to your financial health in a YouTube video of the same title.
He describes an important lesson from Charlie Munger who noticed how quickly bias formed in the minds of Berkeley law students arguing cases in class. Munger points to a best ideas fund by that experienced dismal returns because of bias.
How can we eliminate bias from our independent financial analysis of the stocks we buy and sell as investors? Mohnish Pabrai offers up a simple hack.
First spend very little time on a given company.
Buffett trained himself at the beginning of his career by scanning each page of the Moody’s manual which summarizes the key information of thousands of stocks one page per firm. As a mature investor Warren Buffett enjoyed stellar returns in Korea.
He purchased shares of firms he did not know in exact detail. He discovered these opportunities by rapidly scanning through a manual with thousands of stocks with summary information of each firm on one page.
The Japan Company Handbook is another example. Buffett will scan tens of thousands of companies a year across different stock markets around the world.
Pabrai points this out to emphasize that Buffett does not spend much time analyzing a particular company. “It has to be a stock that just stops you in your tracks” he explains “a hundred thousand in book value trading at forty thousand making twenty-five thousand a year.
Many firms are scanned but very, very few are chosen. Those that are chosen must have a pattern that hits Buffett over the head with a two by four.
Warren Buffet typically decides “no” after scanning a company in ten seconds. Mohnish discovered from reading Berkshire Hathaway letters to shareholders the importance of being extremely selective.
This frees up a lot of time for Pabrai to intensively study just a few businesses after scanning a lot of stuff on the horizon before letting it in. Once a company really grabs him then and only then does he take the time to really get to know it.
Case in point is that he spent two months studying General Motors and Fiat Chrysler which both had unusual traits.
He earned eleven hundred percent on his value investments from two thousand to twenty thirteen.
Some stock investing opportunities come through the door that are obvious no-brainers. Warren Buffett when approached with the opportunity to buy Dairy Queen was able to make an offer in a half an hour because of the clarity that arises from this approach.
Make sure you pick up Security Analysis by Graham and The Dhando Investor by Mohnish Pabrai on Amazon. Both are excellent reads that will help you understand Buffett better.
Then google “Warren Buffet Letters to Shareholders.”
That’ll get you to the right part of the Berkshire Hathaway website to download and read each free of charge. Don’t forget to pick up the book “The Big Short” by Michael Lewis for a raw look at the stinking armpit of Wall Street.
And for fun watch the nineteen eighty-nine Keanu Reaves flick “Bill & Ted's Excellent Adventure.”
What’s the monster takeaway from this podcast? And it is a monster.
It’s vital to your financial health to flip through summaries of thousands of companies from time to time. And the more mindless you make it the better.
This gives you a shot at tapping your unconscious mind.
These summaries may be complicated data gleaned from the financial statements. Or they can be simple price and volume data charted over time.
But I ask you this. Do you want monster paydays?
Either way you must sit and stare with sparkly eyes. And very good things only come to investors who stare at goats.