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Sheryl Sostarich

10/23/2007 3:35 PM
Welcome back to the After Hours Book Forum. Today we begin our discussion of The Little Book of Value Investing by Christopher H Browne. This is one in a series of little books on investing, wherein the author details his mindset and philosophy about value investing. Christopher Browne is a managing director of the 86-year old investment management firm, Tweedy, Browne and Reilly. This entity has been an advisor to two of the most respected investors that ever lived, namely, Benjamin Graham and Warren Buffett. It is no surprise that The Little Book of Value Investing is filled with quotes from these two market mavens or that the book dwells on the concepts of intrinsic value and margin of safety. Sir John Templeton dislikes being called a contrarian. How is a value investor different from a contrarian investor? What can growth investors learn from value investors? I look forward to your responses and comments. Sheryl Sostarich Ssostar@comcast.net

Eric Chlan

10/26/2007 6:51 AM
Sheryl I love the idea of a book forum. I could not imagine how much time it took to find value stocks before the internet. I wonder if Graham would have ben as successful if he had as much technology as we have today. I think when information is more available so easy that it effects the chances of finding that nugget of a company through all the dirt. On the other hand bad news is spread faster then it was then. I think a contrarian always goes the opposite of the majority and a value invester is looking for quality stock at a great price. Good day.

Kate Laird

10/26/2007 2:28 PM
I'm excited about joining the forum. I purchased The Little Book of Value Investing several months ago and found it to be a quick read. Being fairly new to investing I like the idea of finding stocks "on sale"! What I need to do now is decifer the book bit by bit to implement the advice. In to many instances I imagine the growth investor will pay too much for the stock. If they use the methodology of value investing they're able to get the same company at bargain prices. Patience and good research is key. Yet - as we know - many investors purchase on good news. Maybe the value investor just has to wait for bad news to get the bargain! Where would the bargains be if everyone was a value investor?! Kate Laird

Joe Craig
Ellicott City, MD
StockCentral Administrator

10/27/2007 12:07 PM
Sheryl, I hope that your discussion will help to define "Value" investing and compare it to "our" style of investing. How to the approaches differ? How are they similar? Some have described our approach as "Growth At a Reasonable Price." I presume that the reasonable price part has to do with value. Is that right? Or is it different?

Joe

Jeanie Krieger

10/29/2007 11:41 AM
I had to look up contrarian investing because I wasn't sure what it meant. Here's a very understandable post from wikipedia.org. Contrarian Investing In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. Similarly, widespread optimism can result in unjustifiably high valuations that will eventually lead to drops, when those high expectations don't pan out. Avoiding investments in over-hyped investments reduces the risk of such drops. These general principles can apply whether the investment in question is an individual stock, an industry sector, or an entire market or asset class. Contrarians are sometimes thought of as perma-bears—market participants who are permanently biased to a bear market view. However, a contrarian does not necessarily have a negative view of the overall stock market, nor does he believe that it is always overvalued, or that the conventional wisdom is always wrong. Rather, a contrarian seeks opportunities to buy or sell specific investments when the majority of investors appear to be doing the opposite, to the point where that investment has become mispriced. While more "buy" candidates are likely to be identified during market declines (and vice versa), these opportunities can occur during periods when the overall market is generally rising or falling. Similarity to Value Investing Contrarian investing is related to value investing in that the contrarian is also looking for mispriced investments and buying those that appear to be undervalued by the market. Some well-known value investors such as John Neff have questioned whether there is a such thing as a "contrarian", seeing it as essentially synonymous with value investing. One possible distinction is that a value stock, in finance theory, can be identified by financial metrics such as the book value or P/E ratio. A contrarian investor may look at those metrics, but is also interested in measures of "sentiment" regarding the stock among other investors, such as sell-side analyst coverage and earnings forecasts, trading volume, and media commentary about the company and its business prospects. In the example of a stock that has dropped because of excessive pessimism, one can see similarities to the "margin of safety" that value investor Benjamin Graham sought when purchasing stocks -- essentially, being able to buy shares at a discount to their intrinsic value. Arguably that margin of safety is more likely to exist when a stock has fallen a great deal, and that type of drop is usually accompanied by negative news and general pessimism. [Notable Contrarian Investors David Dreman is a money manager often associated with contrarian investing. He has authored several books on the topic and writes the "Contrarian" column in Forbes magazine. John Neff, who managed the Vanguard Windsor fund for many years, is also considered a contrarian, though he has described himself as a value investor (and questioned the distinction). Examples of Contrarian Investing Dogs of the Dow is arguably an example of a simple contrarian strategy. When purchasing the stocks in the Dow Jones Industrial Average that have the highest relative dividend yield, an investor is often buying many of the "distressed" companies among those 30 stocks. These "Dogs" have high yields not because dividends were raised, but rather because their share prices fell. The company is experiencing difficulties, or simply is at a low point in their business cycle. By repeatedly buying such stocks, and selling them when they no longer meet the criteria, the "Dogs" investor is systematically buying the least-loved of the Dow 30, and selling them when they become loved again. During the Dot com bubble an investor would have profited by avoiding the technology stocks that were the subject of most investors' attention. Asset classes such as value stocks and real estate investment trusts were largely ignored by the financial press at the time, despite their historically low valuations, and many mutual funds in those categories lost assets. These investments experienced strong gains amidst the large drops in the overall US stock market when the bubble unwound. -------------------- Jeanie Krieger

Sheryl Sostarich

10/29/2007 12:22 PM
I'm delighted that Eric has taken the time to thoughtfully read The Little Book of Value Investing by Christopher Browne. I agree with your response to the question how is a contrarian investor different from a value investor? A contrarian investor is one who buys securities when everyone is fearful and sells securities when everyone is greedy. A value investor is one who has studied the fundamental characteristics of a company and buys quality companies at a discounted price. Sir John Templeton is a contrarian in the sense that he had the foresight to short the prominent Internet and technology stocks at the height of the 1990s technology bubble. He is a value investor because he has done the homework and waits for buying opportunities in high-quality companies. Sir John Templeton is a true mentor for value investors. Sheryl Sostarich Ssostar@comcast.net

Sheryl Sostarich

10/30/2007 2:19 PM
Warren Buffett is quoted often in The Little Book of Value Investing. His investment style has earned him a place among the greatest of value investors. He bought a stake in the Korean steelmaker, Posco because the company has a high return on equity, has strong cash flows, and has very little debt. Above all, it was a cheap stock. Buffett sold his stake in PetroChina because of the huge run-up in price. In a recent interview, Buffett said that "he isn't interested in buying depressed homebuilders unless they are selling below what he feels they're worth." What do value investors mean when they say, buy investments with a margin of safety? Sheryl Sostarich Ssostar@comcast.net

Diane Windingland

11/11/2007 11:19 AM
I just finished chapter 14 "Send Your Stocks to the Mayo Clinic"--Wow! I love those 15 questions--I'm planning on typing them out and saving them for future reference. I find myself wanting to apply the information in chapters 12-14--as a newbie investor, I could certainly use the experience in looking at balance sheets and income statements. I do have a detailed question regarding a statement on p. 96. regarding cost of goods sold: "Sometimes higher expenses may indicate softening demand that may or may not be due to cyclical effects." How does softening demand translate into higher expenses? Wouldn't it show up as reduced revenue?

Karen OBoyle
Denver, Colorado

11/12/2007 12:23 PM
Diane, I'm thinking that softening demand might cause higher prices because buying the raw materials for producing the products often is purchased in bulk - with discounts for higher volumes purchased. It may also be cheaper to manufacture in larger volumes - the costs (electiricty, machinery, etc) get spread over more products. Just a thought - I'm sure others wil come up with more. Karen

Karen OBoyle

Sheryl Sostarich

11/26/2007 12:50 PM
Diane has given The Little Book of Value Investing a thoughtful read and I compliment her. Diane especially liked Chapter 14 -- Send Your Stocks to the Mayo Clinic. This chapter has been described by one book reviewer as "the best chapter in the book." The 16 questions are a comprehensive checklist for helping you choose quality stocks for your portfolio. Value investors are intensely focused on the fundamental characteristics of a company. They want to own quality companies when they are temporarily on sale. Diane asked about the term softening demand as referenced on page 96 of The Little Book of Value Investing. The cost to produce goods is fixed because, at some point, a company has implemented all the ways there are to produce its products as cheaply as it can. If there is a softening in demand, there will be a build up of inventories on the balance sheet. In some industries, consumer electronics for example, there is a short shelf life, as existing goods are made obsolete by newer designs. Sometimes, the only way to move product is to sell it at or below cost and this is what is termed margin squeeze. A softening demand for products can have a devastating effect on earnings. It is up to you to watch for the telltale signs of an impending selloff in your equity holding, that is, rising inflation, softening demand, declining pretax profit, and no new products in the pipeline. Sheryl Sostarich Ssostar@comast.net

Sheryl Sostarich

11/27/2007 4:25 PM
Chapter 3 of The Little Book of Value Investing discusses Benjamin Graham's philosophy of investing. Benjamin Graham sought to buy companies selling for two-thirds of their intrinsic value. He preferred companies with very little debt and he believed strongly in diversifying one's portfolio. It's a lot easier to value a company with tangible assets such as Pepsi, Best Buy, McDonald's but what about the services stocks like Google, Ebay, FCStone, Genentech, Infosys Technologies? What do you do in researching a company to decide whether it's a good buy? Sheryl Sostarich Ssostar@comcast.net

Sheryl Sostarich

11/28/2007 11:04 AM
I posted a reply to the After Hours Book Forum on Tuesday, November 27 wherein I asked the participants of this forum how they go about valuing the companies they invest in. David asked me why I included Genentech in a list of services companies. Isn't Genentech a manufacturer? Yes, Genentech is a manufacturer and not a services company. I included Genentech on the list because it is an extremely difficult company to value. A good many biotech companies have only the promise of a product. It often takes a decade or more of clinical testing for these companies to discover one or two medical breakthroughs to allow them to attain profitability. How do you value a company without a commercialized product? Sheryl Sostarich Ssostar@comcast.net

Sheryl Sostarich

11/29/2007 3:59 PM
The market turmoil may have made it easier for investors to find bargains but the most important issue for a value investor is a company's intrinsic value, not its share price. It's not just stock prices that are dropping in the financial sector, so are intrinsic values. Profits at 8,560 FDIC-insured institutions dropped 24.7% in the third quarter 2007 to $28.7 billion due to soaring defaults and higher loan loss provisions. Loans more than 90 days delinquent, jumped 58% to $83 billion, mostly residential mortgages. And we are just crossing the period when adjustable rate mortgages will reset. Wells Fargo has fared the best of the mortgage bankers but it delivered a surprise of its own on Tuesday. The lender will take a $1.4 billion pretax charge on its fourth quarter 2007 earnings because of higher than expected losses in its home-equity loan portfolio. I'm disappointed that management has waited until now to fully describe its subprime exposure. Standard and Poor's says it won't lower the company's credit rating, citing Wells' strong capital base and earnings diversity. Moody's says it won't lower the company's credit rating either, feeling confident that the losses on Wells' $71.5 billion home-equity portfolio will be modest. When Warren Buffett starts to pare his 8.3% stake in Wells Fargo, I'll give serious thought to following his lead. Sheryl Sostarich Ssostar@comcast.net

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