Value Investing
Tony Gauvin
® Tony Gauvin, 2007
Value investing
• Long-term growth
• Long term investing.xls
• Increases net worth over time
• Based on techniques for estimating the
“value” of a share of stick
• Many techniques
• Not all techniques work at any given time
• No technique works all the time
• The “heart” of value investing is research
& discipline
® Tony Gauvin, 2007
Background
• Graham & Dodd (1934)
• Shares appear to be under priced based
on some form of fundamental analysis
• Security Analysis
• High Dividend Yield
• Dividend yield greater than discount rate
• Low Price to earnings
• 1/pe > discount rate
• Low Price to Book
• PB < 1
® Tony Gauvin, 2007
Value investing as time progressed
• 1949 B. Graham wrote the Intelligent
Investor
• Margin of safety
• Build a 15 Ton Bridge for a 10 Ton Truck
• “Mr. Market”
• Just because “Mr. Market” is irrational doesn’t
mean you should be too
• 1954 Templeton Fund (15%APR)
• 2000 + Warren Buffet becomes the second
richest man in the world by practicing
value investing ® Tony Gauvin, 2007
Mr Market
Graham’s parable goes something like this. Think of yourself as
owning a share in a business in partners with others. One of
your partners, say Mr Market, is somewhat of a neurotic who
on any given day will offer to buy your share or sell you his at
a specific price. His moods can fluctuate anywhere between
incredible optimism and overwhelming depression. One day he
will nominate a higher price to buy or sell, the next day he
might increase it, lower it, or even appear uninterested in
whether he buys or sells.
The point that Graham makes is that Mr Market’s judgment is
formed more by mood swings that by rational thought and that
this gives the wise investor buying and selling opportunities. If
Mr Market’s price is unreasonably high, then wise investors
have the opportunity to sell. On the other hand, if it is
unreasonably low, then they have the opportunity to buy.
.
http://www.buffettsecrets.com/mr-market.htm
® Tony Gauvin, 2007
Oracle of Omaha
• Warren Buffet
• the essence of value investing is buying stocks at
less than their intrinsic value.
• Discounted value of future earning/distribution/growth
• "finding an outstanding company at a sensible
price"
• the nice thing about investing is that every day
the pitcher throws you a ball and you don't have
to swing. So you can wait for your pitch and then
hit it out of the park. And that's the good news
that is always true
® Tony Gauvin, 2007
Famous Warren Buffet quotes
• Wide diversification is only required when investors
do not understand what they are doing.
• If a business does well, the stock eventually follows
• Our favorite holding period is forever.
• Only buy something that you'd be perfectly happy
to hold if the market shut down for 10 years
• The first rule is not to lose. The second rule is not to
forget the first rule.
• If past history was all there was to the game, the
richest people would be librarians
® Tony Gauvin, 2007
Things you should know
• Stock markets are Predator prey relationship
• To buy a stock someone must sell it
• Why would any one sell a stock that is worth more than
that what they are getting??
• For you to be right, someone else has to be wrong
• The currency of stock markets is not money but
information
• Knowing something that no one else know is profitable
• That is why insider trading is illegal (ask Martha Stewart)
• Traders who harness information are Wolves, all else
are sheep
• Get smart or get broke!
® Tony Gauvin, 2007
How it works (at least for me)
3 Steps
Search Strategy
1. Find a pool of sticks to research
Valuation strategy
1. IN or OUT
2. I pick I have elimination rules
1. Intangible assets!
2. “cooking the books”
3. Find a true value for the stock
A disciplined approach to buying and selling
•
If things are not working right change 1 or
2! Stick to the discipline!
® Tony Gauvin, 2007
Search Strategy
• Guidelines a pool of potential stocks
• Pick obscure stocks but not “penny stocks” or OTC
• Stocks that have “low visibility”, high visibility means no
surprises
• Not too many analyst covering the stock
• < five for small cap
• < ten for mid cap
• Not too much institutional ownership
• I like 20-60%
• Use fundamentals to pare down list
• Go with what you know, limit your self to industry you have
experience with
® Tony Gauvin, 2007
Search Using MSN Stock Screener
• Two Modes
• Deluxe
• Power searches
• Power Searches Fundamental screens
•
•
•
•
Dogs of the dow
Great Expectations
GARP
Righteous rockets
• Deluxe
• Low P/E < Industry
• Price/book <= 1.5
• % institutional ownership > 10 , < 60
® Tony Gauvin, 2007
Valuation Strategy
• There are too many to explain
• http://www.12manage.com/i_fi.html
• Best use forecasts of future growth
(earning/dividend/equity) to develop current
discount prices
• http://www.moneychimp.com/articles/valuation/s
tockvalue.htm
• Choice is pick a model someone has develop OR
develop you own
• Either way do the analysis your self
• “True” value
• Hard look at the company
® Tony Gauvin, 2007
Discipline
• Buy when stocks are 30% below true
valuation based on your model
• Sell based on periodic reevaluation of stock
• when stocks reaches 95% of the valuation your
model predicts
• When stocks fall 10% below the price you bought
them it redo your model
• Did you do something wrong? or is this a chance to buy
more (greater vale)
• Don’t “stock watch”
• That’s for swing, momentum and day traders
(graham’s Mr. Markets)
® Tony Gauvin, 2007
Best Rule to follow
In a bear market buy, in
a bull market sell
The secret is knowing what to buy
and what to sell
® Tony Gauvin, 2007