We'd make Benjamin Graham proud

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
Taggart
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We'd make Benjamin Graham proud

Post by Taggart »

We'd make Benjamin Graham proud

SCOTT ADAMS

INVESTMENT EDITOR

June 1, 2007

WHAT ARE WE LOOKING FOR?

Today we'll get some help from Bob Tattersall, executive vice-president of Howson Tattersall Investment Counsel, and Benjamin Graham, the dean of value investing. Mr. Tattersall suggests a value screen based on what Mr. Graham calls net current asset value.
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Post by bubbalouie »

The article had a list of stocks that'll I'll be checking out. Thx.

I believe it was Tattersall that said, mainly in regard to smallcaps, that trading liquidity improves when a company's fundamentals improves.
I've seen this many times. Really, if one likes a company, just buy it despite the liquidity concerns imo; the liquidity will usually take care of itself.
"They misunderestimated me." --George W. Bush, November 6, 2000
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Post by NormR »

I don't think that most of DHOM's current assets (i.e. investments in land) are really all that current.

Irwin was in this one. Here's why he left
Unfortunately, housing demand slowed sharper than we expected in Ohio and Kentucky and DHOM struggled to find new buyers for its homes. Unit sales declined 24% in 2005, and 30% in the first nine months of 2006. Despite rising costs and falling sale prices, DHOM continued to invest in new housing projects. This hurt margins and left virtually no free cash remaining for debt reduction or share repurchases. With many economists predicting another tough year ahead for housing markets, we are concerned about both the company’s ability to generate free cash flow and its deteriorating balance sheet. While DHOM sales could eventually return to previous levels, we are however, no longer comfortable with the company’s debt level given that earnings and free cash flow are likely to remain negative for the foreseeable future. After considerable analysis, we decided to sell our shares upon learning that DHOM’s debt had been sold by its banks to two hedge funds. We are concerned that the hedge funds’ interests may not be aligned with the interests of equity holders.
Net Net stocks are now very rare in North America. Look carefully if you find them. It is likely that your data is wrong in some way.
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Post by bubbalouie »

Net Net stocks are now very rare in North America.
norm, i'm not following you; what do you mean by this?
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Post by NormR »

bubbalouie wrote:
Net Net stocks are now very rare in North America.
norm, i'm not following you; what do you mean by this?
Sorry, Net Net is short form for net net working capital. The extra net indicates the removal of total liabilities instead of just current liabilities. The notion being, you find how much cash (and very near cash) the company has and remove all liabilities.

I believe the article was looking for such net net stocks. But the wording was a little vague. I'm not sure if they used current assets - total liabilities or current assets - current liabilities. The former is more in keeping with Graham.

Anyway, I look for such stocks from time to time. In recent years there have only been a handful of them and most are ugly for very good reasons. More, and higher quality candidates, appear in major downturns.

Apple was almost a net net when I bought it near $7.
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Post by bubbalouie »

Apple was almost a net net when I bought it near $7.


Thx for explaining net net.

I recall Apple had a ton of cash/share at one time. Too bad I missed it.
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Post by Taggart »

bubbalouie wrote:The article had a list of stocks that'll I'll be checking out. Thx.

I believe it was Tattersall that said, mainly in regard to smallcaps, that trading liquidity improves when a company's fundamentals improves.
I've seen this many times. Really, if one likes a company, just buy it despite the liquidity concerns imo; the liquidity will usually take care of itself.
Then you should have no problem buying on the OTC market in the U.S. That's where you'll probably find most of the net-net's. As for myself, I refuse to buy anything on the OTC due to a bad experience with liquidity problems for some ADR's I bought and sold a number of years ago.

------------------------------------------

Here's what Charles Brandes said about net-net's on page 62 of his Third Edition book "Value Investing Today".

Graham's most famous screen for value focused on "net-net" current assets. He calculated this value by subtracting all of a company's liabilities-the total amount of money owed to various creditor's-from it's current assets, which essentially equal the company's cash or near cash (such as receivables) on hand. In other words, a company with positive net-net current assets theoretically could pay off all of it's debtholders' claims using its cash on hand and still have cash left over.

Graham believed that if a stock's price was less than two-thirds of net-net current assets per share-and if the company was currently profitable-investors needed no other yardstick: The stock was a buy. The reasoning behind this rule is straightforward. When share price is less than two-thirds of net-net current assets, investors can effectively buy this excess cash for less than 67 cents on the dollar and get a full claim on the company's permanent assets for free. In Graham's eyes, this was an extremely attractive investment as long as the company in question was currently generating profits.

"What about companies that qualified except for recent profitability?" I asked Graham. These companies he told me, were dangerously situated. He believed losses could rapidly burn up corporate assets and subsequently endanger the potential payoff of an investment.

Admittedly, during Graham's lifetime, few companies met the stringent criteria of the net-net method-except at the bottom of major market declines. And today, elevated valuations and increased investor vigilance make it nearly impossible to find a profitable company selling at a one-third discount to its net-net current assets.

--------------------------------------------

Here's a few blogs that will give you further insight on the method:

One

Two

Three
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Post by kcowan »

Taggart wrote:Then you should have no problem buying on the OTC market in the U.S. That's where you'll probably find most of the net-net's. As for myself, I refuse to buy anything on the OTC due to a bad experience with liquidity problems for some ADR's I bought and sold a number of years ago.
Another reason for avoiding them is that, when the TSXV got cleaned up, the Howe Street Boys and their buddies all escaped to the OTC and Pink Sheets.

Never believe anything that an OTC company says.

Are there exceptions? Yes. How can you find them? With great difficulty. IMHO
For the fun of it...Keith
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Post by NormR »

From the original article,
Investors need to ask themselves if the assets and inventory are valued properly, and if the accounts receivable are collectible? Also, we now worry about non-balance sheet liabilities, such as environmental issues and pension deficits, which were probably not an issue in Ben Graham's day, Mr. Tattersall says.
Add severance costs. For many small Net Net stocks, much less than expected can be realized on liquidation.

Another problem is that management may be happier burning through the cash rather than returning it to shareholders. Several dot-com stocks passed the test a few years ago. Lots of cash raised in the IPO but no real business and a very high burn rate . . .

Most non-specialists should consider Graham's other methods instead. I'm currently updating Graham's Simple Way where one can select from many large-cap stocks. (Preliminary numbers indicate last year's gains were almost 27%)
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Post by Lado »

Stocks from the S&P/TSX Composite Index having an earnings yield greater than 10% are:

CANFOR CORPORATION 23.04
WEST FRASER TIMBER CO. LTD. 22.1
METHANEX CORPORATION 19.65
HUDBAY MINERALS INC. 19.02
INNVEST REAL ESTATE INV. TRUST 18.54
SAVANNA ENERGY SERVICES CORP. 16.47
NORTHGATE MINERALS CORP. 14.83
PRECISION DRILLING TRUST 14.27
PINETREE CAPITAL LTD. 14.21
CRESCENT POINT ENERGY TRUST 13.96
CANWEST GLOBAL COMMUNICATIONS 13.08
ANVIL MINING LIMITED 12.99
INMET MINING CORPORATION 12.86
AUR RESOURCES INC. 12.57
TECK COMINCO LIMITED 12.51
TRANSFORCE INCOME FUND 12.17
KINGSWAY FINANCIAL SERVICES 11.44
SHERRITT INTERNATIONAL CORP. 11.06
ALGOMA STEEL INC. 10.64
ENCANA CORPORATION 10.06


Format isn't perfect I know. The number following the company name is the earnings yield.


CANFOR CORPORATION 0.12
WEST FRASER TIMBER CO. LTD. 0.29
METHANEX CORPORATION 0.2
HUDBAY MINERALS INC. 0.01
INNVEST REAL ESTATE INV. TRUST 0.81
SAVANNA ENERGY SERVICES CORP. 0.1
NORTHGATE MINERALS CORP. 0
PRECISION DRILLING TRUST 0.04
PINETREE CAPITAL LTD. 0.02
CRESCENT POINT ENERGY TRUST 0
CANWEST GLOBAL COMMUNICATIONS 1.58
ANVIL MINING LIMITED 0.01
INMET MINING CORPORATION 0.03
AUR RESOURCES INC. 0.04
TECK COMINCO LIMITED 0.08
TRANSFORCE INCOME FUND 0.29
KINGSWAY FINANCIAL SERVICES 0.41
SHERRITT INTERNATIONAL CORP. 0.12
ALGOMA STEEL INC. 0
ENCANA CORPORATION 0.15

The number following the company name above is the long term debt/market cap. For value stocks I like to stick with a ratio less than 0.25 which would leave us with the following:

ALGOMA STEEL INC. 0.00
ANVIL MINING LIMITED 0.01
AUR RESOURCES INC. 0.04
CANFOR CORPORATION 0.12
CRESCENT POINT ENERGY TRUST 0.00
ENCANA CORPORATION 0.15
HUDBAY MINERALS INC. 0.01
INMET MINING CORPORATION 0.03
METHANEX CORPORATION 0.20
NORTHGATE MINERALS CORP. 0.00
PINETREE CAPITAL LTD. 0.02
PRECISION DRILLING TRUST 0.04
SAVANNA ENERGY SERVICES CORP. 0.10
SHERRITT INTERNATIONAL CORP. 0.12
TECK COMINCO LIMITED 0.08



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Post by Lado »

I should have provided a disclosure. I am a happy owner of Aur Resources.

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Post by NormR »

Lado wrote:long term debt/market cap.
That's an unusual ratio.
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Post by Lado »

That's an unusual ratio.
I don't pretend to be normal!

I am testing this strategy as time allows. From what I have seen so far I wouldn't bet the farm on this simple search. More criteria may be required to weed out those stocks which are cheap for a reason.

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Post by Lado »

I would place money on the following stocks having a better-than-market return for the next twelve months:

Amerigo Resources
Divestco
Endeavour Mining
Hudbay Minerals
Imperial Metals
March Networks
Methanex
Quadra Mining

This list is based on a screen only. Your thoughts Norm.

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Post by NormR »

Lado wrote:I would place money on the following stocks having a better-than-market return for the next twelve months:

...

This list is based on a screen only. Your thoughts Norm.
Sorry, I can't comment
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Post by Taggart »

kcowan wrote:
Taggart wrote:Then you should have no problem buying on the OTC market in the U.S. That's where you'll probably find most of the net-net's. As for myself, I refuse to buy anything on the OTC due to a bad experience with liquidity problems for some ADR's I bought and sold a number of years ago.
Another reason for avoiding them is that, when the TSXV got cleaned up, the Howe Street Boys and their buddies all escaped to the OTC and Pink Sheets.

Never believe anything that an OTC company says.

Are there exceptions? Yes. How can you find them? With great difficulty. IMHO
The old time investors like Graham, Schloss, Buffett, Tweedy Browne, Carret, and Kahn, they all invested at one time or another in the OTC pink sheets, but they knew how to pick out the few jewels from the garbage. I'm sure they passed on information to one another, plus they knew what they were doing. I don't, so I stay away.
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Post by WishingWealth »

Remembering a Classic Investing Theory NY Times.
...Today, the Graham-Dodd approach produces a very different picture from the one that Wall Street has been offering. Based on average profits over the last 10 years, the P/E ratio has been hovering around 27 recently. That’s higher than it has been at any other point over the last 130 years, save the great bubbles of the 1920s and the 1990s. The stock run-up of the 1990s was so big, in other words, that the market may still not have fully worked it off.

Now, this one statistic does not mean that a bear market is inevitable. But it does offer a good framework for thinking about stocks.

Over the last few years, corporate profits have soared. Economies around the world have been growing, new technologies have made companies more efficient and for a variety of reasons — globalization and automation chief among them — workers have not been able to demand big pay increases. In just three years, from 2003 to 2006, inflation-adjusted corporate profits jumped more than 30 percent, according to the Commerce Department. This profit boom has allowed standard, one-year P/E ratios to remain fairly low.

Going forward, one possibility is that the boom will continue. In this case, the Graham-Dodd P/E ratio doesn’t really matter. It is capturing a reality that no longer exists, and stocks could do well over the next few years.

The other possibility is that the boom will prove fleeting. Perhaps the recent productivity gains will peter out (as some measures suggest is already happening). Or perhaps the world’s major economies will slump in the next few years. If something along these lines happens, stocks may suddenly start to look very expensive.

In the long term, the stock market will almost certainly continue to be a good investment. But the next few years do seem to depend on a more rickety foundation than Wall Street’s soothing words suggest. Many investors are banking on the idea that the economy has entered a new era of rapid profit growth, and investments that depend on the words “new era” don’t usually do so well.

That makes for one more risk in a market that is relearning the meaning of the word.
http://www.nytimes.com/2007/08/15/busin ... ref=slogin

WW


Historic P/E Graph.
http://www.nytimes.com/imagepages/2007/ ... HARDT.html
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Post by Taggart »

Financial Times

An investor’s classic shows its value again

By John Authers

Published: June 17 2008 03:22

The biggest event in the world of investment publishing this year looks certain to be the re-publication of a book that came out almost three-quarters of a century ago.

Security Analysis, by the late Benjamin Graham and David Dodd, was the tome that launched value investing. It was first published in 1934. McGraw Hill is publishing a sixth edition of their magnum opus later this year, and it is hard to imagine better publicity.

Warren Buffett, no less, announces in a foreword that the book “laid out a road map for investing that I have now been following for 57 years. There’s been no reason to look for another.”

A more effective endorsement for an investment book would be harder to come by. But it also raises important questions. If Mr Buffett has no reason to look for another investment road map, what is the need for another edition? And Mr Buffett, and many others, have built more on the foundations laid by Graham and Dodd in the intervening 74 years. Why do we need to re-read a book that was written in the exceptional circumstances of the 1930s, during the worst economic recession the US has suffered?
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Post by augustabound »

A good point but this edition will feature a commentary much like the updated version of The Intelligent Investor.

http://www.mhprofessional.com/product.p ... 0071592539

I haven't read Security Analysis yet but from what I've heard it's much dryer and less obvious for the individual investor to interpret. IIRC, it was written for the investment professional.
What I hope to do is read the original Security Analysis first, then read the new updated version, if for nothing more to see how I understand the book versus some of the commentary the new one holds. I think the Toronto reference library has a copy to look at but not borrow, it might mean a few trip to read over the course of a few months but it might be worth it.
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Post by NormR »

augustabound wrote:A good point but this edition will feature a commentary much like the updated version of The Intelligent Investor.

http://www.mhprofessional.com/product.p ... 0071592539

I haven't read Security Analysis yet but from what I've heard it's much dryer and less obvious for the individual investor to interpret. IIRC, it was written for the investment professional.
What I hope to do is read the original Security Analysis first, then read the new updated version, if for nothing more to see how I understand the book versus some of the commentary the new one holds. I think the Toronto reference library has a copy to look at but not borrow, it might mean a few trip to read over the course of a few months but it might be worth it.
The 1940 edition is usually considered the best. (Many of the early editions have been republished in recent years.) The latest edition (5th) wasn't written by Graham and was dull. This new book has the 1940 material plus commentary and promises to be interesting.
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Post by augustabound »

Good to know. I heard the 1940 was the best but I didn't know why until now.
Thanks Norm
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Post by Taggart »

Wall Street Journal

Jason Zweig

Is It Time to Tiptoe Into Financial Stocks?

The Stocks May Look Cheap, But
Bank on it: These Are Treacherous Waters.

July 26, 2008

Inquiring minds want to know: What would Graham do?

-------------------------

Note: The short video interview is worth watching as well.
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Post by Mike Schimek »

Inquiring minds want to know: What would Graham do?
I think Graham would buy a hardcover version of the Intelligent Investor, find Jason Zweig, and beat him over the head senseless with it in frustration.

Mike
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Post by Taggart »

Mike Schimek wrote:
Inquiring minds want to know: What would Graham do?
I think Graham would buy a hardcover version of the Intelligent Investor, find Jason Zweig, and beat him over the head senseless with it in frustration.

Mike
...and with the continuing financial destruction of the banking system across the U.S. and Europe, you can say that with a straight face. :roll:
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Post by cycle »

Mike Schimek wrote:I think Graham would buy a hardcover version of the Intelligent Investor, find Jason Zweig, and beat him over the head senseless with it in frustration.
You do realize that in the linked interview, Zweig applies Graham's method to argue against buying financials, right? ;-)
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