I'm am finding the exact same thing in the agrsseive conservative portion of my portfolio, so I too am evolving towards high ROE reasobale price firms. Still have a hard on for small caps though, haven't lost that yet. In my view this happens to often because a given industry's economics are so bad that no matter how honest & competent an individual operator happens to be, the business result is dominated by industry/sector/political dynamics (i.e. essentially Buffet's point: "when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.").Mike Schimek wrote:
I'm evolving though, finding myself increasingly attracted to high ROE stocks that are in good businesses, which is Buffet's approach. The disadvantage of cheap value stocks is that often they can just sit there for a very long time and remain cheap. Case in point for me is Lakeview, which I've held for years. Less prominent is Calvalley, which I started buying at 2.00+/- and is now 1.55. It is probably the best value in the market right now that I can see, but the only movement it made was downwards so far this year.
The only thing I might offer to add to th ROE portion of the discussion is what I like to use for calcs:
http://en.wikipedia.org/wiki/DuPont_analysis
IMO, no need to get all nutty about this model, you can do back of the envelope with it also althought there is tons of judgemnet and assumptions about extrapolating past trends forward as scomac mentions but a nice model nonetheless. Going with rough estimates for the inputs, it's great for building a diversified portfolio on inteligent quantitative criteria.