Will The Real Value Investor Please Stand Up

[moore_capital54]

Hey Guys,

 

The level of fear is no different from 2008-2009. In the word's of Buffet, investors have truly "talked themselves into a funk"

 

We are now past pricing in a recession and are pricing in a full blown credit crisis.

 

The real value investor is buying hand over first, and maintaining exposure to equity markets. The other guys are waiting to time the bottom based on some pre-1971 historical metric that will never return due to money printing. There is going to be a lot of money printing here soon and keep in mind the last round of money printing didn't even reach the markets yet and has been prudently invested in treasuries.

 

Homes are now extremely affordable, the savings rate is the highest its been in a while, interest rates are near zero and will "only" be there for another 2 years, this will get the greedy players in the game soon, S&P is trading at 9.9x 2012 earnings and a near 2% dividend yield, VIX has been over 30 for almost 3 months now, Europe hasn't even started to print money yet, and the Fed only starts to buy long-dated treasuries (money printing) this week!

 

Fellow Canadians, we have been buying Le Chateau, which is literally being given away here. Owner Manager, Great Brand, and Fantastic Dividend. http://www.bloomberg.com/apps/quote?ticker=CTU%2FA:CN

 

A few weeks ago I was sent this by an intelligent investor. I thought I would share it with the board as it may prevent some of the newer investors from reaching the stage of saying "maybe the markets are just not for me"

 

http://simplerulesbooks.com/wp-content/uploads/2011/08/cycle-of-market-emotions.jpg

 

 

[Myth465]

Cash feels so nice right now  ;). I am waiting until I see the whites in their Eyes or until Germany capitulates / grows balls and kicks Greece out and uses the funds on their banks / Italy / Spain. Running out of ammo. Nothing has been resolved or addressed thus far.

 

Anything else would be imprudent for me. My equities have been cut in 1/3rd so missing 15% or so is nothing.  I can catch the bottom 10% and miss a bit, and know my cash was well invested. Been buying the dip for 2 months and its been quite painful. The cash will get spent though, some guys hold cash forever.....

[bmichaud]

S&P is trading at 9.9x 2012 earnings and a near 2% dividend yield

 

This quote completely discredits the rest of the post. At 1,124 on the S&P and 10y median inflation-adjusted earnings of $63, the S&P has a True PE of 17.7X.

 

The "real value investors" are still being prudent with their capital waiting for a state of undervaluation that creates the margin of safety all "real value investors" seek when managing their money.

 

Buffett's quote in a November 1974 Forbes article: "Look, I can't construct a disaster-proof portfolio. But if you're only worried about corporate profits, panic or depression, these things don't bother me at these prices." That was as of November 1, 1974.

 

Guess what the True PE of the market was back then.....8.59X. The earnings yield for the market was 11.6% versus the long-run average 10y treasury rate of 3.79% (the long-run 10y treasury yield up until November 1974) for a spread of 7.9%.

 

At a True PE of 17.7X, the EY on the market is 5.6%. The long-run 10y treasury rate is currently 4.68% for a spread of .96%. If we use the average rate as of November 1974, the current spread is 1.85%.

 

A spread of 1.85% doesn't sound the ALL IN alarm for a lot of "real value investors".

[Parsad]

What the hell is a "true" value investor?  ;D 

 

You buy something when it is cheap and sell when it is dear.  Where you buy on that range is a personal choice and something you have to be comfortable with. 

 

The main thing is that you recognize when things are overvalued and when they are undervalued.  Does anyone here think that ten years down the road, anything you bought today would not have done significantly better than 10-year treasuries paying 2%?  If not, you're a fool!

 

You run risk either way...if you buy now, you could run the risk of being early...if you buy later, you could run the risk of missing the boat altogether.  There were quite a few people who were buying early in 2008, and many who missed the rebound altogether in 2009 and 2010. 

 

Again, the only concern any value investor should have is am I getting value?  Not trying to time the market either way, and not sitting on cash paying 2% for ten years.  Cheers! 

[Ben Graham]

What the hell is a "true" value investor?  ;D 

 

You buy something when it is cheap and sell when it is dear.  Where you buy on that range is a personal choice and something you have to be comfortable with. 

 

The main thing is that you recognize when things are overvalued and when they are undervalued.  Does anyone here think that ten years down the road, anything you bought today would not have done significantly better than 10-year treasuries paying 2%?  If not, you're a fool!

 

You run risk either way...if you buy now, you could run the risk of being early...if you buy later, you could run the risk of missing the boat altogether.  There were quite a few people who were buying early in 2008, and many who missed the rebound altogether in 2009 and 2010. 

 

Again, the only concern any value investor should have is am I getting value?  Not trying to time the market either way, and not sitting on cash paying 2% for ten years.  Cheers!

[moore_capital54]

Ben I was going to literally do the same thing. Parsad, that is exactly what my definition of a "real" value investor is.

 

Bmichaud I am not sure why that quote discredits the rest of the post. Just because I am viewing a forward PE and you view a trailing PE, the S&P Today is indeed reflecting a 9.9 P/E Ratio.

 

 

[NormR]

Fellow Canadians, we have been buying Le Chateau, which is literally being given away here. Owner Manager, Great Brand, and Fantastic Dividend.

 

It recently cut its dividend by ~50%. Less than fantastic for dividend investors ...

[berkshiremystery]

moore_capital54,...  :)

 

great that you are back to the board. I always appreciated all your posts. I myself was for some days abstinent from the board, and as I came back I didn't even noticed you missing. Grrrr,.... but somehow after a few minutes, I felt somebody was missing. Searched the last post of yours and saw your little interlectual adventure with our admired board manager Sanj.  Just wanted to let you all know that I always enjoyed both of your posts, so don't be ashamed to have a little argument adventure. Gosh,...lol,...  I myself would have thought myself into trouble here a couple of weeks ago with my thoughts about Jim Simons, and I felt you were rather right about your opinion about HFT.  But guys & dolls, we are all friends here, don't let one different view or opinion make you afraid to post here. I'm looking forward to see your three hundred post mark of valuable research.  Cheers !  :)

[Parsad]

Moore,

 

We've looked at Le Chateau too, as we are finally buying Canadian stocks now as well.  My only concern was that they have completely changed their format and direction, moving into more upscale clothes.  Their locations also seem to be of better quality, and I would suspect their leases or purchases for those properties would be significantly higher.  At higher price points, combined with higher rental/ownership costs, do you think they will be able to increase revenues enough to offset those costs? 

 

Incidentally, we did buy two Canadian stocks in the Canadian fund yesterday.  The first time we've owned any Canadian stocks other than Fairfax and the basket of REITS we bought in 2008/2009.  Cheers!

[moore_capital54]

I definitely feel some animosity towards me, but the truth is I have been on vacation. I value all the members of this board and would occasionally read posts for many years until I decided to join. I don't have a problem admitting when I am wrong about something either or giving credit where credit is do. For example, I recently wrote to Munger privately who has been right on the Macro while I have been wrong.

 

But that is what makes a market, both sides of the coin. I have been through this before, and am just voicing my opinions and enjoy all comments.

 

Even ones like NORMR, where he states that an 8.2% current dividend yield is less than fantastic on a company trading below book, at 1/3 of sales, and about 5x normalized FCF. A company majority controlled by a family that has delivered value for decades and has distributed dividends to shareholders that have exceeded the current market cap.

 

 

I don't hedge my posts as some of the members on this board do. As Governor Christie recently said to a reporter, you will never have to wonder where I stand on an issue. On that note I will also disclose our current performance as of Sept. 30.

 

-15% on the Value Fund

+3% on the Resource Funds

 

We have maintained our exposure to equity markets in a way that I feel will outperform when investors come back to reality.

 

 

[moore_capital54]

The Segals are a great French Canadian family. I am not sure if some of you are familiar with David's Tea? Its a wonderful concept. Well that is another Segal Family enterprise. I would bet that the Segals know what they are doing, and their money is where their mouth is. I don't see how CTU can deliver me a permanent capital loss over the next 5-10 years. When Hersch Segal sold his shares you know who bought them? His Cousin Jane! You can't make this stuff up, their interests are aligned!

[Parsad]

I definitely feel some animosity towards me, but the truth is I have been on vacation. I value all the members of this board and would occasionally read posts for many years until I decided to join. I don't have a problem admitting when I am wrong about something either or giving credit where credit is do. For example, I recently wrote to Munger privately who has been right on the Macro while I have been wrong.

 

But that is what makes a market, both sides of the coin. I have been through this before, and am just voicing my opinions and enjoy all comments.

 

Moore, don't perceive it as animosity.  I think it's more of just heads butting during a debate...be it my head, your head or someone elses.  That's why the forum works.  As long as people aren't slagging each other, it's all good!  ;D  Cheers!

 

[tombgrt]

Again, the only concern any value investor should have is am I getting value?  Not trying to time the market either way, and not sitting on cash paying 2% for ten years.  Cheers!

 

Timing is the flavor of the month it seems. Mr. Market at his best today:

 

"Investors are asking why should they buy stocks right now," said Robert Pavlik, chief market strategist at Banyan Partners. "Because they look cheap? Right now, that's not good enough for anybody, even if you're a long-term investor. The way it's been going, tomorrow they're going to be cheaper."

 

The same happened in late 2008. Some guys I know were thrilled they didn't buy anything back in late 2008/start of 2009 (I wasn't investing yet) and in July 2009 they were still convinced the market was going to crash. They had nothing to show for their waiting.

 

 

Btw moore, I for one appreciate your insights and opinions greatly, so keep it up! ;)

[moore_capital54]

Thanks Parsad, and I agree.

 

Tombgrt, that is exactly why I am so vocal. We absolutely nailed it in 2008-2009, and I know so many fund managers and professional investors that even in July-December 2009 were still waiting for the "double bottom" to form.

 

A great investor once told me something that resonated. He said, all the best buys in my career felt like shit when I was buying them.

 

I can definitely relate to that. As long as you believe you are right on the fundamentals over the long-term why wait?

 

Bmichaud for example is waiting based on some metric from 1974. Good Luck with that. I think in his case is simply rationalizing his personal bias for cash. Maybe as a fidcuaciary he has little wiggle room? Who knows? Deep down inside, I feel the same way about Munger but the problem with Munger is the resolution of his predictions has been so on point that it is difficult to counter his arguments at this stage.  Hes been right... for now.

 

Our investors can sustain volatility and they have. We have gotten a total of $400k in redemptions in September.

 

I see so many bargains in the market right now that I will continue to buy and maintain full exposure to equity markets. Besides our BAC trade we really haven't' experienced significant paper losses.

 

 

 

 

 

[alwaysinvert]

I agree wholeheartedly with OP and am almost down to no cash. Waiting for positive signals is market timing and does not work. If you think there are cheap stocks out there but want to wait for further drops then I don't know what you are doing. If you don't think stocks are cheap until they are traded at 4 times earnings, then credit to you and have fun waiting.

[BargainValueHunter]

I feel you will go nuts trying to time the EXACT BOTTOM or EXACT TOP.

 

Investing is easiest when you don't try to out think yourself.

 

With over 4000 securities to choose from WHO CARES what "The Market" is doing?

 

Times like this are beautiful, of course, because the selling gets highly profitable for value seekers but even '07 Q2 had some nice bargains.

 

Pick the best companies trading at the lowest prices relative to future earnings then go play golf or whatever.

 

Or...

 

Drive yourself mad trying to be a wizard making some sort of magic investing potion...whatever floats your boat.

[moore_capital54]

Well Said. I think Pabrai said an investor should be a Gentleman of Leisure. I loved the statement and fully agree.

[Liberty]

What the hell is a "true" value investor?  ;D 

 

You buy something when it is cheap and sell when it is dear.

 

Nailed it!  8)

[Cardboard]

I believe that the only logical way to "enter" the market is to be or near fully invested at this time. There should be enough bargains out there to fill one's portfolio quite easily. Then if the market drops further, you need to sell your cheap stocks for cheaper ones. It is tough to do, but the only way that makes sense IMO.

 

Hedging with cash, puts, short sells, etc. is speculation. You never know when to pull the plug. There is no signal telling you that it is time to unload unlike a stock that approaches your estimate of fair value on the way up. What is capitulation? When are the sovereigns issues going to be resolved and what does it look like?

 

If you are short now, what do you do? Take all, some or no profit?

 

I guess if your definition of a cheap stock is 3 times earnings or half of net cash, then you will enter the market after me, but you should still sell these stocks for the ones at 2 times earnings and 1/4 of net cash as the market moves against you.

 

Cardboard 

[moore_capital54]

I believe that the only logical way to "enter" the market is to be or near fully invested at this time. There should be enough bargains out there to fill one's portfolio quite easily. Then if the market drops further, you need to sell your cheap stocks for cheaper ones. It is tough to do, but the only way that makes sense IMO.

 

Hedging with cash, puts, short sells, etc. is speculation. You never know when to pull the plug. There is no signal telling you that it is time to unload unlike a stock that approaches your estimate of fair value on the way up. What is capitulation? When are the sovereigns issues going to be resolved and what does it look like?

 

If you are short now, what do you do? Take all, some or no profit?

 

I guess if your definition of a cheap stock is 3 times earnings or half of net cash, then you will enter the market after me, but you should still sell these stocks for the ones at 2 times earnings and 1/4 of net cash as the market moves against you.

 

Cardboard

 

Again, well said. I do feel that cash is a great hedge as well, but when you see companies you like dropping 50-70% as we have seen over the past 2 months that is what you had your cash for in my view.

 

I remember a berkshire annual meeting, I think it was 2009, where Buffett or Munger said that any Manager who was all cash in 2008 was not someone they would even waste their time on.

 

 

[NormR]

Even ones like NORMR, where he states that an 8.2% current dividend yield is less than fantastic on a company trading below book, at 1/3 of sales, and about 5x normalized FCF. A company majority controlled by a family that has delivered value for decades and has distributed dividends to shareholders that have exceeded the current market cap.

 

Hyping it as a dividend stock is, IMHO, disingenuous.  It might be a good value but not on account of the dividend.

 

But more importantly, good investors seek out reasons why they might be wrong and not why they are right. 

[vinod1]

I get your point about value investing and not worrying about macro. I would caution on a few things

 

1. S&P 500 profit margins are historically at their highest levels ever. So it would be imprudent to assume that such margins are sustainable or base your earnings for S&P 500 at that levels into the future. You are essentially betting that "This time it is different". To use analyst expectations for next year earnings is not a good idea. They are very consistently too high. Lots of studies if you want to look it up.

 

2. Given the high debt levels of both consumers and government (and the current political background) and zero rates by fed, we ran out of both fiscal and monetary bullets. Europe is in a pretty dire situation, comparable to years preceeding the Great Depression. Not that it is likely, but it is certainly a possibility. If such a scenario should happen, it would have a significant impact on US at a time when we ran out of fiscal and monetary ammunition. Not that I would avoid investing in stocks due to this but I want to position my portfolio to be able to survive should this scenario play out. Assuming that great depression would not happen again does not seem to be a good risk control. Whether this might mean 10% cash or 50% cash depends on you.

 

3. A careful reading of Great Depression and humility to accept that something like that or even worse could happen again is a must for any investor. This is what I took when Buffett said about what he is looking for in an investment manager "genetically programmed to recognize and avoid risk, including those never before encountered". I came from a very poor family, and I do not every want to be that poor again. I read a great deal about the Great Depression and protecting myself from such an event has been high on my list of priorities since I got interested in Investing several years back. If you look at what happened during Great Depressions stocks first fell 50%, investors jumped in and it went up 60%, then it crashed 85%. Unless one is holding some cash or holding a significant portion of portfolio in wide moat exceptionally strong companies, it would not be possible to recover from such a shock.

 

That said I am about 80% long nominally (about 70% cash). BAC is my top holding. My thinking was either BAC and other financials do well and I make a pretty good return or they go bankrupt or get diluted to such an extent that it is essentially permanent loss of capital. In such a scenario, I think it is likely that some pretty good bargains would be available to deploy cash at very attractive returns.

 

Vinod

[moore_capital54]

Even ones like NORMR, where he states that an 8.2% current dividend yield is less than fantastic on a company trading below book, at 1/3 of sales, and about 5x normalized FCF. A company majority controlled by a family that has delivered value for decades and has distributed dividends to shareholders that have exceeded the current market cap.

 

Hyping it as a dividend stock is, IMHO, disingenuous.  It might be a good value but not on account of the dividend.

 

But more importantly, good investors seek out reasons why they might be wrong and not why they are right.

 

Norm, I will take 8.2% in this environment. Also, not sure when I was ever hyping anything...

 

As for being a good investor or not, with respect I am not sure you are qualified to make such an evaluation.

 

Cheers!

[bmichaud]

Ben I was going to literally do the same thing. Parsad, that is exactly what my definition of a "real" value investor is.

 

Bmichaud I am not sure why that quote discredits the rest of the post. Just because I am viewing a forward PE and you view a trailing PE, the S&P Today is indeed reflecting a 9.9 P/E Ratio.

 

Not that you're viewing a forward PE but rather that you are looking at a PE based on dramatically peak earnings. A 12X on operating eps of $100 (or thereabouts) is not even remotely relevant to a cyclical data set. It's no different than saying CAT is cheap based on $6 eps when in fact mid-cycle eps is probably more like $3.50 or $4.

 

And I won't even get into the danger of relying on Fed "money printing" when in fact the Fed is merely swapping non-interest bearing liabilities (cash) for an interest-bearing liability (treasuries) - that does NOTHING in a deleveraging environment.

[bmichaud]

Vinod - other than holding fins, I don't know if you could have worded what I am thinking any better. Im even around 80pc long right now!

 

I'm surprised you are comfortable holding BAC (guess it depends on position sizing too, since a big position to me is 10pc) given ur view on where the economy could ultimately end up. IMO, if even half of the Great Depression scenario plays out, banks will get crushed.