Value Strategies.pdf
Transcript of Value Strategies.pdf
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Value Strategiesfor
Conservative Investors
Canadian MoneySaver ConferenceOctober 2003
Norm Rothery, PhDwww.stingyinvestor.com
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Slide 3 of 22 Norm Rothery 2003
Before Investing
Be debt free
No Credit Card Balances No Loans No Mortgages
Have a rainy weather fund
Stash 3-6 months of income in short term notes High interest bank accounts
ING Direct American Express
Short-term GICs Frugal short-term income funds
Save for large ticket items Homes Cars Tuition Medical
Insurance
Make sure that you are fully covered
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Slide 4 of 22 Norm Rothery 2003
Why invest in stocks?
U.S. Annual Returns adjusted for inflation and taxesPeriod Stocks Bonds T-Bills Gold
1802-1996 5.9% 2.3% 2.1% 0.06%
1802-1870 7.0% 4.8% 5.1% 0.18%
1871-1925 6.6% 3.2% 2.7% -0.82%
1926-1996 4.2% -0.71% -1.1% 0.63%
Source: David Dreman
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Controllable Factors: Taxes and Trading
Investment compounded for 20 years with a 27% tax on gains
Annual ReturnBefore Tax
AnnualTurnover
Value of $1Mafter 20 yrs
Annual ReturnAfter Tax
15% 0% 16,366,500 15.0%
15% 3% 14,780,800 14.4%
15% 10% 12,386,300 13.4%
15% 30% 9,694,000 12.0%
15% 80% 8,136,600 11.1%
15% 100% 7,990,800 11.0%
Source: www.tweedy.com
Group Annual Turnover
Single Men 85%
Married Men 75%
Married Women 53%
Single Women 51%
Phone Trading ~70%
Online Trading ~90%
Source: John Nofsinger
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Slide 7 of 22 Norm Rothery 2003
Indexing: The default choice
Simply buy a basket of stocks that mimics an index.
Potential Advantages low cost broad diversification tax efficiency through low turnover
Source: A Random Walk Down Wall Street
Potential Disadvantages selecting a good index
high-fee index funds & ETFs limited diversification from specialty indices valuation
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Slide 9 of 22 Norm Rothery 2003
Valuation
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Slide 10 of 22 Norm Rothery 2003
Valuation
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Slide 11 of 22 Norm Rothery 2003
Select Value Strategies
Benjamin Graham: The Father of Value Investing
Margin of Safety Assets on the cheap Stable growth Low debt with a high earnings yield.
David Dreman: Relative Ratios
Price-to-Earnings Price-to-Book Price-to-Cash Flow High Dividend Yield
Dividend Yield
Warren Buffett
Strong Companies Concentration Margin of Safety Qualitative
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Slide 12 of 22 Norm Rothery 2003
Benjamin Graham Margin of Safety
There are instances where a common stock may beconsidered sound because it enjoys a margin of safetyaslarge as that of a good bond. This will occur, for example,when a company has outstanding only common stock thatunder depression conditions is selling for less than theamount of bonds that could safely be issued against itsproperty and earning power. That was the position of ahost of strongly financed industrial companies at the low
price levels of 1932-33. In such instances the investor canobtain the margin of safety associated with a bond, plus allthe chances of larger income and principal appreciationinherent in a common stock
-The Intelligent Investor (4thed) pg 278
Factors
Price much less than Working Capital Strong balance sheet Profits and expected profits
Problems
Scarcity of such stocks Hidden liabilities Poor outlook
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Benjamin Graham Defensive Investors
Guidelines for Defensive Investors
Price-to-Earnings Ratio less than 15 Price-to-Book Ratio less than 1.5 Book Value over 0 Current Ratio over 2 Earnings growth of 33% over 10 years Uninterrupted dividends over 20 years
Some earnings in each of the past 10 years Annual revenue of more than $100 Million (1950)
The Intelligent Investor 4thEd, pgs 184-185
My Approximation
Price-to-Earnings Ratio less than 15 Price-to-Book Ratio less than 1.5
Book Value per share more than 0.01 Current Ratio more than 2 Annual EPS Growth (5 Yr Avg) > 2.9186%. 5 Year Dividend Growth more than 0% 5 Year P/E Low more than 0.01 1 Year Revenue more than $400 Million
- See November 2003 Canadian MoneySaver
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Slide 14 of 22 Norm Rothery 2003
Benjamin Graham Defensive Investors
Performance of previous Graham Picks (October 3 2003)
Stock Initial Price Current Price Gain
2000 Graham Stocks (12/12/2000)
AAR Corp (AIR) $11.94 $9.70 -15.8%Haverty Furniture (HVT) $10.06 $20.76 112.4%La-z-boy (LZB) $15.88 $23.20 52.7%Rollins Truck (RLC) Bought in 2001 82.0%Reliance Steel (RS) $25.13 $23.00 -5.9%Tredegar Corp (TG) $15.56 $15.70 3.5%Thor Industries (THO) $19.69 $60.70 *517.7%Wabash National (WNC) $7.81 $16.75 116.1%Watsco (WSO) $11.35 $19.65 102.6%
Average Gain 107.3%S&P500 (SPY) -22.2%
2001 Graham Stocks (10/29/2001)
Centex (CTX) $39.45 $83.71 112.8%Domtar (DTC) $8.19 $11.38 43.0%Haverty Furniture (HVT) $12.80 $20.76 65.3%M.D.C. Holdings (MDC) $27.35 $59.11 *164.1%Pulte Homes (PHM) $33.83 $71.42 111.8%
Average Gain 99.4%S&P500 (SPY) -1.4%
2002 Graham Stocks (10/27/2002)Centex (CTX) $43.38 $83.71 93.3%Pulte Homes (PHM) $46.17 $71.42 55.0%D.R. Horton (DHI) $20.16 $36.12 80.4%Woodward Governor Company(WGOV)
$36.62 $45.97 28.1%
M.D.C. Holdings (MDC) $37.91 $59.11 *72.5%Standard Pacific (SPF) $25.10 $40.39 62.2%Seaboard (SEB) $207.00 $229.50 12.3%Universal Forest Products (UFPI) $18.34 $26.93 47.3%Haverty Furniture (HVT) $11.75 $20.76 78.7%
Watsco, Inc. (WSO) $14.25 $19.65 38.7%Average Gain 56.8%S&P500 (SPY) 16.3%
Source: quote.yahoo.com, *Adjusted for splits
This Year: Pulte Homes (PHM) & Ameron Int (AMN)
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Slide 15 of 22 Norm Rothery 2003
Benjamin Graham Earnings Yield
Average annual % gain or loss from 1937 - 1969
Period 10 lowestP/Es
10 highestP/Es
30 DJIAStocks
1937-42 -2.2% -10.0% -6.3%
1943-47 17.3% 8.3% 14.9%
1948-52 16.4% 4.6% 9.9%
1953-57 20.9% 10.0% 13.7%
1958-62 10.2% -3.3% 3.6%
1963-69 8.0% 4.6% 4.0%
Average 11.8% 2.4% 4.6%
Source: Benjamin Graham
A low price-to-earnings approach also worked from 1970-1997
Quintilelow1 2 3 4
high5 market
Return 19.0% 17.4% 14.6% 13.1% 12.3% 15.3%
Source: David Dreman
Grahams Earnings Yield Approach Earnings Yield > twice that of AAA Corporate Bonds
Maximum P/E Ratio of 10 Equity / Total Assets more than 50% From 1926-1976 yielded 2 times the returns of the DJIA
The Rediscovered Benjamin Graham, pg 259
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David Dreman: Industry Ratio Analysis
Industry-Relative Price-to-Earnings from 1970-1997
Quintilelow1 2 3 4
high5 market
Return 17.7% 16.7% 16.1% 13.7% 12.2% 15.3%
Industry-Relative Dividend Yield from 1970-1997
Quintile
high
1 2 3 4
low
5 market
Return 17.0% 16.0% 14.9% 14.1% 12.7% 14.9%
No need to rush
P/E buy-and-hold annual returns (1970-1996)
Quintile 2 Years 3 Years 5 Years 8 Years
1 (low) 18.7% 18.1% 18.7% 18.4%
2 16.9% 16.5% 17.1% 17.5%
3 15.3% 15.2% 15.5% 16.2%
4 13.5% 13.7% 14.4% 15.3%
5 (high) 11.9% 11.3% 11.8% 12.8%
Market 15.3% 15.0% 15.6% 16.2%
Source: Contrarian Investment Strategies: The Next Generation
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Slide 18 of 22 Norm Rothery 2003
Dividend Based Approaches
High Dividend Yield
Dividend Yield from 1970-1997
Quintilehigh
1 2 3 4low5 market
Return 16.1% 17.5% 15.1% 13.8% 12.2% 14.9%Source: David Dreman
[Attend David Stanleys Presentation for more info]
Relative Dividend Yield Compare yield to historic highs/lows Compare yield to an appropriate index
Dividend Growth High yield compared to similar payout ratios Stick to low dividend payout ratios Current and expected profits Little debt
Distressed Dividends
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Slide 19 of 22 Norm Rothery 2003
Warren Buffett
We believe that our formula the purchase at sensible prices of
businesses that have good underlying economics and are run byhonest and able people is certain to produce reasonablesuccess.
Strong companies at fair prices
An investor should act as though he had a lifetime decision cardwith just twenty punches on it. With every investment decision hiscard is punched, and he has one fewer available for the rest of hislife.
Concentration
There is simply no precision to the process - and if you think so,you are kidding yourself. There should be such a margin of safetythat you dont need to carry it out to three decimal places.
Margin of safety
The qualitative is harder to teach and understand, so why not just
focus on the quantitative? ... It makes more sense to buy awonderful business at a fair price.
Difficult to emulate
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Slide 20 of 22 Norm Rothery 2003
Potential problems with value investing
Value stocks can be psychologically unappealing
Hard to boast about your newest picks Unlikely to hear good things in the news People may criticise your ugly ducklings Holding for long periods is seen as slothful
Taxes may be higher Higher turnover
High dividend payments may not be as taxefficient as capital gains.
Commissions may be higher low volume stocks tend to have higher
spreads and buying large positions mayimpact the market.
Value is often seen as an unrealized risk factor
Cheap stocks can get cheaper before recovering
Cheap stocks can just get cheaper
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Slide 21 of 22 Norm Rothery 2003
Cheap stocks can get cheaper
While value stocks may outperform the market,they may lose ground in a meltdown
The markets are still very expensive on a
historical basis and remain dangerous
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Value Strategies for Conservative Investors Norman Rothery
Value Oriented Books
Security Analysis by Graham & Dodd 007141228X
The Intelligent Investor by Benjamin Graham 0060555661 The Rediscovered Benjamin Graham by Janet Lowe 0471244724
Value Investing Made Easy by Janet Lowe 0070388644 Contrarian Investment Strategies by David Dreman 0684813505 What Works on Wall Street by James P. OShaugnessy 0070482462 Relative Dividend Yield by Anthony Spare 0471327050 Beating the Dow by OHiggins & Downes 006098404X Buffett: The Making of an American... by Roger Lowenstein 0385484917 Value Investing by Martin Whitman 0471398101
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