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Value Investing. Tony Gauvin. 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

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value investing

Value Investing

Tony Gauvin

® Tony Gauvin, 2007

value investing2
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
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
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.

.

Mr Market

http://www.buffettsecrets.com/mr-market.htm

® Tony Gauvin, 2007

oracle of omaha
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
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
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
How it works (at least for me)

3 Steps

Search Strategy

      • Find a pool of sticks to research

Valuation strategy

      • IN or OUT
      • I pick I have elimination rules
        • Intangible assets!
        • “cooking the books”
      • 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
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
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
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/stockvalue.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
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
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