AAAMP Value Blog
A Value Investing Blog
Slow and Steady Wins the Race
Cash Flow From Operations (CFO) is an important line on the company Cash Flow Statement . It is the cash inflows and outflows of a company’s core business operations. The cash flow statement defines three types of cash flow :
A comprehensive review and summary of Deep Value -Why Activist Investors and Other Contrarians Battle For Control of “Losing” Corporations, by Tobias E. Carlisle.
Failing businesses, poor management, and unpredictability often provide the most promising investment opportunities. Deep value offers the best risk/reward ratio for investors willing to go against intuition and what is normally accepted by the investment crowd.
Owner Earnings and Owners’ Cash Profits are similar types of cash flow for analysis of businesses and stocks. These metrics provide important insight into the cash flow of the entity, particularly the cash flow available for the owners.
Are you ever confused by the different types of cash flow for investment analysis? There are too many cash flow calculations for most of us to have in memory. I know I get them confused and I’m a seasoned investor.
I believe you will find this a useful guide to the different types of cash flow and cash flow calculations, along with practical step by step comparisons and uses for each metric.
Working capital is an important measure of a company’s operating liquidity. The working capital ratio (a.k.a current ratio) is an indicator of the ability of the company to meet its short term obligations.
Working capital calculations such as Net Current Asset Value (NCAV) and Net Net Working Capital (NNWC) provide valuable metrics with which to measure against price in order to identify bargain stocks.
Enterprise value (EV) and Enterprise value ratios are part of the basic foundation of stock analysis for value investors.
The purpose of Enterprise Value (EV) is two fold; First, to calculate what it would cost to purchase the entire company or business. Secondly, to provide a capital neutral valuation with which to compare with other companies.
While preparing for The Intelligent Investor Book Review I underlined the great quotes from the book. They provide an interesting and valuable perspective of, what may be, the greatest investing book ever written. I have included the page number for each quote for easy reference.
Benjamin Graham’s objective was to provide an investment policy book for the ordinary investor. He succeeded in putting seemingly hard concepts into terms that could be understood and, more importantly, implemented by the average investor.
The Intelligent Investor, by Benjamin Graham, is probably the most important and influential value investing book ever written. Warren Buffet described it as “by far the best book ever written on investing”.
Investment, Speculation, Inflation, and Market History – The Intelligent Investor Book Review (Chapters 1, 2, & 3)
One of the most important and basic rules is to keep the activities of investment and speculation totally separate. Intelligent investing involves: 1) analysis of the fundamental soundness of a business 2) a calculated plan to prevent a severe loss and 3) the pursuit of a reasonable return. Speculation involves basing decisions on the market price, hoping that someone will pay more than you at a later date.
The defensive investor should understand the difference between prediction (qualitative approach) and protection (quantitative or statistical approach). The risky approach is to try and predict or anticipate the future. The protection approach measures the proportion or ratios between price and relevant statistics (i.e. earnings, dividends, assets, debt, etc.).
The Enterprising Investor has the time and experience (or proper guidance) in investing to expand the possible universe of opportunities beyond conservative investments. It is an active approach that requires constant attention and monitoring.
If every investor did their research and only bought stocks with a margin of safety below the intrinsic value of the company, the market would be efficient and fairly stable. But we know that this isn’t true. The market swings wildly from day to day and takes large swings in valuation over periods of euphoria and pessimism.
Graham used a parable with an imaginary investor named Mr. Market to illustrate how an intelligent investor should take advantage of market fluctuations. This is a parable about greed and fear, price and value, and how the intelligent investor will react.
The most important objective of the advisor may be to save you from your own worst enemy, YOU. A good advisor will help you keep your emotions in control, especially at important moments. Instead of panic selling, are you going to be prepared to buy when prices have fallen? Instead of following the crowd, who might be buying at prices far above intrinsic value, are you going to look elsewhere for better values?
In investment selection, it is most accurate to be able to make judgments based on past performance. The greater the amount of assumptions that have to be made about the future, the greater the possibility of misjudgment or error. Graham is adamant about not putting any importance in short term earnings. The more an analyst relies on short term results, the greater the risk, and the more due diligence that is required.
Graham urged shareholders to take an active role in being owners of the company. He thought management with good results should be rewarded, and management with poor results should be questioned and challenged.
He was particularly adamant about shareholders demanding a fair portion of their earnings returned in dividends. This is because much of the time companies squander past earnings. Just because management does a good job with current operations doesn’t mean they know the best use of excess company capital.
The margin of safety for an investment is the difference between the real or fundamental value and the price you pay. The goal of the value investor is pay less (hopefully, much less) than the real value. Ben Graham called margin of safety “the secret of sound investment” and “the central concept of investment”. He also devoted a whole chapter to the concept and, I am confident, placed it last because it is the most important.
Everyone wants to beat the market. Volumes of books, articles, and blog posts can be found on how to “beat the market”. But is that the right goal to have? Or should you at least think about it differently?
Drawdowns destroy your future. They rob you of the investment capital you once had to grow your portfolio. Keeping drawdowns as small as possible is more important than high returns. This is why: Losing your principal is the biggest risk in investing. Most investors don’t realize how devastating a large portfolio drawdown is to their long term returns. I will demonstrate the importance of avoiding these drawdowns.
A well constructed asset allocation plan can lower portfolio volatility and increase returns at the same time! That makes asset allocation more important than which individual investments you choose for diversification.
Many financial firms give you standard platitudes about asset allocation plans. I’m going to challenge you to think skeptically about some of their commonplace thinking. Most of them leave out important aspects, such as expenses and valuation, because it doesn’t fit the products they sell. Here are the factors that are important and my thoughts on each.
There are fundamental investing principles that apply to each of us whether we are seasoned portfolio managers or a novice investor. Here are 10 investing principles fundamental to successful outcomes.
In value investing, one of the most important and difficult aspects of stock selection is determining whether you have found a real value investment or a value trap. The father of value investing, Benjamin Graham, spent a considerable amount of time trying to differentiate between true value investments and value traps.
The average investor makes decisions that cause them to underperform average investment returns. The difference between average investment returns and average investor returns is often called the behavior gap.
The following value strategies will provide a framework for making your asset allocation investment decisions and avoiding many of the mistakes that create the behavior gap.
Your investment analysis should include high probability value strategies that improve returns and lower portfolio volatility. The focus needs to be on strategies that are long term value oriented rather than on instant gratification.
There is a behavior gap that affects investment returns. Instead of market timing based on valuation many let their emotions cause them to make detrimental asset allocation decisions. Trying to predict whether the market is going up or down in the short term is a bad form of market timing. Valuation timing is a completely different, longer term way of thinking about the market.
These are 47 of my favorite value investing quotes, sayings, and money proverbs from the wisest value investors. Together they offer a mountain of wisdom hard to duplicate in any one place.
We put a lot of emphasis on buy side investment decisions. However, the sell side can make the difference between success and failure. We’re going to consider 3 reasons for selling a stock and examine two common mistakes made by value investors:
Investment decisions should be valuation-based because the price you pay is the biggest determinant of your long term return on investment. All investment decisions are based on probability because no one has the ability to accurately forecast the future. Your best means of increasing the probability of higher than average returns is to make valuation-based investment decisions in your asset allocation and individual investments.
Stop loss orders are a widely used investment tool that value investors should mostly avoid. Many investment pundits frequently recommend using stop loss orders as a risk management tool. But for value investors this can be the wrong tool.
A tactical asset allocation provides the value investor a dynamic investment allocation strategy that adjusts to favorable and unfavorable valuations. Instead of a strict fixed percentage you have greater flexibility because you can choose from a range based on valuation levels.
Value investing is about purchasing investment assets at prices that put the odds of above average returns heavily in your favor. Excepting an investment that is going to go bust, almost any investment can be profitable if purchased at a low enough price.
The key to successful value investing is buying assets when the perceived risk is greater than the real risk. It’s equally important to avoid assets when the perceived risk is less that the real risk.
Portfolio rebalancing and weighting are powerful risk management strategies every investor should employ. This is universal for every investor, but especially relevant for the value investor.
Examples demonstrate that volatility lowers your investment returns. Arithmetic and geometric averages serve different purposes and only geometric averages will accurately reflect compounded investment returns.
Even small differences in investment returns can make huge differences in results over long periods of time. The consequence is investors need to put additional emphasis on the amount of volatility they are willing to accept. It may be that you can increase your long term investment returns by taking LESS risk!
You can control investment losses by determining your probable maximum loss and choosing an asset allocation that is consistent with your investment philosophy. How much of your investment portfolio can you afford to lose is one of the most critical questions you should ask yourself.