Category Archives: Portfolio Commentary

Q3 2017 Performance Update


I had a nice run this quarter after underperforming for most of the year. We will see if it lasts.

Interestingly, nearly all of the gains occurred in the last month. A month ago, I was down 2.72% for the quarter and the portfolio then staged a resurgence. Even after the resurgence, I still lag the S&P significantly by 8.8%

For most of the year, richly valued large-capitalization growth stocks dominated the market, and cheap stocks have lagged. This appears to have reversed in the last month, but we will see if the trend can be sustained.

As explained in a previous blog post, value stocks have lagged the market in the United States for the longest period of time since World War II. The trend will ultimately reverse itself, but there is no telling how that will take. I expect my portfolio to perform in a more exaggerated fashion to a standard value portfolio due to my concentration in 20 stocks. It should keep up with value as a group but it will be more volatile. This should lead to bigger gains in the long run with periods of pain and volatility.


While staying put for most of the year, I traded a bit this quarter. The sales are below.


The first trade was in STS (Supreme Industries) on August 9th. A buyout was announced at $21 per share. I sold for $20.95, securing a 31% gain from my purchase price. Buyouts are one of the key drivers of performance in value stocks. I think once the buyout is announced, it makes sense to sell rather than capture a tiny gain. All that can happen after a deal is announced is the deal falling through or a bidding war. A bidding war didn’t seem likely in this situation.

The next trade was in Sanderson Farms (SAFM). I have a weird temperament: I get nervous when a stock goes up too much, and I don’t really care when it goes down. I got out of Sanderson Farms because the valuation simply got too high and I already secured a 59% gain. Nevertheless, the rally continued with the stock going up another 12.9%. I probably should have let the momentum continue.

I feel the same way about TopBuild (BLD) in which I am up 71%. To avoid a repeat of the Sanderson Farms situation, I am going to let that position continue to run. When it looks like the momentum has faded, I will sell. I will indeed sell at the end of the year when I do my complete portfolio rebalance.

This is the chief drawback of deep value investing. Time is not on your side. You’re buying businesses when they look dead (or they’re just so tiny that they’re being ignored) and selling when they’ve had a modest improvement in their outlook, which leads to a massive increase in price because the market was so downbeat in the first place.

Deep Value vs. Buy & Hold

I am not a “buy and hold” investor. Contrary to popular belief, neither was Benjamin Graham. Buy and hold forever was Phil Fisher’s idea, which Warren Buffett later picked up on. Phil Fisher recommended buying stock in excellent companies and then keeping them forever. This is advice that Warren Buffett then picked up when he shifted his investment philosophy from the purchase of undervalued cigar butts to investing for the long term in good companies

In contrast, Graham’s recommendation was to hold a stock for two years or after a 50% gain, then sell. In other words, buy undervalued stocks and sell them when they reach fair value. While most value investors moved on from this philosophy, Walter Schloss stuck to it and delivered impressive results throughout his career.

One of the drawbacks of a deep value approach (contrasted with the Warren Buffett approach) is that, as Warren Buffett likes to say, time is the friend of the good business and the enemy of the bad business. I am not buying the Coca-Cola’s of the world: I am buying ignored, hated, beaten up stocks in which a problem caused Wall Street to throw the baby out with the bathwater.

I like this approach for three reasons.

1) I’m not as smart as Warren Buffett and Charlie Munger to evaluate how “good” business is. Most of the people trying to emulate Warren and Charlie aren’t either, despite their claims to the contrary. Buffett and Munger have a genius at identifying companies with strong returns on capital that have an economic “moat” which allows them to sustain those high returns on capital. This looks easy in retrospect, but it ‘s hard to pull off in practice. Most of the Fortune 500 from 1950 is gone today. Most of those businesses thought they had a “moat” of some kind, but the relentless pressure of competition made it wither away.

Buffett’s 1987/1988 purchase of Coca-Cola looks like a slam dunk in retrospect, but hindsight is 20/20. Coca-Cola had just made some blunders. They were steadily losing market share to Pepsi in the early 1980s, which lead them to change the formula of Coca-Cola which caused an incredible public relations backlash. Buffett also bought Coke in the wake of the 1987 stock market crash, when many in the investing public suspected that the US may go through another Great Depression.

Buffett also had the insight to buy Coca-Cola at the right price. There is no such thing as a “good company at any price.” Coke made sense in its 1987/1988 price. It didn’t make sense at its 1998 price.

Once Wall Street and the investing public caught on to Coke’s greatness, Coke surged throughout the 1990s, reaching a peak P/E ratio of 50 in 1998. From there, it proceeded to plunge 44% in the bear market of 2000-2002. Coke didn’t change: it was still a great company, just as it was when Buffett first bought it. Since the 1998 peak, the stock price is only up about 9% (although it has consistently paid dividends over that time).

Not only did Buffett have the genius to recognize Coke’s natural moat and economic advantages: he had the talent to identify the right price to pay for Coke. That isn’t something that I can do.

The good news is: it’s not something I need the capacity to do because I’m not a billionaire. Buffett was forced into this style of investing when he became too big. Buffett’s best returns were actually when he was buying and selling cigar butts of the net-net and low P/E variety in the 1950s and 1960s. He had to stop doing that because he became too big. He was so big that he had to buy controlling interests in net-nets, which caused a lot of pain on his part. Trying to run bad businesses is not fun.

In fact, Buffett had this to say in 1999:

“If I were running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

Now, I sure as hell can’t make 50% a year, but it seems absurd to me that most people try to invest like a billionaire when they don’t have to. An average person like me can operate in the small and micro-cap corners of the market and buy screaming bargains, then sell when they’ve had a modest improvement.

2) The other reason I prefer the deep value approach is because it is quantitative. I don’t have to visit management, I don’t have to have profound insights into the economy or future of the business, I don’t have to understand the “culture” of the firm, I don’t have to figure out if there is a moat.

It’s all right there in the annual reports and the quantitative signals from the stock. I look for a variety of signals: low P/E, cheap price/sales, bargain Enterprise multiples. I don’t need to have incredible insights into the operation and future of the business. I buy companies that are priced like they’re going to die and they are not for obvious reasons a) they don’t have a lot of debt and b) are still profitable.

Peter Lynch once pointed something out that is so obvious and so grounded in common sense that it eludes the smartest investors: “Companies that have no debt can’t go bankrupt.”

I think the leading “edges” that will exist in the future are behavioral. There is nothing more behaviorally challenging than deep value investing. You’re buying businesses with “stories” that make the stomach churn. You’re suffering short-term volatility and underperformance. Over the long run, however, the rewards will compound.

This is why I have an aversion to buying and holding great businesses, growth investing and momentum investing. It’s behaviorally easy. If it’s easy, it is eventually going to be arbitraged away. Buffett-style investing requires a stroke of genius that most people simply do not have.


3) Every value investor is trying to be the next Warren Buffett. “Wonderful companies at good prices” is a crowded game that I’m not interested in playing because everyone else is playing it. Deep value, in contrast, is a niche. As long as it stays a niche, it should outperform over the long term.

Warren and Charlie make it look easy. It’s not.

Anyway, I’ve gone off on a tangent. Back to the portfolio!


It also appears that I made a mistake with these two stocks. They are both well run Florida insurance operations. I bought them last year in the wake of hurricane Matthew related losses. I figured that they were a great value and if Florida avoided a massive hurricane, they should do well.

When hurricane Irma was barrelling towards Florida, I got scared and sold both stocks. This looked like a smart move at the time, but both have recovered nicely.

One of the points that Tobias Carlisle makes is that models outperform humans in most fields.  In fact, simple models outperform experts when equipped with the model. The tweaks that the experts bring to the design usually create a drag on performance.

For instance, if you have a model indicating when someone will go to the bar for the evening, you should be able to override that model if the patron has a broken leg. The research suggests the opposite: you are better off going with the model.

I think I should have done this with UIHC & FNHC. I let my emotions make me frightened during the hurricane, and I sold both at a loss for the year. Both stocks completely recovered from the Irma sell-off and are back to where they were before.

I let my emotions get the best of me. Hopefully, I can control this a bit better in the future and let the statistical cheapness of the portfolio work over time.

Global Low CAPE Indexing

I wrote a blog post earlier in the month discussing the idea of buying indexes for countries with low CAPE ratios. I still haven’t decided to pull the trigger on this idea. I still hold a lot of cash, (about 17%). I deployed some of it this month in two incredibly cheap stocks: Foot Locker & Game Stop. I still haven’t decided on whether or not I want to pull the trigger on this idea.


I increased my bet on the physical retail space. I initiated a new position in Foot Locker and increased my position in Gamestop. Both are ridiculously cheap by all metrics. Foot Locker trades at a P/E of 8 and Gamestop trades at a P/E of 6. They are similarly cheap on an enterprise multiple and price to sales basis. They both have clean balance sheets: little financial debt relative to their assets and earnings.

Retail stocks have an inverse relationship with Amazon’s stock this year, which has been on fire. This is due to the ubiquitous narrative: physical retail is dead and Amazon is taking over the world.

I believe that investors have overreacted to Amazon’s success. They have bid up Amazon to an insane multiple (242 times earnings as of this writing). Amazon is a good company, but as I stated earlier in my Coca-Cola 1998 example, there is no such thing as a company so good that it is worth any price. Meanwhile, physical retail stocks have been hammered down to levels not seen since the Great Recession even though their financial situation is better than it was back then.

There is certainly some truth to the rise of Amazon, but I think investors are overreacting. This is why retail stocks now comprise 25% of my portfolio. If you want to outperform the market, you have to do things that are different than the market.

The popular perception is that most shopping will occur online, but the fact of the matter is that 91% of all retail sales still take place in a store. E-commerce has increased at a relatively steady pace since 2000, gaining a little less than 1% a year. This means that in 10 years, 80% of all retail sales will still occur in a store. The revenues spent on retail sales will also be higher than they are today through normal economic growth.

There will also be a peak to online shopping. There is only so far you can go with shipping products. There is only so much you can reduce prices and still maintain economies of scale. I don’t think e-commerce will eat into physical retail’s market share forever. At some point, the two will probably reach an equilibrium. Whether that’s 50-50 or 80-20 is yet to be seen.

Retail is a declining market and some operations will go out of business, but this is an opportunity for the physical retail stores that survive. As companies like Sears and K-Mart go out of business, their less indebted competitors should benefit from their demise. The goal is identifying the retail operations that will survive and whose stocks have been unduly punished in the current shake out.

All of the retail stocks that I own have common characteristics: they all are profitable, and they all have very little debt. I’m betting that they will survive the shake-up and the slightest glimmer of hope should cause their stocks to appreciate nicely.

Or maybe I’m just crazy. That is altogether possible!

In any case, we’ll see how this continues to shake out in Q4 2017. Hopefully, the value resurgence continues.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Going Global with Value Investing


Holding Cash in a Euphoric Market

I have a problem. 26% of my portfolio is in cash. I hate cash. It earns nothing. My preference is to be fully invested at all times. I prefer not to try to time the market.

But . . . I am frightened by the valuations present in the U.S. market right now. I don’t believe in market timing, but with a Shiller CAPE around 30, average equity allocation at 42% (probably higher now), and market cap to GDP at 132% . . . it definitely feels like the market is primed for a fall. Usually, value stocks tumble with everything else (except for the early 2000s).

This conflicts with my belief that investors shouldn’t time the market. If you own cheap stocks, it shouldn’t matter what the general market is doing, they will eventually realize their intrinsic value. The CAPE ratio or any valuation metric for that matter isn’t entirely predictive. Just because stocks are expensive now doesn’t mean that the market is necessarily going to crash. Valuations may even be justified if interest rates stay low. That seems like wishful thinking, but we’ve gone through long stretches before where interest rates stay very low (as they did in the 1930s and 1940s). You just don’t know. No one has a crystal ball.

Whether it is stocks or companies, all that you can do is put the probabilities in your favor.  Expensive stocks and markets can get more expensive. Cheap stocks and markets can go down. As a group, though, this is unlikely. Buying cheap stacks the odds in your favor.

International Net-Net Investing

The prudent course seems to me to expand outside of the United States for diversification. It is also a way to make sure I am not overly correlated with the US market. The most tempting way to do this is to buy net-nets in foreign countries.

Net-net investing involves buying companies at sub-liquidation values. In the most basic form, you take all current assets and subtract all liabilities to arrive at the net current asset value (NCAV). No value is given to long term assets like plant, property, and equipment which might be more difficult to sell. Graham advocated buying a net-net at 2/3 of the NCAV value and then selling when it reaches full value (thus securing a 50% gain). Graham remarked about net-nets: “I consider it a foolproof method of systematic investment . . . not on the basis of individual results but in terms of the expectable group outcome.”

Studies show that net-net investing is the best way to earn the highest returns. Buffett’s best returns were when he was investing in net-nets in the 1950s and 1960s. Joel Greenblatt created his original “magic formula” with a net-net strategy in 1981. He devised a strategy of buying net-nets with low P/E’s and demonstrated that you could earn 40% returns.  The period he studied was after the market crash of 1973-74. Those net-net opportunities were eliminated during the bull market of the 1980s and 1990s, which is why he didn’t stick to that strategy. Net-net investing is also hard for professionals investing a lot of money, as the stocks usually have extremely low market caps. It’s only something individuals like me can pursue who are dealing with relatively small sums of money.

Those net-net opportunities were eliminated during the bull market of the 1980s and 1990s, which is why he didn’t stick to that strategy. Net-net investing is also hard for professionals investing a lot of money (i.e., over $10 million or so), as the stocks usually have extremely low market caps. It’s only something that individuals like me can pursue who are dealing with relatively small sums of money.

The strategy I pursue during frothy bull markets is Graham’s low P/E strategy that he devised in the 1970s. Graham demonstrated that this strategy delivers 15% rates of return over the long run. 15% returns are incredible but not nearly as exciting as what you can make investing in net-nets which amp up returns to the 20% level. I look at other value factors (price to sales, EBIT-Enterprise Value, relative valuation), but I try to stick to Graham’s rules (low debt to equity ratio and an earnings yield that doubles corporate bond yields).

While Graham’s P/E strategy is my base during bull markets, I look at other value factors (price to sales, EBIT-Enterprise Value, relative valuation). I like to see multiple signals that a stock is cheap but I try to stick to Graham’s rules (low debt to equity ratio and an earnings yield that doubles corporate bond yields).

I would much rather invest in net-nets than the low P/E strategy, as the returns are better, it is easier to calculate intrinsic value, and it is easier to determine the appropriate selling point (you sell when the stock hits the net current asset value). Unfortunately, in the United States, there aren’t enough net-nets available to make it viable. Net-net returns are higher than any other strategy, but a net-net is also more likely to go bankrupt than a normal company, so diversification is paramount. When Graham bought net-nets for his partnership, he would buy them in bulk. I read once that he would own nearly 100 net-nets at any given time.

We live in a different world. To put it in perspective, there are about 9 net-nets in the United States right now. Of these 9 choices, they aren’t of the best quality and most of them can only be bought on OTC exchanges.

Net-nets become available in bulk in the United States during market meltdowns like 2008 and 2009. There were also a lot of them in the early 2000s during the tech crash. During both periods, net-nets performed exceptionally well.

There are quality net-nets available internationally, but the problem I have with buying them is that I don’t trust my ability to read foreign financial statements or research companies. I can’t go into Edgar and read an annual report for a Korean net-net, for instance.

I don’t even know where I can run reliable screens to hone in on the right opportunities. Unforeseen tax consequences would also plague me by investing in individual foreign stocks. While I wouldn’t owe US taxes because this is an IRA account, I would still owe taxes in the foreign countries on any gains. For those reasons, I am not keen on buying individual stocks outside of the United States.

Another reason I prefer buying individual companies in the United States is the SEC. I’m happy that the SEC is active in the US market. The SEC misses quite a bit, but it’s still better than what exists internationally.

For all of these reasons, I don’t want to buy international net-nets even though I think the returns are probably substantial and it would allow me to diversify outside of the frothy United States market.

I will shift to net-nets when they are available in bulk quantities (as they were in 2008 and 2009) during the next market meltdown and I can buy at least 10 quality choices. Unfortunately, that’s not an option in the current market.

A Possible International Solution

Thinking about the issue, I thought of something I once heard of listening to a Meb Faber speech from 2014 at Google. He discussed a really interesting idea: applying Robert Shiller’s CAPE ratio internationally.

Meb Faber has done a great research (available on his website) about this topic. He has empirically demonstrated that countries with a low CAPE tend to deliver higher returns (as a group) compared to those markets with higher valuations. Just like individual companies with low valuation metrics, this occurs as a group and it’s not an iron clad rule of prediction.

The CAPE ratio isn’t the best valuation metric for a market, but it’s good enough and it’s readily available for most markets.

This brings me to a possible solution: buying international indexes via ETFs for countries posting low CAPE ratios. This would allow me to avoid the tax consequences of international investing in individual stocks, remain consistent with a value approach, and provide adequate diversification. I will also be able to lower my correlation with the US market in a manner consistent with a value template.

I found a decent list of countries by CAPE ratio. The cheapest market in the world right now is Russia. The reasons for Russia’s low valuation is obvious. Oil has been crushed in recent years and Russia’s economy is very oil dependent. They are also under international heat and sanctions. For these reasons, Russia has a CAPE ratio of 4.93. Russia is hated by international investors. Of course, that is music to my ears: the best investments are the ones that everyone hates.

If it’s not behaviorally difficult to buy, it’s not really a bargain.

To give some perspective on how low Russia’s CAPE ratio is — there were only a handful of times that the US has a CAPE ratio that low — the early 1920s, the early 1930s, World War II, the early 1950s, the early 1980s. All of these were exceptional times to buy stocks. Even in March of 2009, the CAPE ratio for the US market only went down to 15.

In the early 1920s, early 1930s and the early 1980s – people hated stocks, which made them the best times to buy them.

Business Week ran a cover in 1979 called “the death of equities”. This was right before the greatest bull market in history from 1982-2000, which took the Dow from below 1,000 to over 10,000. The reason people hated stocks in the early 1930s is obvious. In the early 1920s, people in the United States hated stocks because the country suffered a severe but short Depression, which everyone forgets about because it is overshadowed by the Great one in the 1930s.

It’s true for individual companies and it’s true for entire markets: buy them when everyone hates them, sell them when everyone loves them.

Possible Investments

I haven’t decided if I’m willing to pull the trigger on this idea just yet, but I am curious to hear anyone’s thoughts.

I was considering putting 10% of my portfolio into two of the below ETFs:

iShares MSCI Brazil Index (Ticker: EWZ).  Brazil currently has a CAPE ratio of 10.4.

iShares MSCI Russia Capped ETF (Ticker: ERUS).  Russia currently has a CAPE ratio of 4.9.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

The Madness of Men


The Madness of Men

Value investing has been enduring a tough time. This is certainly true for my own portfolio. I’m down 7.72% year to date compared to an 8.34% gain for the S&P 500. It’s times like this that it helps to look to history.

We’re currently in an era where investors are gobbling up growth companies and they don’t care what the price is. I remember the same mood back when I was in high school. People forget, but the bubble wasn’t simply concentrated in dot-com stocks. The bubble was pervasive among even the most stable of blue chip companies: Cisco, Microsoft, Coca Cola.

Going further back in history, the same euphoria characterized the Nifty Fifty era. The Nifty Fifty was a group of 50 stocks in the early 1970s that grew by leaps and bounds in the 1960s. Many of them were exceptional companies (like McDonalds and Xerox), but the euphoria pushed their valuations to extraordinary levels. Predictably, valuations came crashing down and investors were burned.

Taking things back even further, the same mood characterized the South Seas bubble. That bubble was fueled by optimism over the age of exploration and it famously burned Isaac Newton. Newton remarked of the collapse: “I can calculate the movement of the stars, but not the madness of men.”

Every bubble has something in common. There is something new and exciting in the air that promises to change our lives and this fuels speculation. It starts with a truth (i.e., real estate is an excellent investment for the middle class) and then descends into temporary madness. Of course, the market always corrects this madness. Eventually.

During the dot-com bubble, it was the promise of the internet. The internet was going to transform the way we live and everyone could see it . . . so, Cisco Systems was valued more than General Electric and was a thing. They were right about the promise of the internet but wrong about the impact on stocks. Adding fuel to the fire was the promise of the “new economy”. Productivity was surging at the time. Productivity is the key ingredient in economic growth, so the belief was that we were entering an era of permanently higher growth. This fueled predictions of the federal budget deficit going to zero in 10-20 years. In truth, productivity was simply reverting to the mean after stagnation in the 1970s and 1980s. Keep this in mind when commentators say that the current productivity slump is permanent and means that the US economy will never grow faster than 2%.

With the Nifty Fifty, it was optimism about the power of the post-World War II American economy. The 1950s were a good time for the American economy and the 1960s were even better. The unemployment rate was only 3.9% by the end of the decade. Americans experienced abundance that was foreign to them in the past. Suburbs popped up everywhere and car ownership became ubiquitous. In the 1970s, the good times took a hit due to inflation, an oil shock, and the confidence-sapping Watergate scandal. Also, disco. Unaware of what was about to happen, investors thought that you could simply buy the fastest growing companies in the world’s fastest growing economy, and price didn’t matter.

With the South Seas bubble, it was the promise of the age of exploration. The New World opened up two continents that were rich in natural resources and abundance. Surely, investing in the company that would dominate trade in the new era was a surefire bet.

Now, the euphoria is fueled by the promise of scaled up e-commerce in the form of Amazon, cryptocurrency (personally, I only trust a currency that is secured by the full faith and credit of people with guns, aircraft carriers, stealth planes and nuclear weapons), the transformation of our lives by smartphones and the promise of whatever Elon Musk thinks is cool (electric cars, cars that drive themselves, hyper loops, USB ports in our brains, etc.)

Euclidean Technologies Q2 2017 Letter

I was reading Euclidean Technologies Q2-2017 letter and came across this historical nugget:

“Among large-cap stocks, the spread between value and growth is now larger than at any point over the past six decades, with one exception—the top of the dot-com bubble.”  Barrons, June 28, 2017

The letter is a great read and is well worth your time. The letter makes two very key points:

  1. Value stocks are going through the longest cycle since World War II of underperformance versus growth. Each period of time that growth outperforms value, value eventually stages a significant resurgence. Their chart showing this history can be accessed here.
  2. They also have a great analysis of the performance of different valuation metrics since 1970. They find that using enterprise values instead of raw market prices in a valuation ratio works best. They find that all of the major valuations work and, as is demonstrated in Deep Value, the acquirer’s multiple (in both the EBIT and EBITDA variations) exhibit the highest performance. The comparison of different valuation metrics can be accessed here.


I don’t know when or how the current cycle will shake out. I am confident in one thing: buying expensive stocks is dangerous and buying cheap stocks is a safe long term bet, no matter how you slice it. The current disconnect will not last forever.

I think indexing makes sense over the long run and I don’t think we’re on the brink of a 1929 or 2008 scenario. With that said, I do think that this current environment is fueled by performance chasing, just as it was in the 1990s. Just like the 1990s, money is pouring into large cap index funds. As index funds concentrate their bets on the biggest components of the index, those companies see their valuations increase. This isn’t due to any change in their actual business performance but is due to their weighting in the index. The money pouring into index funds is not permanent capital and I suspect many will head for the hills once the current cycle turns on them, as usually happens.

Most investment strategies work and make no mistake: indexing is simply a strategy. It’s a smart, tax efficient and cheap strategy. It will only work for investors if they stick to it, which they typically don’t, as demonstrated by this chart.

Value is having a tough time, but it’s times like this that are the reason value investing works over the long run. If value investing delivered double digit returns every year consistently, then everybody would do it.

The strategy I am pursuing is consistent with Ben Graham’s recommended strategy from the 1970s: buying low P/E stocks that have safe balance sheets. I look at other factors (such as the enterprise multiple), but that’s the gist of what I’m doing. When looking at my own performance, I compare it to this backtest of the strategy done over at Alpha Architect. In 1998, the 20-stock variation of the strategy lost 9.01%, compared to a 26% gain in the S&P 500. In 1999, the strategy gained 4.55% against a gain of 19.53% in the S&P.

The worst year for the strategy was 1969, in which it lost 28%. The S&P lost only 8% that year.

Over the long run, however, Ben’s simple (but not easy) strategy delivered a 15% rate of return. That’s the long run return I’m striving for with this IRA over the next few decades.

I don’t know how long the doldrums will last, but I do know they will end. It may take years, but I’m not going to abandon it. The only thing I may change if the market takes a hit is to shift my focus to asset-based investing (i.e., net nets and stocks below tangible book). The only reason I’m not doing that now is that they are not available in sufficient quantities.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Q2 2017 Performance Update


The trends that were in place in Q1 are still raging on into Q2. Large cap tech stocks continue their ascendancy and value lags. In comparison, I am not doing well at all.


Inside My Portfolio


The laggards in the portfolio are the same from the first quarter. My retail stocks (CATO, AEO, GME, DDS) continue to get hammered. Dillard’s seems to be holding up as the best of the bunch. This makes sense because it is the least scary looking and highest quality of the retail names that I own.

Dillard’s is usually a mall anchor and focuses on higher end clothes. There are also stand-alone stores. American Eagle is actually in the mall (where fewer people are going these days) and targets teenagers. Teenagers, in sharp contrast to the teenage world I grew up in, don’t care about what clothes they wear. This is good for civilization but not for my portfolio! Cato is one of the few names I own that actually produced a quarterly loss in Q1, making that one a bit terrifying. It will be interesting to see how this plays out. I suspect the scarier looking names (AEO, CATO) will actually outperform the less scary DDS, but we’ll see.

Topbuild (BLD) continues its momentum. If it tops 50% in gains, I may pare back the position. Sanderson Farms (SAFM) is benefitting from rising chicken prices.

IDT is a very volatile stock. After their terrible quarter in March, it fell from $20.29 to $12.38. It then rebounded up to $17.58, falling again after another bad quarterly result down to $13.75. The loss occurred because of a $10 MM legal settlement with the FCC. The good news is that there was hardly any drop off in the core operating business of IDT and the settlement appears to be temporary (I hope!). IDT is also paying a healthy dividend.

The Market

The overall market continues its momentum, with most of the performance soaked up by big cap glamor companies. Amazon is up 29% year to date, Telsa is up 69%, Facebook is up 31%, Netflix is up 21%. This occurs against the backdrop of a strong economy with serious headwinds. There is significant political uncertainty around the Trump administration, and the Fed continues raising rates.

I don’t think the current environment will last. The present frenzy over sexy stocks like Facebook, Amazon, and Tesla has ‘late ’90s’ and ‘nifty 50’ written all over it. There is no telling when the momentum will stop, but I think it will end eventually. The question is when it will stop, which is a question that no one can answer. Is this 1997 or 2000? Is this 1967 or 1972? No one knows, but I’m not going to jump on the bandwagon and embrace the current mood.

Value strategies continue to lag. This has been going on for a decade. A strategy I like to compare myself to is Validea’s Benjamin Graham Portfolio. Year to date their 20-stock Ben Graham portfolio (based on their own interpretation of a Ben Graham stock screen) is down 9.2%. This gives me some comfort, as I know that I’m in good company. Since 2003, Validea’s version of the Ben Graham strategy delivered an annualized return of 8.6%, compared to the S&P 500’s average of 6.5%.

I see similar comparisons with AAII’s value stock screens. AAII’s best performing stock screens over the long run are their value screens. Most of these stock screens are also having a tough time year to date. Again, this gives me comfort. I know I’m in good company!

As they say: misery loves company!

The big question is how all of this plays out. Back in 2008, value stocks declined before the broader market. It was a canary in the coal mine, predicting the broad-based decline in stocks that year. In contrast, value stocks registered similar poor performance in 1998 and 1999. When the broader market was decimated in 2000-2003, value stocks actually had a bull market! Hopefully, the current situation is more like 1999 than 2008, but we’ll just have to wait and see.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Q1 2017 Performance Update


My Q1 2017 Performance: Down .11%

S&P 500 Q1 2017 Performance: Up 5.53%

My portfolio is regularly tracked here.

The S&P 500 had an amazing quarter and I had a lackluster one in relative terms. Overall I’m down 2% since I started tracking the portfolio in mid December 2016. At one point I was down 5% earlier this quarter.

Anti-Amazon Trade (GME, CATO, DDS, AEO)

Much of my under-performance is attributable to my anti-Amazon trade. As mentioned in the earlier post, the conventional wisdom is that Amazon is going to destroy conventional retail. I remain unconvinced that retail is going to die. People will always shop in physical stores. While retail may be in decline, it will not go away. For clothing in particular, people will always want to see the item and try it on. There is also the instant gratification aspect of conventional retail that will allow it to endure. Moreover, no matter how technologically sophisticated we become, people will always want to leave the house and occasionally go shopping. They are not going to hang out at home all day and never shop in a physical location again. Even Amazon realizes this truth, which is why I find it amusing that they are thinking about expanding into physical retail!

My unsophisticated thesis is simple: the retail stocks are all priced like retail is going to die soon and I don’t think it is going to happen. Simultaneously, the price of Amazon has been bid up to an extreme P/E ratio (180.98) and the momentum continues.

While I may be early to the anti-Amazon trade, I don’t think I am wrong. Predicting when the market will accurately value a stock is not possible. You can only buy when there is a mismatch between price and intrinsic value and wait.


IDT is my worst performer. During the week of March 6th after reporting disappointing earnings, the stock collapsed from $19.50 to $13.11, a decline of 33%. The stock plummeted further to $12.03. I was certainly wrong on this one, but I do not want to sell. $5.66 of that $12 price is cash. IDT has no debt. They also aren’t cutting their dividend and while the core business is struggling, it’s not dying. I’m sticking with it.


Manning and Napier is also not doing well. Active management continues to be punished after the amazing track record of the indexes since 2009. Investors don’t want to pay high fees to asset managers when they can buy a low-cost index fund that will outperform them. Assets under management are declining, which is hurting the business. I don’t think this trend will last forever and in the meantime I am at least being paid a nice dividend yield to own Manning and Napier. The company currently has a negative enterprise value, with the current price less than the cash on hand, which currently stands at $9.19 per share. It’s a ridiculously cheap stock and the slightest glimmer of hope should allow me to take at least one free puff from this cigar butt.

Bubble Basket

David Einhorn refers to a “bubble basket” that he’s short on, which includes Amazon and Netflix. Q1 2017 was a good time for bubble basket. Tesla, a company with no earnings trading at 6.48 times revenue, is up 30% year to date. Amazon is up 18.23% and trades at 180 times earnings. Netflix, trading at 347 times earnings, is up 19.39%. Facebook, trading at 40 times earnings, is up 23.47% year to date. These are simply crazy valuations and I suspect they eventually they will go down in history with the Nifty Fifty.

Snapchat also debuted on the markets this quarter, as a symbolic representation of the frothy mood. The IPO felt like a flashback to the late ’90s, when an IPO and a dot com at the end of a name was a key to instant riches. SNAP has no earnings, $404 million in revenue. $27.11 billion market cap. This isn’t crazy, but it’s still pretty crazy.

Einhorn is losing money shorting these stocks, but I still think he’s right. Therein lies the problem with shorting: there is no way to predict how long the market will be crazy and ignore reality. It will eventually happen, but there is no telling how long it will take.

If you’re short and the stock goes up 100%: you lost all of your money. This is why shorting technology stocks in the ’90s was a risky move even though there was a bubble and the shorts were vindicated. If you were early to the short (in, say, 1998), then you would have lost a tremendous amount of money even though the thesis was vindicated in the early 2000s. Take a look at the percentage returns for the NASDAQ 100 from 1998 through 2002:

1998: Up 85.30%

1999: Up 101.95%

2000: Down 36.84%

2001: Down 32.65%

2002: Down 37.58%

“The market can stay irrational longer than you can stay solvent.” – John Maynard Keynes

That is why I don’t short stocks or use leverage. Timing is hard, even if you’re a pro like Einhorn. If Einhorn can’t do it, then I certainly can’t do it!

Portfolio Value

On an EBITDA/Enterprise Value basis, many of the worst performing stocks in my portfolio are some of the most attractively valued. Why sell now?


The frequent under-performance of value strategies is a key reason that they outperform over the long run.

If a fund manager delivered the kind of relative under performance that I delivered this quarter, they would probably be yelled at by their boss or at the very least forced to endure a healthy dose of corporate passive aggressiveness.

It’s moments like this (which can last years) during which there is a strong incentive to simply buy stocks that look like the S&P 500 or had some recent momentum. This strategy is a recipe for long term under-performance.

Behaviorally, it is easier to go with the crowd. If you’re right and the crowd is right, then you’re doing great! If you’re wrong and the crowd is wrong, then at least everybody else was wrong too!

If, however, you take a contrarian opinion and the crowd is right and you’re wrong (as I am with the anti-Amazon trade for now) then you lose your job. Contrarian opinions are eminently risky. Things are even more behaviorally difficult when you look at the companies in a value portfolio. Why am I even investing in this garbage? Everybody knows that retail is dead, Gamestop will be replaced by streaming video games, etc. This makes it all the easier to click that tempting “sell” button and end the pain.

This is why having one investor (me!) and no boss is advantageous and makes for better investing.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Greenbrier (GBX)


Greenbrier, one of my holdings, is poised to benefit from a recovery in oil prices.  Greenbrier manufactures, leases and repairs rail cars.

Greenbrier was a beneficiary of the fracking boom and was negatively impacted by the bust in the last two years.  Much of the oil that is being drilled throughout the US must to be transported via rail.  Greenbrier’s stock peaked at $75 a share in mid 2014 around the same time that oil prices peaked above $100 and then began its decline to $50.

GBX’s Performance

Meanwhile, amid the decline in oil prices, Greenbrier has been humming along and generating profits while the stock has been disconnected from the actual performance of the company and slid to the current $41.85 price level.  Take a look at the operating income for the last few fiscal years:

2016: $408 million

2015: $386 million

2014: $239 million

They have also been paying down debt.  Long term debt has been reduced from $445 million to $303 million.

Saudi Arabia & Oil Prices

With that said, it appears that oil prices are bottoming.  Saudi Arabia engineered the decline in oil prices to kill their competition.  Their mission is now accomplished and they want to see oil prices go back up.  They are now organizing OPEC to cut production and raise oil prices again.

I suspect Saudi engineered higher oil prices will simply mean that US production will increase in response, which will benefit the train industry and companies like Greenbrier.  The only way that it wouldn’t benefit would be if the US invests in oil pipelines.  It appears unlikely that any pipelines will be built.  In addition to the environmentalists, there is a strong resistance from NIMBY citizens.  Any struggle to get these pipelines built will probably be akin to the Bush administration’s efforts to drill in ANWR, efforts that were abandoned because they were deemed to be too much of a political pain.

Personally, I don’t see how transporting all of this oil via train and truck is any better for the environment than putting it in a pipeline, but I don’t think it is good investing to think in terms of what should happen.  Even if the new administration fights the political pressure and gets a pipeline built, it will be years before it actually happens.  In the meantime, we will need a way to transport all of this oil and rail will benefit.

Margin of Safety

Greenbrier presents an excellent margin of safety at the current price.  Even without higher oil prices, Greenbrier has been performing well while the stock price has fallen amid speculation that ignores the fundamentals of the business.  My guess is that betting against rail while oil goes down has been fashionable on Wall Street, thereby creating attractive prices.  It is a great value even if my prediction about oil prices doesn’t come true.  I feel the same way about Valero, another stock I own as a play for an oil resurgence.

That’s the idea behind the margin of safety — even if I am wrong, the stock was purchased at a wide enough margin of safety that I should still do ok.  I can bet on higher oil prices in a safe way, as opposed to buying a leveraged ETF or oil futures.

PLEASE NOTE: The information provided on this site is not financial advice and I am not a financial professional. I am an amateur and the purpose of this site is to simply monitor my successes and failures.

Is Retail Dead?


Value investing requires one to defy conventional thinking.  It requires independent thought.

Right now, the conventional wisdom is: brick and mortar retail is going to be dead soon.  Most physical retailers are going the way of Blockbuster Video and Borders books.  People are going to buy everything online.

You can see this conventional wisdom in the valuations that the market assigns to the following stocks:

Wal-Mart: 14.98 times earnings

Dillard’s: 11.38 times earnings (a stock I own)

Gamestop: 6.79 times earnings (a stock I own)

Amazon: 171.87 times earnings (!)

Clearly, investors are wildly optimistic on the prospects of Amazon and downbeat on the future of more conventional retail operations.  Like most things, I think that the market is getting ahead of itself.  They have taken a trend (the rise of online retail) and are getting carried away with it.  The amazing innovations that Amazon churns out definitely fuel the optimistic forecast.

For Gamestop, the logic is a bit more easy to understand.  Consumers are going to buy more of their video games online directly to their console rather than shop in the store.  Maybe.  When I look at Gamestop’s actual operating income for the last four fiscal years, I see a much different story:

FY ending 2016: $648 million

2015: $618.30 million

2014: $573.50 million

2013: -44.90 million

In other words, Gamestop has been delivering consistently better results while the market has been losing faith in its prospects as a result of speculation.  I do not see a business that is dying.

The point of value investing is to ignore the speculation and focus on what is actually happening and what the company is actually earning.  At 6.78 times earnings, Gamestop presents a tremendous margin of safety regardless of its future.  In other words, 6.78 years of earnings can pay for the entire company’s market capitalization.

Amazon is the sexiest of growth stocks with amazing prospects for the future.  But the stock offers no margin of safety.  Gamestop does.  That’s why I am taking the unconventional route and owning brick and mortar stores like Dillard’s and Gamestop that the market hates (or is ambivalent to) and passing on incredible story stocks that the market loves.

Keep in mind that Amazon is up 332% in the last five years.  Those are tantalizing returns that attract attention and investors.  However, following the crowd and chasing returns is not investing.  It is speculation.  Investing is considering what you, as the owner of the company, are paying for what the company is earning.  The logic is that Amazon will continue to grow and continue to be an amazing company.  Perhaps it will.

“Perhaps” and “maybe” have no place in an investment operation.  Those words are for the track, not for investing.  When it comes to my investments, I demand a margin of safety.

PLEASE NOTE: The information provided on this site is not financial advice and I am not a financial professional. I am an amateur and the purpose of this site is to simply monitor my successes and failures.

Portfolio Stats


Above are the characteristics of the portfolio.  As there are no companies trading below liquidation value, this year’s portfolio sticks to Graham’s recommended mix of safe balance sheets and earnings yields that double the current AAA bond yield, which is 3.71%.

Graham recommended a minimum earnings yield of 10% regardless of how low interest rates are.  After the most recent run-up in the markets, there were not many bargain stocks to choose from and I had to loosen the standards and try to simply double the current AAA corporate bond yield.  I certainly stretched both rules with Valero.  However, when you factor in Valero’s current 3.48% dividend yield, the logic makes a bit more sense, particularly when it appears that oil prices are bottoming.  Regardless, the average still remains 10.95%, which is above Graham’s recommendation.

The average debt/equity ratio of the portfolio is currently 14.845%, which is safe.  This average rate does not include MSGN, which has negative equity, a phenomenon common among spin offs because parent companies normally like to unload debt on these entities.  I am comfortable with this debt because 19 out of the 20 securities in the portfolio have safe balance sheets and I can afford to have 1 security representing 5% of my portfolio with a risky capital structure.  Additionally, I am comfortable with this debt because the risk of recession is low based on the current household debt service ratio explained in an earlier blog post.

For each of the stocks in my portfolio, there is a reason to either yawn or be repulsed, which is the point.  All of these companies have problems but they are all earning money and have safe capital structures, implying that their problems will not be fatal.  If the company were perfect, everyone would own it and the bargain would disappear.  Beautiful companies aren’t cheap.  The beautiful cheap company is about as common as a unicorn and takes a genius like Warren Buffett to spot.

I’m not anywhere near Warren Buffett’s level of intelligence, so I’ll settle the diversified portfolio of deep bargains.  Besides, with the small sums that I am investing, I can indulge in deeply discounted small cap companies that larger investors cannot invest large sums in.  Over long stretches of time I believe that I can beat the indexes with this approach.

PLEASE NOTE: The information provided on this site is not financial advice and I am not a financial professional. I am an amateur and the purpose of this site is to simply monitor my successes and failures.