Strategy

My strategy is inspired by the ideas of Benjamin Graham. I purchase common stocks that I believe are trading at a discount to their intrinsic value. I sell when I believe they are at or above their intrinsic value. I do not utilize leverage of any kind. I don’t sell short. As John Maynard Keynes put it, “Markets can stay irrational longer than you can remain solvent”.  With a long position that isn’t leveraged, I can wait out irrationality. That isn’t an option when you are short or using borrowed money to buy stocks. The issues I purchase generally fit into the below overlapping categories.

  1. Statistically cheap stocks on the basis of sales and income.  I prefer companies and industries that make people either yawn or recoil.  My preferred measure of value is simple: the inverse of the P/E ratio, or “earnings yield”. As Ben Graham recommended, I buy companies when their yield doubles that of a AAA corporate bond. In addition to low P/E’s and high earnings yields, I also prefer stocks with low valuation metrics such as price/sales and enterprise value/operating income. I want a stock to be considered a bargain by multiple metrics.
  2. Companies that are conservatively financed. I tend to prefer firms that have a debt to equity ratio that is below 50%. For larger capitalization stocks, I will tolerate a bit more leverage (around 100%). If a company is utilizing significant leverage, they may be able to produce great results in the short run, but one mistake will kill the firm. I believe that the best way to minimize the risk of the portfolio is to focus on the balance sheets of the companies in the portfolio.  Debt is danger.
  3. Spin-offs.  I will sometimes pursue spin-off special situations if the idea hits me over the head and the investment has an acceptable margin of safety.
  4. Companies that trade below their liquidation value.  Sometimes companies will trade at a significant discount to their liquidation value.  They are typically only available in large numbers during recessions.
  5. Companies that are based in the United States.  I shy away from international investments. I understand GAAP accounting principles. I trust the SEC will limit most but not all accounting shenanigans. I generally have an optimistic view on the long-term economic prospects of the United States economy. We have our problems, but who doesn’t? I am sure that there are amazing value opportunities in other markets, but I stick to what I know and what I have the time to research.

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.

I am a value investor. My outlook is inspired by the ideas of Benjamin Graham. This site is a real time chronicle of my portfolio and an outlet to share my ideas. I hope you enjoy.

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