Ideas to find good investment idea.

Working with the 1,660 stocks covered by the Value Line Investment Survey, we identified companies that bought significant amounts of their own common stock in the ten years from 1974 through 1983. Next we reduced this list to voluntary repurchasers — cutting out, for example, companies that had bought the shares by paying “greenmail” to get rid of a threatening shareholder. Then we measured the total returns (stock appreciation plus dividends) earned by shareholders from the approximate dates of each repurchase “episode” to the end of 1984. For exactly the same periods, we compared the results with total returns earned on Standard & Poor’s 500-stock index, a generally accepted indicator of “the stock market.”

Read futher @ http://management.fortune.cnn.com/2012/11/21/buffett-stock-buybacks/

Graham checklist made simpler

Use the Benjamin Graham Investing Checklist to Invest Like Him

Written by

Jae Jun

Benjamin Graham liked to keep things simple. In fact, his entire investing principles were simple and disciplined.

Buy a bucket of cheap stocks at a discount to fair value, sell when it reaches NCAV. Couldn’t be simpler.

When you think of Graham, he is usually associated with cheapness, but don’t forget he was an academic at Columbia University, worked at Wall Street and made $500k at the age of 25 in the early 1900′s, formed a partnership with Jerome Newman and then went on to write Security Analysis and the Intelligent Investor.

For such a savvy businessman and investor, Graham knew that he did not need to complicate things. He cut out the fat in investing and used discipline and simple ideas to generate his returns.

How?

He created a 10 point checklist (which I’ll call the Benjamin Graham investing checklist) during his Newman Partnership days. Graham filled out this checklist manually for hundreds of stocks over and over again.

He and Walter collected numbers from the Moody’s Manuals and filled out hundreds of the simple forms that Graham-Newman used to make decisions – pg 185 Snowball

You see, Graham was top of his class and he most likely had a higher IQ than you.

But, he invested like he had a low IQ and spent all his time manually writing numbers into a checklist to see whether it passed his investment checklist.

He was a master of the K.I.S.S (Keep It Simple Stupid) rule.

So what is this Ben Graham Investing checklist?

Here is the original checklist consisting of ten items.

1. An earnings-to-price yield at least twice the AAA bond rate

2. P/E ratio less than 40% of the highest P/E ratio the stock had over the past 5 years

3. Dividend yield of at least 2/3 the AAA bond yield

4. Stock price below 2/3 of tangible book value per share

5. Stock price below 2/3 of Net Current Asset Value (NCAV)

6. Total debt less than book value

7. Current ratio great than 2

8. Total debt less than 2 times Net Current Asset Value (NCAV)

9. Earnings growth of prior 10 years at least at a 7% annual compound rate

10. Stability of growth of earnings in that no more than 2 declines of 5% or more in year end earnings in the prior 10 years are permissible.

 Simplifying the Ben Graham Investment Checklist Further

But could the checklist be improved? That was the question I wanted to answer which ultimately led to the creation of the Graham checklist screen.

Here is a link where you can read how I went about fine tuning Ben Graham’s investing criteria.

Long story short, after multiple rounds of testing and fine tuning, the best results came by narrowing the ten point checklist down to four.

1. An earnings-to-price yield at least twice the AAA bond rate

2. P/E (excluding extraordinary items) ratio less than 40% of the highest P/E ratio the stock had over the past 5 years

6. Total debt less than book value

7. Current ratio great than 2

With the original list, there are some harsh requirements such as no.5. Trying to find a NCAV stock yielding at least 2.3% in dividends with stable growth and earnings is impossible in today’s market.

Some Stocks Passing the Contemporary Graham Investment Checklist

Here are some stocks in no particular order that pass the four point Graham checklist where current AAA bonds yield around 3.3%

Western Digital Corp (WDC)

Makes hard drives for digital content.

#1: Earnings Yield 2x AAA bond rate: Pass. Earnings yield is currently 17%.

#2: PE < 40% of highest in past 5 years: Pass.

#6: Total debt < book value: Pass. Total debt = $2.1b. Book value = $8.2b

#7: Current ratio > 2: Pass. Currently at 2.2

CF Industries (CF)

Manufacturer and distributor of nitrogen and phosphate fertilizer products.

#1: Earnings Yield 2x AAA bond rate: Pass. Earnings yield is currently 14%.

#2: PE < 40% of highest in past 5 years: Pass.

#6: Total debt < book value: Pass. Total debt = $1.6b. Book value = $5.9b

#7: Current ratio > 2: Pass. Currently at 2.3

HollyFrontier Corp (HFC)

Petroleum refiner.

#1: Earnings Yield 2x AAA bond rate: Pass. Earnings yield is currently 14%.

#2: PE < 40% of highest in past 5 years: Pass.

#6: Total debt < book value: Pass. Total debt = $1.3b. Book value = $6b

#7: Current ratio > 2: Pass. Currently at 2.22

Cooper Tire & Rubber (CTB)

Makes car and truck tires.

#1: Earnings Yield 2x AAA bond rate: Pass. Earnings yield is currently 14%.

#2: PE < 40% of highest in past 5 years: Pass.

#6: Total debt < book value: Total debt = $373m. Book value = $757.6m

#7: Current ratio > 2: Pass. Currently 2.2

Apple (AAPL)

Since I hold Apple (AAPL), where does it stand against Graham’s checklist?

#1: Earnings Yield 2x AAA bond rate: Pass. Earnings yield is 10%.

#2: PE < 40% of highest in past 5 years: Fail. Current PE of 9.8 is 47% of highest PE in last 5 years. Forward PE is 8.1 so it will pass this criteria next year.

#6: Total debt < book value: Pass. No debt.

#7: Current ratio > 2: Fail. Currently at 1.5

Graham would not have bought AAPL, but he would next year.

Source: http://tinyurl.com/bltkon7

Blackstone learning experience

Source: http://www.blackstone.com/news-views/blackstone-blog/blackstone%27s-byron-wien-discusses-lessons-learned-in-his-first-80-years

Blackstone’s Byron Wien Discusses Lessons Learned in His First 80 Years

02/12/2013

Here are some of the lessons I have learned in my first 80 years.  I hope to continue to practice them in the next 80.

1. Concentrate on finding a big idea that will make an impact on the people you want to influence.  The Ten Surprises which I started doing in 1986 has been a defining product.  People all over the world are aware of it and identify me with it.  What they seem to like about it is that I put myself at risk by going on record with these events which I believe are probable and hold myself accountable at year-end.  If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time.
2. Network intensely.  Luck plays a big role in life and there is no better way to increase your luck than by knowing as many people as possible.  Nurture your network by sending articles, books and emails to people to show you’re thinking about them.  Write op-eds and thought pieces for major publications.  Organize discussion groups to bring your thoughtful friends together.
3. When you meet someone new, treat that person as a friend.  Assume he or she is a winner and will become a positive force in your life.  Most people wait for others to prove their value.  Give them the benefit of the doubt from the start.  Occasionally you will be disappointed, but your network will broaden rapidly if you follow this path.
4. Read all the time.  Don’t just do it because you’re curious about something, read actively.  Have a point of view before you start a book or article and see if what you think is confirmed or refuted by the author.  If you do that, you will read faster and comprehend more.
5. Get enough sleep.  Seven hours will do until you’re sixty, eight from sixty to seventy, nine thereafter which might include eight hours at night and a one hour afternoon nap.
6. Evolve.  Try to think of your life in phases so you can avoid a burn-out.  Do the numbers crunching in the early phase of your career.  Try developing concepts later on.  Stay at risk throughout the process.
7. Travel extensively.  Try to get everywhere before you wear out.  Attempt to meet local interesting people where you travel and keep in contact with them throughout your life.  See them when you return to a place.
8. When meeting someone new, try to find out what formative experience occurred in their lives before they were seventeen.  It is my belief that some important event in everyone’s youth has an influence on everything that occurs afterwards.
9. On philanthropy my approach is to try to relieve pain rather than spread joy.  Music, theatre and art museums have many affluent supporters, give the best parties and can add to your social luster in a community.  They don’t need you.  Social service, hospitals and educational institutions can make the world a better place and help the disadvantaged make their way toward the American dream.
10. Younger people are naturally insecure and tend to overplay their accomplishments.  Most people don’t become comfortable with who they are until they’re in their 40’s.  By that time they can underplay their achievements and become a nicer more likeable person.  Try to get to that point as soon as you can.
11. Take the time to pat those who work for you on the back when they do good work.  Most people are so focused on the next challenge that they fail to thank the people who support them.  It is important to do this.  It motivates and inspires people and encourages them to perform at a higher level.
12. When someone extends a kindness to you write them a hand-written note, not an e-mail.  Handwritten notes make an impact and are not quickly forgotten.
13. At the beginning of every year think of ways you can do your job better than you have ever done it before.  Write it down and look at what you have set out for yourself when the year is over.
14. Never retire.  If you work forever, you can live forever.  I know there is an abundance of biological evidence against this theory, but I’m going with it anyway.

Learning from Mr.Chetan Parikh

Source:http://www.safalniveshak.com/value-investing-chetan-parikh-way-part-1/

Some of their techniques are vital for investors too and we attempt to practice them at Jeetay.

a. Negative visualization: Translated into simpler language, it means always asking the question – “What’s the worst that can happen?”

The Stoics believed that all we have is “on loan” from Fortune, which can be taken without our permission or advance notice.

Profitability, margins and growth depend much more on a company’s ecosystem and the forces shaping it than on management. Ecosystems are fragile. Much as managements with a “halo” may dispute this, a company’s good fortune is also “on loan”.

The Stoics argued that “flux and change” are part of the world.

Many company valuations depend on “speculative” developments, and I use this term in a Grahamian sense.

Rather than wanting the things that the company already has (earnings, assets and proven and sustainable growth) as the Stoics would, Mr. Market often asks a price for things that a company desires and promises – but currently does not have – and many investors pay this price. In financial markets, as in life, this is bound to lead to unhappiness in the long term.

Negative visualization can be aided by what Frank Partnoy in his wonderful book “Wait – The Art and Science of Delay” calls “pre-mortems”.

Many investors do post-mortems, or learnings from decision made, but a “pre-mortem” assumes that a decision has failed and asks why.

Let me hasten to add that we do not spend all our time thinking negatively or worrying about it obsessively because we always build a sufficient “margin of safety” in the price we are willing to pay, but we do think of gloom and doom periodically.

A honest confession – when we are sitting on large amount of cash with just a few ideas, we (perversely) wish that it comes to pass.

In the words of Marcus Aurelius, a real philosopher-king (a Stoic philosopher and a Roman emperor), we take care to be “the user, but not the slave, of the gifts of Fortune.”

b. The dichotomy of control: Epictetus’s “dichotomy of control” comes from his statement that “some things are up to us and some things are not up to us”, some things over which we have complete control and some things over which we do not have complete control.

As Ben Graham pointed out that an investor has complete control only over the price he chooses to pay. If he is not a “control investor”, he has no say in managerial decisions reflecting corporate strategy and capital allocation. He has also no control over his exit price.

This one decision and the only thing over which the investor has complete control – the price to be paid – should be thought of with rationality, rigor and facts, but it often surrendered to fads, fashions and rumors.

c. Fatalism: Again in simpler language, it means letting go of the past. This means not being hostage to “if only” thoughts.

These are elements of the Stoic way of thinking that have helped us at Jeetay.

10. Socrates claimed that the only thing he was sure of was his own ignorance. He stated. “The only thing that I know is that I know nothing.”

Remembering this statement is a sure formula for humility and curiosity, both of which are the hallmarks of successful investors.

It is through the influence of Socrates that philosophy developed into the modern discipline of continuous critical reflection. From Socrates, investors can learn that the greatest danger is the suspension of critical thought.

11. Much more than any other philosopher before him, Aristotle made much of observation and detailed classification of data in his studies. Thus he was considered as the father of empirical science and the scientific method.

Unlike his predecessor Plato, Aristotle conducted his investigations by considering the opinions of both experts and lay people, before detailing his own arguments, assuming that some truth was to be found in commonly held ideas.

Investors should remember this when investigating companies and engaging in what Phil Fisher calls “Scuttlebutt.”

 

Learnings from Warren Buffet Documentary

Source:http://www.youtube.com/watch?v=eRflufmkwbw

1. Invest dont speculate- Investment attitude is like you look at the asset to produce returns. If warren buys a farm land, he looks at the returns from an acre not the price of the land everyday. If you buy a stock, hoping to go next week is purely speculation. And no one is expert in predicting what is going to happen next week.

2. Warren & Buffett have a checklist before buying any business. a) Need to understand business. 2. Business with Intrinsic characteristics. c) Competitive Advantage d) Margin of Safety.

3. Market is there to serve you not to instruct you. Mr. Market will throw you Business at irrational prices, its investors duty to pick the right business at the right price.

4. Don’t just buy a share, become Business owner.

5. Allocate Capital Efficiently.

6. Lot of smart people have gone broke because of high leverage.

about Warren

It’s interesting to note that Buffett managed to invest very differently from Ben Graham even while he bought almost the same exact kinds of stocks Ben Graham bought. In fact, sometimes he literally bought the same stocks Graham bought. But Buffett always got much better results.

Why?

Because he focused. Warren Buffett told Charlie Rose that “focus” was the key to his success. He’s repeated over and over again that he doesn’t necessarily have more good ideas than other investors – he just has fewer bad ideas. Buffett focuses on his very best ideas and puts as much money as possible into those ideas.

Working Capital

Why did i chose working capital as my topic for the day? Why does it play so much importance in analyzing the ratio?? Why does Prof Sanjay Bakshi choose to focus on negative working capital??

Working Capital is the lifeline of the Business. Without sufficient working capital, the company would go burst. What is working capital??

Working capital = current assets/current liabilities.

As we know Company should have sufficient capital to run the show.  Today we are focusing on a concept called negative working capital. What is negative working capital? Negative working capital is nothing but current liabilities are excess over current assets. What does current liabilities are excess over current assets mean? It means Company has to deliver product/service at a later date, company has received advance cash for the product/service. Doesn’t sound cool when you receive the cash in advance and deliver the product/service later. I find this kind of Business fantastic. Why does it clients  pay first and get the product later?? Because company might be having certain characteristics which allows itself to receive cash first and then deliver the product later. What are the characteristics company has which has advantages of collecting cash first?? Branding – company might be carrying branding image in the minds of consumer (Colgate).

Cash Flow Misrepresentation

How one can mislead cash flow from operation in balance sheet..

There are 3 ways companies can fool analyst in Operating cash flow.

• First – Cash flow reporting from discontinued operations, cash overdrafts, purchases and sales of trading securities and capitalizing operatiing costs.
• Second – Taxes on Non operating gains and losses and the tax benefit from stock options.
• Third – reporting of nonrecurring sources and uses of operating cash flow.Non recurring results from accounts receivable  securitisations, and the increased use of vendor financing.

Discontinued Operation

Companies might add cash from discontinued operations to the running operations, to look cash flow attractive. I need to know whether GAAP has mandated companies to disclose discontinued companies.

 

 

Some thoughts of Amit Wadhwaney of Third Avenue

1. Some Businesses come with Liabilities. Then there are other liabilities that are off the balance sheet,  things that the company’s committed to spend, the company’s required to spend, needs to spend just to stay in the business.

2. We try to buy Businesses which have survivability, which have staying power, staying power in the face of adversity of elements.

Reviwing our last performance

Copied from Oldschool.

The stock analysis today is not all about forward thinking analysis. The premise of this article is looking back at the initial investment thesis and seeing how it turned out along with some additional thoughts about the future.

What I really like about this is that it reminded me of a money management fund where analysts did not receive performance bonuses based on the last 3-6 month performance. Instead, this fund paid analysts on how well their picks did 2-5 years AFTER they had purchased it.

If a stock shot up 30% in one year and then fell 30% in year two, that performance was considered to be worth 0%.

Just something that popped into my head while reading this article and thought it was interesting enough to share 

Articles like this, which revisits an investment 20 months later, or even 4 years later, is a process that we all should be in the habit of practicing.

Source:http://www.oldschoolvalue.com/blog/stock-analysis/calm-20-months-later-still-going-strong/