I have been wanting to make this thread for awhile to separate from all the day trading going on in the "Stock Market" thread. Please keep this focused on long term investing (i.e. for retirement).

"Value Investing" is one of the most overused, but misunderstood, terms on Wall Street. To most, it means buying near 52-week lows or at low P/E multiples. To invest in this mindset means looking for a low PRICE, but having no idea what that price is in relation to the VALUE of the company.

Quote :

"Stocks are commonly referred to as "undervalued" or "overvalued" in reference to whether or not they are attractively priced. The reality is such that a stock can never be under- or overvalued—merely under- or overpriced. The value of a company at a given point in time is fixed, the price moves rapidly above or below that value as the fools play with the stock. As Warren Buffett tells us: "Price is what you pay, value is what you get." In other words, no matter what price you pay for a stock, you end up with the same amount of value."

So hopefully as this progresses, those of you who care enough will learn how to properly assess the VALUE of a business, and therefore determine what price you should pay for a stock. More to come soon...

DISCLAIMER: Most of the information, quotes, etc. will come from fwallstreet.com. If you want to read ahead, here is a good place to start: http://www.fwallstreet.com/blog/25.htm

11/26/2008 12:00:39 PM

I've had so much junk mail from Motley Fool about this, definitely a good principle, but I like playing fantasy football w/ my money.

11/26/2008 12:01:45 PM

^the more you learn on your own, the more ridiculous and contradictory Motley Fool becomes...trust me. You will never want to pay fees for other people to tell you what to do with your money ever again when you realize how simple it is to do this.

11/26/2008 12:04:57 PM

Buy and hold was our grandparents strategy ...

Im not convinced that the majority of my money should be put into a strategy like this.

With all the leveraged games out there now, and only increasing, I think you have to look at technical fundamentals for 80% of your decision making these days if you want to make money in bull and bear markets.

Maybe thats just me. While we are putting good sites out there, ill push a plug for http://www.alphatrends.net

Dude is right on in his technical analysis, and his book is super informative.

11/26/2008 12:15:33 PM

^ grandparents strategy...

hahah

OMG home mortgages are my grandparents strategy for purchasing a home. I will go Web 2.0 and build my own out of trash...

11/26/2008 12:37:49 PM

I've picked up a few books that talk about the different strategies. I also picked up a "how to read a financial report" book so that I can quickly and easily scan the reports for bits of information on my own. I honestly don't think anyone here should be trading in the market without really being able to understand a balance sheet income statement and cash flow report. You can't just look at P/E and think a stock is over or under priced.

That said, I think trying to do this sort of analysis in this market is a waste of time until things tend to stabilize. Everything is so beaten down that you can basically pick a handful of any of the classic (and newer) large caps and probably have good success. Kraft, Coke, Intel, etc. But I'm not really looking to do a lot of buy and holding in my trading account. Just kinda waiting on a bit of normalcy to return because I haven't had a ton of success playing all this volatility. I've been basically a day and in some cases hours/minutes from being down a little (where I am now) to up big and I really don't thrive on the pressure.

11/26/2008 12:54:40 PM

Basic Value Investing Rules
1) CASH is king, EARNINGS are trash. Earnings are defined as the profit a company has after basic expenses and taxes. But they say nothing about the financial state of that company. For example, say your company had earnings of $10,000 for the year, but had to take out a $15,000 loan. On paper, it looks like you grew by $10K, but in actuality you just dug yourself a $5K hole. Earnings do not reflect that debt, and therefore can be easily manipulated. The key is to focus on the cash a business generates on its own. Steadily growing cash is the true sign of a healthy business, and the proper way to value that business.

2) Following Free Cash Flow. Free cash flow (a.k.a. "owner earnings" ala Buffett) is the amount of cash a company generates, less capital expenditures (costs for property, plants and equipment). It is the true indicator of how the business is performing. A great business is one that can generate cash and continue to that cash on its own. Therefore, steadily increasing free cash flow indicates a growing business.

3) Long Term Consistency. Of course, you cannot determine the true state of a business by looking at just a few months worth of data, or even a few years. So pay no attention to those quarterly reports. Look at at least 5 years worth of data, and ideally 10 years worth. A company worth investing in will show steady growth in free cash flow over a 5-10 year period.

4) Predicting Future Value. Sounds daunting, but really isn't if you've done steps 1-3. As a rule of thumb, the future value of a business should mirror the growth of that business over the previous 5-10 years. And since we've learned that true growth is based on growing free cash flow, finding the median growth of free cash flow over this time frame should accurately determine growth from this point forward. Once all of this is done, you can assign a monetary value to the business as a whole, divide by the number of shares outstanding, and voila, you have a per-share value.

5) Buy With a Margin of Safety. We've done all this work to determine the value of our business, but we all know that in reality, even the most stable of businesses can be unpredictable. To account for the unpredictability, we have to buy companies at a steep discount to their intrinsic value....with a margin of safety. This is what separates true "value investors" from speculators. A 50% discount is a good starting point for most businesses, 25% is adequate for industry leaders.

Sounds complicated, but luckily Microsoft Excel makes the calculations very simple. The next post will highlight an example and provide an easy to use spreadsheet for the calculations. Then you will be on your way.

The Importance Of (or lack thereof) Earnings: http://www.fwallstreet.com/blog/22.htm
Free Cash Flow (a.k.a "owner earnings): http://www.fwallstreet.com/blog/26.htm

11/26/2008 1:03:26 PM

Quote :

"Buy and hold was our grandparents strategy ... Im not convinced that the majority of my money should be put into a strategy like this. With all the leveraged games out there now, and only increasing, I think you have to look at technical fundamentals for 80% of your decision making these days if you want to make money in bull and bear markets."

The key is buying at a steep discount to value. That is TRUE value investing. If you overpaid initially, then yeah "buy and hold" isn't going to make you a lot of money. But if you bought at a discount, the market will eventually realize the value of the business. Price always follows value in the long term. And if you use CASH as a basis for your valuation, then you do not have to worry about leveraging (ala earnings). See my previous post and follow those rules...and it's all gravy.

BTW, Buffett has admitted to trying technical evaluations in the past and flat out said it doesn't work.

11/26/2008 1:09:51 PM

should have put some money into CIT on Friday.

11/26/2008 1:46:25 PM

Case Study: Johnson & Johnson (JNJ)

For a great example of a very investor-worthy business, look no further than JNJ - a great company with steady increasing cash, an industry leader (a large moat), and a fairly predictable business.

After looking through the steps of valuation, you might say you don't have time to do all those calculations. But thanks to the wonderful age of technology, they are all done for you at the click of a mouse. Free cash flow numbers are already done for you at Morningstar.com. And Microsoft Excel does the rest. Plugging all this into a simple spreadsheet will give you your intrinsic value and possible purchase price.

JNJ Free Cash Flow (10 yr time frame): http://quicktake.morningstar.com/StockNet/cashflow10.aspx?Country=USA&Symbol=JNJ
You can see a steady increase in cash over the last 10 years.

Another portion of the valuation comes from shareholder equity. Shareholder equity is worth of the company's assets, i.e. the worth of the company if it were to liquidate. While we would never want to invest in a company that we expected to liquidate, a sign of a healthy business is the growth in value of its underlying assets...so we use this to help calculate our value. We also must account for the debt the company is taking on. Debt can be a good thing, if that debt is helping the company generate more CASH in the process (this is called Cash Returned On Invested Capital - CROIC). This is accounted for by looking at both Current and Total Liabilities. You've just learned how to read a balance sheet. Again, Morningstar is a great source for this info...

JNJ 10-year Balance Sheet: http://quicktake.morningstar.com/StockNet/balance10.aspx?Country=USA&Symbol=JNJ

Now, it's time to crunch the numbers via Excel. My analysis of JNJ looks like this:



Purchase Price: $66.14. Sure looks like JNJ is trading at a great price today, with respect to the value of the company.


Here is your very own spreadsheet via fwallstreet.com:
http://www.fwallstreet.com/postimages/4-JNJ-Analysis.xls
1) Plug in the numbers on the first three rows from Morningstar.
2) Change the denominator in the "Per Share Value" formula to the number of shares outstanding. I grab this number from MSN Money: http://moneycentral.msn.com/detail/stock_quote?Symbol=jnj&getquote=Get+Quote (look at Total Shares Out.)
3) Calculate your discount rate, i.e. your expected rate of return. The default is 15% which I think is a good number, but you can change it in the "Total Value" formula.
4) Adjust your margin of safety according (remember, 25% for industry leaders, 50% for most others)
5) $Profit

Once you get familiar with the spreadsheet, you can analyze dozens of companies in a few hours time. It is a great starting point, but of course there is no 100% assurance in investing. Stick with strong, stable companies with a large moat (marketplace dominance), steadily grows its cash, and then buy with a margin of safety. Hope this all helps. Further discussion is welcome and encouraged...the idea is not to give "hot stock tips" but to get you to learn how to do this on your own.

Buying JNJ (2006 analysis): http://www.fwallstreet.com/blog/4.htm


[Edited on November 26, 2008 at 2:29 PM. Reason : ]

11/26/2008 2:13:49 PM

This thread is relevant to my interests.

11/26/2008 2:19:39 PM

im interested to see how this thread progresses

good topic

11/26/2008 2:25:11 PM

Quote :

"I also picked up a "how to read a financial report" book so that I can quickly and easily scan the reports for bits of information on my own. I honestly don't think anyone here should be trading in the market without really being able to understand a balance sheet income statement and cash flow report. You can't just look at P/E and think a stock is over or under priced."

so your Dummies guide to reading financial statements has given you the financial expertise to become a savvy investor?

That is laughable.

11/26/2008 5:32:47 PM

I don't trust any investment advice from anyone until I see a track record. People who give you unsolicited advice but who aren't willing to show you their track record are posers and idiots.

OP needs to 1) show that his advice works and 2) prove that he has put his own money where his mouth is.

Otherwise, it's all noise. You absolutely should not assume that just because someone works in the industry that they are competent in any way.

11/26/2008 5:41:35 PM

Quote :

"so your Dummies guide to reading financial statements has given you the financial expertise to become a savvy investor? That is laughable."

Please, please show me anywhere in this thread I've said anything that would give you the impression I think I'm a savvy investor? Are you nuts?

What's laughable is you've made two contradictory statements in this thread where adults are attempting to discuss investing without adding a damn thing yourself. Run along to chit chat, I think it's a more suitable place for you.

[Edited on November 26, 2008 at 5:59 PM. Reason : .]

11/26/2008 5:58:42 PM

Might want to check this one out (Valuation: Measuring and Managing the Value of Companies):

http://www.amazon.com/Valuation-Measuring-Managing-Companies-Fourth/dp/0471702188/ref=sr_1_4?ie=UTF8&s=books&qid=1227741102&sr=8-4

Lots of value investing books out there, I thought this was one of the better ones.

11/26/2008 6:20:53 PM

^^ if i saw anything intelligent in this thread, I might reply.

[Edited on November 27, 2008 at 12:00 AM. Reason : from your posts in the stock market thread, I think you believe you are "savvy"]

11/26/2008 11:47:32 PM

Hey Arab you sound like a little dick.

11/27/2008 12:27:47 PM

^

Quote :

"So what do you guys think about buying some RIM, since the Storm is coming out soon?"

STFU.

The problem with some of the long term "value" investment strategies sofar put forth, is that they fail to adequately address why some companies stock will always perform lower than its "value". If you want long term investing, invest in blue chip cash generators who consistently distribute dividends (plow the dividends back in), don't get swallowed up by this "value" vs market price.

11/27/2008 1:54:58 PM

i will say that value investors were buyin LEH all the way down while the technical people wouldn't touch it with a 10ft pole

not that you can't make money w/ value investing, but being aware of other strategies will help you understand why other people are buy/selling...

11/29/2008 2:01:45 AM

Quote :

"The problem with some of the long term "value" investment strategies sofar put forth, is that they fail to adequately address why some companies stock will always perform lower than its "value"."

Ok, so what addresses it then?

Quote :

"If you want long term investing, invest in blue chip cash generators who consistently distribute dividends (plow the dividends back in), don't get swallowed up by this "value" vs market price."

Umm, I dobut too many people on this site can get ahold of enough shares in the next 5-10 years that dividend investing makes a hill of beans. Besides, that is boring anyway and if you had 1/10th the brain you should have for that big dome of yours, you'd know that this isn't what this thread is about so you can save your negative nancy for chit chat. I can't actually recall you saying anything of worth in the stock thread, so why are you here popping off about BS?

Quote :

"i will say that value investors were buyin LEH all the way down while the technical people wouldn't touch it with a 10ft pole "

I don't think you understand what value investing is if this is your example, it isn't just seeing a stock that is seemingly underpriced relative to historics or P/Es.

11/29/2008 6:12:34 PM

Hey Arab, you're still a pretentious dick.

11/30/2008 7:16:18 PM

what information did lehman brothers released that led you to believe they were going bankrupt?

my point is, you can't trust the timely release of information from companies

11/30/2008 8:19:56 PM

Quote :

"i will say that value investors were buyin LEH all the way down while the technical people wouldn't touch it with a 10ft pole"

Quote :

"I don't think you understand what value investing is if this is your example, it isn't just seeing a stock that is seemingly underpriced relative to historics or P/Es."

exactly. the person talking about buying LEH clearly didn't read the earlier posts or try to do any kind of analysis. i have found that financial companies are almost impossible to analyze because there is no cut and dry way to determine "cash from operations" and "capital expenditures." their money-making methods are so complex, i wouldn't even want to try. there is a post about valuing financial companies here: http://www.fwallstreet.com/blog/50.htm

11/30/2008 8:27:42 PM

^^ there were a number of analysts that knew lehman had way too much leverage and exposure to mbs (among other securities) and called their potential collapse in 2007.

11/30/2008 9:23:46 PM

skokiaan said:

Quote :

"I don't trust any investment advice from anyone until I see a track record. People who give you unsolicited advice but who aren't willing to show you their track record are posers and idiots. OP needs to 1) show that his advice works and 2) prove that he has put his own money where his mouth is. Otherwise, it's all noise. You absolutely should not assume that just because someone works in the industry that they are competent in any way."

First of all, I never claimed to work in the industry. Far from it actually...that's kind of my point, that ANYONE can learn to invest properly when they know how to assess value. "Diversification" is a word Wall St. loves to throw around to make you feel good about throwing your money away on their mutual fund fees...diversification essentially means a mix of good companies, OK companies, and bad companies. Personally, I'd rather own all good companies.

But you are right that you shouldn't just listen to anybody about investment advice. Value investing has a pretty important subscriber IMO - Warren Buffett. Value investing defined as buying a company's free cash, and doing so at a steep discount, is how Buffett invests. "Owner earnings" is his own term. Everything that fwallstreet site is based on comes from the thinking of value investing greats like Buffett and Charlie Munger. You don't have to read too many of the blogs to see that. So that was all the support I needed.

That said, I don't want this to turn into a "hot stock tips" thread so I'm not really going to mention individual stocks outside of an analysis example. Hopefully you all will do some of this analysis on your own using the above method. I will say that am almost 100% in large cap stocks at this point.

nattrngnabob said:

Quote :

"I think trying to do this sort of analysis in this market is a waste of time until things tend to stabilize. Everything is so beaten down that you can basically pick a handful of any of the classic (and newer) large caps and probably have good success. Kraft, Coke, Intel, etc."

You are pretty much right about large caps providing good success at these depressed prices, which is exactly why my money is there now. Sure we might still be heading down some more, but long term they are going to be winners because the value of their business hasn't changed. But that is why you are wrong about not being able to do this analysis in a volatile market...this is EXACTLY what the value investor waits for, for fear and panic to bring prices down to acceptable purchase levels and then to jump in! That's why we analyze 10 years worth of data to see how a company is truly performing...you simply can't do that with any accuracy analyzing annual performance, and certainly not quarterly. If you stay focused on long term performance, 2008 is going to look like a blip on the radar in another 10 years, or less.

I'm really curious to see if anyone has used the spreadsheet to do their own analysis yet bc there are sure to be many more questions about it. This is good discussion so keep it coming.

12/1/2008 12:53:44 AM

I'm interested to see if anyone has done any investing based on the info in this thread yet?

There is some very good insight from rallydurham in the "Stock Market in 2009" thread in regards to the impending demise of the dollar. The cards are set for inflation to run rampant as 1) government spending/debt balloons, and 2) we continue to fund additional spending by printing more and more money, ultimately destroying the value of the dollar.

The U.S. credit backed model is broken, and we are in for a complete overhaul of the economic system in the next decade. So I would caveat earlier posts by looking for stocks of global-dominating companies with good dividends. And with inflation all but certain, dollar-dominated commodities (e.g. OIL) and GOLD will soar. And as always, look at companies that are generating CASH...stay away from debt-ridden, speculative stocks.

Excellent analysis of this scenario by perennial bear Peter Schiff in "Bull Moves in Bear Markets."
http://www.bargaineering.com/articles/bull-moves-in-bear-markets-by-peter-schiff.html


[Edited on January 4, 2009 at 7:15 PM. Reason : ]

1/4/2009 7:12:49 PM

Trying to be like Buffet is the biggest cliche in the investing world. You can't be like Buffet because he gets a completely different level of information than you can.

He can actually talk to a company's leadership, go over their books, examine a company's operations in detail, etc. The best anyone here can do is look at filings and reports that are a coarse sample of metrics that suggest something about reality. In a more realistic case, the information that is widely available is also full of half-truths and spin.

Everyone tries to be like Buffet, and almost all fail because they don't have the resources, time, and talent. You can't processize success. Otherwise, all these Buffet followers would be getting rich left and right.

1/4/2009 7:36:28 PM

I have been value investing for the past 7 or 8 months. It all started when my dad gave me this book:

http://www.amazon.com/gp/product/0471733067?v=glance&n=283155&n=507846&s=books&v=glance

I picked most of my stocks using a combination of the excel spreadsheet provided on fwallstreet.com and the Magic Formula Investing site. If you like fwallstreet's idea here is a tool that will most definitely come in hand:

http://indiainvestor.wordpress.com/2007/10/22/update-11-automatically-scanning-the-sp-500-using-fwallstreetcom-method/

You basically input the company, margin of safety, and the rest is done for you. Its no holy grail, but it beats having to input the earnings yourself. It takes the fwallstreet's excel spreadsheet to another level.

As for the value investing, my portfolio is down 20% for the year. Not bad considering the stock market as a whole. I don't claim to be a master stock picker, just an average Joe trying to put some money away and (hopefully) earn more than a savings account.

I hold very few stocks but have bought a couple following fwallstreets advice - WMT, ADBE, and AEO to name a few. My Scottrade account is more like an automatic savings account, so right now I'm getting some steals for some of the companies I do purchase. Now lets just hope that fwallstreet's advice about price following value is true.

1/5/2009 12:57:56 AM

^To offer a basis of comparison, my retirement accounts are all down about 20%, as well. I didn't put any work into them other than picking the lowest cost ones out of every investment type offered (yay bonds).

You can't call a strategy an effective one if it can't do better than average, random, or uninformed (my retirement accounts).

I'm not trying to be a dick -- I'm just saying it is highly unlikely that any of the value investing techniques are going to help any amateur do better than other investment options that require little to no work.

Unless you derive some sort of entertainment out of looking at balance sheets, it's a waste of time. The trading in the other thread is more about entertainment -- like going to a casino -- than doing something that will significantly impact your wealth.


[Edited on January 5, 2009 at 1:38 AM. Reason : ,]

1/5/2009 1:21:25 AM

^ Valid point, I guess explaining my motivation for value investing might have been useful...

My attempt isn't to become an awesome stock picker - although it would be nice. The fundamental idea in fwallstreet's investment strategy is buying good, solid business's at cheap prices. From the site, Joe Ponzio (fwallstreet's writer) states that in the long term price will tend to follow value. If you buy a company like WMT at a price that is currently lower than its value, the price of the stock should tend to follow the value. This won't always happen, but that's the reason you add in a margin of safety when looking at a particular stock.

Like I said, I don't claim to be a wonderful stock picker but I do know that I am picking up cheap stocks in valuable companies (I feel that every investor should be licking their chops right now). My idea is not to sell and make a quick profit, but to hold on to these companies until their stock price follows the value of the company. Now if some of the fundamentals of the company change (e.g. if Walmart acquires New York & Company) then I will bail, yet another reason you build in a margin of safety.

Basically, the value investing idea is to survive during the hard times and shine during the good. Not saying that it works, but that's the idea.

Oh yeah, and the 20% down is including a home-run swing in C. Went against the grain with this one, but what the hell, I'm young. Without my home-run swings, my "FWallStreet" portfolio is down 14% - once again, not great but it has (with the C exception) kept me away from the financial mess.

1/5/2009 10:49:32 AM

there is no such thing as long term value investing - as the recent market has shown - 11 YEARS worth of gains can be wiped out in a bad month. Regardless, of where the market goes though there are strategic ways to invest. But keeping a stock in something such as a retail on the brink of a recession (as noticed last january) is stupid to just "have it in something"

a lot of people don't understand that you can make money whether you feel the market will go up OR down....just have to be smart on where to put it and don't be afraid to change picks based on what research is showing.

There are blantant obvious things to watch for such as home prices skyrocketing 20% year over year, or oil spiking 150%.....stuff like that doesn't last and you need to adjust your portfolio accordingly, the person who sits back on the long term will get slaughtered

1/5/2009 7:11:51 PM

the main point of the whole thread was to bring some knowledge and discipline to investing instead of just dumping money into Wall Street's mutual funds. all these fund managers are really concerned about is making money for themselves, which they do very well from dumb saps pouring money into them.

of course no one is going to be Buffett. he is the greatest of all time. but it would be a pretty dumb thing to do not to at least TRY to emulate him. if you buy great companies at great prices and stick to your valuing/investing strategy...you will do well.

1/5/2009 9:42:05 PM

Quote :

"there is no such thing as long term value investing"

I will have to disagree, respectfully of course. Isn't value investing what Warren Buffet has been doing for 50-some years? I wouldn't call that a complete failure at long term value investing. I'm not sure where you get 11 years of gains wiped out in one bad month but I believe in the peaks and valley of the economy and the stock market. With every downturn there is a rebound. I have no idea when the stock market will rebound, but I plan on it happening before I retire in 2038.

Warren Buffet's version of value investing involves buying stocks at prices less than their intrinsic value. FWallStreet is a site that helps find the intrinsic value of companies.

1/5/2009 11:23:03 PM