Value Investing

[Julia]

Nope I find Small caps with qualities I like performs no worse
than the big blue-chip, some operate in a captive market where it actually command far better return than blue-chip.

I agree. There is often an assumption that the best return will be from blue chips. Frequently it just ain't so.

 

[kermit345]

My assumption is that the smaller stocks have the potential to provide greater returns then blue chips due to their scale and number of shareholders on issue. While the blue chips generally provide a more steady return once again due to their scale and shareholders on issue.

So it becomes a bit of a trade off, small caps can provide greater opportunities with hightened volatility (in my view), while blue chips can provide more steady results and less volatility. This is a very generalised statement though and can vary depending on the individual company.

 

[bunyip]

My assumption is that the smaller stocks have the potential to provide greater returns then blue chips due to their scale and number of shareholders on issue. While the blue chips generally provide a more steady return once again due to their scale and shareholders on issue.

So it becomes a bit of a trade off, small caps can provide greater opportunities with hightened volatility (in my view), while blue chips can provide more steady results and less volatility. This is a very generalised statement though and can vary depending on the individual company.

The smaller the company, the wilder its price action and the more difficult it is to trade for most people except for a few skilled individuals who specialise in small stocks. I've met hundreds of traders and investors over the years through my involvement with the ATAA, and so many of them have told me they've blown one account after another by chasing what they believed would be astronomical returns from small stocks. Sometimes they do in fact get those astronomical returns, but all too often they would have been far more profitable with a simple strategy of buying strongly uptrending blue chips and sticking with them as long as their trends continued.

If blue chips are too slow-moving, then mid cap stocks offer an alternative that's kind of half way between the blue chips and the cheapies. Mid caps in my experience tend to be less choppy than smaller stocks while at the same time making generally larger percentage moves than blue chips.

Another alternative is to buy blue chips and then write options on them each month. The return from the options premiums can add an extra 15 to 20% yearly to your profit from blue chips, and two or three times that much if you write options on US blue chips. However, there are limited numbers of ASX blue chips suited to this strategy.
Most people never use options to produce extra income, because they know nothing about them and they never take the trouble to learn.
One of the big benefits I've found by being an ATAA member is that you get exposed to various strategies that you otherwise may never have come across.
When you talk to someone who's profiting from a strategy that's not being used by many people, you're more inclined to learn that strategy yourself to see if you can profit from it.
Hence, as a trader you grow and learn strategies to profit under all market conditions, rather than only when the market is bullish.

 

[Laohu]

Hi All, new to ASF, hope u all well

Great thread; some very intelligent people posting here, I have learnt already and hopefully will be able to contribute something useful in return.

Have taken note of your username ROE - an investor after my own heart - and would love yours and others advice re some good titles regarding stock valuation; I am trying to hone my intrinsic value calculations.

It's going quite well, but would like some other ideas if possible, especially re valuing Retained earnings; hopefully someone can perhaps point me in the right direction.

Enjoying your previous posts and looking forward to some more, cheers

 

[So_Cynical]

The smaller the company, the wilder its price action and the more difficult it is to trade for most people except for a few skilled individuals who specialise in small stocks. I've met hundreds of traders and investors over the years through my involvement with the ATAA, and so many of them have told me they've blown one account after another by chasing what they believed would be astronomical returns from small stocks.

I've had some success with small stocks, at least the non resource/energy/biotech variety of small stocks...there's a few small/micro caps with niche business that have been very good to me...just a matter of using the volatility to your advantage and buying the bottom of the range when the opportunity presents its self.

 

[ROE]

Good question. I think it's perfectly reasonable to demand more upside (ie. a greater discount) when looking at more risky situations. There are many reasons why smaller companies are more risky and you've already mentioned a few.

It is interesting to note that you're return on smaller caps matches that of your larger cap holdings - is there also an increase in the volatility of returns?

I don't subscribe to the theory more volatile = more risk

This theory pay no attention to the quality of the company, its business
and how much cash or asset it has etc...

I measure risk on the probability if I could lose my capital investing
in a company based on its merits and quantitative measures....

I think it's a crazy idea, just because something move from 32.00 to 4.50
like FLT it's become riskier, it's a bargain that some people missed.

or Credit Corp 11 bucks to 40 cents bargain not to be missed..

Yes some company do move from dizzy high to low price and it deserve to
be so as it business model is weak and its debt laden culture isn't worth
putting the money at risk..that is risky not because the movement of price or company size

I wouldn't buy SIP for any price even from $2.00 to 50 or 20 cents
I used to think SIP was cheap once but not after I dig a lot deeper so
never got involve

I wouldn't buy PRY or ISF from any price to any price

to me those companies are hell a lot more risky than a small fry like ONT
same industries many time the size of ONT but I would put 30K into ONT than
3K in any of those mentioned.

 

[bunyip]

I've had some success with small stocks, at least the non resource/energy/biotech variety of small stocks...there's a few small/micro caps with niche business that have been very good to me...just a matter of using the volatility to your advantage and buying the bottom of the range when the opportunity presents its self.

Fair enough.
There are so many stocks and markets and lots of different strategies to profit from them. We're truly blessed to be living in this day and age when there's a veritable smorgasbord of trading and investing opportunities under every conceivable market condition.

 

[doctorj]

I don't subscribe to the theory more volatile = more risk

Sorry, what I meant was this - say you do 5 transactions in big companies and 5 in small and your returns are as follows:

Big cap: 12%, 15%, 7%, 11%, 12%
Small cap: -75%, -10%, 30%, -18%, 200%

Or are your returns relatively comparable?

 

[So_Cynical]

I think small/micro caps need to be clearly divided into 2 groups...1 group that basically don't make money and are looking for something, gold, oil, Iron, cure for cancer etc etc...and the small/micro caps that actually have a business and make money or at least have some cash flow and or are very close to making money.

Two very different beasts....however fair to say the small/micro cap end of the spectrum is dominated by stocks that fall into the "don't make money/looking for something" group...so unfortunately (fortunately for me ) many many investors, punters, traders, and mums & dads completely over look the entire sector due to the "looking for something" dominance.

Ill post the charts of some of my micro and small cap holdings to demonstrate what i mean....money making, niche market, small and micro caps, and my entry's/part exits in CLV, SND and PFL
~

 

[ROE]

Sorry, what I meant was this - say you do 5 transactions in big companies and 5 in small and your returns are as follows:

Big cap: 12%, 15%, 7%, 11%, 12%
Small cap: -75%, -10%, 30%, -18%, 200%

Or are your returns relatively comparable?

Probably but I never do any charting to compare because I find there is not much use for me personally...So_Cynical is the man for that , he seem to know a lot more than me on a wide range of topic ....I prefer to spend time on probability of me losing capital

The small caps that do have a decent business model and make money and has good quality management I see it to be better an investment....stuff like TRS, DMP, JBH and NVT .. Use volatility to your advantage for these stocks.

I dont play much in the mining area except select few mining services company like FGE so I don't see many crazy wild ride.

Mining is getting out of my circle of competence so I don't want to go there.

 

[Errr]

Another alternative is to buy blue chips and then write options on them each month. The return from the options premiums can add an extra 15 to 20% yearly to your profit from blue chips, and two or three times that much if you write options on US blue chips. However, there are limited numbers of ASX blue chips suited to this strategy.
Most people never use options to produce extra income, because they know nothing about them and they never take the trouble to learn.
One of the big benefits I've found by being an ATAA member is that you get exposed to various strategies that you otherwise may never have come across.

An old lecturer of mine provided some research showing that selling or buying vol was roughly fairly compensated; it would depend on the holding time frame and other objectives. I think was with respect to buying and holding the underlying for the long-term then writing (can't remember too well). Also on the same token markets can be irrational and if you have the stock specific understanding it's sound. In my opinion/an assumption writing options on large bluechips would be more likely to be fairly priced than less followed stocks. I just wouldn't categorically write options on a portfolio of bluechips that you intend to hold for the long-term.

 

[bunyip]

Roe - are there times when you find a stock that shapes up well in terms of both fundamentals and value, so you buy it and then it stagnates and goes nowhere for a prolonged period of time?

How long would you be willing to stick with a stock that doesn't go up like you expected it would?

 

[ROE]

Roe - are there times when you find a stock that shapes up well in terms of both fundamentals and value, so you buy it and then it stagnates and goes nowhere for a prolonged period of time?

How long would you be willing to stick with a stock that doesn't go up like you expected it would?

As long as it paid me the dividend yield of long term bonds or more I'm happy I don't mind a couple of them stay in the lager for a while as long a dividend stream keep coming in.

I haven't had any experience where the majority of them are like that...

Most of my investment I give it 3-5 years to judge whether it's a keeper or something I need to let go....

My investment horizon is very long probably another 25-30 years to go..

I pure as much cash in as I can and I do the best I can, I don't try any fancy tricks to beat the market but to get steady return if it turn out to be 8% one year or 15% another or 50% another then so be it.....

Just good old fashion conservative save and invest and compounding

 

[bunyip]

As long as it paid me the dividend yield of long term bonds or more I'm happy I don't mind a couple of them stay in the lager for a while as long a dividend stream keep coming in.

I haven't had any experience where the majority of them are like that...

Most of my investment I give it 3-5 years to judge whether it's a keeper or something I need to let go....

My investment horizon is very long probably another 25-30 years to go..

I pure as much cash in as I can and I do the best I can, I don't try any fancy tricks to beat the market but to get steady return if it turn out to be 8% one year or 15% another or 50% another then so be it.....

Just good old fashion conservative save and invest and compounding'

So you might hang on to a sleepy stock for as long as five years before you tire of it's poor performance and decide to let it go?

You have a lot of patience, my friend. In fact I'd suggest that your patience is at times costing you big money by causing you to miss out on stocks that sometimes make gains of well over 100% in less than a year while your funds are tied up in a sleeper.

Your policy of 'good old fashion conservative save and invest and compounding' can be applied to these powerhouse stocks just as well as to any other stock.

 

[ROE]

So you might hang on to a sleepy stock for as long as five years before you tire of it's poor performance and decide to let it go?

You have a lot of patience, my friend. In fact I'd suggest that your patience is at times costing you big money by causing you to miss out on stocks that sometimes make gains of well over 100% in less than a year while your funds are tied up in a sleeper.

Your policy of 'good old fashion conservative save and invest and compounding' can be applied to these powerhouse stocks just as well as to any other stock.

Lot of stock that pass me by that make 100% or 1000% gain

Lot of people make money with margin loan and amplified their growth

Probably a Billion people on this planet make more money than me.

Do I care? Not really, I don't want to be someone else I want to be me, I'm very content of what I have and to be me I keep doing what I do with very little influence from the outside.

Come GFC and other world events I can sleep and buy more stocks cheap
while everyone is out to safe guard their capital and get out of stocks

“True contentment depends not upon what we have; a tub was large enough for Diogenes, but a world was too little for Alexander.”

 

[bunyip]

Lot of stock that pass me by that make 100% or 1000% gain

Lot of people make money with margin loan and amplified their growth

Probably a Billion people on this planet make more money than me.

Do I care? Not really, I don't want to be someone else I want to be me, I'm very content of what I have and to be me I keep doing what I do with very little influence from the outside.

Come GFC and other world events I can sleep and buy more stocks cheap
while everyone is out to safe guard their capital and get out of stocks

“True contentment depends not upon what we have; a tub was large enough for Diogenes, but a world was too little for Alexander.”

That's fair comment.
We're usually happy and contented when we're doing something that suits our personality.
And happiness is the most important thing of all.

Happy Easter to you, Roe. And to everyone else on ASF.

 

[ROE]

That's fair comment.
We're usually happy and contented when we're doing something that suits our personality.
And happiness is the most important thing of all.

Happy Easter to you, Roe. And to everyone else on ASF.

Same to you and everyone else, enjoy your easter and may you make a reasonable return for your money.

Enjoy life and be happy

 

[Sirloin Steak]

Well for me this is more a theological thread than anything else.
Value investing is my religion.
The best thing about it is that its not too complicated.
As Ben Graham said in the Intelligent Investor only elementary maths should ever be required.
Now more than ever the hardest part is remaining emotionless.
This is something that I am generally good at but I still slip up from time to time.
The best source of information for me personally is the gospels.
I consider these to be the intelligent investor and security analysis.
Reading up on Buffett is fantastic but I dont leave room for interpretation.
I only pay attention to things that he has written or said.
Berkshire Hathaway annual reports are great for this.

 

[doctorj]

As Ben Graham said in the Intelligent Investor only elementary maths should ever be required.

I've always wondered how the rule of simple maths reconcile with Buffet's exposure to Gen Re (who reinsure all manor of long tail risks). Any thoughts?

 

[Sirloin Steak]

ROE that is a great list of companies. I was wondering how do you determine how much to pay for them? They all seem to have great growth prospects but a company like ONT seems to be pretty tightly held. Do you just buy it anyway in the knowledge that it will be a great return in the long run, or are you patient and prepared to wait to buy on bad news or a change in market sentiment?

They are great stocks. The problem is that they are very expensive.Theres nothing to say that they wont keep going up for years to come but there is little margin of safety. People are paying a huge premium for the quality of these companies so if something goes wrong this premium may be eliminated and the share price will dive.