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Newsletter - August 12th, 2023

Updated: Sep 3

Dear Reader,


Attached is our latest list of stocks generated from basic value screens (low p/e, ev/ebitda, debt/equity, etc.), which don’t meet our investment criteria - and our reasoning.


This may help you avoid a few ‘value traps’ or stocks that aren’t sufficiently attractive compared to the opportunities available today.


For reports of stock ideas that pass our quantitative and qualitative standards, join at the link below:



 

Irving Kahn; History of the Bond market

 

Irving Kahn at Ivey


Kahn was Benjamin Graham's assistant at Columbia University. He helped compile statistical tables for Security Analysis, and data for his later research into the performance of certain factors.


He lived to the age of 109 and was known to read annual reports till the very end - an endearing trait.


We've referenced a section of Kahn's talk in an earlier newsletter - it still seems terribly under-viewed. This appears to be the first talk of this course at Ivey.


Notes of the full interaction below:


12:00 Tech stocks


Kahn and his firm had no aversion to tech stocks (probably because they weren't trying to predict earnings 10 years out like Buffett does). They looked for busted tech stocks at discounts to book, close to cash/share, etc.



14:30 Courage


Courage is a pre-requisite when buying unloved stocks but this can be made easier with wide diversification.



16:00 Ease into the buying


It may be good policy to ease into the buying of distressed stocks as they usually drift lower after initial purchase. Several successful investors generated their largest capital gains averaging down on price/value discrepancies.



17:00 Values well bought ...


... are half sold already.



25:00 Opportunistic


Instead of being industry-focused or theme-focused, it's probably best to be opportunistic and "shoot ducks in a barrel".


We look for ideas that generally sell for less than the debt that could be safely issued against the company i.e. the ideal combination of low risk and high reward - our 'fish in a barrel'.



29:30 Hedging risk


Best way to hedge risk is to buy good value. This way you sleep better too.



34:00 Foreign securities


Rule of law and enforcement of contracts is essential for protection of capital.



35:15 Low risk wealth creation


Key feature of the value approach is growing capital with low risk of loss, which can be achieved with "non-growth" stocks as well.


As Ben Graham said in the Intelligent Investor: once the investor is willing to give up brilliant growth prospects, he will have no difficulty finding a wide selection of stocks offering good value for money.


We find this to be just as true today as in 1972 - particularly when looking around the world where you can find more bargains and better bargains than if you confined yourself to your home country.



41:30 Intangibles


Intangibles not recognized on the balance sheet need to be appraised at times.


One example is internally generated brands. Moreover, development of those brands through marketing expenditures reduces earnings and cash flows and may not be apparent in financial ratios such as returns on invested capital.


There's no simple solution to this except to gain an understanding of the underlying business on a case-by-case basis.



48:15 Tranche


Kahn illustrates Ben Graham's teaching technique, which was Socratic in nature and got students thinking critically for themselves.



56:00 Factors Kahn looks for:


1) Obscure, out-of-favor stocks

2) Low debt

3) Management ownership of stock

4) Good prospective earnings yield


When buying, Kahn prefers companies that may be losing money but not losing cash as that knocks the price down (similar to stocks we look for).



60:00 Real cases


Ben Graham's distinctive style was the use of live examples, which takes guts as the analysis risks looking foolish in the light of subsequent events. One example was his analysis of US Steel's earning power in the first edition of Security Analysis, which he revisited in the second edition and pointed out the flaws.

 

Bonds


There was a delightful piece in last week's FT Weekend magazine on the history of the bond market, which we've attached below.


It describes the birth of the bond in Italy, Warburg's role in Eurodollar bonds, Milken's role in the junk bond market, Ranieri's role in the securitization of mortgages, etc.

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