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Newsletter - February 4th, 2023

Updated: Mar 24, 2023

Dear Reader,

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


More notes on Berkshire AGM videos, junk bond spreads, and spotting bubbles:


Smart Competition/Herd Behavior

It's tempting to reason that the concentration of talent in stocks would dry up opportunities for smaller investors but the 2008 financial crisis (which happened about two years after this talk), 2020 pandemic outbreak, and numerous market convulsions outside the US - not to mention industry-specific downturns that happen more frequently - indicates that people, no matter how smart they are, succumb to fear and uncertainty in a herd-like manner rendering them paralyzed and unable to act.

We've witnessed this first-hand - in 2008 (though we went forth then with the reckless boldness of youth) and in 2020 (people wanted more information on how the pandemic played out before acting).

But as Mohnish Pabrai pointed out in his book Dhandho Investor, there are situations where high uncertainty is combined with low risk. High uncertainty tends to reduce prices to the point where your downside is low - at that point, the risk/reward equation is favorable and high uncertainty is the source of super-normal profits.

Though we can't be fully immune to these emotions, we can be aware of them and that'll take us some way toward acquiring the mindset essential for investment success.


Important and Knowable

If you confine yourself to the important and knowable facts, reason correctly, and don't rely on public opinion polls (more below), you've got the correct framework for making rational investment decisions.


Wild Emotions => Wild Profits

It is crucial to set up your portfolio in a manner where you can be emotionally detached from stocks. For us, the antidote is wide diversification - for others, it may be a larger cash balance - each investor must find his way to achieve this emotional detachment.

If you can do this, and simply invest when securities are cheap, you're on your way to investment success.


Worldwide Cheap Stocks

Buffett said in 2006 if he were starting again, he'd be looking worldwide for cheap stocks among smaller companies - and that's precisely what we do. The opportunities are greater, especially with smaller amounts of capital - though geo-political risks must be controlled for.


Junk Bond Spreads

Here in 2007 at the height of a bull market, Buffett talks about junk bond spreads indicating the froth in markets. Though he doesn't extrapolate to say that they must revert to the mean, we've used it to observe market sentiment - and it's been a fairly good predictor of impending market change though we don't know when that'll happen.

A few years ago, we considered adopting some timing method based on junk bond spreads, which would've worked in the past; but instead concluded that being fully invested in cheap stocks at all times is a simpler method more likely to produce successful results over a lifetime.

In any case, we're attaching the chart that we used to look at, which some of you may find useful:

This chart indicates the spread between 'below investment grade' corporate bonds (BB rating or below) and treasuries. Generally a spread below 4 percentage points indicates fairly bullish/upbeat sentiment with concurrent fully priced markets.

We're in the business of finding individual undervalued stocks so this isn't very relevant - only as an indicator of where the market stands (to prepare psychologically for the worst).


Spotting Bubbles

We read an interesting article in the FT Weekend magazine last week where Tim Harford pointed out that Charles Mackay, author of the famous book 'Extraordinary Popular Delusions and the Madness of Crowds' (where he described the Tulip bubble in the 1630s in Netherlands), didn't spot the Great Railway Mania in England that was right under his nose.

Just goes to show that it isn't easy to be completely detached from the era you live in, and even the best researchers on the subject can be blind to bubbles around them.

Download PDF • 4.71MB


Until next time, Have a great week!


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