Newsletter - June 29th, 2024

Dear Reader,

Attached is a recent list of stocks that passed value screens (e.g. below net current asset value, below tangible equity, etc.) but don’t meet our investment criteria - and our reasoning.

This may help you avoid some ‘value traps’, and stocks that aren’t sufficiently attractive compared to opportunities available today.

For reports of stocks that pass our quantitative and qualitative standards:

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Anthony Bolton: Former Fidelity Special Situations Fund Manager

Bolton ran the fund for 28 years, and achieved a compound annual return of 19.5%.

Some notes below:

0:45 Strategy

Bolton's strategy was to bet on "over-depressed" stocks where price declines were exaggerated - similar to the stocks we report on.

2:15 Timeframe

In the stock market, time arbitrage is your competitive advantage.

If you can adopt a time horizon of 2-3 years for a typical undervalued stock, you've got an edge over competitors who operate on much shorter timeframes.

Time horizons may have even shortened since Ben Graham's time. Even if institutional investors want to adopt longer time horizons, most of their clients want fast results.

3:15 Temperament

1) Controlling your emotions (fear and greed), and 2) Keeping an open mind (enough conviction but not too much) - are important in stock investing.

6:45 Index outperformance

Bolton believes the current popularity of index investing may be cyclical.

The S&P 500's performance is driven by a handful of stocks - and reversals could sour public sentiment on index investing.

10:30 Warning signs

One sign of an overheated market is a focus on relative valuations (vs. other stocks) rather than absolute valuations.

Every stock we report on must be objectively cheap on a standalone basis. This may limit our selection in bull markets but we prefer to be sure about our investments (even if the stock market closed for the next three years) - rather than participate in an irrationally exuberant stock market.

17:00 Lessons from losers

Bolton's losers usually had weak balance sheets i.e. excessive borrowings, pension liabilities etc.

We are dogmatic on this point - we require balance sheets with little or no debt. Excess cash is a bonus.

When you're investing in companies going through downturns, you can't risk getting your equity wiped out by large senior securities, which are ahead of the equity in the capital structure.

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For reports on the best investment values in stocks worldwide:

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Wish you an excellent week ahead.