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Newsletter - October 23rd, 2024

Writer's picture: AuditorInvestor  AuditorInvestor

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:

 


 

Michael Mauboussin Interview


Mauboussin is an insightful writer on investment topics. Some notes from a recent interview below:




7:15 Shareholder yields


Mauboussin provides an interesting history of share repurchases/buybacks. Though these were executed long before the 1980s, they were at risk of stock manipulation charges from the SEC - until safe harbor provisions were brought in 1982 that opened the floodgates.


Investors ought to look at net repurchases and dividends i.e. shareholder yields to get a truer picture of shareholder returns. (We assess shareholder yields in all our stock reports.)


In our view, buybacks of an undervalued company (which increases an investor's ownership at a bargain price) is just as valuable as dividends in hard cash.


[Note: At 24:45, Mauboussin states that dividend yields fell below bond yields in 1957, and didn't return except during rare bear markets like 1973-74. Shareholder yields provide a more stable signal. Also see 18:45 below.]



14:00 Single stock returns


Altria provided the highest total (single stock) return in the US over time (since 1925) at 16%/year compounded. Moreover, only 6-8 stocks in the top 100 generated returns >20%/year.


It's unlikely that an investor can successfully pick a few stocks to ride over a lifetime. We advocate a diversified approach with reasonably regular churn (two to four years) for satisfactory results.



18:45 History isn't a perfect guide


The top three largest stocks by market capitalization performed poorly over 65 years prior to the last decade. As Buffett said, if history were a perfect guide, the Forbes 400 would be filled with librarians.


Adopt timeless investing principles (Benjamin Graham's writings are an excellent guide), not trading strategies (which come and go).



20:15 Large cap vs. Active Managers


Mauboussin notes that 400 of the S&P 500 companies underperformed the index in 2023 - when large cap outperforms small cap, active managers tend to struggle and vice versa.



23:00 Changing attitudes


Value investing has been redefined repeatedly since Benjamin Graham's time. At bottom it's buying a business for less than it's worth.


Mauboussin translates it in "modern" terms as buying low expectations (priced into the stock) and selling high expectations.


Our stocks generally tend to be out of favor, where Mr. Market expects limited growth (or even declines) in profitability - at least in the near-term. Our objective is to buy the business considerably below its worth to a private owner.



26:30 Intangible expenditures


Selling, general and administrative expenses have grown as a % of revenues over time, and can't be compared to the past. This is largely because of expenditures on intangible assets, which can't be capitalized under strict accounting rules. (Amazon incurred such expenditures early in its growth phase and the financial statements didn't reflect the substantial intangible assets it was building.)


A pure focus on the income statement would result in an incomplete analysis. We focus on multiple financial factors (including the cash flow statement) to assess stocks.


Further, a better understanding of the qualitative aspects of a business can provide insights that can't be found in studying the financial statements alone.



35:15 "Steady state" earnings multiple


Mauboussin refers to Damodaran's research into steady state multiples of the S&P 500 since 1963-2023 of 10-11x earnings plus a premium for future value creation. Mauboussin adds that historically the market has priced stocks at: 2/3rd steady state multiple and 1/3rd future value creation i.e. ~15-17x earnings.


We look for stocks substantially cheaper than steady state multiples - backed by cash flows, and reasonable prospects.



39:00 Intangible risks


Investors should be mindful of the obsolescence risks of intangible assets (offsetting high growth prospects).


Benjamin Graham's advice to require reasonable multiples of tangible assets is wise for small investors. We emphasize moderate multiples to tangible assets in our own work.



44:45 Company life-cycle returns


A company's stage in the business life cycle doesn't depend on age - but on how it reinvests earnings.


Investors can generate their best three-year returns from companies in the 'maturity' and 'shake-out' stage (before the decline stage).



53:30 Socratic AI


Mauboussin suggests an interesting thought on using the socratic method in AI to learn new subjects. The socratic method encourages the student to think about a subject by asking questions rather than being told facts to regurgitate (incidentally the same method Benjamin Graham used in his classes).


 

For reports on the best investment values in stocks worldwide:



 

Wish you an excellent week ahead.

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