Value Investing: The Art of Buying Undervalued Companies

11 minutes

 

“Price is what you pay, value is what you get.”

Warren Buffett

In this simple saying, Warren Buffett, arguably the greatest investor of our generation has summed up what value investing is. It is the search for companies that are selling below their intrinsic value, with the hope that we can buy them at a discount and that their price will rise over time.

Value investing, unlike some other investing strategies is fairly simple. It doesn’t require that you have an extensive background in finance. Certainly, understanding the basics of finance will help, but you don’t need to go to Harvard to follow this strategy.

It also doesn’t require an expensive subscription to terminals to help you find companies or how to read very extensive charts. There is also little need for math, but some is required.

The main ingredients needed are patience, common sense, money to invest and the willingness to do some reading and accounting then you have what it takes to become a value investor.

Five Fundamental Concepts of Value Investing

Value Investing Fundamental No. 1 – All companies have intrinsic value. This is what gets most people about value investing. The basic concept is so simple that you probably do it on a daily basis already. The idea is that if you already know the true value of something then you will save a ton of money by buying it when it is on sale.

Let’s use an example to illustrate. Most people would agree that whether you buy a new cell phone when it’s on sale or when it’s at full price, you’re getting the same cell phone with the same screen size and same memory. The obvious assumption that we have to make is that the value of the cell phone will not depreciate with time as new technology becomes available.  

Stocks are the same way, the company’s stock price can change even though it’s intrinsic value has stayed the same. Stocks, like cell phones, go through periods of higher or lower demand. These fluctuations change the price but they don’t change what you are getting.

Most savvy shoppers would say that it is crazy to buy a cell phone at full price when you can buy them on sale many times throughout the year, particularly during the holidays. Stocks work the same way. The only difference is that unlike cell phones, there is no predictable time of the year that stocks will go on sale, such as a Black Friday event. Which is unfortunate. Also, their prices won’t be advertised in a daily mailing like Target. Also unfortunate.

If they did know about the sale price it would create more demand and drive up the price, which means they wouldn’t be a bargain for us to take advantage of.

The trick with value investing, if you are willing to do a little sleuthing work to find these secret sales, you can get stocks at a discount that other investors would be oblivious to.

Continue reading “Value Investing: The Art of Buying Undervalued Companies”

Superinvestors of Graham and Doddsville: What We Learned

13 minutes


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“While they differ greatly in style, these investors are, mentally, always buying the business, not the stock. A few of them sometimes buy whole businesses, far more often they simply buy small pieces of the business.”  

        Warren Buffett, Superinvestors of Graham and Doddsville

In May 1984, Buffett laid out his thoughts on everything you need to know about his investing philosophy.

In a speech at Columbia Business School, which was later adapted into an essay. Buffett introduced what he termed “The Superinvestors of Graham and Doddsville.”

The “Superinvestors of Graham and Doddsville” is a name that Buffett gave to Benjamin Graham and a group of his proteges. The group of money managers once studied under or worked for Graham, Buffett or Munger, Buffett’s partner at Berkshire Hathaway. We will talk about each of them more in depth coming up.

The speech was given in honor of the 50th anniversary of “Security Analysis” which was written by Benjamin Graham and David Dodd. The book was published in 1934 and was the seminal book on analysis business using financial fundamentals that were outlined by Graham and Dodd.

Warren Buffett is arguably the world’s great investor, there have been many books, essays, and papers written on his greatness. I am not smart enough or eloquent enough to improve on them but I will touch on his beginnings for a moment.

Although Buffett’s father was a stock broker he didn’t have his a-ha moment until he read another very famous Graham book “The Intelligent Investor”. It caused Buffett to apply to the Columbia School of Business to study with Graham. To this day, Buffett credits that book with changing his professional life and Warren believes that most of what everybody needs to know about investing come from two chapters in the book.

The chapter on Mr. Market, which outlines behavioral finance concepts before the term even existed. And the chapter on Margin of Safety.

Breakdown of the speech

At the start of the speech he asks the question “is the Graham and Dodd look for values with a significant margin of safety relative to prices approach to security analysis out of date?”

He then touches on the theory of Efficient Market Hypothesis, which states that the market is efficient in how it prices each and every stock in the market. Meaning that the market is taking into account everything that is known about the company’s prospects and the state of the economy in the price of each stock.

The hypothesis states there are no undervalued stocks because there are smart security analysts who utilize all available information to ensure unfailingly accurate pricing.  

He thinks that this is bunk!

Continue reading “Superinvestors of Graham and Doddsville: What We Learned”

403b: 9 Benefits that Can Help Your Retirement Savings Grow

9 minutes

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What is a 403b?

A 403b plan is a retirement plan for certain public school individuals, employees of tax-exempt organizations, and ministers. Individual 403b accounts are set up by employees and managed by eligible employees.

While not as prominent as the better-known 401k, the 403b retirement framework is often used by schools systems, churches, hospitals and may other types of organizations.

The structure of the 403b is as follows.

An individual account within the 403b typically takes the form of a Tax Sheltered Annuity. This is an annuity contract offered by an insurance company. In exchange for a premium, which can be paid in a lump sum or a series of payments. The insurance company agrees to make fixed or variable payments beginning at a future date. This can be either for a specific term or for the rest of your life.

Like a pension, your contributions and your contract’s earnings from investments can consider building up your retirement income stream.

A 403b can also be structured as a custodial account that can invest in mutual funds.

Some 403b plans which are specific to churches can take the form of an account that invests in either mutual funds or annuity contracts.

You can’t contribute directly to your 403b plan. What they do instead is per your salary-reduction agreement they withhold a predetermined amount from your paycheck. This is known as an “elective deferral”. These elective deferrals are exempt from income tax, although you are still responsible for Medicare and Social Security tax on these contributions.

Plan earnings are also exempt from income tax until the participant withdraws them. This is one of the big benefits of the 403b plan and the tax-deferred annuity structure.

One thing to keep in mind is that some plans don’t allow for after-tax elective deferrals. In these cases, the deferral amounts aren’t deductible on your tax returns. Of course.

On top of elective deferrals, your employer can contribute directly to your plan via “non-elective contributions”. Current regulations allow your account to be funded through a combination of elective deferrals and employer contributions.

So how much can I contribute to my 403b?

Continue reading “403b: 9 Benefits that Can Help Your Retirement Savings Grow”

3 Different Types of Annuities and How They Can Be of Benefit

12 minutes

 

Photo courtesy of clay marketing

Did you know that Charles Dickens refers to annuities in his novels often because they were the favored investment of the upper class in 18th century Europe?

Or did you know that Babe Ruth didn’t lose his money during the Great Depression because his money was safely invested in annuities?

One last one for you. Did you know that Wheel of Fortune often gives away annuities as prizes?

Annuities are a product that most of us have heard of, but what do we really know about them? What are they really? How do they work and when should I use them?

These are some of the questions we will answer as well as looking at the different types of annuities, and there are many.

What are Annuities?

Annuities were invented by Babylonian landlords in approximately 1700 BC. They used the income from a certain piece of farmland to provide lifetime rewards for soldiers loyal assistants.

In more recent times, annuities were first offered to the American public in 1912 by the Pennsylvania Company for Insurance on Lives and Granting Annuities.

According to Investopedia, an “annuity is a contractual financial product sold by financial institutions that are designed to accept and grow funds from an individual and then, upon annualization, pay out a stream of payments to the individual at a later point in time. The period of time when an annuity is being funded and before payments begin is referred to as the accumulation phase. Once payments begin, the contract is the annuitization phase.”

Annuities were designed to be a reliable source of steady cash flows for an individual in their retirement years. Or alleviate risk or the fear of outliving your money. A very real fear.

Annuities can also be created to turn a large lump sum of cash into a steady cash flow. This is great for winners of large sums of cash such as lottery winners or a winning a lawsuit.

Defined benefit pensions or Social Security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass.

You remember those J.G. Wentworth commercials? Well, those are the perfect example of a lifetime guaranteed annuity. You give them your lump sum of cash and they give you a lifetime cash flow for that exchange.

How do Annuities Work?

An annuity is a cross between an insurance product and an investment product. They come in many different shapes and sizes, but the basic theme is that you give your money to a financial institution, like an insurance company and they promise you a certain rate of return, usually for the rest of your life.

The annuity will make payments to you on either a future date or series of dates determined by you. The income you receive from an annuity can be paid out monthly, annually, or even a lump sum payment. Continue reading “3 Different Types of Annuities and How They Can Be of Benefit”

Tools That I Use to Be a Better Investor

6 minutes

 

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This is a list of the different tools that I use to help me find the stocks that I investigate, track, and purchase. It is an ongoing list and I discover new tools all the time. Please check back from time to time to see what may have changed. I will update as I discover new things. This is the fun part as we discover more ways to learn about stocks and how to invest. It is never over, the learning. 

Stock Screeners:

FINVIZ

This is hands down my favorite screener. It is super easy to use and has great information on all sorts of financial data. It is sortable by rows and you can edit out the data you don’t want. It does have a premium edition that enables you to export your picks into an excel spreadsheet.

One of the things I like about this particular screener is that you can sort by all the financial data I am looking for to weed out the stocks I won’t be interested in. For the value investing metrics that I look for it gives me great flexibility to edit those metrics out to help narrow down the choices.

It also has links to different news sources relating to the particular company you are investigating. Another perk of this site is that if you are looking for in-depth info on a company and need the data quickly it is easy to search for that data on their site.

One last perk, it is free!

GOOGLE FINANCE

This is another great screener that I will use to get additional ideas. I came across this website in general thru Preston & Stig from The Investors Podcast. They use this site for their stock screener. They send out a checklist for signing up for their newsletters that have some great ratios for you to screen for.

One of the things that I like about the Google screener is not only the ability to screen for stocks but also the ability to check on all the news in the financial world.

An additional plus is you can download the app as well so you can access all of these features from your smartphone as well.

Also free.

FINANCIAL DATA:

Morningstar

This is one of the best sites to gather financial data on any company that you are interested in. It has ten years of data, which can be difficult to find on many sites.

Continue reading “Tools That I Use to Be a Better Investor”

401k vs Roth: Which is best for you?

12 minutes

photo courtesy of girls just wanna have funds

 

“Hang in there, retirement is only 30 years away!” Workplace graffiti
401k is one of the most common words used when discussing retirement. But what do we really know about them? Most employers offer them to their employees as a means of providing a benefit to their employees. It is also a means of retirement for many workers.

Let’s lay out some stats for you so you get a framework of the influence a 401k has on our retirement.

Total value of assets held in a 401k   $4.5 Trillion

  • Percentage of assets held in a 401k    18%
  • Total number of participants in a 401k    52,500,000
  • Percent of works that participate   81%
  • Average percent of salary contributed   6.8%
  • Percent of assets held in a mutual fund   64%

The average match of company contributions to 401k plans is 2.7%.

Let’s spend a little time to layout what a 401k is and how it works. Then we will spend some time comparing it to a Roth IRA.

 

What is a 401k?

 

A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.”   Wall Street Journal

The 401k was established in 1978 and has grown to become the most popular type of employer-sponsored retirement plan out there.

Continue reading “401k vs Roth: Which is best for you?”

Microsoft, Would I buy it again?

14 minutes

 

Microsoft, one of the largest, best-known tech companies out there. They are an interesting mix of trendy and hip. Or old-school tech with their previous reliance on arguably out-dated tech, laptop computers and Windows operating systems. With the advent of cloud computing and data storage, they have recently soared back into our collective conscience with their success in this field.

This company was the first stock I ever purchased so it has a soft spot in my heart. And always will. I have never sold that original purchase and have made additional ones since. I would like to take some time to look at why I bought this stock back then and what I think of the purchase now based on my evaluation of today’s company. Would I have bought it back then knowing what I know now?

Let’s take a look and see.

Business Overview

Microsoft was founded in 1975, and they operate in 190 countries around the world. Microsoft(MSFT) is a technology company “whose mission is to empower every person and every organization on the planet to achieve more. Our strategy is to build best-in-class platforms and productivity services for a mobile-first, cloud-first world.”

Their products include operating systems: server applications, business solution applications, software development tools, video games, and training and certification of computer system integrators and developers. They also design, build and service PCs, tablets, gaming consoles, and of course. Phones.

This is by no means and exhaustive list but a sampling of some of the more well-known products they offer. Of course, the two best known being Windows and Xbox.

For the year ending 2016, Microsoft reported revenues of $85,320 billion which resulted in net income of $16,798 billion. This was a decrease of 9% in revenue from 2015 and an increase of 11% in net income from 2015. The earnings per share increase from $1.48 in 2015 to $2.10 which was an increase of 42%.

Some explanations from MSFT for these changes were in 2016 there was a deferral of net revenue from Windows 10 of $6.6 billion(9%) and an unfavorable foreign currency impact of about $3.8 billion or 4%.

Additionally, the changes in EPS from 2015 to 2016 were due to the negative impact of the Windows 10 net revenue deferral and impairment, integration, and restructuring expenses. This drove down the EPS $0.69 to $2.10. This was an increase over 2015 but not as much as it could have been, obviously.

Some key changes in expenses were:

  • The cost of revenue decreased $258 million or 1%, mainly due to a reduction in phone sales, which was a result of the change in strategy regarding the phone business.
  • Impairment, integration, and restructuring expenses decrease $8.9 billion, due to prior year goodwill and asset impairment charges related to the phone business and restructuring charges associated with changes in the phone business.
  • Sales and marketing expenses decreased $1 billion or  6%, driven by a reduction in the phone business and a favorable foreign currency impact of about 2%.

Some highlights for 2016 were: Continue reading “Microsoft, Would I buy it again?”

Trinity Industries (TRN): Are they still running down the track?

9 minutes

 

trinityrail_600x400

Trinity Industries (TRN) is a leading company that specializes in industrial products and services. They offer railcars, railcar parts, and leasing, management and maintenance products. They also offer additional services such as barges, storage and distribution containers as well as highway products and wind towers.

The company which is based in Dallas, Texas was founded in 1933 and employs 22,030 people and has annual sales of $6,392.7 billion as of 2015. Sales have tripled in the last five years from $1.9 billion to the current $6.4 billion.

In the last five years, TRN stock has seen a 74% increase in the current price of $23.49.

The last decade has seen a steady increase in earnings growth as well as dividend increases as well. TRN has paid dividends for the last 209 quarters and counting. While not in the same class as a Dividend Aristocrat, the fact that they have paid a dividend since 1964 lets me know that their shareholders are important to them.

TRN is not the highest-yielding stock. Its dividend currently is a pretty paltry 1.86% right now. But what it lacks in yield, it makes up for with consistency.

Business Overview

Trinity Industries breaks up their business into five different groups. We will discuss them in turn.

Rail Group

The Rail Group which is responsible for 45% of the revenue generated by TRN is a leading manufacturer of railcars, railcar axles, and railcar coupling devices.

They also produce autorack cars, boxcars, covered hopper cars, and tank cars among others. Currently, they compete against five other major railcar manufacturers in North America.

In 2015 TRN shipped 34,295 railcars which were 41% of all railcars shipped in North America.

In addition to the railcars, the Rail Group also manufactures railcar parts and components used in manufacturing or repairing railcars including couplers, axles, and other equipment. They also have repair services available at multiple facilities in the US.

They have set up the manufacturing to be able to change to demands of the business and be able to provide any type of railcar that is needed. Continue reading “Trinity Industries (TRN): Are they still running down the track?”

Podcasts That I Listen Too and So Should You

6 minutes

This list is by no means comprehensive but they are the most influential to me and I think bring great value to anyone that is looking to learn more about investing. They are in no particular order.

THE INVESTORS PODCAST        The Investing Podcast

Easily one of my favorite podcasts from the very beginning. This is run by Preston Pysh and Stig Brodersen. They both have great insights into investing and they come at it from a value perspective, which I really enjoy.

The format is structured around book reviews. Every week they will review a book that has been written by or about a millionaire. The thesis is that they study billionaires and how they accumulated their wealth. Not all of the books are related specifically to investing per se.

They also throw in some interviews with some great authors, hedge fund managers, and investing professionals. The also include their mastermind sessions with other very smart people in which they will discuss all kinds of subjects ranging from technical aspects to macroeconomics and everything in between.

Needless to say, each interview is very well done with some fantastic questions asked. I also really enjoy their discussions about macroeconomics and how it affects the market.

Their investing idols would be Warren Buffet, Charlie Munger, and Ray Dalio. All three of these gentleman are from the value investing world but with different slants to how they think. Preston and Stig do a great job of breaking down some of the different aspects of their philosophies and make it very understandable to even me.

Probably my favorite thing about his podcast is the energy and passion that they both have about value investing. And how much they want to help educate the public and encourage everyone to learn more about how to grow their wealth. They present all of their material in a way that can be easily understood, even to someone who would be new to this.

They post one episode a week on Sundays and they typically range to about an hour an episode. They also have a great website with some additional materials on it. In particular would be the forum that they run and some awesome educational videos they created. The videos are a series explaining the basics of investing to some very advanced topics. Top notch stuff that I aspire to be as good as.

THE MEB FABER SHOW        Meb Faber Research – Stock Market and Investing Blog

Another highly anticipated podcast for me every week is the Meb Faber show. Meb is a hedge fund manager for Cambria and he is a very educated and spoken host. I really enjoy his show for the education that he presents.

He has two shows a week and each is about an hour long. He has links to all the items that he discusses on his website. He has links to some awesome material from different white papers he has written to books of his as well as some other great investors.

Continue reading “Podcasts That I Listen Too and So Should You”

Blogs I Follow

6 minutes

Here is a list of the most influential blogs that I read. They are a great mix of investing insights and practical tips that you can apply easily.

Teaching yourself about finance and investing is like learning a new language. The only way to learn it is to immerse yourself in it. This list of blogs has been the most influential for me. I learn so much from them that I can apply on a daily basis. I hope you enjoy them as much as I do.

Investing for Beginners 101        Investing for Beginners 101

One of my favorite blogs. This is written by Andrew Sather. He is a self-taught investor that started just recently but he has a great way of explaining things so you can easily understand what he is trying to convey.

Andrew is from the value investing school and is a great admirer of Warren Buffet, Benjamin Graham among others. Andrew has written some really great articles and he has an awesome free ebook about how to buy your first stock and how to evaluate stocks. It is a very easy book to read and he has some great examples to show you how to do it.

The Value Trap is another book he has written in this he discusses some of the biggest bankruptcies and what lead to their demise. It gives a great look at what financial indicators were present that directly lead to the companies going bankrupt. The book has great charts and lays out the indicators to look for when you are valuing a company so you can avoid these value traps in your own investing. Definitely worth every penny

He was also one of the co-founders of one of my favorite podcasts, The Money Tree Podcast. Andrew was the value investor representative on the show and I really enjoyed his insights.

I really enjoy reading Andrew’s blogs every week and he is one the one that gave me the idea to start my own blog. I took inspiration from his story and I could relate to where he was coming from. I like his views on investing and I agree with with the way that he presents his material.

I hope you enjoy his work as much as I do.

Old School Value

Another favorite that is run by Jae Jun. Like Andrew, he is a self-taught investor as well. Jae also is from the value investing camp. His website has so many great tools, articles and a terrific screening tool that he created.

Jae comes at things from a much more technical aspect than some of the blogs that I read but I really enjoy his breakdown of how he uses these tools to value a company. He has a great way of explaining some of the more technical math problems and making them easier to understand. He has some great spreadsheets that you can utilize to follow the examples he writes about.

Continue reading “Blogs I Follow”