What Has Worked in Investing?


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Jae Jun

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As the market continues to climb, it’s easy to look for new ways to invest and potentially get off course.

Despite how well you are doing, there’s always the temptation to look at what others are doing and kick yourself for the ones you’ve missed.

I mean, check out what Amazon and Microsoft have done.

Amazon is up 47% YTD and Bezos is the richest man in the world again.

Microsoft is up 44% this year.

Wow.

Basically, anyone who bought FANG (Facebook, Amazon, Netflix, Google) stocks are making a killing this year.

But is that skill or luck? Or am I being a sore loser? 😅

Well, that’s one way of going about it.

The other way is to ignore what people are doing, turn off the market news and read Tweedy Browne’s method of what has worked in investing.

The point of Tweedy Browne’s handbook is to share the strategies and guidelines used at their firm to select stocks.

There are about 40 strategies in the handbook with a short description along with historical results.

To make it easier to understand, the strategies are broadly assigned to 5 categories.

  1. Low Price in Relation to Asset Value (low P/B ratio)
  2. Low Price in Relation to Earnings (low P/E ratio)
  3. A Significant Pattern of Purchases by One or More Insiders (Officers and Directors). Large share repurchases can be a component of this.
  4. Significant Decline in a Stock’s Price
  5. Small Market Capitalization

These are simple, tried and true categories and there are many shared in the handbook.

Here’s one that I like.

Buying stocks with low P/B as well as stocks below 66% of NCAV makes for good investments (if you can find them).

To emulate a quick and broad search off of the 5 categories, here’s a quick screen I whipped up in Old School Value to see what I can find.

My filters are set to look for

  • PB stocks between 0 and 4
  • PE ratio between 0 and 15
  • Diluted shares outstanding showing negative CAGR over a 3 year period to indicate a sign of repurchases
  • Stocks in the bottom 10% of the pile close to their year low price

If I wanted to broaden the universe a bit more, I could expand the last criteria from the bottom 10% to the bottom 20%.

Sticking with the bottom 10% filter, I get the following results.

If the image doesn’t show up in your email, here’s the list in point form.

  1. GME – Gamestop
  2. JNPR Juniper Networks
  3. BGFV – Big Five
  4. M – Macy’s
  5. FL – Footlocker
  6. ALK – Alaska Air
  7. BBBY – Bed Bath & Beyond
  8. ESRX – Express Scripts
  9. CLS – Celestica
  10. DISCA – Discovery Communications

Of the 10, five are in retail and two in communications.

With the market the way it has been, you get an idea of which sectors/industries are out of favor right now.

I would not blindly buy any of these companies.

Frankly many scare me.

Take a look at Gamestop (GME).

Right off the bat, it doesn’t pass my sniff test.

  • Increase in debt
  • decline in revenue
  • business model that once made it profitable is being attacked
  • multiples constantly in decline

This was a company that turned it around, but the numbers don’t lie.

Certain numbers scream value, like a P/FCF of 3.5 and a low P/B, but unless you’re buying a big basket and spreading your bets, taking a large position in GME makes me uneasy.

If you do a quick and dirty DCF to get an idea of what the numbers say, GME is a very undervalued stock by the numbers.

But how will the business and narrative play out?

Look at the numbers below and comment in the image.

If I see a big disconnect like this between fair value and the stock price, obviously something isn’t right.

Either:

  1. I’m wrong
  2. The market is wrong
  3. The market and I are both wrong

I like to look at the DuPont analysis to check whether the ROE is valid.

In Gamestop’s case, there’s a warning sign.

Do you see it?

There are actually two warning signs.

Asset turnover has been dropping while leverage has increased.

No two ROE is identical. By breaking it down like this, you can see that a supposedly consistent ROE looks very different.

Gamestop is an easy pass for me.

The list of stocks I’ve found is definitely out of favor. But at least it’s a different look to what is being displayed on finance sites where they only talk about stocks at their 52-week highs.

What Has Worked in Investing

Now despite what the market is doing, I highly recommend Tweedy Browne’s handbook as long-term results don’t lie on what has worked in investing.

Pick the best value stocks with our Stock Ranks, screening and valuation tool. Try the live demo today.

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