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TMFAleph1 (95.09)

Are you genuinely value-conscious?

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January 30, 2012 – Comments (9) | RELATED TICKERS: BRK-B , MKL , LUK

"Are you genuinely value-conscious? The concept of value is the keystone of profitable investing and most investors act as if they can do without it!"

The second issue of the Real Returns Report is out; you can find it here. My motorcycle runs on blog comments, by the way -- comment generously.

9 Comments – Post Your Own

#1) On January 30, 2012 at 12:34 PM, Teacherman1 (43.04) wrote:

Thanks for the post.

That is a real "brain strainer", so I will have to read it several times to even begin to get a handle on it.

One question, you mentioned that your methodology was not about TA (along with several other things it was not), but isn't it in a sense sort of "long term" reverseTA?

Maybe I don't yet understand it enough yet to see why it is not, but again, thanks for posting your "Reports".

I am "very old school" from my long ago days in banking, when we routinely valued a business at 5X earnings.

I guess that appears as a real "outlier" for most of today's investors.

"Buy low, lower and lowest.

Have a great week.

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#2) On January 30, 2012 at 12:38 PM, Mega (99.96) wrote:

What's the difference between equity q and Tobin's q?

To calculate q, why do you value liabilities at market price?  Does it really make sense that you can build an equivalent company with market price liabilities instead of nominal liabilities?

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#3) On January 30, 2012 at 1:02 PM, TMFAleph1 (95.09) wrote:

@Mega Short

On the difference between equity q and Tobin's q, here is an excerpt from a paper by Andrew Wright, who is one of the top academics on Tobin's q:

"The standard definition, following Tobin, and hence usually termed “Tobin’s q” or “Tobin’s average q” is:

Qt = (market value of equities + liabilities) / total assets

An alternative definition, which can be termed “equity q” is defined by:

Qe = market value of equities / net worth 

where net worth = total assets - liabilities. For both Tobin’s q and equity q the numerator needs to be measured at market value, and both numerator and denominator should be measured in a way that consistently reflects the ownership of the underlying assets."

In other words, the distinction between Tobin's q and the Equity q is comparable to that between enterprise value and market value.

It might seem paradoxical to use market values for liabilities -- after all, if the debt is distressed, for example, the market value will represent a significant discount to the nominal values that were originally borrowed. However, consider that distressed debt should be tracking underlying asset values closely as it represents an estimate of the recovery value. If asset values have been significantly impaired, reproducing the same set of assets may be significantly cheaper than the original cost.

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#4) On January 30, 2012 at 1:05 PM, TMFAleph1 (95.09) wrote:

@Teacherman,

There is no sense in which a value-focused investment approach is similar to TA, which does not integrate any notion of intrinsic value in its methodology.

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#5) On January 30, 2012 at 2:05 PM, Mega (99.96) wrote:

I think Teacherman might be referring to the BMW method discussed on the TMF boards, that uses technical methods to identify possible entry points for value type stocks.

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#6) On January 30, 2012 at 2:15 PM, Mega (99.96) wrote:

"However, consider that distressed debt should be tracking underlying asset values closely as it represents an estimate of the recovery value. If asset values have been significantly impaired, reproducing the same set of assets may be significantly cheaper than the original cost."

Interesting theory.

I'm wary of putting much faith in debt pricing. I don't know any reason debt market valuation should be more or less accurate than the equity market.

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#7) On January 30, 2012 at 3:34 PM, TMFAleph1 (95.09) wrote:

I don't know about how their methodology for determining entry/ exit points, but my understanding of the BMW method is that it is inextricably linked to the notion of intrinsic value, being that their fundamental assumption is that stock returns will track the economics of the underlying businesses over long periods.

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#8) On January 30, 2012 at 3:44 PM, Teacherman1 (43.04) wrote:

TMFAleph1 -

It is obvious that I don't (yet) understand what you are doing, but I am going to print it out and look at it at more length. It is hard for a dyslexic, one-eyed man to follow through several pages of explination on a computer screen.

That was just a quick ( and apparently incorrect ) take from a one time quick look.

MegaShort - 

I am somewhat familiar with the BMW method, but don't consciously use any type of TA in my investing.

I base value on what the company does, where it came from, where it is, and where it appears to be going, along with the basic fundamentals. 

I then come up with what I consider a "reasonable" starting price, then try to wait patienly for it to come down to that price.

Since at my age, I am not what is usually considered a long term investor, I look for "value" based on an "intermediate term" (6 months to 1 year) or a "longer term" (2 to 4 years), and am not adverse to taking a timely profit and starting over.

Of course, at times I make "pure" speculation buys (which I clearly indicate them to be in my pitch), and since those are usually based on price movements, I guess that could be considered using the BMW method.

It would be interesting to see some "examples", of how this method has, or would have worked for some specific stocks.

Just some more "verbal petrol" for your bike TMFAleph1.

If you can get me to understand this, you should be able to get just about anybody to understand it, and I assume at least a part of what you are doing is educating.

Hope everyone has a profitable week, month, year, or whatever your time frame is. 

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#9) On January 30, 2012 at 4:31 PM, TMFAleph1 (95.09) wrote:

@Teacherman

There are shorter-term strategies that fall under the value investing mantle -- most of them involve a catalyst that is expected to unlock value within a certain timeframe. These strategies usually go by "special situations" or "event-driven" (the event is often the catalyst: spin-off, merger, exit frombankruptcy, etc.) However, this generally applies to individual companies rather than asset classes/ sub-asset classes (which is what I look at.) If you have any questions, don't hesitate!

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