No, that's not true at all. Not remotely.

1) A 'value' stock with a 10pe while market is 15xpe doesn't ever have to get to 15xpe to make an above-market return. No mean reversion is necessary.

2) Nor do you have to trade it in a range - buy it at 8x and sell at 12x - to profit. You've bought equity, not a bond, so the company and/or your profits will grow if you've invested correctly regardless of market psychology.

MSFT is going to make $XX Billion next year regardless of whether its PE goes up or down. At some Stock Price = K, that becomes a buy, big value, and screaming buy vs the reverse.

Virtually no value managers or professional investors, mutual, hedge or otherwise invest based on hoped-for PE expansion. You have that optionality starting at a low base, for sure, but that's not why you do it. That's just the whipped creme on your sundae if you've done your job well.

There are at least 2-3 other obvious ways the market pays out for 'value' other than PE multiples. Jo-Ann would be an easy example of this.

[N.b. and future market returns have nothing to do with mean-reversion of profits, there are already studies that have amply demonstrated this over 1 and 3-yr periods, that's simply an outright myth, just fyi.]

Let me make one point clear that I think others frequently misconstrue. when I say I invest on value, I'm making actual estimates of the companies value based on cash flows and cash asset values that accrue to the owners equity, along with a reasonable risk analysis.

The typical retail investor thinks value is just buying at a low PE or low price to book. So they can't and shouldn't have the confidence to hold through big downswings.

1) Bump!

2) I assume you invest full time? Could you talk a bit about your time shedule, time management and how long it takes on average from an idea in your head (or reading about the company somewhere and getting interested in it) to finally execute the trade?

3) I don't know if you remember me DC, but we argued in the newbies thread a bit about trading being zero-sum, I posted that .pdf from the prof where he explained that issue and so on and so forth. I now read Graham's Intelligent Investor (revised) and I'm halfway through Murphy's TA book (although there's really nothing new in there for me) and I came to following conclusions:

a) Trading indeed is zero-sum and the only money to be made by looking at batman-cape-formations is an amount small enough, so the big players don't care. There is, of course, still money to be made if you find a decent edge somewhere (maybe identify, when some algos trying to dump huge amount of shares, exploiting obvious price discrepancies, etc.).
Time needed: Similar to poker the more time you spend researching, backtesting, brainstorming and working on it, the better the results will be. But I assume it'll be hard to become a multimillionair that way if you don't do it full-time/have a really good mentor/work in a really good prop shop etc. Again similar to recreational poker players vs. pros.

b) Non-Statistical Arbitrage/Pair Trading/everything else connected with automated trading is all about (connection) speed and execution and basicly left to the big players.
Time needed: Unrealistic to pursue if you don't want to work in the industry (read: full-time job).

c) Investing is now the big questionmark and what my actual question is about: I don't want to work in the industry and my (free)time will be somewhat limited in the future (I'll be done with lawschool next year and then do Big Law). I'll make decent money and I already have decent money so I'm wondering if it is "worth my time" to start valueing single companies, doing prop. reasearch and then invest or should I simply follow the passiv investor approach of Graham? How time consuming is serious (!) investing? I know, the more time you spend working on it, the better it'll be. But is achieving a higher return compared to a passiv investing approach worth my time spent on research? I know this depends on some variables I don't want to make public here (networth/amount to invest, $/h at job, etc.) but I'm not looking for a def. answere, just something to get me thinking and re-thinking this whole "investing money-issue".

I get up, review any outstanding trades and new email, take my daughter to the bus stop, shower, then start reading financials and occasionally checking mail/stocks until market close, then I eat lunch and usually go play poker.

Sometimes I find an idea and it's so obvious i can start buying after reading the latest 10Q & 10K, sometimes it takes weeks of dedicated research before I feel comfortable that I understand their business and industry well enough to make purchase commitment.

I did it in my spare time to start, without doing much investing. Understanding how to value a business is a great skill that is applicable far beyond buying and selling stocks. For example if you buy or build your own business, buy a house, and in making bigger investment decisions.

But to actually directly earn money from it you'd probably want to be fairly consistent about looking at and finding new businesses. You can do it in your spare time, and it probably won't lead to a high hourly earn rate on a small portfolio, but can lead to one on a larger portfolio. Obviously it's much better if you enjoy it as well.

If you plan to buy individual stocks, you might as well do it the best way possible, otherwise index funds make the most sense for someone who has limited time and a high hourly earn rate in their chosen profession.

For you, it will come down to "do I want to do this in my spare time?" If you love poring over accounting statements in your spare time, then you should. I know people like this. However, most people I know would rather watch football on TV or spend time with their wife.

From a career perspective, if you're BigLaw you aren't going to have a ton of time, so you're really going to have to love reading financials to be looking at micros. Plus, you're going to have to get your trades cleared by inhouse folks -- not only will this be a pain and undermine confidentiality of your best ideas, but this is the sort of fact that will get out and make it harder for you to make partner. It will never be brought up in a performance review but the rumor will get out eventually that you "aren't completely focused on your clients."

If I were you, I'd put my money into index funds until I had enough money to hire a fee-based portfolio manager. Then once I eventually had real money, I'd put significant chunks of my portfolio in alternative investments.

EDIT: hope you don't mind my post in your thread, DC. Solid thread.

Another thing you need to consider is the pre-clearance processes at law firms. I've been in Big Law for almost 15 years. I've spent time at two firms and each had a pretty significant pre-clearance procedure (i.e. you need to get your trades cleared by a firm committee). It is a major pain.

Oh wow, I completely forgot about the pre-clearance procedure. Thanks for all the excellent responds guys. For now I'll just keep reading/learning for the sake of knowledge accumulation. And now back to asking DC!

Completely agree on both counts.

That's quite a categorical statement- interesting. The latter part of my parenthetical is a surrogate for earnings, fyi.

Yes, earnings can grow, while the multiple paid stays the same. Earnings growth is a subset of outcomes.

Trading in a range is irrelevant to the discussion at hand.
Again, you're focusing on a subset of value-opportunities where earnings growth is a fulcrum of the thesis. Are you saying that flat-earning businesses cannot be bought cheaply? What happens when a stable annuity-like return stream trades at 3x? You're buying an income-stream stinking cheap. Are you not looking for reversion to rational levels over time?

If you are referring to relative-valuation theses, then I agree; otherwise, this is patently false. You are using "hoped-for," a cool rhetorical device, as a pejorative, which it indeed is in the sense that "hope is not a rigorous investment thesis."

Again, your implication is that you can't pick up a business dirt-cheap unless you know that earnings will grow. As for your statement about professional investors and hedge-fund managers, many explicitly state "multiple expansion" in the thesis.

Can you please define the myth, the truth, and link to the studies you referenced?

Not to side-track your argument, but I'd like to point out to the audience that's the prototypical value trap (maybe not 3x, but certainly at 6 or 7x), a super cheap company that isn't growing earnings at any significant speed. Ben Graham was so risk averse he'd buy stuff like that because of margin of safety, and his returns were supposedly just so-so (though probably very low risk). Walter Schloss had good returns buying stuff like that (supposedly 20% long term), but he'd hold 100 positions at a time.

If you could buy at a real 3x, i.e. based on long term owner earnings of the business, not just a fluke quarter or asset sales, I'd say a catalyst is very likely in the relatively near future. A company can't keep piling up earnings at 33% of market value without pressure building for a change in corporate strategy to address the low market value. A new board, a buyout, a proxy fight, etc, are all likely, as are a substantial dividend or stock buybacks to head off those actions.

So when you get extremely cheap, unless there is already a large holder with a control position big enough to thwart change, price often can create it's own catalyst.

When you are at 7x earnings, it's not cheap enough to fully motivate those forces. Without earnings growth you can sit around for years waiting for reversion to the mean.

Completely agree about value-trap considerations, as well as corporate actions. I was merely pointing out what buying something really cheap might entail.

As for Walter Schloss, his story is awesome, and his lectures/letters make for great reads. His liquidation framework is applicable even today, and a great starting outline.

"I'm wondering if it is "worth my time" to start valueing single companies, doing prop. reasearch and then invest or should I simply follow the passiv investor approach of Graham".

If you had bought 1 share of Coca-Cola stock for $40 in 1919, when it went public, and simply held that share for the past 91 years (or had it passed down to you), it would now be worth over $5,000,000. Pick a great company, invest for the long haul, and let the magic of compounding take over. That's a much better approach IMO than trying to constantly trade in and out of stocks.

Please tell me what the Coca-Cola of today is.

What is the average price of a stock you buy? Are there minimum daily trade volume (in dollars) for you to be interested in? How do you deal with stocks with a 10-15% gap between bid ask?

Krishan

"Flops are part of life’s menu. Everyone makes mistakes. High achievers learn by their mistakes. By doing that, an error becomes the raw material out of which future successes are forged. Failure is not a crime. Failure to learn from failure is." Unknown quote

What was your biggest loss, what happened, and what did you learn from it?

Almost all my stocks have large bid/ask spreads, some more than 30%. And they also have low volumes, some trade as infrequently as weekly and as little as a few thousand dollars in a week.

The big spreads I handle by just leaving long dated GTC limit orders out at prices I regard as attractive, sometimes I get fills, many days I don't. Occasionally I can become both the bid and the ask, if my IV estimate is near the ask, but the bid is 30% less.

The problems are that sometimes irked market makers would stick me withb a handful, say $10 of shares for $7 commission, to try to get me to pull orders but overall it averages a good price.

Now that I'm at IB, it's no problem, I only pay 0.5% on small orders, plus their algo trading tools can buy shares opportunistically without keeping orders open.

The reality is that illiquid stocks are like the high limit game at a poker room. Often the game runs with a group of stronger players where there is little to no profit for most participants, until an action player rolls in and makes all their waiting worthwhile. I sit around for weeks or months picking up dribbles until some big buyer or seller appears then I can often fill out my position overnight.

I can't think of any big losers right now. My biggest mistakes usually tend to be errors of omission, failing to research or buy something aggressively and only make a small profit instead of a large one.

The two biggest losers I can remember both followed the same pattern. I bought heavily into something based on simplistic analysis, that was in actuality much more complicated, and being too lazy or busy with distractions to answer the nagging questions. As the stock started to drop steadily, giving me a larger and larger paper loss, I'd finally roll up my sleeves and spend weeks learning every nook and cranny. One was my first bankruptcy, and the second my first investment that owned securitized trusts.

I learned a great deal from both, and ended up doubling down on both at far lower prices and with a great deal more confidence in their valuations. In the end they both got ack close to break-even for me, thanks to the research and doubling down. And in the long run they opened doors to more good ideas for me.

The main lesson was, don't buy heavily until you've answered all the key questions, no matter how long it takes. If you have a bunch of cash and are too busy to do lots of research because you want to go to the WSOP or because of some other distraction, sit on it. Don't lower your standards and invest in sub-par ideas cause you dont have time to find better, or cut corners just to keep your money working.

You have no screening process for financials? You just read what comes out on the day? At this point are you still coming across tons of new names every day or is it rereading what is new about companies?

Can you link us to sec or pinksheet 10K/10Q that enabled you to buy in the past without further research. Would be good exercise for those of us interested in your investing style to take a swing and see if we can see what you saw. Obviously doesn't have to be current.

To kind of piggy back on Krishan last post,

Where's the first place you usually go after reading through SEC filings and still have questions? Is it just usually the company website and any recent media releases?

Sure I have a screening process. I spend around $400 a year for a subscription to

http://www.10kwizard.com/

which emails me filings on any of my holdings or that meet my screening criteria immediately when they are released.

I also use Google alerts and get a daily email from BankruptcyData.com. Sometimes it gets overwhelming, right now I have 20-30 emails to read that have piled up this week as I've been focused on a single idea and some programming on my portfolio management system.

Anything that I bought after reading just current financials is likely to be a balance sheet only play, i.e. something trading at less than net assets with a management/board commitment to do something about it.

Again, I'm going to keep proprietary ideas proprietary, even stuff that I've finished can give insight into my secret sauce and some of my ideas are so illiquid that I don't need any more competitors.

Usually more of their SEC filings, though sometimes their press releases aren't always released as 8ks, so it's good to check recent PR when you have questions. It really depends on the type of questions. If they own commercial properties I might go to LoopNet to see if I can estimate comps to value them by, or even find the property's sale price if it's not disclosed by the company.

I've even visited locations locally to double check on the type of the building, and would do so out of state if required, but so far it hasn't seemed necessary.

I try to avoid talking to management, though sometimes it's necessary if you can't understand the business or some aspect of it. You just need to avoid being biased, some CEOs can be very enthusiastic salesmen for their company's stock.

I'm amazed you can do this without talking with management. But I'm biased as I do a lot of that. The question is probably answered implicitly but do you ever approach management for a private placement? Warrant coverage or the like? I think that's an edge of my hedge fund that should be replicable? Particularly for illiquid stocks.

How do you get warrant coverage from any respectable comp for a low-mid 6 fig investment?

The reality of these stocks is that any reasonable sized fund has to assume they take the stock up 10% to buy it and down 10% to sell it and those dont assume trying to sell on bad news or buy on good news. Not easy to find stuff where you have to add this into your cushion. What really drives these stocks is the takeout / special dividend / shareholder friendly restructuring / etc because thats really all that gets you paid. To a lesser extent, some of these comps will grow / expand their float / get coverage, and go the organic route but thats not really as common.

So when you have a super cheap stock that doesn't really fit for a takeout even at its valuation, it can stay cheap for a long time. And when it finally starts moving, you usually see massive reversion. So much so that it makes absolutely no sense from a news / earnings timing standpoint. I can point to countless examples of stocks that are 5x their early 09 valuation even though they generate fairly stable cash flows.

Sorry, i replied yesterday but iPhone ate it. I'm still too small to do any private placements, and still have far too good many ideas to dig through doing what I'm doing now to be motivated to change much.