I read an insightful "book" last week, "Margin of Safety" by Seth Klarman. It reminded me a lot of Stock Market Genius, by Greenblatt. Klarman spent some time giving examples of special situations where securities became under-valued, such as Spin-offs and Bankruptcies. I think he made several interesting points (note the book was written around 1990):
- He commented that you could never have a successful formulaic approach to investing. Instead, he said that formulas and screening techniques can be useful tools for identifying opportunities, but then you had to roll up your sleeves as many "cheap" stocks are cheap for a reason.
- He is a big advocate of attempting to value a stock/company, though he emphasizes that you can not be very precise. That is why he wants a large margin of safety (difference between value and price).
- In his valuing of companies, he never uses "traditional" measures, such as P/E ratios or dividend yields. He focuses more on NPV of future cash flows.
- He spent a great deal of time explaining why value investors have to swim against to masses. He talked about bubbles and how to recognize them. He spent a chapter talking about the usage of junk bonds in the late 1980s for leveraged buyouts and why it was destined to crash. You could have easily lifted that section out and put it in 2009 describing the sub-prime fiasco. He even talked about how rating agencies exacerbated the junk bonds problem by allowing investment banks to split the junk bonds into tranches giving higher ratings to upper tranches. It was eerie.
- He talked about the importance of not being fully invested. You always need to have cash to take advantage of opportunities should the market crash.
- He spoke a lot about risk and how the common notion that to make higher returns that you have to take more risk is wrong. He states that would only be true in efficient markets. Then he argues that if you buy a security cheap enough (with high margin of safety) that it is actually lower risk with higher returns.
HPQ, BP, NWS, GNW, PDLI, NG, THRX, VSAT and AVEO are his top 9 holdings. Interestingly, a few of these stocks have been in the magic formula screen during the past year (PDLI, HPQ, NWS and AVEO).
I own HPQ, I have a buy order on BP (I should have just bought when I put in the buy order as it is up 14% since then), I bought PDLI a year ago but foolishly sold it on fear and then I just bought GNW.
GNW (Genworth) is a spin-off from GE a few years back. They are primarily a life insurer but also wrote mortgage insurance, which crushed them. Pre-crisis, they were trading above $30, now they are under $7. I at first found it odd that Klarman bought them as he specifically said he didn't like investing in insurers. But i think for him this was a clear example of a stock that has all potential bad news already priced in (ie has a large margin of safety). Their book value per share is above $35 and they are trading at $6.70.
My dividend portfolio is trucking along. While I am trailing the Russell 3000 a bit (by 1.6 points) on my open stocks, I have had some good timing, especially of late as my purchases of FCX, HPQ and STO have done quite well. I am really hurt by some of my financial institution purchases, especially LNC, STD and SLF. I feel good about all of them, though every now and then I waver on STD due to the debt crisis.
| Current Portfolio | |||||||
| Stock | Shares | Avg Cost | Current Price | Dividends Received | Pct Change | R3K Change | Diff |
| AXS | 1,133 | 33.03 | 30.91 | 484 | -5.1% | -5.3% | 0.1% |
| AZN | 424 | 47.15 | 45.84 | 1,092 | 2.7% | -1.5% | 4.1% |
| BHK | 2,879 | 12.54 | 13.21 | 896 | 7.9% | -5.8% | 13.6% |
| CEL | 1,497 | 26.04 | 16.30 | 5,112 | -24.3% | 15.0% | -39.3% |
| CHKE | 1,642 | 17.21 | 12.53 | 2,623 | -17.9% | 14.8% | -32.7% |
| CPL | 1,000 | 22.67 | 26.61 | - | 17.4% | 9.5% | 7.9% |
| CSCO | 1,801 | 16.74 | 18.73 | 196 | 12.6% | -4.0% | 16.5% |
| CSQ | 5,002 | 8.15 | 8.57 | 710 | 6.8% | 9.4% | -2.6% |
| FCX | 500 | 36.00 | 40.54 | - | 12.6% | 6.0% | 6.6% |
| HPQ | 800 | 25.79 | 28.18 | - | 9.3% | 6.0% | 3.3% |
| INTC | 1,271 | 19.58 | 25.35 | 997 | 33.5% | 10.6% | 22.9% |
| JQC | 4,375 | 8.87 | 8.24 | 633 | -5.4% | -3.3% | -2.1% |
| KMF | 1,731 | 21.63 | 22.49 | 607 | 5.6% | 5.9% | -0.3% |
| KSW | 13,048 | 3.76 | 3.36 | 4,023 | -2.4% | 8.5% | -10.9% |
| LNC | 2,415 | 24.33 | 20.79 | 400 | -13.9% | 3.5% | -17.4% |
| MNDO | 13,678 | 2.48 | 1.87 | 2,400 | -17.4% | -1.2% | -16.2% |
| MSFT | 945 | 26.75 | 25.66 | 576 | -1.8% | 3.0% | -4.8% |
| PM | 432 | 45.31 | 75.58 | 1,614 | 75.1% | 18.1% | 56.9% |
| PRE | 505 | 56.34 | 64.85 | 300 | 16.2% | 4.8% | 11.3% |
| PVD | 397 | 63.26 | 61.50 | 698 | 0.0% | 5.8% | -5.8% |
| RTN | 454 | 46.81 | 45.64 | 216 | -1.5% | -4.6% | 3.1% |
| SBS | 1,035 | 39.34 | 55.25 | 2,390 | 46.3% | 10.4% | 35.9% |
| SLF | 2,731 | 27.26 | 18.53 | 1,805 | -29.6% | -2.2% | -27.4% |
| STD | 6,090 | 9.62 | 7.96 | 3,460 | -11.4% | 2.3% | -13.6% |
| STO | 1,000 | 23.86 | 26.01 | - | 9.0% | 7.2% | 1.8% |
| UNTD | 3,397 | 5.86 | 5.34 | 1,897 | 0.6% | 15.9% | -15.3% |
| USB | 2,099 | 21.96 | 26.21 | 739 | 21.0% | 8.2% | 12.8% |
| VR | 1,910 | 29.42 | 30.26 | 1,212 | 5.0% | -3.4% | 8.4% |
| WBK | 489 | 105.97 | 110.58 | 3,636 | 11.4% | 3.6% | 7.8% |
| Total Open | 38,715 | 2.3% | 4.0% | -1.6% | |||
| Closed | 13.5% | 7.8% | 5.8% | ||||
| Combined | 7.6% | 5.7% | 1.8% | ||||
| IRR Since 12/31/10 | 6.1% | ||||||
| Estimated Dividends for Next year | |||||||
| Stock | Shares | Ann Dividend / Share | Yield | Projected Dividend | Sector | ||
| AXS | 1,133 | $ 0.92 | 3.0% | 1,042 | Insurance | ||
| AZN | 424 | $ 2.40 | 5.2% | 1,018 | Pharma | ||
| BHK | 2,879 | $ 0.80 | 6.1% | 2,315 | Bond | ||
| CEL | 1,497 | $ 2.05 | 12.6% | 3,068 | Utility | ||
| CHKE | 1,642 | $ 0.80 | 6.4% | 1,314 | Consumer | ||
| CPL | 1,000 | $ 1.27 | 4.8% | 1,270 | Utility | ||
| CSCO | 1,801 | $ 0.24 | 1.3% | 432 | Tech | ||
| CSQ | 5,002 | $ 0.63 | 7.4% | 3,152 | Hybrid | ||
| FCX | 500 | $ 1.00 | 2.5% | 500 | Basic Resources | ||
| HPQ | 800 | $ 0.48 | 1.7% | 384 | Tech | ||
| INTC | 1,271 | $ 0.84 | 3.3% | 1,067 | Tech | ||
| JQC | 4,375 | $ 0.80 | 9.7% | 3,500 | Hybrid | ||
| KMF | 1,731 | $ 1.60 | 7.1% | 2,770 | Pipelines | ||
| KSW | 13,048 | $ 0.15 | 4.5% | 1,957 | Construction | ||
| LNC | 2,415 | $ 0.32 | 1.5% | 773 | Insurance | ||
| MNDO | 13,678 | $ 0.20 | 10.7% | 2,736 | Tech | ||
| MSFT | 945 | $ 0.80 | 3.1% | 756 | Tech | ||
| PM | 432 | $ 3.08 | 4.1% | 1,330 | Consumer | ||
| PRE | 505 | $ 2.40 | 3.7% | 1,211 | Insurance | ||
| PVD | 397 | $ 3.70 | 6.0% | 1,470 | Finance | ||
| RTN | 454 | $ 1.72 | 3.8% | 782 | Defense | ||
| SBS | 1,035 | $ 2.39 | 4.3% | 2,473 | Utility | ||
| SLF | 2,731 | $ 1.46 | 7.9% | 3,988 | Insurance | ||
| STD | 6,090 | $ 0.78 | 9.8% | 4,750 | Finance | ||
| STO | 1,000 | $ 0.94 | 3.6% | 940 | Basic Resources | ||
| UNTD | 3,397 | $ 0.40 | 7.5% | 1,359 | Consumer | ||
| USB | 2,099 | $ 0.50 | 1.9% | 1,050 | Finance | ||
| VR | 1,910 | $ 1.00 | 3.3% | 1,910 | Insurance | ||
| WBK | 489 | $ 8.13 | 7.4% | 3,972 | Finance | ||
| Total | 5.6% | 53,287 | |||||
| Upcoming Dividends | |||||||
| Stock | Shares | x Date | Div/Share | Est New Shares | Amount | ||
| CSQ | 5,002 | 12/8/11 | $ 0.05 | 30.0 | 263 | ||
| VR | 1,910 | 12/11/11 | $ 0.25 | 15.0 | 477 | ||
| HPQ | 800 | 12/12/11 | $ 0.12 | 3.0 | 96 | ||
| BHK | 2,879 | 12/13/11 | $ 0.07 | 14.0 | 193 | ||
| JQC | 4,375 | 12/13/11 | $ 0.18 | 92.0 | 766 | ||
| PM | 432 | 12/27/11 | $ 0.77 | 4.0 | 333 | ||
| SBS | 1,035 | 12/28/11 | $ 1.71 | 32.0 | 1,770 | ||
| AXS | 1,133 | 12/28/11 | $ 0.23 | 8.0 | 261 | ||
| USB | 2,099 | 12/29/11 | $ 0.13 | 10.0 | 262 | ||
| CEL | 1,497 | 1/3/12 | $ 0.51 | 46.0 | 763 | ||
| RTN | 454 | 1/3/12 | $ 0.43 | 4.0 | 195 | ||
GuruFocus Magic Formula Newsletter
As I looked up Seth Klarman, I saw that GuruFocus has a newsletter dedicated to small cap magic formula-type stocks. I am not sure whether I get it due to my premium membership. But here are the stocks they have in their portfolio (started in May), which isn't exactly setting the world afire:
CRWS
APNC
SPAN
RELV
PMD
BDMS
KSW
It is an interesting list, glad to see KSW on the list!
Auf Wiedersehen!
Posts
3 comments:
Where did you get the copy of MoS? You didn't buy it, right? That would be quite the un-value investor move...
A friend sent it to me in pdf form.
Hey Marsh- enjoy ur blog and hold lot of the same stocks. Have u ever taken a look at ITRN. I believe Klarman holds, pays a divi and shows up in your mfi extended list. - Best
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