During the crash of 2008 and early 2009, some of the greatest value investments of a lifetime could be had for pennies on their book value dollar. They were picked up by astute savers who had prepared for the times we have endured recently.
Shares of companies like Ashford Hospitality Trust (AHT) dropped from $15 to $2 during the depths of the bear, and now trade near $9, or half of tangible book value.
Dillard's (DDS) dropped from $30 to $3 and nearly hit $30 again in April's run.
Stein Mart (SMRT) hit $1 and has since rebounded to $10.
Clearly this was a deep value statistician's stock market -- one that would have been very lucrative for Ben Graham I believe. His diversified approach would have made up for the many landmine cheap stocks that trapped many deep value investors, including yours truly. I have recovered to some degree. I steered a larger client from a large concentrated holding in Newspapers and and Fannie Mae (FNM) and Freddie Mac (FRE) in 2008 (the newspaper stock went from $20 to $2, where I am currently accumulating the name) and into Berkshire Hathaway (BRK.A). The sub-account I directly managed has suffered in comparison although posting big gains recently.
I feel the main reason for my mistake involved the lack of diversification. Graham believed that only a quick analysis of the underlying business with little to zero analysis of the industry or macro outlook was necessary to make money in stocks trading at 66% of book value or less as the basket would outperform over time. I was more involved in activist investing and that style requires a greater than 10% allocation to a particular name...
Clearly a basket of stocks chosen at 66% or less of book value would have outperformed in 2009-2010 but also I believe this strategy would have greatly lagged in 2008. What the lesson learned for investors seems to be is that an astute, 'cigar butt' Graham and Dodd investor must have cash ready in times of crises to be able to pounce on opportunity. Furthermore, anyone engaging in the deep value small cap arena must espouse a diversification approach that reaches over 15-20 stocks. The main lesson for me seems to be that of wide diversification. In that having 20-30 names will add much needed risk aversion versus running a 10-15 holding portfolio in Graham type investments during bear markets. Current Graham type stocks are as follows:
Avalon Holdings (AWX)
Chromcraft Revington (CRC)
National Western Life Insurance (NWLI)
Excel Maritime (EXM)
Kindred Healthcare (KND)
Integrated Electrical (IESC)
Aspen Insurance (AHL)
Hastings Entertainment (HAST)
Tandy Brands (TBAC)
Oilsands Quest (BQI)
Parlux Fragrances (PARL)
Alliance One Intl (AOI)
A.C. Moore (ACMR)
There are other cheap stocks relative to book value of course, but I am invested in most of these due to their positive earnings and or book value trends over time. Another way to add a margin of safety is to sell puts on these stocks instead of purchasing the stocks directly to lower your purchase price and to gain yield.
In my opinion the average name is not inexpensive in this market and I do not think that the market has miraculously healed itself. There is tremendous risk right now just as there was two years ago... Much of this is masked in numbers that need later revision and a large majority of investors who have missed the precious metals and commodities boom, viewing gold as some type of conspirator-fear investment.
Gold and silver and other commodities have risen, in my opinion, in direct proportion to the increase in size and spending of the federal government. So, in essence, the growth of government under Bush was unprecedented and led to higher prices of commodities which suffocated commerce. In turn, Barack Obama has fought the the commerce falloff issue by increasing the size of the federal government even more, which has helped commerce in the short run. In the long run, fiscal irresponsibility by our leaders in Washington will lead to a greater rise in the price of raw materials and another round of sluggish commerce.
If you have been following my advice, articles, ideas, or newsletters in the past you know that I have been invested in commodities since 2005 and feel the bull market in that space will at least perform nearly in step with the overall equity markets. That's why we feel it's a great time to invest in farming and farmland -- which makes up a 14% position in my fund. I feel that low interest rates and a skewed rich and poor means we will continue to debase the currency to meet our Federal budget needs.
I will post a performance update on the names listed in this article at year end.
I am short some stocks against these holdings because I am not going to be ill prepared the next time I can buy decent companies at 10% of their intrinsic values -- 2008 was the time to pick up a decade worth of stock gains.
Many of the currently most hyped investments on Wall Street face the biggest corrections when stocks turn south, in my opinion, so I am going to be short some stocks that are very popular as a small hedge to guard against overall economic regulatory and market uncertainty. As many in the small value space have learned -- we are on our own in the deep end of the pool as value investors with regards to the accuracy of financial statement reporting, enforcement of fraud provisions, and the actual control of shareholder value creation as it relates to the behavior of corporate management and boards of directors. The SEC does not hold your hand in this space, and maybe that is what makes it a land of opportunity complete with large risks and large rewards -- the risks being greatly skewed to the upside when diversification is practiced religiously.
Disclosure: Long all stocks mentioned