John writes Controlled Greed, a blog reporting his adventures as a stock picker. He personally owns every stock recommended on the site. Controlled Greed launched in April 2005; John's reported stock picks have averaged +36.9% for the life of the blog through 2006. His stock picks averaged +27.5% for the year 2006 (both figures include dividends).
1. Are you a value investor?
2. What is value investing?
Stated simply, it’s buying a stock that’s trading for less than the underlying value of the company it represents. There may be different ways of measuring this, such as discounts to tangible book value or sum-of-the-parts analysis, among others, but that’s basically what it is.
3. What is your approach to investing?
I want to buy a company that’s undervalued, and that I can see a way or several potential ways for the value to be realized over the long term. Sometimes I get lucky and the stock price rises in several months, but my window upon buying is three to five years.
4. How do you evaluate a stock?
The process of finding a stock to invest in can take days or years. I start by reading, reading, and reading some more. I think you need to love reading generally to be a good value investor. My memory is that Warren Buffett told Charlie Rose on Rose’s PBS show that when he comes to the Berkshire Hathaway office every day he starts by reading newspapers, business magazines and annual reports. And that reading is the bulk of his job.
I also follow the holdings of some of my favorite investors. One of the things I like about Christopher Browne’s The Little Book of Value Investing is that he writes about this very approvingly. If the guys at Tweedy Browne are looking at what Peter Cundill, Mason Hawkins and Marty Whitman hold, and they’re all looking at each other’s portfolios, then it’s something you and I should be doing too. It’s a great way to build a list of candidates for investment.
That said, you shouldn’t buy a stock just because one of your favorite investors owns it. They may have bought it at a much lower price than what it’s going for once it’s reported, for one thing. And you still need to research it to make sure you understand it. Plus, many of the top-notch investors have portfolios with billions of dollars of assets -- meaning they can’t take advantage of some smaller bargains.
Reading all this stuff as the years go by builds up a knowledge base. Sometimes I come across a story that makes sense, I research to confirm it, and make the stock purchase. Other times, it takes longer.
An example is my investment in 3i Group, which trades on the London Stock Exchange under the symbol "III". I first read about 3i in the Financial Times in the 1990s. It had been around since the 1940s but was going public at the time. It got caught up in the tech bubble.
Then fast-forward to January 2005 and Meryl Witmer of Eagle Capital Partners recommended 3i in that year’s Barron’s Roundtable. I researched it myself and everything checked out -- the company had new management committed to returning cash to shareholders, it traded below net asset value, and it had a competitive advantage in doing small-to-medium sized deals in Europe. All this, and it was just beginning to make private equity deals in Mainland China and India.
Anyway, once I have a portfolio candidate, I look at its financial statements, search Barron’s, WSJ.com, FT.com, Bloomberg and Reuters. I also do Google searches and sometimes review analyst reports.
5. Why do you buy a stock?
I have conviction it is undervalued relative to the underlying business the shares represent, and see one or more potential reasons for its value to be realized over the next several years.
6. Why do you sell a stock?
The easy answer is because it has become fully valued. The reality is much harder -- though it’s a good problem to have. I used to have a set rule that if the stock doubled in price, I’d sell half of my position to get my original capital back. Then the position became a free ride. I still do that when the situation arises. But now, I sometimes sell 25% of a holding when it’s appreciated a third or more.
This is something I’m still working out. Basically, I probably buy too soon and sell too soon.
7. What investment decision are you most proud of?
This predates the blog, which launched in April 2005. I’m most proud that I stayed true to my value orientation throughout the tech bubble. I never bought AOL, Yahoo!, Cisco, JDS Uniphase or any of that crowd. I was never even tempted, really. Looking at my brokerage statement was like watching grass grow, but I was patient.
8. What investment decision do you most regret?
This also predates Controlled Greed. I’m a stock picker and I’ve had more winners than losers, but I’ve had losers just the same. The two I most regret are LTV (the steel company) and Friedman’s (jewelry store chain). LTV went completely bust and I dumped Friedman’s for a big loss before it filed bankruptcy.
This is a good time to reference something Sir John Templeton said. My memory is him saying that successful investors get six out of 10 stock investments right, and mediocre investors get four out of 10 right. So anyone following my blog should understand that if I list 20 stock picks, six would be losers -- if I live up to Sir John’s standard! I just hope that my losers will be dead money as opposed to blowups. But there are no guarantees.
9. Why do you blog?
I enjoy writing and I enjoy investing. I’d always had a fantasy about writing my own investment newsletter, because most of them are awful. But I didn’t want to borrow the money needed for renting mailing lists, paying paper and printing costs, marketing expenses, and paying postage. So when I started hearing more and more about blogging, I decided to give it a try. I see stock-picking blogs like Controlled Greed “taking on” investment newsletters, if they take on anything.
I also like serving my readers -- whether through letting them see what I’m buying or selling, or perhaps helping speed-up the learning curve if they’re newer investors. One of the most rewarding developments has been the complimentary emails I’ve received from industry professionals as well as retail investors.
Finally, blogs and blogging are still relatively new. It will be interesting to see what blogs become and it’s fun being at least a tiny part of that.
10. What’s your best post?
11. What’s your worst post?
With the stock picks, I guess the worst are where I’ve recommended Media General (NYSE:MEG) and Takefuji Corp. (OTC:TAKAF), since they’re both down a lot. But I remain cautiously optimistic about their long-term prospects and continue holding them.
Aside from stock picks, the worst was linking a Bloomberg columnist who slammed Warren Buffett’s currency hedge against the US Dollar, writing that Buffett hadn’t done well with the investment. The columnist didn’t factor in the entire length of time of Buffett’s currency play -- which had, in fact, made money. Several people corrected that and I wish I’d done better due diligence. It was one of those times I wish I had an editor!
12. What financial publications do you read?
Barron’s, The Wall Street Journal and The Financial Times -- all online. I also subscribe to Outstanding Investors Digest.
13. What investing blogs do you read?
Yours, Clyde Milton’s Cheap Stocks, Fat Pitch Financials and Vinvesting are the value blogs I read regularly. I also read Bill Rempel, The Big Picture, Bill Cara, Maoxian, Random Roger and Trader Mike. I really need to give a tip of the cap to Trader Mike -- he got me into Blogads and anytime I’ve emailed him a question he’s been very generous with his time answering. Even though I’m not a trader, his blog is a big inspiration to me.
14. What’s the best investment book you’ve read?
No surprise -- "The Intelligent Investor" by Benjamin Graham. The single best piece of investing writing I’ve ever read is Warren Buffett’s “Superinvestors of Graham-and-Doddsville”, which is reprinted as an appendix to Graham’s book.
15. What’s the last investment book you’ve read?
The Little Book of Value Investing by Christopher Browne.
16. When did you start investing?
In 1986. I was out of college just a few years and mentioned to someone older that I figured stock market investing was just something you did after you bought a house. He set me straight, got me to read some investing books, and I bought my first stock.
17. How have you improved as an investor?
As time goes on, and we live through events like the October 1987 market plunge, the Asian crisis of the late 1990s, and the tech bubble bursting in 2000, I find it’s easier to take the long view of things, to fight the headwinds, and to be patient.
18. How do you need to improve as an investor?
I need to remain patient, because things aren’t cheap right now.
19. Where are the bargains in today’s market?
Well, I’d like to say the Japanese consumer lenders since I own one -- Takefuji Corp. But anyone going in there needs to understand the risks and threats of government regulation on hampering the profitability of these companies. Here in the US, stocks are mostly fairly valued.
20. What’s the most interesting company we haven’t heard of?
ArmorGroup International trades in London and the symbol is ARG. You might find some shares trading OTC ("over the counter") in the US under the symbol AMGPF, but you’d have a hard time filling a decent sized order. The stock is up more than 30% in US Dollar terms since I recommended it last September. ArmorGroup provides security protection, security training and mine clearance services for militaries, governments and private companies. And they provide these services in risky places like Iraq, Afghanistan and Nigeria.
The stock was bought at net tangible asset value and is a play on overstretched US and UK militaries and the increasing need for security in third word countries. ArmorGroup is getting more work from companies in “extractive industries” in dangerous regions, so it could be a play on a long-term commodities boom.