20 Questions With Value Investor Joe Citarrella

by: Geoff Gannon
Joe Citarrella is a student at Yale University who began investing as a teenager in order to debunk family myths about the stock market. Joe writes JoeCit - Intelligent Investing, a value investing blog that combines research and advice. Joe is a devoted value investor whose portfolio holdings and results can be seen at the About section of his blog.

1. Are you a value investor?

Absolutely.

2. What is value investing?

Value investing is the practice of buying a security for less than it’s intrinsically worth. Arguably the most important element of successful value investing is the concept of a margin of safety. If you feel a stock is worth $20, for instance, but it sells for $18, that’s simply not enough of a cushion. $10-$15 might be more like it, in my opinion. Looking for the no-brainers is a hallmark of “true” value investing.

3. What is your approach to investing?

On a very broad level, I look for simple, easily understandable businesses that sell for less than they’re worth. Because of their general scarcity, that often means focusing on just a few really good ideas and putting a large chunk of my portfolio to work in just one or two “theses” that I believe have a high probability of outsized returns. In seeking out these opportunities, my approach is a combination of following the so-called paper trail and, occasionally, using quantitative screens to find stocks matching certain filters. In general, I’ll use guiding criteria that, most of the time, lead me to say "no" quite easily. But this narrows the playing field, forces efficient use of time, gets rid of noise, and enhances returns while lowering risk.

4. How do you evaluate a stock?

After a stock passes some basic filters and meets my criteria of a simple business that appears undervalued, I’ll take a look at the most recent 10-K. I’ll read management’s discussion and check the company’s financial position and operating results over the past several years. Normally, before digging very deeply, I’ll already have an idea what the thesis for an investment is.

Naturally, buying a company for half of book value is an entirely different ballgame than buying a company because of its growth potential or operating successes. Because I’ll do both, I need an idea of why I’m looking into the company in the first place. Doing so also allows me to know what to look for and where to look. This seems obvious but it’s often forgotten. Lots of mistakes are made by people who forgot what they were setting out to do.

As I continue digging into the numbers, management, etc., the stock will have to continue passing filters and tests. In the process, I look for reasons to say "no" rather than reasons to say "yes". When it’s tough or impossible to say "no", you can be more confident in your affirmative decisions when you make them. Buffett’s twenty punch rule should absolutely be taken into account by every investor.

Lastly, while I used to be very big on spreadsheets and fancy valuation models to figure out an intrinsic value, I tend not to rely so heavily on them today since I won’t invest unless the opportunity smacks me in the face. Because valuation methods are by nature imprecise and sensitive, they’re of little use when you’re in the game of looking for huge margins of safety. By the time I put a significant amount into a company, I’d estimate that anywhere between 20-40 hours of research has been done.

5. Why do you buy a stock?

I buy a stock when it’s so undervalued as to give at least a 30-40% margin of safety. Naturally, opportunity costs are considered seriously, so that this margin is a minimum and may be quite a bit higher if other opportunities offer as much or more of a margin.

6. Why do you sell a stock?

I’ll sell “cigar butts” when they reach what I estimate to be their fair value, but I try to hang on to the great businesses unless they become absurdly overvalued. Obviously, I’ve broken my own rules on occasion, but this is the basic goal.

7. What investment decision are you most proud of?

It’s hard to say which decision I’m most proud of, but in terms of annualized performance the best to date has been my relatively recent investment in Concord Camera (NASDAQ:LENS). I bought in around $2.40 split adjusted in October/November, and it’s currently trading around $4.80.

8. What investment decision do you most regret?

I wish I knew where to start on this one. I’ve definitely made some stupid decisions, and most of my mistakes were when I tried doing things I didn’t fully understand. For instance, one of my worst investments was in Vitesse Semiconductor (NASDAQ:VTSS) back when shares traded around $1.50.

I was basically trying to piggyback on Robert Chapman’s 13D filing, but didn’t know much at all about the business. In fact, the business stinks and I had no good reason to be in it as the whole thing was way outside my circle of competence. Not surprisingly, I ended up getting out at about 60 cents on the dollar, and I probably deserved much worse than that.

9. Why do you blog?

I blog for three reasons. First, it helps me crystallize my own thoughts and focus on what’s important. Second, whether or not it’s true, I feel like I’m helping others handle their own investments instead of relying on brokers or mediocre mutual funds – “giving back” in some small way, you might say. Third, it’s fun and I get a kick out of it.

10. What’s your best post?

I’m personally a big fan of two posts in particular, namely my second post on Concord Camera and my post on Whole Foods Market (WFMI), which actually defers to Gannon On Investing on homebuilders.

11. What’s your worst post?

By far the worst post was on Winn-Dixie Stores (NASDAQ:WINN). I completely botched the facts, which was both ironic and embarrassing given that the posts talk about how important it is for investors to “read the fine print.” I should have taken my own advice, because I used the much larger pre-bankruptcy share base to calculate a market value, which dramatically overstated the true numbers. For posterity and a good laugh, I’ve left the post up with editing notes added in.

12. What financial publications do you read?

I read the Journal, NYT Business Day, and Seeking Alpha. I’ll occasionally pick up Investor’s Business Daily or the Financial Times, but those are much rarer than my quotidian visit to NYT. Also, I’ll read tons of books on investing – anything I can get my hands on. At any given point I’m typically reading 2 to 3 books on finance or investing.

13. What investing blogs do you read?

I stop by several blogs on any given day (probably too many to mention). I suppose some of the most notable are Yaser Anwar’s Investment Ideas, The Kirk Report, Clyde Milton’s Cheap Stocks, and, of course, Gannon on Investing.

14. What’s the best investment book you’ve read?

It’s hard to comment on the best investment book I’ve read, since any good one offers something different but no less important. In terms of the book that I believe is an absolute must read, it’s got to be Ben Graham’s "The Intelligent Investor" (I think any edition is fine). Phil Fisher’s "Common Stocks and Uncommon Profits" is also an important read. And, of course, reading "Warren Buffett: Essays on Corporate America" should be on the list since it’s a coherent and well-edited compilation of Buffett’s letters to shareholders, which are essential for any business person or investor.

15. What’s the last investment book you’ve read?

I just finished Michael Moe’s "Finding the Next Starbucks", which I wrote about in a recent post.

16. When did you start investing?

I started reading and learning around 16 or 17, and actually put real money to work around 17 or 18. I started because my family had little to no understanding of finance, so I decided to go on a mini crusade to prove that it can’t be that hard. I wanted to learn what made businesses tick and, of course, how to value them. I became consumed by the process and started having fun, so I stuck with it and I haven’t looked back.

17. How have you improved as an investor?

I’ve improved a great deal since I started. The two most important things I’ve come to figure out are patience and knowing thyself, if you will. While I had known in theory that an investor needs to be patient and stay within his or her circle of competence, it was a lot easier said than done.

As humans, we have psychological tendencies to want results immediately and to think we are better and know more than we actually do. But successful investors can do neither. So in that way, investing is a great exercise in humility and self-control. The ability to stomach volatility and wait while prices fall or stagnate is not an easy process.

Coming to know what you don’t know (and in my case, there’s been a lot of that) is also not an easy process. But if you stick with it and come to learn this through experience, it pays off big time in the end, if for nothing else than growing as a person.

18. How do you need to improve as an investor?

I still need to work on patience and self-control, but aside from that I think I need to work more on my start-to-finish approach to finding investments. It doesn’t lend itself well to covering a lot of ground, and while that’s never the goal per se, I feel I can be more efficient in my research by tweaking the process a bit. Some friends have commented that I should work on portfolio management/allocation, since I tend to be very heavily focused on some highly volatile, tiny companies. This doesn’t bother me a bit, but I’ve taken some heat for it.

19. Where are the bargains in today’s market?

I’m generally bad at pinning down broad areas to find bargains, but I’d say micro to small cap stocks are (usually) where the biggest bargains can be found. It should always be taken on a case-by-case basis though.

20. What’s the most interesting company we haven’t heard of?

I could put in a shameless plug for Concord Camera, but my blog has enough of that. I guess it depends on how you define “interesting.” There are some nifty business models, like Harris & Harris (NASDAQ:TINY), the publicly traded nanotech fund. There are also some dominant franchises with products used in everyday life that no one thinks of or knows about.

For instance, Schweitzer-Maudit (NYSE:SWM) manufactures the papers used in about 70% of the world’s cigarettes. Everyone knows the cigarettes, but no one even thinks of the papers. It’s fascinating that they have such a huge market share, but remain totally uninteresting to investors. In fact, I’m doing some research on the company now, and it looks pretty attractive. I’ll probably write a post on it soon.

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