20 Questions With Value Investor Clyde Milton

by: Geoff Gannon

Clyde Milton became enamored with deep value, off the beaten path investment ideas through years of fundamental research, and ultimately, as a writer/editor for a now defunct personal finance magazine.

He strives to research stocks that few others will, using valuation techniques based on Ben Graham's ideas (such as stocks trading below their net current asset value) as well as some ideas he has developed himself.

Milton freely admits that his site is written under a pseudonym; Clyde and Milton being the first names of his beloved grandfathers, to whom the site is dedicated. While Cheap Stocks was originally launched primarily to keep Milton's research and writing skills sharp (and not as a public site) it has developed a following.

1. Are you a value investor?

There’s no doubt about that. I am a dyed in the wool, card carrying, unapologetic value investor. That’s generally how I’m wired. I don’t understand how to value growth companies for the most part, perhaps I’m just not smart enough.

2. What is value investing?

Value investing is the ultimate pursuit, the ultimate treasure hunt, the extremely rewarding (financially and otherwise) quest to buy a buck's worth of assets for much less than a buck – be those assets land, cash, marketable securities, pieces of other companies, water rights, or what have you. It’s the attempt to find that situation where true value is not reflected in the current price (market cap or enterprise value) of a given company. There’s a huge dependency here: that the markets ultimately discover what your analysis has revealed, and that your analysis was accurate. It doesn't always work that way in practice, and patience is paramount.

3. What is your approach to investing?

It’s “off the beaten path” for lack of a better description. I try and turn over the rocks that few others do (maybe they are way smarter than I am, and know not to waste their time). For example, I will buy illiquid securities such as profitable companies that have “gone private”, and no longer file with the SEC, and are not required to comply with Sarbanes Oxley, but still trade on the Pink Sheets. Sometimes, liquidity is over-rated….if you can afford to be patient.

4. How do you evaluate a stock?

I start by identifying a potentially interesting situation. It may be that I discover a little-known thinly traded company that has some “hidden” or undervalued assets on its balance sheet. It might be a down and out company with a relatively large amount of cash relative to market cap, that is on the verge of profitability. It could be a situation where inventories are carried at lower of cost or market, and these inventories, in our estimation, are worth several times carrying value—this situation is rare. Could be land holdings that are undervalued. Most of these situations require some digging.

5. Why do you buy a stock?

When I’m convinced that there’s a real opportunity that the market is ignoring. It’s very difficult to quantify in a mathematical sense. There’s analysis behind it, but you also have to use your gut, and rely on past experience, both positive and negative.

6. Why do you sell a stock?

When I’m convinced full value has been realized, when the story does not unfold as I believed that it would, or when the reasons I took a position in the first place are no longer true.

7. What investment decision are you most proud of?

PICO Holdings (NASDAQ:PICO), which I stumbled onto a few years back, when it was trading in the low teens. As a value investor, it’s great to see your ideas finally being discovered by the market.

8. What investment decision do you most regret?

A little known net/net (company trading below its net current asset value) that went up in smoke…literally. Allou Health and Beauty was a distributor of health and beauty products, profitable, and seemingly cheap. That’s until the arsonist struck, destroying the company’s main warehouse. The good news was that the company had adequate insurance to cover the loss. The bad news was that management/owners were behind the fire. They allegedly paid an arsonist to set the fire. An inside job, which meant that the insurance company did not have to pay, and these crooks went to jail. Turns out that there was an earlier fire that insurance covered, but even that may have been suspicious.

9. Why do you blog?

It’s a labor of love. I entered the world of financial “journalism” several years into my career, but unfortunately, one of the publications I wrote for went under, thus ending that part of my career. This blog was an avenue to continue writing, to continue the research. The blog was never meant to be “discovered” as it has been. The truth is that now I would do this full-time, with much more frequent postings, perhaps a premium newsletter, if I could feed my family doing so. Currently the site does not generate any revenue, there’s no advertising.

10. What’s your best post?

Some of the earlier posts, research on companies such as Circuit City (NYSE:CC), Ambassadors International (AMIE), and Duckwall Alco (DUCK). All were net/nets, all have had nice runs.

11. What’s your worst post?

The postings that we’ve done on Jones Soda (OTCQB:JSDA) may be the worst – but not because of the results. The company has been a 4-5 bagger since we initiated research, but the fact that we covered a company such as Jones shocked some of our readers, and was seemingly out of character. This is not the typical company we research, it seems very expensive using our typical metrics. But we saw value in the brand name, which is very difficult to quantify.

12. What financial publications do you read?

The Wall Street Journal, Financial Analysts Journal, and a couple of magazines that may surprise you: Kiplinger's and Money. Both have come a long way, but I’m still amazed at some of the stuff I read that can lead “do it yourself” investors down the wrong path. Investors should beware of retail publications. Sometimes the writers are not that well informed, they are journalists first, and some of the stories are misleading fluff. I know this firsthand, because I worked in the industry. Also, monthly publications require a great deal of lead time, and by the time the stories are published, the material is old.

13. What investing blogs do you read?

Seeking Alpha covers a wide array of great blogs, yours included. I really like Jim Picerno’s Capital Spectator, which I consider to be the finest site out there regarding markets, the economy, and asset classes.

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

I thought David Dreman’s "Contrarian Investment Strategies" was excellent. Hagstrom’s "The Warren Buffet Way" was another great. Peter Lynch’s "One Up on Wall Street" is a classic. Not exactly a value investing book, but great nonetheless. "The Intelligent Investor" goes without saying. Sorry, that’s more than one, but I can’t help it.

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

Chris Browne’s “The Little Book of Value Investing” which may be on its way (in my mind) to becoming a classic. Browne is terrific at keeping investing simple. I’ve long been a proponent of Tweedy Browne and their investment philosophy, and have had funds with them for years.

16. When did you start investing?

Started with funds in college, then stocks in my early 20’s. I was fascinated by the research/due diligence process as an investor. Was also fascinated by financial statement analysis. It never got old or boring, and I felt it armed me well to make good investment decisions

17. How have you improved as an investor?

I am more likely to throw in the towel earlier on a situation that’s going bad. I also limit my position sizes much more than in the early days, won’t take large positions in any single name. I’m also more conscious of avoiding the classic value trap. The hope is that as you mature as an investor, you make better decisions, don’t jump to conclusions too easily, and generally invest better. That’s certainly true in my case, but I hope to continue to improve.

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

I need to expand my opportunity set. There’s more to value investing than net/nets, undervalued land and water rights, and GPT’s (going private transactions).

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

I hate to say it, but for me the bargains are few and far between these days. That could mean that the markets are pricey, or more likely that I’m just not looking hard enough.

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

Pennwest Energy (NYSE:PWE) is a Canadian Income Trust that recently came under a great deal of pressure (along with all the other Canadian Income Trusts) due to a tax law change in Canada, that will take effect in 2011. The current yield is more than 11%, but expect that to decrease. The company owns 4 million acres in Canada, and is sitting on a vast amount of oil (For full disclosure, I do own this stock).