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I am a private investor building a value focused portfolio. While I do not work directly in investing, I do have a financial background and hold the CFA designation. The goal of Margin of Safety Investing is to share my investing journey as I review and analyze investing opportunities using a... More
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  • Is it time to be bearish?
    While we hear a lot of positives about the economy, we could count on Dave Rosenberg to put things into perspective and give us a “cooler” (or more bearish?) view of the economy.  I found his latest piece a good summary of what’s going on (click here if you want to subscribe to his newsletter).

    Dave Rosenberg’s key points for me are as follows:

    1-While improving, the current economic situation is still not strong: we need QE2, tax cuts and extended benefits because the Fed and politics are worried of putting the economy back in clear recession territory

    2- The US debt/GDP ratio is getting out of control and into ratios consistent with downgrades in other countries (Canada back a couple decades, EU periphery today)

    3- Gas is back up above $3, often consistent with slowing of growth in future quarters

    4- Yields are up, which will make home financing more difficult…

    5- …speaking of homes, prices are down 3 months in a row the last time since March-May 2009!

    6- Finally the situation in Europe will not be good for the US, Europe representing 25% of US exports.

    I think it’s a good time to be cautious and look for high quality, reasonably priced invesments consistent with avalue approach!

    Many happy returns,


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 05 3:38 PM | Link | Comment!
  • Weekend Reading: Dividends Matters!

    In a recent paper – a man from a different time – Montier takes a look at what has driven shareholder returns over long period of times and the answer is pretty clear: dividends and dividend growth!

    -          “ To those with an attention span measured in longer than milliseconds […] dividends are a vital element of return

    The point is well illustrated when Montier compares the sources of returns on a 1-year vs. 5-year basis for the US markets since 1871.  The results are quite telling:

    Over a 1 year period, ~75% of returns are driven by change in valuation

    Over a 5 year period, ~50% of returns are driven by dividend growth and 25% by dividend yield!

    Over the entire 140 years, 90% of the market real returns are driven by the dividend yield.

    Montier also compares dividends vs. stock repurchase which he likes less : “ I don’t regard repurchases as equivalent to dividends, least of all in their permanence.”

    The article then goes on to explore a particular opportunity in dividend swaps.

    Overall I share Montier’s view of dividend and think they are a key feature to value investing – I do however like it if management, in addition to dividends, use excess cash for stock repurchases.  Maybe an ideal stock for me would bay 2-3% dividend yield and would have another 1-2% of buybacks per years on average.
    How about you? What is your view of dividends and buybacks?

    Many happy returns!


    Disclosure: No stocks
    Nov 26 11:42 AM | Link | Comment!
  • Weekend reading with James Montier: The trinity of risk

    I am very happy to share with you the article that has been the base for my quick reviews: The trinity of risk by one of my favorites: James Montier


    In this article argues that value investing is the “only investment approach […] that puts risk management at the heart of the process” and by this he means the risk of permanent loss of capital.


    Re-shuffling the risks to mirror the order in which I look at them in my quick reviews, we have:


    1-       Business risk: which using Graham’s quote is: “the danger of a loss of quality and earnings power through economic changes or deterioration in management”. In order to evaluate this risk and get a sense of strength and stability of companies, I review their cash generation, returns on equity and assets and growth. I also evaluate management’s shareholder orientation through a review of their uses of cash.


    2-       Balance Sheet risk: Here Montier suggests using Altman’s z-score as a good measure of health. In my framework I may be a bit more stringent, usually requiring a Debt/Equity ratio below 1.0x.  If the company seems promising enough that I perform a longer analysis I also review Altman’s z-scores but given my requirements beforehand z-scores in my analyses have so far turned out to be good (over 3.0x)


    3-       Valuation risk: using again a quote from Graham to introduce the idea: “The danger in… growth stock(s) [is that] for such favored issues the market has a tendency to set prices that will not be adequately protected by a conservative projection of future earnings”.  Graham (and Montier) often used what is now called the “Graham and Dodd P/E” or the P/E using 10-year average earnings. Graham put a line in the sand in terms of maximum valuation he was willing to invest at: “We would suggest that about 16 times is as high a price as can be paid in an investment purchase of a common stock”.  In my quick reviews I look at both P/E (NYSE:TTM) and cash returns (enterprise value / Free cash flow) to get a sense for valuation.


    What metrics do you use to evaluate companies along these and maybe other dimensions?


    Have a great weekend!



    Disclosure: No position
    Oct 29 5:02 PM | Link | Comment!
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