In the early 1990s, during the middle of a secular bull market, I began work on "A Modern Approach To Graham and Dodd Investing," that was not particularly suited for the decade of the 1990s, but was ideally suited for the following "Lost Decade" of the 2000s. In the early 2010s, I affiliated with Carryl Capital Management, a growth firm that is doing well even in the current decade, but will likely be most topical in a new "T. Rowe Price" environment of the 2020s.
- Description: Hedge fund manager. Trading frequency: Weekly
- Interests: Stocks - long
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A Modern Approach to Graham and Dodd Investing Benjamin Graham and David Dodd published their seminal work, "Securities Analysis," in 1934 as a retrospective to the 1929 crash. In 2004, Thomas P. Au published "A Modern Approach to Graham and Dodd Investing" predicting ANOTHER 1929-type crash. It was nearly five years later, in 2008-2009, that this ...More
definition was met, with a collapse of the Dow to less than 50% of its peak, triggering a recession, as in 1929. Only about 20% of U.S. stocks are true growth stocks, according to Tweedy Browne (a value house). If you divide the universe into the value (80%) and growth (20%) portions, both of them match the market: A statistical property called "regression to the mean" pulls down the P/E ratios of growth stocks (as a group) enough to compensate for their generally higher growth, after allowing for the higher dividend yields of value stocks. Growth stock investors can also do very well by concentrating on the same kind of fundamental analysis as value investors, albeit with a somewhat greater emphasis on earnings momentum. Within the value 80%, stocks are basically indistinguishable except by valuation. Therefore, the bottom half of this universe (the cheapest 40% of the whole) will outperform the top half (the intermediate 40% of the whole), as well as the overall market. In fact, it's the intermediate or "limbo" 40% where the real losers, the Enrons, Worldcoms, Tycos, and financials are found. That's because they are false growth stocks that generate the verisimilitude of growth through the use of leverage. In the bankruptcy chapter, the book does a case study of Worldcom by presenting the three main financial statements in reverse order, cash flow statement, then balance sheet, then income statement. This is to train the student to gloss over the income statement, and focus on a cash flow profile that showed the company in deep trouble. In this instance, the weakness of the balance sheet was underlined by noting that most of the equity was represented by goodwill. In fact, one might do well to read whole annual reports from back to front. It is in the back that management is "legally accurate but not volunteering information" with the facts, while the front provides glossies that give visceral impressions of a prosperity that may be false.
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