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Tom Au, CFA
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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.
My book:
A Modern Approach to Graham and Dodd Investing
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  • Watch Out For The Modern Credit Anstalt Bank

    In 1931, the United States and the world seemed to be in a recovery mode, following the 1929 crash, and even President Herbert Hoover honestly though, "Prosperity is just around the corner." That was derailed by a seeming random event; the collapse of the Credit Anstalt bank of Austria, a country that was most noted for being just "offshore" Germany, then the world's second largest economy (now the fourth). We ought to be watching out for a similar event now.

    As reported in my (Wiley, 2004) book, "A Modern Approach to Graham and Dodd Investing": "The seminal event [in 1931] that turned the global retreat into an economic collapse was the collapse of the Credit Anstalt Bank in Austria, which plunged Europe deeper into a decade-long depression (and brought Hitler to power in Germany), while infecting the United States."

    There are two places where there could be a "Credit Anstalt Bank" collapse. One is in Europe, where the Greeks (rather than the Austrians) now have their hands full with the Germans. The other could be in East Asia, where China is the new "Weimar Germany," with the world's second largest economy, and is a country that is worrying about the fall of its stock market and economic growth model, and may be inclined to take extreme measures to "sauve qui peut" (save whatever it can).

    Jul 08 10:18 AM | Link | 2 Comments
  • Beta: Different Implications For Value And Growth Stocks

    I've been a value investor for most of my career, at least until 2012 (when I stopped publishing on Seeking Alpha). That's when I began a stint with some growth investors for that year, and through 2013, before returning to my value roots in 2014. But at least I've seen the other side of the fence.

    The "beta" of a stock refers to the volatility of a stock, relative to the market. Specifically, it reflects the speed of investor reaction to develoments at the company represented by the stock. Oddly enough, beta works in different, and opposite ways for value and growth stocks.

    A deep value investor wants stocks with high betas. That is stocks to which investors overreact on both the up- and down-sides. When e.g. cyclical stocks reach deep value levels (typically below book value), that's the time to buy; and when they return to "normal" levels, it's time to sell. My experience with cheap stocks with low betas is not nearly as satisfying; they would never go down enough to be truly cheap, and would not go up enough when things turned around.

    Value and growth are not mutually exclusive. "Cheap" growth stocks in fact, form one leg of my value triad. (The other two are deep cyclicals and income issues.) After my stint as a growth investor, I fine tuned my description of them to be stocks with a company growth rate of 10% or more, selling at a market multiple, more or less. A growth rate of 10% is almost twice the historical market growth rate of 5.5% (nominal), and is actually three times the market growth rate in real terms (after subtracting 3% inflation from both numerator and denominator).

    It is possible for a stock to be both a growth and value stock. Suppose there is a company growing at 15% a year, but whose stock is hated by the market, so that it sells at 80% of the market multiple. This is not a made-up example, but one that used to describe tobacco stocks (from the 1950s until the 1990s). As long as the stock stayed around 80% of the market, it would be no more volatile than the market as a whole, while its superior 15% growth rate would cause it to outperform over time. There was another advantage; with a valuation of 80% of the market multiple (instead of twice that for stocks of comparable growth in other industries), the stock would yield 5%, instead of 2%-3%, leading to a total return (growth plus yield) of 20%, assuming that the P/E multiple didn't change. That's why you want low betas with growth stocks.

    But with growth stocks, a high beta is often an enemy rather than a friend. That is because the great danger of buying a growth stock is buying one that is priced too high. Put another way, a high beta means that changes in the valuation could easily offset the impact of earnings growht.

    I believe that a market multiple or thereabouts is not "too high," and would prefer that a growth stock remain at such levels for many years, allowing for many entries. After the passage of "Obamacare" in 2010, this described many health care stocks, whose earnings prospects were barely dented, but whose P/E multiples were hammered.

    To sum up: Buy cyclical stocks for relatively short holding periods when a high beta makes them cheap, and buy growth stocks for long holding periods when they are cheap, even with low betas. One wants to avoid cyclicals at the top of their cyclical cycles, and growth stocks at the upper end of their secular cycles.

    Tags: Value
    Jul 06 10:12 AM | Link | 1 Comment
  • Pairing Dogs Of The Dow, 2015 Edition

    Since I am now publishing again, I will go back to an old theme, of pushing the investment strategy of the 10 "Dogs of the Dow," and then trying to select within theme, by pairing them, and choosing the more attractive one in each pair, based on present and past dividend yields. (Yields as of December 26, 2014 follow the stock ticker symbols in parentheses.)

    Given two large, blue chip companies in the same industry whose stocks have rather different yields, the more attractive stock is often the higher yielding one. In our list, there is one exception, where the lower-yielding stock is offering a much higher yield than it typically does. This strategy reduces the portfolio to five "Dogs" that hopefully will outperform the "Dogs" Strategy itself, while we believe that the ten "Dogs" will outperform the overall Dow.

    A T& T (NYSE:T), 5.38% vs. Verizon (NYSE:VZ), 4.60%: These are both telecom stocks, and historically, their yields have been pretty close together. A T& T's yield is now more than three-quarters of a point "wide" of Verizon, which is too much. The choice is A T &T.

    Chevron (NYSE:CVX), 3.78% vs. ExxonMobil (NYSE:XOM), 2.96%: These are two global "blue chip" energy producers. ExxonMobil is the safest company around, but Chevron is right behind it in this regard. Even so, the yield on Chevron stock is more than three quarters of a percentage point higher. That's a large "handicap" given their similarities. Dividend yields and "total return" are key in "tortoise vs. hare" races involving large energy companies, so Chevron is the clear choice.

    Coca Cola(NYSE:KO) 2.84% vs. McDonald's (NYSE:MCD), 3.59%: These are both prime consumer stocks. Historically, Coca Cola stock has been the higher quality issue, and therefore the better choice when the two yields were about the same, but McDonald's yield is "too much" higher than Coke's.

    Merck (NYSE:MRK), 3.12% vs. Pfizer (NYSE:PFE), 3.54%: This is a bit closer than the some of the other comparisons, but again, the two trade typically trade "tighter" than they do now. Also, Merck is at the high end of its ten-year range; this is less true for Pfizer, meaning that the latter, higher-yielding issue, is the greater value.

    Caterpillar (NYSE:CAT) 2.96% vs. General Electric (NYSE:GE), 3.41%: This is the exception to the rule of choosing the higher-yielding of two similar securities. They are both "industrial" companies, but Caterpillar seldom trades at a yield approaching 3.00%, while GE often trades "wider" than 3.50%. GE has the larger "captive" finance subsidiary (GE Financial), meaning that it has to yield much more to compensate for its greater exposure to the volatile financial industry.

    Our choices: A T&T (T), Caterpillar (CAT), Chevron (CVX), McDonald's (MCD), Pfizer (PFE).

    Dec 28 3:16 PM | Link | 1 Comment
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