John Paulson is one of a number of hedge fund managers featured in Sebastian Mallaby’s book More Money than God, largely because he earned almost $4 billion for himself and billions more for his clients. Credit default swaps, the bane of AIG, Lehman Brothers, and Bear Stearns, were his big ticket to even bigger riches.
Well, that was then. Now, not so much. In 2011, according to Bloomberg Businessweek, Paulson’s Advantage Plus Fund was down -52.5%. It’s down another -6.3% through May of this year.
He’s still has more money than most everybody else–but G_d.
Something I found looking for something else. Looks like a good place to spend some time–if you’re a value investor.
From the Preface to Graham and Dodd’s 1934 classic, Security Analysis:
. . . we have striven throughout to guard the student against overemphasis upon the superficial and the temporary. Twenty years of varied experience in Wall Street have taught the senior author that this overemphasis is at once a delusion and the nemesis of the world of finance.
Graham’s (via Zweig) admonition to be a critical thinker is, well, critical to being a good value investor. So what does that mean? What do I need to think critically about? Zweig gives us a clue when he refers to “Wall Street ‘fact.'” Obviously, that would refer to fact and figures in annual reports and 10-Ks. It would include any form of advertisement, be it an ad in Smart Money magazine or listing in an “unbiased” assessment in an article in The Wall Street Journal, touting the stocks you should be in now.
Not so obvious is the need to read between and behind the lines of such “facts” as you assess the relative merits of the stocks your screener tells you to look into further.
- Why are they undervalued?
- Is there or could there be a regulatory problem?
- Why did that insider sell (or buy)?
- Is there a problem with that newly announced product? Why isn’t the market responding to it?
- Is something amiss with management or a location?
- What are shareholders saying on the Internet and in the press? Are the positives really positive and the negatives negative?
And so on. Value investing is detective work, pure and simple, and the Colombos of the investment world will virtually always be taking money from the Detective Clouseaus.
Like I said in my previous post, I’ve read The Intelligent Investor (2003) before. I began thumbing through it again. Four items in Jason Zweig’s Note at the beginning struck me in a way they didn’t the last time through, though they are quite obvious (pp. xii-xiii):
- The intelligent investor is a realist who sells to optimists and buys from pessimists.
- Only by insisting on what Graham called the “margin of safety”–never overpaying, no matter how exciting an investment seems to be–can you minimize your odds of error.
- Become a critical thinker who takes no Wall Street “fact” on faith.
- Finally, Graham became a master at researching stocks in microscopic, almost molecular, detail.
I tend to be an optimist, so I have my work cut out with the first item. The second simply augers for caution–and I can be cautious. I think I can take a pretty good stab at the third. Detail? I like digging. Will I like digging as much as Graham?
I read Jason Zweig’s 2003 revision of Graham’s The Intelligent Investor a few years ago. I planned on reading it again, but before I did, I realized that I needed to find a good stock screener first. That way, as I read, I could tweak the stock screener to fit my value investing purposes.
After looking at the obvious choices–Google Finance, Yahoo Finance, and a few others–I stumbled upon a nifty little blog post by Jim Fink at Investing Daily titled “Best Stock Screening Tools on the Web.” In it he highly recommended the screener at FinViz.com. I agree with him that FinViz’s screener is the most comprehensive free screener on the Web, certainly more comprehensive than the others I looked at. I’ve decided that it will be my screener of choice–at least for now.
This blog is an experiment. I’ve read off and on in the value investing literature, but that’s it. I’ve decided to go beyond mere reading. Value investing has always impressed me as an investment style, so I’ve decided to investigate it further, to learn the ins and outs, to bring together the necessary tools to play the part of a value investor, and eventually, become a talented value investor.
This blog will act as my working papers in that endeavor. And so as I learn, so will you. If you’re interested in becoming a value investor, I hope what I discover and write about will be of help to you.
At bottom I like fundamental analysis. I like seeing how the parts work and interact. I like detective work. I like discovering something that few, if any, know besides me. If that describes you, then you’ll probably like the value investing approach too.