Copyright © 2009, Greenwich Financial Management Inc., a registered investment advisor.
There is a pun in the title of the new book, Wisdom on Value Investing (John Wiley, 2009). The author is Gabriel Wisdom, and what he sets out is wisdom concerning the "value investing" style.
Wisdom is a co-founder of American Money Management, LLC and President of the Fallen Angel family of mutual funds. According to the book jacket, he has managed "more than a billion dollars for wealthy investors since 1983." He hosts a daily program on Business Talk Radio Network.
The author favors "fallen angels"—securities offered at prices below their intrinsic value. There are three sources of such situations, he says: the business cycle, excessive pessimism in the market and a one-time "calamity befalling an otherwise sound company" (pp. 18-20). He urges the reader to follow a contrary stance, against prevailing sentiment in the market.
Wisdom suggests as standards of value a number of financial statistics followed by most value investors, including the price to earnings ratio, debt level, return on equity and free cash flow.
One question that many investors puzzle over is when to sell. Wisdom cites three signals: first, if the reason you bought is no longer valid; second, if profits come sooner than expected (in other words, don't succumb to over-optimism); third, if a better opportunity comes along. In practice, those who have an eye for something worth holding a long time are probably best suited for the value style of investing. I'm not sure if Warren Buffett has ever unloaded a company, although a few of his picks (especially early on, such as Dexter Shoe) came out poorly.
At times, the reader may be puzzled by Wisdom's practice of citing investment principles that are in tension with one another, without his resolving or even noting such differences. For example, he cites Shawn Andrew to the effect that the crowd is usually right, except at major turning points (p. 9) but also cites with approval George Soros' statement: "I assume that the markets are always wrong" (p. 131). By the same token, he cites Warren Buffet (p. 1) about how a net saver should buy when prices are sinking, but then he also recommends buying when technical patterns show a rising price trend, albeit close to the bottom.
Although most of this book concerns securities investing, chapter fourteen concern real estate as the "other fallen angel opportunity." He sees evidence for an eighteen year real estate cycle in the United States, following the work of statistician Edward Dewey (1895-1978). The chapter discusses how to watch this recurrent pattern and invest opportunistically. He suggests as examples of fallen angels in this area abandoned properties in working class neighborhoods at the bottom of a business cycle.
Wisdom offers a breakdown (pp. 114-117) of the "twelve most common opportunities for investors": fallen angels; out-of-favor blue chip stocks; spinoffs; overlooked smaller companies; companies run by gifted deal-makers; cyclical companies at the bottom of a cycle; growth at a reasonable price; distressed companies; post-bankruptcies; the part is worth more than the whole; activism in the marketplace; oddballs/innovators.
One section of the books that is highly misleading concerns "book value." The author describes book value as a "bottom-line assessment, by an independent source, of a company's value…arrived at by auditors who seek to determine the actual value of each share of the enterprise, independent of the market price….The process is similar to an appraisal [of] real estate…an estimated fair market value is determined." In fact, if these procedures were actually followed by companies, book value would probably be a much more interesting number. In fact, the book value of a company is an accounting measure, equal to a company's assets minus its liabilities, preferred stock and intangibles. The book value of an asset is based on its original cost minus accumulated depreciation. Notoriously, these numbers can deviate wildly from any reasonable estimate of an asset's "fair value" or "market value." How can a seasoned professional like Wisdom, on such a fundamental matter, fall this far from the mark? Did he skip class that day?
Perhaps the most impressive part of the book is Chapter 15, concerning "Ten Fallen Angels for the Next Five Years." Here are five large capitalization stocks he recommended early this year, the price he recommended them at (on 3/30/2009) and their present price per share (market close, 11/6/2009):
- General Dynamics (GD, $41.59; now $65.58, up 58%);
- Google (GOOG, $348.06; now $551.10, up 58%);
- Jacobs Engineering (JEC, $38.66; now $43.81, up 13%);
- Johnson & Johnson (JNJ, $$52.60; now $60.30, up 15%).
- Visa (V, $55.60; now $43.81, up 13%)
Among smaller companies, he recommended: - Hansen Natural (HANS, $36; now $34.46, down 4%);
- Sketchers (SKX, $6.67; now $22.80, up 242%) (!);
- World Fuel Services (INT, $31.63; now 51.36, up 62%);
- Move (MOVE, $1.45; now $1.66, up 14%);
- Lincare Holdings (LNCR, $21.80; now $33.10, up 52%).
Not bad for a 221 day holding period! One might say, "Oh, almost everything has done much better since March 2009," but that would be to deprive the author unfairly of the courage of his timing of publication. And in fact, this portfolio beat the market handily. The mean gain was 50% for these ten stocks. Over the same interval, the S&P 500 gained 36% and the Russell 2000 40%.
Journalist Joe Tash aided in the writing of the book, which is clear and understandable. The book is aimed at individual investors, and many would profit from the lucid presentation of basic value investing principles. On the whole, despite some flaws and inconsistencies, this book is worth adding to the bookshelf of serious investors.
Among other works deserving a place on the value investor's bookshelf, I would mention Benjamin Graham's classic, The Intelligent Investor (1949), David Dreman's New Contrarian Investment Strategy(1982), Timothy Vick's Wall Street on Sale (1998), and Martin Whitman/Martin Shubik, The Aggressive Conservative Investor (1979). Among more recent works, consider Joel Greenblatt, The Little Book that Beats the Market (2005) and Christopher Browne/Roger Lowenstein, The Little Book of Value Investing (2006).
Andrew Szabo CFA is managing director of Greenwich Financial Management Inc., a registered investment advisor. Questions call 917-796-8500 or e-mail Szabo@GreenwichFinancial.com). For more information, please visit http://greenwichfinancial.com/.
