Long term value investing

Ghost of Cutten · Nov 25, 2009

Quote from lrm21:

I agree long term investing in non dividend paying stocks should be a minor concentration. As pure home run plays. trying to grab a microsoft or google. but that is not value investing since these companies in their early stages will appear overvalued.

Established companies pay dividends.

Apple and Berkshire Hathaway pay no dividend. Both were value investments late in 2008 and early in 2009.

Any company that can significantly out-earn the cost of capital is better off paying no dividend.

Ghost of Cutten · Nov 25, 2009

Quote from rwk:

The basic problem I have with long-term investing is that by the time you have usable feedback, you're dead.

In my experience, all deep value investments I have ever done have resolved the price discount within 2-3 years at most. The longest I had to wait was from September 2001 to late 2003/early 2004. In most cases I was collecting nice fat dividends while I waited.

If your life expectancy is less than 2-3 years, then value investing is probably not for you.

drcha · Nov 25, 2009

In response to the OP's question, there are several active forums on the Morningstar web site that are very useful and interesting to read. You have to join the site for about $150 per year. Morningstar is pretty good at picking funds, but not at picking stocks. They do provide an in-depth analysis of each stock, though, that you could use as a starting point for further research. And they have many nice screening tools.

Blue_Bull · Nov 25, 2009

Quote from drcha:

In response to the OP's question, there are several active forums on the Morningstar web site that are very useful and interesting to read. You have to join the site for about $150 per year. Morningstar is pretty good at picking funds, but not at picking stocks. They do provide an in-depth analysis of each stock, though, that you could use as a starting point for further research. And they have many nice screening tools.

Thanks! I might give it a trial or something to see what they're all about

Blue_Bull · Nov 25, 2009

Quote from Ghost of Cutten:

P/Es can be almost worthless because they are historical. It is future earnings that matter, not past earnings. Ditto for PEG and, to a lesser extent, dividends.

Relying on things like P/E or dividend yields is how a lot of non-value investors lose fortunes getting suckered into value traps, like Bill Miller with Fannie Mae (meanwhile I was shorting it down to low single digits despite being a value investor myself) or Mohnish Pabrai with that financial stock that went broke.

A value investment is something that i) has practically no chance of going broke ii) is so cheap that even in the worst case scenario, you will make money.

So for example, a company which owns $100 million of real estate, has $40 million of long term debt, and is selling for a market cap of $10 million, with a dividend yield of 30%, would be a value investment.

True value investments tend to only present themselves near bear market lows, or when individual companies or sectors are in serious short-term trouble, or when a stock/sector/market/country has been ignored for years.

Such a stock sounds like a no brainer, even to the non-value investor, no?

The Big D · Nov 30, 2009

Quote from lrm21:

I agree long term investing in non dividend paying stocks should be a minor concentration. As pure home run plays. trying to grab a microsoft or google. but that is not value investing since these companies in their early stages will appear overvalued.

Established companies pay dividends.

This is again a trader rather than investor mentality. Even after MSFT and GOOG's "home run", they haven't established a dividend schedule that even begins to pay off their investors. GOOG pays nothing. MSFT pays next to nothing. It seems unlikely either ever will.

The only way to have profited on those stocks was to sell and leave someone else holding the non-dividend-paying bag. That's all well and good, but any time your strategy is to leave some other guy holding the bag, you're a trader rather than an investor. I have no problem with the trader mentality, but it's good to be clear about what you're doing.

The Big D · Nov 30, 2009

Quote from Ghost of Cutten:

Apple and Berkshire Hathaway pay no dividend. Both were value investments late in 2008 and early in 2009.

Any company that can significantly out-earn the cost of capital is better off paying no dividend.

Neither of those would be value investing by the classic definition.

Berkshire DOES value investing, but their own stock in not a value investment in and of itself.

AAPL is yet another tech company that never intends to pay off the investors in any way, shape or form if management can help it.

Daal · Nov 30, 2009

Quote from Blue_Bull:

Do you think that the market is less efficient when it comes to long term value picks? So example, a company may be undervalued and rise like, 100% in 5 years. But because of the 5 year time frame, nobody wants to touch it right now. Is that logical?

The evidence is mixed, buying high dividend yield stocks tend to be beat the market. but other measures of value such as low pe, low pb tend to lag growth stocks over long-periods of time. check Pratical Speculation by Niederhoffer

Jesus · Nov 30, 2009

Quote from The Big D:

This is again a trader rather than investor mentality. Even after MSFT and GOOG's "home run", they haven't established a dividend schedule that even begins to pay off their investors. GOOG pays nothing. MSFT pays next to nothing. It seems unlikely either ever will.

The only way to have profited on those stocks was to sell and leave someone else holding the non-dividend-paying bag. That's all well and good, but any time your strategy is to leave some other guy holding the bag, you're a trader rather than an investor. I have no problem with the trader mentality, but it's good to be clear about what you're doing.

WRONG.

Stocks are businesses. Businesses are valuable. They have valuable assets. They have future earnings potential, which in turn makes the company more valuable. Dividends are important, but you can certainly make an investment without the company you are buying paying dividends.

Limitiing your investments to ONLY dividend paying stocks is a close minded strategy that will limit your portfolio. Any asset that is deemed to be trading below its intrinsic value is an investment.

Warren Buffet, the best value investor in the world, has made plenty of investments that did not pay dividends.

The Big D · Nov 30, 2009

Quote from Jesus:

WRONG.

Stocks are businesses. Businesses are valuable. They have valuable assets. They have future earnings potential, which in turn makes the company more valuable. Dividends are important, but you can certainly make an investment without the company you are buying paying dividends.

Limitiing your investments to ONLY dividend paying stocks is a close minded strategy that will limit your portfolio. Any asset that is deemed to be trading below its intrinsic value is an investment.

Warren Buffet, the best value investor in the world, has made plenty of investments that did not pay dividends.

It's you vs. Benjamin Graham (who has already been quoted on the subject in this thread). If you don't like what he has to say, take it up with him

But while you're waiting to talk to him, you might want to ponder this question: if a company is nominally valuable, but never pays dividends and never intends to, and you have no hope of achieving voting control to force a dividend, how will you as an "investor" ever get access to any of that value?