invest.kleinnet.comInvesting

Last update: July 23, 2005. Contact: Mike Klein Note! I am not qualified, licensed, approved or authorized to make any investment recommendations or give any such advice. All data and information on this site is based on data from sources that are not under my control. I cannot guarantee the accuracy of any of the data, in fact I know of some significant data problems such as, but not limited to, incorrect stock splits that lead to radically incorrect prices. No investing decision should be taken based on the information on this site alone, and none of the information here is a recommendation to buy or sell any security!! Do the appropriate further analysis and due diligence before investing. I make no guarantees whatsoever about future returns using the methods or securities mentioned here. Background I look for temporarily undervalued yet high-quality assets that can be purchased at a substantial discount from their estimated, or intrinsic, value. This definition encompasses many possible investment ideas and I am open to any and all. In fact, most, if not all, asset classes rotate in and out of favor over time. Those that are out of favor generally provide more fertile grounds for finding bargains, but no asset class should be ignored for possible ideas as bargains may appear in any asset class at any time. To my knowledge, value investing is the only investing strategy that has been proven through many decades of real and fully documented results to provide excellent market-beating returns at low risk. Many other strategies exist but lack the basic requirements of proof: a very long track record (50 years or more if possible), a well-articulated and consistent strategy throughout, and returns with real money, regularly documented. In value investing's case, the basic tenets were set forth by Graham and Dodd in 1934 in the classic Security Analysis , adopted by Warren Buffett and numerous other extremely successful investors started in the 1950s after attending Graham's investing class at Columbia University. The finest evidence of this strategy's success is described in detail by Buffett in a speech in 1984, "The Superinvestors of Graham and Doddsville." Very few (but not zero) mutual funds continue this strategy, and all beat the market over long time periods. If anyone knows of other proven investing strategies meeting the requirements above, I would be very interested in them as well. I actively invest my own funds and spend the majority of my "work" time on investing -- learning and doing. I earn my income by investing. I do not nor plan to sell advice, data, stock picks, or anything like that. I share methods and results here in the hope that: Others may contribute ideas to improve the results In some small way, to help others become self-sufficient investors substantially beating the market, and thereby help reverse the trend of the last 30 years of investment firms taking control of investing away from individuals by mystifying the process to such a degree that ordinary people are too intimidated to invest themselves Warren Buffett identified four categories of investments that he followed in the 1950s and 1960s to extremely high success, and the two that I have become comfortable with are described below (Underpriced Stalwarts and Under the Radar). The two others, Arbitrage and Control Situations, where he amasses enough stock to take control of the company and thereby directly manages its capital allocation, are unlikely to be categories that I will find myself doing. Underpriced Stalwarts Strong, quality companies with excellent long-term growth prospects that have had some temporary problem causing investor overreaction and unwarranted stock price drop. Buying these at sufficient discounts and holding until the market's efficiency process corrects the price should provide average annual returns in the 20-40% range. Recent examples: Merck, Coke, Nokia. The BMW Method Screen (below) is the easiest way to find candidates for this investment type. Under the Radar Companies too small for any larger investor and usually not covered by analysts, often with poor recent performance but a strong upswing in progress, but sometimes just great companies that are too small for large investors. These could be turnarounds or rapidly growing companies. For safety, these should be selling well below even a conservative valuation, as these smaller ships are easily buffeted around in the winds (and sometimes storms) of the markets. These take a lot more work to identify, analyze, and track; on the other hand their businesses are usually simple and easy to understand, and there is a minimum of financial shenanigans. Sometimes these are companies that have some kind of substantial value locked within them and needs a specific corporate action to unlock it. These are usually fairly explosive stocks when their improved financial performance is proved out or their latent value is unlocked, and may triple, quadruple, or more in a short time. They are, however, difficult to find. Finding candidates for this category requires scouring the results of a number of screens and is my major focus at this time. Buffett has said that he could, today, guarantee an annual return of 50% if he were managing a small portfolio ($10 million or less) by fishing around for these types of companies. They are, of course, hard to find and are not on anyone's list of great investments. You have to find these yourself, and when you find them, bet a lot of the portfolio on them. Estimating a company's value is the hard part and there are many possible approaches. I have spent considerable time developing automated screens, and that is the focus of this web site. I have developed a number of screens that I run regularly and post results here and to The Motley Fool discussion boards. Some of these screens were developed with substantial input from other discussion board members. The screens are explained in more detail here and regular results are posted. Screens Being reasonably software proficient and with previous exposure to dealing with complex systems and data overload (engineering) I feel right at home developing screens for stocks, even with known imperfect and incomplete data. My goal with screens is to whittle down the universe of 8,000 or so public US companies, ADRs, ETFs, etc., with reported financial data to a small manageable number that can be analyzed in depth. To achieve any success, the screens need to have a good "hit rate"--stocks that pass the screen must have a decent number of truly good candidates among them. A "hit rate" of 20-40% is my target for decent candidates; but finding maybe 2 or 3 "great" candidates per year is the ultimate goal where the gain/risk tradeoff is such that I am willing to bet over 10% and up to maybe 30-40% of my total portfolio on such a choice. The screens do not attempt to find all companies that might be good investments, but focus on finding high-yielding small sets of companies. All screens are based on fundamentals (even the BMW Method screen, see below). Every test in every screen is based on some fundamental aspect of running a solid business. While I do some limited back testing, and collect statistics on how the screens operate, I do not tune a screen to provide the best results on historical data, since the more finely tuned a screen is to historical data, the less likely it will find good future investments. BMW Method This screen was inspired by the investment strategy articulated by Motley Fool member BuildMWell (BMW). It relies on detecting buying and selling opportunities for a stock by comparing its price movements over very long time periods (20, 30 years or more) to an "Average CAGR" (Compound Annual Growth Rate) curve for that stock's price. Another way to look at the BMW Method is as an implementation of a "reversion to the mean" strategy, i.e. the price of an asset may deviate, sometimes substantially, from some "...