Want straightforward advice on how to bag a bargain? Read the investing secrets of a top US fund manager.
"Therefore a wise man, while regarding contraries as identical, adapts himself to the laws of nature. This is called following two courses at once."
The Way of Chuang Tzu
Eh?
If want to read some wisdom you can understand without spending twenty years clapping one hand in a cave try this question and answer session with Whitney Tilson, printed in the FT last month. Here's his take on the North and South Poles of investing:
"The distinction between growth and value is largely meaningless to true value investors - as Charlie Munger once said, 'All sensible investing is value investing. Growth is merely one component of value."'
Tilson, a fund manager and former writer for our sister site, Fool.com, doles out what seems to be just common sense but is actually the distillation of success, failure and contemplation. Note that he asks one questioner looking for simple rules of thumb for valuation "Are there any simple rules of thumb for landing a plane?"
Nevertheless he gives us some of the maxims from his investing method:
- Pay up to a P/E of fifteen for a great company, twelve for a decent one and ten for a poor one. This doesn't apply if you are buying a business for its assets.
- Sell a share when it reaches its intrinsic value (your calculation of what the company is worth) or if you need the cash to buy an even cheaper company.
- Revise your intrinsic value calculation and sell/hold/buy decision as news emerges. If the share price has risen and the company is doing better, its shares may still be cheap.
- Buying at a discount to tangible book value gives downside protection. The worse the business is, the bigger the discount you need.
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"Cheapness is a catalyst." It's a big plus if you can see a value "outer" (as it's known on our Value Shares Discussion Board) coming, but if a company is simply very cheap, then just buy it.
I'd have avoided a few disasters if I'd followed the first rule. Some years ago I bought Matalan
(LSE: MTN)
when its PE was 18.4. That looked cheap for a business growing at 33%. The price had crashed 70% from its peak and I thought that gave downside protection. Wrong! Twelve months later I had was 40% down as sales growth slowed. Another two months saw the chief executive gone and a 50% loss.
I've also overpaid for media companies ITV
(LSE: ITV)
and SMG
(LSE: SMG)
on hopes of sector consolidation. The P/Es were high and downside protection low. I knew I was breaking my value rules but I still did it.
Before you grab the control stick on your broker account and land some big bargains, heed Tilson's most important piece of advice -- "There are indeed rules of thumb that I and other seasoned investors use, but knowing when to use them - and, critically, when NOT to use them - can only come from many years of experience."
More:
The Perils Of Investor Overconfidence | Whitney Tilson's Website
