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Hi all,

In a Chatty Primer, Browne Makes the Case for Value Investing

By James Pressley

Oct. 25 (Bloomberg) -- Christopher H. Browne purchases stocks the way a thrifty gourmet buys Delmonico steaks -- on sale. When the price sinks to $2.50 a pound, you load up. When it rises to $12.99 a pound, you think about chicken.

You won't catch Browne buying Google Inc. at 55 times earnings. He prefers down-to-earth operations like Dae Han Flour Mills Co. of South Korea, which he found selling at less than one-third its book value in 2005. Browne trudges through data screens to uncover dull companies with shining balance sheets, and he loves prominent corporations that fall out of fashion.

He is, in short, a value investor.

Browne is a director of Tweedy Browne Co., an investment firm with $13.5 billion under management that follows the precepts of Benjamin Graham, the Columbia University professor who taught Warren Buffett to buy well-run, out-of-favor companies. After 37 years of practicing what Graham preached, Browne has distilled the creed into a disarmingly chatty primer, ``The Little Book of Value Investing.'

Value investing is easy to describe though tricky to do, as Buffett biographer Roger Lowenstein writes in his foreword to this gem: ``It consists of buying securities for less than their intrinsic worth.'

A value investor buys when others sell. Remember when health-care stocks fell in 1992 and 1993 because investors thought Hillary Clinton would nationalize the industry? Browne liked Johnson & Johnson. Were you nervous about travel after 9/11? Value hunters stocked up on American Express Co.

Buffett's Zoo

The idea that stocks can be undervalued contradicts the efficient-market hypothesis, which posits that share prices always reflect everything known about a company. A blindfolded monkey can pick stocks as well as most fund managers, the theory goes; winners are just lucky coin flippers.

Nonsense. Buffett, who's no monkey, shredded this argument in a 1984 speech. Suppose the winning coin flippers are all orangutans, he said. What if a large group of them ``came from a particular zoo in Omaha?' Was it luck -- or did those shaggy apes have something in common?

He then laid out the records of some of the most successful investors ever. They all came from the Graham zoo. Academic studies support this conclusion.

Why do so few people practice value investing? Browne and Lowenstein cite reasons ranging from temperament (you need patience) to anxiety (how do you know the stock won't stay cheap?). Another explanation, I'd say, is that Graham wrote in prose so academic it could stop a raging bull in its tracks.

Cheap Earnings

Browne, by contrast, sticks to the vernacular: ``Buy earnings on the cheap,' he writes, advising readers to purchase good companies selling at low multiples of their earnings. ``Buy a buck for 66 cents,' he counsels, describing how some stock sells below the company's book value per share.

Take Conzzeta Holding AG, a Swiss conglomerate active in everything from sheet metal to sporting goods. In 2003, Conzzeta was selling at about half its book value. The stock has since almost tripled from its 2003 low.

This is no glib, get-rich-quick book. Value investing involves drudgery. Browne's first job at Tweedy -- long before desktop computer search engines -- was ``to look through the Standard & Poor's and Moody's manuals for stocks selling below their book value.'

Digging for Dollars

My father still employs this technique. One day during the 1990s stock bubble, Dad went down to the public library and plowed through the Moody's handbook. He found a company then known as Ennis Business Forms.

``Its capitalization was limited to common stock,' Dad recalls. ``It had no debt at all.'

Ennis Inc. of Texas makes business forms, tags and labels. It confers no bragging rights at cocktail parties.

Dad paid about $10 a share. The price went down, so he bought more at $7. Ennis now trades at about $23. It has paid a dividend of 15.5 cents a share every quarter for years.

On the facing page in Moody's that day at the library was a high flier called Enron Corp. Dad turned the page.

``The Little Book of Value Investing' is published by Wiley (180 pages, $19.95, 13.99 pounds).

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At Chapter 12 I decided to thumb ahead, kinda looking for the Magic Formula for value investing. Drat. Just lots of hard, dreary research ahead. Is there a value stock screener out there somewhere to help me cut to the chase?
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Hi Pirate,

Most of the metrics Browne recommends using in the book can be handled with just about any web screen.

Personnally, I prefer MSN's screen which allows the user to enter formulas as part of the screen. But that's just what I've been using and am used to.

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Hi Rich,

Thanks for responding.

Is it possible for you to bullet-point the steps to do this? Bear with me. I've never used a screen but would like to learn how. I mean, I've gone to stock screener screens, seen all the variables, but do not know what they mean. I plug things in randomly, hoping the results will make some kind of sense. They never do.

I'd like to plug in whatever it is Browne refers to into some screen and see results I can comprehend.

Like they say, it's always difficult until you learn how. And I haven't yet found simple, step-by-step instructions to slowly walk me through stock screens and what the results mean. In King's English, that is.


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Hi CaribPirate,

Sure, I'll help you out.

First things first, do you have the "Deluxe MSN Screen" available here:

If not, download it and go ahead and play with it.

Let me know with another post/email that you've got it and that it seems to work.

Then, I'll work up a step by step and post it here.

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Super, Rich. Thanks. I'll download this, tinker around and get back with you later.

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If you're looking for companies and industries that Mr. Market hates at the moment, what do you think of home builder stocks? I own several, and am thinking about overweighting them, and can't see any reason at all not to.
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Thanks for the reply.

The way I look at it is the homebuilders are really cheap right now. The ones I own appear to be good business in that the fundamentals look solid. I'll never be able to predict a bottom, but I do believe that I have an acceptable margin of safety at today's prices. Even if the stocks do go down from here, I know that sooner or later they'll come back, and likely with a vengenance, so I would merely see a drop in price as a buying opportunity.

One part of my thesis is that when some of the outrageous and tricky mortgages that people have gotten into come to roost, a goodly percentage of these folks will need to downsize into smaller homes, causing more housing activity, although lower price points on average. We'll see how it all works out.
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If you don't mind me asking, which homebuilders are you most interested in and why? I don't know the industry that well, but if the Market carnage continues, I want to understand it better.
I own some HD right now because I think that's a safer way to play housing value. HD is too cheap and will benefit from less new-home construction.

I'm half-way through the book. If someone is well-versed in Graham/Buffett a majority of the instruction is repetative. However, there's many new perspectives including International Value investing.

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Hi brentvoss,

I own TOL, MDC and NVR. I am most interested in TOL.

I look at it like this: TOL is selling at a low valuation compared to what it historically sells at. Of the builders I considered, I view TOL as the most fundamentally sound (best margins, ROE, etc.). As clueless as I am as to how the housing market is going to perform in the short term, I'm betting a lot of money that it will not only return eventually, but will return with a vengeance. I'm pretty new at investing but I already see in myself that I like to dumpster dive...if a stock or an industry is beaten down, that's where I like to look. People are always going to buy houses, so the builder stocks will come back at some point.

There's an opportunity cost to money, however. I will continually invest money into TOL while it trades below historic valuation levels, believing that it will eventually again trade at the top end of those levels. The question is: how long will I have to wait? If I pump money into TOL and it sits or even goes lower for three years, then doubles from today's prices, then I'm the happiest boy in Toyland. If it flounders for 5-6 years, or we get stuck in a recession, then my investment won't be likely to beat the market, and/or provide an acceptable return.

I'm banking that this downturn in housing will last no more than about three years from today, and that TOL will bounce back quite nicely from today's levels, and even more nicely from any lower level it might get to. I plan on overweighting TOL and maybe some other builders (after doing some reading and thinking about how too much diversification does little else than guarantee mediocre returns) and am expecting to double my money by the end of the third year. I come to this conclusion without using any fancy DCF models or anything of the sort, but instead just doing my best to think about the home-building market, think about the economy, and understanding things like good businesses and reversion to the mean.

Hope this helps, and thanks for the question.
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For those who subscribe to The Prudent Speculator (TPS), a value oriented newsletter and huge market outperformer for greater than 20 years, you will see that their portfolio contains numerous builders and building related stocks. They continue to do well, as these have seen some appreciation as of late. The average holding period for TPS portfolio stocks is over 5 years, so it may take a while to see market beating returns.

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Rich wrote
"If not, download it and go ahead and play with it.

Let me know with another post/email that you've got it and that it seems to work.

Then, I'll work up a step by step and post it here."

I have completed the downloan, can you post the instructions?



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I too like value investing yet don't do much of it. I've been reading many of you're post and must say I like your style. I've even been to your social club board.

Want your opinion on my situation.

I have some IRAs (one Roth and one regular.) I plan on converting the old IRA to a ROTH as I understand the laws will be changing soon and allow me to do so.

I just started these as I feel like I have enough in the 401K to start funding IRAs.

ROTH amount: 4K
Sitting in QQQQ
Reg IRA: 4K
Also sitting in QQQQ and a little stock called HLEX. Love em' as they are making money hand over fist.
Individual account: 5K
Here I have GE, MSFT and QQQQ

As you can see I'm a little 'lazy' when it comes to investing, but I do tend to buy stocks based on value with the occassional buy on stocks like rule breakers (RATE). As for my 401K, I reposition percentage wise and rebalance once a year and I've averaged in the double digits over the long run. This is the approach I like as I can buy, hold and forget (Less worry) as well as force myself to buy cheap when I rebalance every year.

So, I have two questions for you.

1) If you were as lazy as me and wanted someone else to do most of the 'research' what would you do? Would you subscribe to one of the newsletters here or some where else or would you advise me to just stick with mutual funds altogether?

2) If you had 5K to invest in one stock with it in mind to fund your child's education in 20 years, what would that stock be? (I don't like 529 plans)

I hope I've given you enough detail about me to give an honest insightful opinion. (All other opinions are welcomed also)


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