Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (11) | Ignore Thread Prev Thread | Next Thread
Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 213747  
Subject: OT: Graham & Doddsville Fall Issue Date: 10/8/2012 12:04 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 15
One of my favorite free newsletters:

http://www4.gsb.columbia.edu/filemgr?&file_id=7312109

Includes a profile on Loews.
Print the post Back To Top
Author: bjustice7 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194747 of 213747
Subject: Re: OT: Graham & Doddsville Fall Issue Date: 10/8/2012 6:16 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
Interesting that Joel Greenblatt thinks that the market has only been more undervalued than today 13 percent of the time (page 9). I'd be interested to see his methodology...

Print the post Back To Top
Author: BenGrahamFollowe One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194749 of 213747
Subject: Re: OT: Graham & Doddsville Fall Issue Date: 10/8/2012 7:46 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 5
>>>Interesting that Joel Greenblatt thinks that the market has only been more undervalued than today 13 percent of the time (page 9). I'd be interested to see his methodology...<<<

He explained very clearly how he arrived at it. He used the Russell 1000 Index (which is the largest 1,000 U.S. stocks by market cap). He used the market cap weighted free cash flow yield for each day of the last 20 years. In only 13% of the days has it yielded a higher free cash flow than now.

He went on further to say when it has been this cheap it has given a 17% return over the next 12 months and a mid 30's over 2 years. He also said "It’s a very attractive time to invest in the market, despite the run-ups that we’ve seen in the last year."

Print the post Back To Top
Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194758 of 213747
Subject: Re: OT: Graham & Doddsville Fall Issue Date: 10/9/2012 9:05 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 3
He explained very clearly how he arrived at it. He used the Russell 1000 Index (which is the largest 1,000 U.S. stocks by market cap).
He used the market cap weighted free cash flow yield for each day of the last 20 years.
In only 13% of the days has it yielded a higher free cash flow than now.


That's an interesting value metric. Makes some sense, especially for non-financials.
The free cash flow yield at the moment is indeed high, though I've
only calculated the average for the last 11 years so far, so I can't
confirm where it sits compared to historical average values.
Above the ten year average, anyway.

But wouldn't the cash flow need a cyclical adjustment just as much as earnings would?
It's certainly not smooth: from Jan 2007 to April 2010 aggregate trailing US corporate free cash flow fell -68%.

Right now trailing aggregate US corporate free cash flow (the cash flow itself,
not the cash flow yield) is 22% higher than it was in the bubble years of 2006 and 2007.
That is a figure that certainly gives me pause.
If one thinks today's high level is the cyclically adjusted sustainable level of free cash flow, then maybe he's right.
Colour me dubious; there is always another recession coming, and
net margins tend to be pretty strongly mean reverting over the years.
It seems imprudent to assume that an oscillating function with seemingly strong
mean reversion is at a sustainable level when it's near an all time high.

FWIW aggregate trailing nominal free cash flow on my figures peaked in
March 2012 and has fallen steadily since, down -8.3% so far.
The free cash flow yield peaked in this cycle around September 2011 and
has fallen 17% since because the market valuations are up so much.
However as mentioned they are, as he points out, still pretty high.

Note, for all the figures above I used 1550-1700 firms rather than 1000 but the results
should be indistinguishable given how dominant the biggest 1000 are by cap weight.

Jim

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194761 of 213747
Subject: Re: OT: Graham & Doddsville Fall Issue Date: 10/9/2012 9:34 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
From reading Greenblatt's books and interviews over the years, I think one of the main points of his formula approach is to follow the data even in cases where there are concerns regarding individual equities in terms of the sustainability of earnings, etc. I read the G&D interview to basically extend that philosophy to the market overall ... so while earnings seem to be at unsustainable levels as a percentage of GDP and as a percentage of sales, perhaps this is part of the "wall of worry" that could propel stocks higher over the next few years.

I may be misinterpreting the formula approach or the G&D interview entirely but that's how I read it.

Print the post Back To Top
Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194763 of 213747
Subject: Re: OT: Graham & Doddsville Fall Issue Date: 10/9/2012 9:56 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
.. so while earnings seem to be at unsustainable levels as a
percentage of GDP and as a percentage of sales, perhaps this is part of
the "wall of worry" that could propel stocks higher over the next few years.


This can be sensible too.
The issue I like to address is "absolute" valuation; what something
is worth in a year of average valuation levels and average earning levels,
even though we may be at an above-average or below-average valuation level for a decade.
Current earnings and current cash flow are certainly what drives prices in
the shorter term, though that's starting to edge into the "beauty contest" realm.
Not value per se, but value as currently perceived.
It's not invalid, just a teensy bit closer to price prediction end of the spectrum.

Though I use both, I try to draw a firm intellectual distinction between
"X is cheap" and "the price of X is likely to rise in the short term".
Comparison of earnings yields and bond yields falls squarely in the latter category,
as do earnings rising or falling for purely cyclical reasons.
Too often you'll see someone saying "X is cheap due to Y" when they
really mean "the price of X is likely to rise because of Y".
Both good to know, but very different.

Jim

Print the post Back To Top
Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194777 of 213747
Subject: Re: OT: Graham & Doddsville Fall Issue Date: 10/9/2012 3:47 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
From reading Greenblatt's books and interviews over the years, I think one of the main points of his formula approach is to follow the data even in cases where there are concerns regarding individual equities in terms of the sustainability of earnings, etc. I read the G&D interview to basically extend that philosophy to the market overall ... so while earnings seem to be at unsustainable levels as a percentage of GDP and as a percentage of sales, perhaps this is part of the "wall of worry" that could propel stocks higher over the next few years.

I may be misinterpreting the formula approach or the G&D interview entirely but that's how I read it.


While I respect their opinions, I don't think there underlying assumptions make sense:

1. Margins are at new base levels higher because wages are a new baase levels lower. I see no indication that wages, even when sent overseas, stay low. In fact, I think China is finding that low cost workers

Print the post Back To Top
Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194778 of 213747
Subject: Re: OT: Graham & Doddsville Fall Issue Date: 10/9/2012 3:59 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
Sorry,

From reading Greenblatt's books and interviews over the years, I think one of the main points of his formula approach is to follow the data even in cases where there are concerns regarding individual equities in terms of the sustainability of earnings, etc. I read the G&D interview to basically extend that philosophy to the market overall ... so while earnings seem to be at unsustainable levels as a percentage of GDP and as a percentage of sales, perhaps this is part of the "wall of worry" that could propel stocks higher over the next few years.

I may be misinterpreting the formula approach or the G&D interview entirely but that's how I read it.


While I respect their opinions, I don't think their underlying assumptions make sense:

1. Margins are at new base levels higher because wages are new base levels lower. I see no indication that wages, even when sent overseas, stay low. In fact, I think China is finding that low cost workers are demanding and getting higher wages. The major factor in lower wages is business reluctance NOT to increase employment under ZIRP and the threat of recession. That should regress if/when unemployment decreases.

2. Looking back do we believe that interest rates can remain this low, and that devaluation will continue even with tremendous pump priming. This entire argument rhymes with those made with housing as people argued against a bubble. PLUS, eventually even with devaluation, the price devaluation of equities should decrease too.

3. I see no way that earnings overall can continue to rise tremendously faster than GDP. How does that work? Who is the last person in Brazil or some emerging country that must buy something before the model breaks down internationally.

I beginning to like this article by James Montier more and more every day.
https://www.gmo.com/America/CMSAttachmentDownload.aspx?targe...

Hockeypop

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194783 of 213747
Subject: Re: OT: Graham & Doddsville Fall Issue Date: 10/9/2012 6:39 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
I see no way that earnings overall can continue to rise tremendously faster than GDP.

I don't disagree at all ... Wasn't advocating for that view, only stating my impression of the argument.

Print the post Back To Top
Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194785 of 213747
Subject: Re: OT: Graham & Doddsville Fall Issue Date: 10/9/2012 8:35 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
I wasn't arguing with you, rationalwalk, but Greenblatt. Having read that article I think you nailed his thesis that the market should go higher. As perhaps the interviewer pointed out there are some VERY astute value investors who are very divergent about where the economy is headed.

I think Mungofitch points out that the goal is NOT to anticipate a turn, but to turn not long after a top, and always watch the "tea leaves."

While intellectually I agree, and have participated somewhat in this rise, it is just SO clear to me that this will turn "soon", and I have bet that way.

Of course the real trick is not to guess right once, but to guess right often.

Hockeypop

Print the post Back To Top
Author: upinefficientmkt Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194834 of 213747
Subject: Re: OT: Graham & Doddsville Fall Issue Date: 10/12/2012 7:31 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
<<<
He explained very clearly how he arrived at it. He used the Russell 1000 Index (which is the largest 1,000 U.S. stocks by market cap). He used the market cap weighted free cash flow yield for each day of the last 20 years. In only 13% of the days has it yielded a higher free cash flow than now.

He went on further to say when it has been this cheap it has given a 17% return over the next 12 months and a mid 30's over 2 years. He also said "It’s a very attractive time to invest in the market, despite the run-ups that we’ve seen in the last year."
>>>

This is an important insight by itself. Consider the possiblity of having a couple of moving averages linked to this metric. It may be more of a point in time observation with a probability forecast feature that can be updated daily/weekly/monthly... you get the picture.

I think it also important to note that he relates a story in the article of doing his own due diligence on a company that ranked high. Although he found great qualitative reasons for dismissing the ranking (the company was essentially losing a patent for its main profit stream), he stuck with his system, invested anyway and turned a hefty profit before the company's ranking fell and was sold.

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (11) | Ignore Thread Prev Thread | Next Thread
Advertisement