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Secrets of the Value-Conscious Investor

As a researcher and practitioner of money mind training methods such as Zen Meditation and assisted hypnosis, I am very sensitive to words like “awakened” or “conscious.” Naturally, "The Conscious Investor," a new book by Dr. John Price, quickly became my favorite. I have studied and reconfigured hundreds of money minds over more than 20 years. I know first-hand that most investors are unconscious of the intrinsic values of their investments.

In addition, the unconscious or subconscious mind is an investor’s biggest enemy, which in essence is the temperament that Warren Buffett talks about. Now, most people believe temperament cannot be changed or rewired. My research shows otherwise. People can change if they really want to. It is true that most people are too lazy or too confident to embark on a conscious, and sometime painful, effort to reconfigure their money mind to value consciousness. But that doesn’t mean unconscious financial behaviors can’t be modified with the right training system.

According to a number of English dictionaries, “conscious” is defined as:

· To be awake or awakened to an inner realization of a fact, a truth, a condition.

· Aware of and giving value or emphasis to a particular fact or phenomenon;

· Intentionally conceived or done; deliberate.

The way of a conscious investor intrigued me. And there is no better way to learn more than asking the man himself, Dr. John Price, who personally programmed, tested and compared over 30 different stock valuation methods in his search for the best approaches. This led to the development of investment software called Conscious Investor®. It also led to his recent book "The Conscious Investor: Profiting from the Timeless Value Approach" (Wiley, 2011) in which he describes the assumptions along with the strengths and weaknesses of these valuation methods.

Dr. Price graciously agreed to answer questions from the Gurufocus Community. So if you have any questions about any valuation method, please post your questions as comments to this article. I will then assemble the questions, and ask Dr. Price to provide his value-conscious insights.

Please allow me to ask the first few questions:

Q: Thank you, Dr. Price, for agreeing to do extensive interviews with Gurufocus.com. As your name may imply, you are the “Doctor of Price and Value” (laugh)…so how would you define a conscious investor?

A: The biggest block to success in the stock market is unconscious investing, or following the crowd without asking the right questions such as: “What is the true value of Microsoft (MSFT)?” Even more fundamental is: “What rate of return can I confidently expect to get?” Unconscious investing without valuation methods is like trying to sail a boat without a rudder. Most people are unconscious investors in the sense that they blindly follow the crowd without a good understanding of underlying value. To help investors become more conscious of the value they get, I presented, in my book, each of the main valuation methods that can be used to calculate intrinsic worth and/or expected return, along with descriptions of how and when to use them, as well as their strengths and weaknesses.

Q: To spot opportunities around us, I always felt investors should be more conscious of the products they personally like. Millions liked Coke (KO), but few were conscious the opportunity right in their mouth. You, too, write about a second meaning to being a conscious investor. Can you explain more about that?

A: People have blind spots. For example, it would be more difficult if they attempt to evaluate and profit from companies that are not in alignment with their own social beliefs. Intellectually they might conclude investing in a, say, slot machine company would be profitable. But if they don’t like the spread of slot machines, any analysis would be hindered (perhaps unconsciously) by the pre-existing mindset.

On the other hand, we need to be more conscious of the products our society needs and likes. As Philip Fisher wrote many years ago, it is important to invest in companies with management of the highest integrity. Conscious investing introduces the idea of investor integrity or social responsibility. It means investing in companies with products and services that you use and believe in. After all, when we invest in a company we want more of its products and services to be sold. Conscious investing means thinking through the idea of what society would be like. In the end of my book, I stressed the two roles of conscious investing: the role of making money, and the role of providing capital to those companies that will play a positive role in society with minimum harm.

Q: What are some of the most important filters or checklist items used in your Conscious Investor software?

A: To get started, we filter on high and consistent return on equity and return on capital, and not too much debt. We also filter on consistency of growth in earnings and sales per share through a proprietary measure called STAEGR®, which is pronounced as “stay-ger” and is derived from STA(bility of) E(arnings) GR(owth). Finally the companies are filtered on the expected return under automatic margins of safety. This is like stress testing potential investments before ponying up any money.

Q: You covered 20 valuation methods in your book. What are the top three valuation methods that you like the most and why?

A: The most important step is to find successful companies with all the hallmarks that this success will continue into the future. Then we search among these companies for those that you can “buy” this success at the best price. I call this the Expected Return method. This method is described in Chapter 11. Later in the book, they are presented again along with the implementation of automatic margins of safety.

The next method I like is the Payback Method. This method calculates the time for an investment to “payback” the original price in terms of free cash flow, earnings per share or dividends. It takes into account the riskiness of receiving the payments so that potential investments can more easily be compared. Payback methods are covered in the chapter called “Don’t Get Mad, Get Even.”

Finally, I find it useful to track price to book or P/B ratios. On their own they are of little use. But when tracked over time they help to indicate the best times to buy. For example, this can be useful when considering an investment in Berkshire Hathaway (BRK.A)(BRK.B). The book looks at a range of balance sheet methods.

Q: How much time you usually spend with a 10-K from a company you never heard of? And how do you work with all those pages? From cover to cover? Or what are the first few sections you dive into?

A: After filtering the market down to a reasonable number of stocks, I download the 10-K. The amount of time I spend on it varies with the company. Usually I will start by reading the Business Overview. Then I would follow by searching on key terms such as risk and debt.

I also look at the Proxy Statement with particular focus on the section “Compensation Discussion and Analysis.” Although the level of compensation is important, more important is the method of determining bonuses. I look that bonuses are genuinely in alignment with the interests of shareholders, the real owners of the business. I prefer bonuses to be awarded in achieving thresholds in earnings per share rather than growth in total shareholder return or operating income. When bonuses are in terms of growth in operating income management can be rewarded by making foolish acquisitions. They can pay too much but the acquisition can still increase operating income.

Q: How do you search for bargains? What are some of your preferred search methods?

A: First and foremost are quality businesses, the sort of businesses that I would be willing to hold for a long period. Once this is done, it is a question of setting target prices based on everything that I have written above, including margins of safety. If the current price is below the target price, I can buy straight away. Otherwise it is a question of waiting until Mr. Market is feeling depressed and is willing to sell me the stock I want at the price I am willing to pay.

Calling for Tougher Valuation Questions for Dr. Price

This is the first part of my interview with Dr. John Price, author of "The Conscious Investor." To make this more interesting and valuable to you, the intelligent and conscious reader of Gurufocus.com, I would like to invite you to post here any questions you may have about all types of valuation methods, or any question you may have after reading Dr. Price's new book. I will then compile all our questions to pick the mathematical brain of Dr. Price.

As value investors, our biggest enemy is what we don’t know or are unconscious of. So what are your blind spots? What problems do you have when you try to be more conscious of the values around you? We need your help to come up with the best questions about the best valuation methods.

About the author:

Dr. Zen
Brian Zen, CFA, PhD, author of "Superinvestor Lecture Notes", serves as Chief Investment Strategist at Zenway Group, a New York-based registered investment advisory firm providing asset management services, training Certified Securities Appraisers (CSA), and teaching Graham-Buffett Value Investing. Previously, Brian served as vice president at JPMorgan Chase and portfolio manager at Prudential-Bache Securities and Janney Montgomery Scott, while teaching graduate-level investment analysis at St. John's University. Brian was a Bernard Baruch Fellow and graduated summa cum laude from Bernard M. Baruch College. He is also a graduate of Columbia University's executive program in value investing. Brian appreciates your feedback at: bzen@zenway.com

Visit Dr. Zen's Website


Rating: 4.4/5 (19 votes)

Comments

Lucia Wang
Lucia Wang - 2 years ago
Question: The expected return method seems to rely on future earnings projections and the terminal value at the end of the projection period. Many believe those projections are less reliable than asset value and replacement value. What do you think?
cyrano
Cyrano premium member - 2 years ago
Dr. Price,

Your method places a very high priority on predictability of earnings and revenue, do you think the market will ever go through extended periods of time (4+ years) where you could lose money because the equities are priced too high? Thanks!
thomascapital
Thomascapital - 2 years ago
Dr. Price,



How do your models incorporate / predict the future by using historical data IF despite consistent historical data the future will not replicate the past? My point being, no matter how great a company's historical data is, the future will only prove to replicate the past et ceteris paribus. Even the largest moats fall over a long enough time span. Oh, and please don't say something like "If company X traded at 15 times earnings historically, I assume it will only trade for 12x earnings to incorporate a margin of safety. That is not an acceptable answer.

mungerism
Mungerism - 2 years ago
Warren Buffett once summarized Ben Graham's teachings into the three cornerstones of sound investing? What would you say if you were to summarize conscious investing into a few fundamental ideas?

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