Jeremy Scott Bailey is an investor, author, entrepreneur and host of the "What Works In Investing?" podcast now available on iTunes. He is the founder and CEO of Burgeón Group Inc., an investment advisory firm that focuses on serving families and individuals through active management.
1. What is the best investment advice you have ever been given?
Look for ideas where there is very little competition. Small and obscure is better than big and well known.
2. What level of math is needed in order to understand the entirety of finance and investing?
You will need to know basic math plus algebra. The math itself is not overly complicated and things like discounted cash flows can be done easily in programs like Excel. It is more important to know how to use the program correctly than to be able to write out a formula for discounting future cash flows.
3. Is "value investing" –Â Warren Buffett (Trades, Portfolio) and Benjamin Graham approach –Â a good investment strategy for long-term goals like investing for retirement?
The concepts behind value investing will help investors compound their investment capital over time and avoid losses from easily avoidable mistakes. If you compound for long enough, you will end up wealthy and will be in position to retire if you want to. Retirement itself is about cash flow more than assets. You can create cash flow in other ways, such as rental properties, your own business and don’t have to only rely on the stock market.
4. What should I know before I start value investing?
This is a very broad question. You should be familiar with the concept of Mr. Market, as described by Graham in "The Intelligent Investor"Ă‚ and the concepts of intrinsic value and margin of safety. Internalizing the idea of hunting for bargains is also important. Some people want to buy expensive things for ego purposes. Those people will never understand bargain hunting. Having a natural tendency to contrarianism will help. You should also be comfortable spending a lot of time alone thinking and reading. You will spend more time reading as an investor than just about any other pursuit.
5. How should one invest in a bear market?
Buy at the point of maximum pessimism like Sir John Templeton advised. One question to answer is whether the bear market is due to a recession that will impact valuations, or whether it is an overreaction to negative news. The best approach to bear markets is to have a list of companies that you really want to own, and what price you are willing to pay for them, then go shopping.
6. What are examples of sustainable competitive advantages?
Having an irreplaceable distribution system like Coca-Cola (KO, Financial) or being the lowest cost distributor with the largest selection like Amazon.com (AMZN, Financial) or controlling irreplaceable land like railroads or having mind-share and priceless catalogs of assets like Disney (DIS, Financial) are examples of sustainable competitive advantages.
7. What are the absolute best, most crucial tips/ideas to succeed in long-term investing?
Find them quickly but be prepared to wait for as long as it takes for the value to be realized by the market.
8. What are the essentials of due diligence when investing?
In my investment process I use a bit of the scientific method called the “null hypothesis.” I attempt to prove that an idea is a bad idea (prove the null hypothesis) as fast as possible so I can stop spending time on it. If I fail to prove that it’s a bad idea (fail to prove the null hypothesis) then I may have found a good idea. If more investors took this approach, I think that there would be fewer mistakes made. The next step is reading annual reports and 10-Ks, looking for all the possible risks until I have exhausted all information sources and still failed to prove it’s a bad idea. Next, I figure out the price I would be willing to pay for it.
9. What kind of stocks would you rather avoid holding because they are more risky than others?
Companies that don’t pay dividends and don’t have a good return on invested capital are dangerous. Companies whose fortunes rise and fall with the price of one commodity are “widow makers.” Any stock that is popular now may lose its popularity for any number of reasons that may prove catastrophic for shareholders.
10. What are some investment lessons you learned in 2016?
You should be OK with the worst-case scenario because sometimes it happens to a company. If the worst case is a total loss, don’t invest in it.
11. What discount rate do you use in your valuation?
I typically use 10% no matter what the bond yields are.
12. Which is more useful, earnings yield or P/E ratio? Why?
They are both useful in different ways. The earnings yield makes it easier to understand what investment returns you could expect from that company if you add the dividend yield. The (price-earnings) P/E ratio is one piece in determining how the company is priced in the market.
13. With just public information, how can you be confident that your valuation is correct while the market is wrong?
First, valuation is a range, not a single number. Ideally, your valuation should be done by several methods, such as a discounted cash flow, a private market valuation and a sum-of-the-parts valuation if applicable. If the market is valuing the company at a significant margin of safety from the lowest end of your range, you can be comfortable that you are buying it with a margin of safety.
14. What are the key attributes of a great investor?
There seem to be some similarities for sure. Typically they are patient and thoughtful, contrarian, bargain hunters and can control their emotions.
15. What are the best books about special situations investing?
"You Can Be a Stock Market Genius" by Joel Greenblatt (Trades, Portfolio) of Gotham Capital is pretty good. "Security Analysis"Ă‚ by Graham and David Dodd has a chapter on special situations. Additionally, I wrote up some case studies of some special situations I invested in with great results that you can download from my web site.
16. What skills are needed to succeed in distressed debt/special situations investing?
You should have a thorough understanding of the rights of different classes of bondholders, be facile with legal documents such as an Agreement and Plan of Merger, and you should understand Chapter 11 bankruptcy and its impact on various classes of creditors.
17. What are the best websites to follow for value investing-oriented investment ideas?
I like GuruFocus.com for coattailing, Seeking Alpha for commentary about ideas. ValueWalk.com has some great information, and my website whatworksininvesting.com is fairly new, but I’m adding content all the time. Personally, I have a pretty good process for generating ideas and usually have more ideas than I have time.
18. Who are the best value investors in the U.S. with under $1 billion in capital?
I like Carlo Cannell of Cannell Capital for small-caps, and I like Lawrence Seidman for small banks.
19. What are the best mutual funds for value investors?
I don’t have a recommendation, but I would find one run by a respected value investor.
20. For an individual relatively unsophisticated non-professional investor, what are the most undervalued asset classes today and what are the best funds or mechanisms to invest in them with a buy and hold mentality?
I don’t invest based on asset classes, I look at individual ideas. I would suggest that an “unsophisticated nonprofessional investor” either hire a professional investor to run their money or put their money in no load index funds.
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