Question 1. (grol1971) Traditionally your portfolios have been very focused. What do you think about the Bruce Berkowitz's investment in PFE, which accounts for more than 20% of Fairholme Fund.
Question 2. (grol1971) Could you share your thinking about the relationship among long-term earnings stability, long-term ROE/ROIC and valuation levels (PE, PS)? How do you think about the dynamics of these three variables when valuating a company?
Question 3. (batbeer2) Some notable investors such as Benjamin Graham, Philip Fisher and yourself are also well respected teachers. In your view, do good teachers and intelligent investors share any particular qualities ?
Question 4. ([email protected]) In the magic formula investing you suggest a simple scheme of buying the cheapest stocks and sell them every year after a year. A few questions:
- How do you ensure that beyond the statistics there is nothing else that is going on about the company which will cause its value to remain depressed or worse go down?
- Do you actually use the magic formula for any of your investing? If yes what are the additional criteria you use once the magic formula has identified the first set of stocks?
A few additional questions:
- How often do you evaluate your portfolio and when do you decide to sell a stock?
- What are the key attributes of being a successful investor?
- What is the best way to get into asset management? I have been investing on my own and pretty successfully and I am now looking at opportunity to manage money for others.
- What are the some best sources to get good investment ideas.
Question 5. (charliet) it seems from your portfolio that you weren't very active in the market in the past two years. You had a concentrated portfolio before and recently you came back with a very diversified portfolio in 2008. Then it seemed that you sold almost everything. Was it because you saw the crash coming? Why did you switch funds and can we invest in your new fund? If so, how? What do you see the market and the economy doing in the next few years?
Question 6. (valueradar) In your magic formula, you use return on capital and earning yield to rank the companies. It seems that we will get a lot of cyclicals at their earnings peak, when the earning yield is high and return on capital is high, too. However, that is the worst time to invest in cyclicals. How to avoid this with the magic formula?
Question 7. (valueradar) Do you think you learned any lessons from the great market crash of 2008? if yes, what are those?
Question 8. (valueradar) 2008 was a bad year for value managers. A lot of very respectable value managers lost around 50% or even more, and had permanent losses. What do you think went wrong with value investing?
Question 9. (valueradar) Do you think the macro economics important in value investing? 2008 seems to prove that micro economics is extremely important.
Question 10. (jonmonsea) Buying companies with high ROIC and low P/E was the strategy of your last book. Going forward in what Bill Gross has termed a "new normal," how do you look at sustainability of ROICs across the market, esp. as they relate to various industries, now that leverage is less easily available. Do you see the market returning 3% after inflation with 10% ROIC, or what? Where do you see the most sustainable moats in preserving relatively un-leveraged ROICs, where the companies are selling at attractive earnings yields? Industries/specific names...?
Question 11. (nport) why does your revised website not continue to list ROIC and Earnings Yield for each selection? I like to do my own analysis and found these numbers very useful. Is there some way, you might reincorporate them for they give great meaning to your insights!
Question 12. (buffetteer17) I suspect that Magic Formula investing has not done well from about Oct. 2007 to Apr. 2009, simply because pretty much all stocks got beaten down. Of course it isn't intended to work well for such short periods of time. What if a conservative investor followed the Magic Formula through this period, but was short the major market indices (S&P, Russell, or others)? How would he have done? In other words, in this current bad time as well as other bad times for the market, did the Magic Formula continue to beat the market averages?
Question 13. (buffetteer17) Since the Magic Formula ranks stocks from best to worst, it is possible to produce a list of the worst stocks as well as the best. How would an investor who shorted the worst stocks have done?
Question 14. (goulzc) The variables you suggest to use in your magic formula (p/e, roe) are based on accounting figures which we know are only approximations of the economic reality underlying the true performance of the firm. Do you make any adjustments to the accounting figures used in your formula and if so which ones.
Question 15. (djswinney) In my opinion your two books are the best investing books out there. Do you have any plans to write another one? If so when and what will it be about?
Question 16. (Callaquin) Your fund's returns (gotham) greatly outperformed other value and "value" funds. What would you say were the seven most important things that gave you (and continue to give you?)an edge over lesser managers?
Question 17. (Callaquin) what is the amount of leverage if any used by the fund during it's operation?
Question 18. (jdt) Because free cash flow growth requires not only high returns on capital but also a reinvestment opportunity, have you explored adding a criterion to the screen that would indicate the presence of a significant opportunity for reinvestment?
Question 19. (chumash) Can you recommend financial instruments with asymmetrical return qualities (high upside but limited downside) that allow you to express a view on a particular stock, sector, or economic event.
For example, John Paulson shorted the bonds of the lowest tranches of CDOs backed by subprime mortgages to express his view that overall sub-prime mortgages defaults were going to rise. His downside was the spread with treasuries (which in 2007 was only 100bps) while his upside was a 100% return if the low tranche bond was wiped due to a mere 200-300 bps increase in mortgage default rates. A great call for Paulson but more impressively was how he figured out the optimal instrument to express his views.
Question 20. (chumash) To followup on my previous question, what instrument would you recommend to use if you believe that interest rates will rise in the next 6m, 1yr, 2ys.?
We will keep the door open for a couple of more days till this Friday. If you ever wondered whether and how Magic Formula Investing works, raise your hands and ask the question you always want to ask. You will be answered by the inventor himself.
Registered users (including Free Members) can continue to post questions by replying or commenting on this thread.