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Mariusz Skonieczny, Classic Value Investors: On your website, you say that for years you were a typical clueless investor following advice from so-called stock “experts” and as a result, you were constantly losing money. What was the determining factor that made you make the transition to value investing?
Jacob Wolinksy, Value Walk: I was always interested in investing since I was a child. I made some big money during the tech bubble specifically in AOL stock. Now in hindsight I realize it was entirely due to luck. After that it was all downhill, I lost money in the tech bubble crash and even in the bull market that started in 2003.
One day I was browsing a website, as far as I recall it was not even a financial website. I found an ad advertising a free copy of a book that Warren Buffett described as the “best book ever written on investing” if you sign up for a for a free trial for some product. I did not sign up for the free trial but I found out the book was called The Intelligent Investor by Benjamin Graham. I took out a copy from the library and realized right away that the mistakes Graham described were the exact mistakes I made. I went on to re-read the book several times and knew right away that value investing was the way to go. I went on to re-read from the other greats Buffett, Dreman, Lynch, Neff, Greenblatt, Klarman etc. and since then I have been hooked.
Mariusz Skonieczny, Classic Value Investors: What types of investors are likely to benefit from your blog, Value Walk, the most?
Jacob Wolinksy, Value Walk: I thought my site would attract mostly new to intermediate investors. However, I am pleasantly surprised that my site is also attracting some really experienced value investors. After posting one of my few first articles on Guru Focus I got an email from Alice Schroeder (author of bestselling The Snowball) telling me much she loved my article about Buffett. I use statcounter and see that I get daily hits from the big Wall Street firms, and occasionally get hits from top value firms like Baupost Group, Pershing Capital, Royce Funds and more.
In fact one of my early emails was from a hedge fund manager in Europe. He manages several billion in his value hedge fund and has crushed the European index for about ten years. He loved one of my articles so much that he asked it to reprint it on his site.
So to answer your question in a roundabout way I would think my site is more geared towards beginning and intermediate investor. However, it seems I attract investors who are probably a lot smarter than me!
Mariusz Skonieczny, Classic Value Investors: Recently, you started another website, Value Investing Forum, in order to exchange investing ideas. Tell us more about it
Jacob Wolinksy, Value Walk: I realized that there is no real value investing website page like a SeekingAlpha type of website but value oriented. I would have ideally liked to start a website like SeekingAlpha that was devoted to value investing with a forum as part of the website. The only problem is that it would require lots of time and I simply do not have the time for it.
Therefore I opted to just focus on the forum for now.
Mariusz Skonieczny, Classic Value Investors: Why did you start it? There are other websites such as Value Investing Club or SumZero that exchange investment ideas. How is your website different from what is already available to investors?
Jacob Wolinksy, Value Walk: Value Investing Club is very elite and only accepts 250 members. Sum Zero is exclusive but less so than Value Investing Club. In addition both sites require members to post articles several times a year which I know many members find inconvenient.
On the other hand you have message boards like Yahoo where anyone could post. People post about tech analysis, their “brilliant” market forecasts, pump and dump schemes etc.
My goal with Value Investing Forum is to create a forum where there is a level of competency and where there are no posting requirements. I also like the forum because I knew everyone who I invited to the forum, and I know these are people I could trust. Of course I hope the forum gets big enough that I won’t know many of the members.
Mariusz Skonieczny, Classic Value Investors: Is Value Investing Forum open to everyone or do members have to be approved? What kind of qualifications does one have to have in order to be part of the forum?
Jacob Wolinksy, Value Walk: The forum is not open to everyone. Initially I invited people that I knew personally, who were competent value investors. In fact, probably almost every single person I invited knows more than me! I just figured someone had to start the forum even if they were not the best in the forum. We have a nice crowd; some hedge fund managers, mutual fund managers, analysts, bloggers, and some non finance people who have been value investing for several years.
The forum is very new so in the future we will have to determine eligibility. I co-manage the forum with a colleague Alex Garcia so it will be a joint decision. The criteria will likely be someone who runs a value site with rich content, works for a value firm, or can send a write up they did on a stock. Not requirements that are too high, but preventing people who know little about value investing from being accepted.
Mariusz Skonieczny, Classic Value Investors: Can nonmembers view investing ideas?
Jacob Wolinksy, Value Walk: Right now non-members can view. However, this policy might change in the future. Right now we are trying to attract people to the forum and we are very new. However, in the future if the forum gets large enough I would prefer only allowing members to view.
Mariusz Skonieczny, Classic Value Investors: Is there a cost associated with being a member of Value Investing Forum? What about being able to view other people’s ideas?
Jacob Wolinksy, Value Walk: No cost whatsoever and we never plan to charge in the future! In fact we lose money on the forum due to hosting costs and purchasing the domain name. In addition, we spent time putting together the forum, and we spend time moderating it. Sometimes I ask myself why I do it!
But I like what I am doing because I feel that the forum will provide a good platform for value investors to exchange ideas. In addition, I gain ideas that I might use myself to invest in. I heard that the reason Joel Greenblatt runs Value Investor Club is because he gains tons of ideas for himself. However, for us this is not the main goal.
Mariusz Skonieczny, Classic Value Investors: How many positions do you hold in your portfolio? What is your view on diversification?
Jacob Wolinksy, Value Walk: Currently I hold about 45 positions in my portfolio. I used to hold more but I have been doing a lot of selling lately so it is now around 45. I post my positions on my website so my readers can see the stocks I hold http://valuewalk.com/about-2/my-portfolio/.
I waver back and forth in my head whether I should be more concentrated or not. I think there are valid arguments to both sides of the debate. I think this can be demonstrated by the fact that you find many great value investors on both sides of the aisle.
I think I am slightly more inclined towards a concentrated portfolio. The reason my portfolio is diversified now is because as the market was declining in 08 and early 09 I kept finding lots of cheap stocks and kept buying. Now as bargains become less available I probably will revert to a more concentrated as it is harder to find true bargains today.
Mariusz Skonieczny, Classic Value Investors: Do you emphasize quantitative, qualitative methods or both when analyzing companies?
Jacob Wolinksy, Value Walk: I definitely emphasize quantitative methods in analyzing stocks. That being said I of course prefer both. However, if it comes down to one or the other I prefer “cigar butt” stocks that are selling cheap that lack qualitative features.
Mariusz Skonieczny, Classic Value Investors: You use more than one method of valuing companies. How would you describe your valuation techniques?
Jacob Wolinksy, Value Walk: I do not have a specific approach I use to my investments. In general, I would say Benjamin Graham, David Dreman and John Neff have had the greatest influence on my investment style. That is usually “cigar butts” companies that are selling really cheap.
However, I will not limit myself to their style. For example my largest holding is Nucor which I believe just surpassed US Steel as the largest steelmaker in America. I will probably hold the stock for many years unless there is a really adverse change to the company. The company has an excellent balance sheet, has paid continuous dividends since 1966 I believe.
Nucor also has a shareholder friendly management. When the company has a good year (which it does most of the time) they pay a special dividend. So even though the dividend yield is about 3% most years you get a 6% dividend. The company achieves amazing returns on capital, earnings and investments. The company now is relatively cheap but I would probably continue holding it even if it went above my estimation of intrinsic value. Now, this would be anathema to Graham and other classic value investors, however it would fit more with Buffett’s type of approach.
Mariusz Skonieczny, Classic Value Investors: Does the size of the company matter to you?
Jacob Wolinksy, Value Walk: No, company size does not matter. I own stocks that range from a few hundred million dollars in market cap to over 100 billion in market cap. I look for wherever I can find value. During January and February 2009 I was finding huge bargains in large caps and was scared to buy small caps in case we did enter a depression I thought large caps would be able to muster it better. At that time I was overweight large caps; however that was due to a unique circumstance.
That being said, I do prefer small stocks. Value small stocks perform the best historically. Many people believe growth small stocks outperform large caps but this was disproven by David Dreman. I did some research into the topic and it appears he is right. However, value small stocks are by far the best performing stock class.
Also, small caps are neglected by analysts and one has a better chance of finding value there. There are also many more small caps to choose from than large caps. So even though I will buy a stock based on value and not market cap I slightly prefer small caps.
Soon I will be doing research for a value hedge fund that focuses exclusively on value nano-cap companies. They take over really small companies trading far below their intrinsic value. They then get on the board, take an activist role, and try to turn the companies around and then sell for a large profit. So, I hope to gain some further experience in the value nano-cap/small-cap investing through this work.
Mariusz Skonieczny, Classic Value Investors: What advice would you give to beginning to intermediate investors?
Jacob Wolinksy, Value Walk: I will tell you the advice I give everyone. Never take stock tips from anyone. It could be your brother, your stock broker or the “expert analyst” on CNBC. The main part of investing is controlling your emotions. This is not as easy as it sounds! I was value investing for years and when the market tanked after Lehman collapse I kept buying and buying. This was really hard as every stock I bought kept going down more and more. It was one of the most emotionally difficult tasks of my life but I ended up being rewarded very handsomely. I did all the buying I could while maintaining enough cash to invest in case the market went down further. I also had to sell some undervalued stocks like Coke at 38 to buy even more undervalued stocks like Caterpillar at 25.
That being said value investing is not for everyone. I always say value investing is contrary to human nature and therefore most people cannot practice it. No matter how many beginning investors I tell about value investing they just do not get it. I provide evidence of its outperformance and they still do not get it. I forget the exact quote from Warren Buffett but either you get it right away the concept of buying a $1 for 50 cents or you don’t.
Of course having the right sentiment is not enough. You must learn some value techniques and know accounting. Once you have the right sentiment, have learned about calculating intrinsic value you might be ready to start investing.
Mariusz Skonieczny, Classic Value Investors: What five books would you recommend to someone just starting out in investing?
Jacob Wolinksy, Value Walk: If we are talking about people who know nothing about investing I would first recommend they read up on asset allocation. William J. Bernstein, and John Bogle, and even Burton Malkiel have several good books on the topic. I do not agree with all of them completely. Burton Malkiel is a huge proponent of the efficient market theory; however 90% of his advice is relevant for the beginning investor.
In terms of value investing my top five books for beginners would be
1. The Intelligent Investor by Benjamin Graham
2. John Neff on Investing by John Neff
3. Contrarian Investment Strategies: The Next Generation by David Dreman
4. The Essays of Warren Buffett Lessons for Corporate America by Lawrence Cunningham
5. Money Masters of Our Time by John Train
Mariusz Skonieczny, Classic Value Investors: Would you share a recent investment and why you chose it?
Jacob Wolinksy, Value Walk: To be honest I have been doing a ton of selling lately. I mentioned this a little bit earlier in the article. I have found the bargains from 2009 and 2008 are no longer available.
The only security I bought recently is an ETF. The ETF is ticker JOF which is an index of smaller cap Japanese stocks. When I bought it, it was selling at less than book value. I try to avoid ETFs but Japanese equities are outside my level of competency and therefore opted for the ETF. Japan faces large problems including a huge Government debt, and what I think is an even bigger problem; an aging population in a country with low immigration and low birth rates.
That being said, Japan has experienced a 21 year bear market. I think Japanese securities especially small cap in particular might do very well over the coming years. I am trying to increase my area of competence in Japanese stocks by communicating with my close colleague Steven Towns of www.steventowns.com. Steven Towns is a genius value investor who focuses almost exclusively on Japanese stocks. I will never buy a stock on his or anyone else’s recommendation but he gives me good leads, and he is trying to help me understand the Japanese market so I can do some of my own research.
I still think there are bargains in the US market. I did a quick screen a few weeks ago and found over 1800 stocks selling below book value. Besides Japan, I plan on focusing some energy on finding value in select US equities however; it will take more effort than in the past few years.