As the chief investment officer at Fremont Investment Advisors, Nancy Tengler employed the value approach she describes in her book,New Era Value Investing.
Chapter 7
In a similar vein to the previous chapter, Tengler now describes specific stocks that she has bought as a result of using RSPR, the method described in Chapter 4. She notes that the types of stocks this method picks up, as opposed to RDY, tend to be more growth oriented, but are still fallen angels of sorts, since they would not qualify as bargains unless they had a relatively low price to sales ratios.
Throughout the technology boom, Tengler notes that RSPR underperformed the market, as the expensive, high-flying stocks were the securities that rose the most. But during the bust, RSPR stocks outperformed their peers, as stocks with high price to sales ratios came crashing down.
Intel (INTC, Financial) is a company that appeared cheap on an RSPR basis in 1988, 1991, and between 1995 and 1996. Despite a strong market position, Intel's earnings would be pressured near the end of a product cycle, as competition would compress the company's margins. This has allowed value investors to take advantage and get in at attractive prices. From 1999 to 2000, however, RSPR suggested Intel was a major "sell", and so the investor was afforded an opportunity to take profits prior to the crash.
Other stocks this method has resulted in identifying are Estee Lauder (EL, Financial) in 2002, Microsoft (MSFT, Financial) in 1995, Oracle (ORCL, Financial) in 1997, Disney (DIS, Financial) from 1999 to 2001, The Home Depot (HD, Financial) in the mid 1990s, Nike (NKE, Financial) in 1998, and Cisco (CSCO, Financial) in 1994, 1997 and 2002.
Occasionally, stocks will become undervalued according to both RDY and RSPR at the same time. These stocks are usually former high-flyers that have reached a stage of maturity. Tengler suggests investors switch to using the RDY method only for evaluating such stocks, as the RSPR method may not longer apply. RDY is also described as the more rigorous method.
Chapter 8
Now that the selection of individual stocks has been discussed, Tengler turns to portfolio construction.
The first thing the investor should determine is the level of concentration in the portfolio. Tengler argues that fewer than 20 stocks are needed for proper diversification, but in her institutional portfolio she carries between 25 and 35 issues. This is due to the fact that clients are decidedly against volatility. Spreading the wealth around helps reduce volatility, even if it means putting money in one's 35th favourite idea rather than putting more money in one's favourite idea.
Tengler argues that the second most important aspect to building a portfolio is buying only the "best" companies. Effort in fundamental stock research aids the investor in this endevour.
Tengler further argues that investors should incorporate both RDY and RSPR (described in Chapters 3 and 4) rather than choosing one or the other. Often, one of these forms will be out of favour while the other can boost results. Furthermore, as the universe of RDY-type stocks declines, investors will still have the ability to apply the value framework by employing the newer RSPR.
Investors should also consider the correlation between issues in their portfolios. Some sectors will do well while others will stall, and so stocks with low correlation to other stocks in a portfolio provide protection against volatility.
Finally, Tengler shares how she maintains buying and selling discipline. She prefers to average into a stock, since she doesn't believe she can predict the bottom. She will start with a position that's around .5% of the portfolio, and spread her buys over time until she has accumulated an amount representing about 3-5% of the total portfolio. At no point can one single position occupy more than 6% of her portfolio, therefore she will begin to sell if the prices moves up such that this occurs. Once the price hits the sell level, she will look to exit her position completely lest the price drop back down. Tengler will also use stop-losses (using money management software) to protect from large one-day or one-week declines.
Tengler closes the chapter by discussing some of the mistakes she has made in her portfolio. The lessons that are illustrated in these mistakes are:
1) Beware of newly merged companies with different operating profiles (e.g. AOL Time Warner)
2) Beware of new companies with short operating histories
Chapter 9
Various low P/B or low P/E indexes have been created in order to separate out value and growth stocks. However, separating out stocks based on a single metric can lead to misleading results. Tengler argues that investing in second-rate companies in slow-growth industries that trade at justifiably low P/E ratios does not constitute value investing. Instead, buying the best companies relative to their peers and their own valuation history is a more legitimate value-oriented strategy.
Furthermore, most companies will shift between value and growth categories repeatedly, making it difficult to pigeon-hole them into one particular style. Tengler illustrates this point using examples of defense stocks (which have gone from growth to value to back again depending on war policy) and technology stocks (which went from growth to value after the bubble of the late 90's).
Tengler discusses Buffett's purchase of Coke as a great example of there being a blend between growth and value. While Coke has been a growth stock for most of several decades, it has run into its share of temporary problems that made investors reduce its P/E ratio. This is a great example of a value purchase, even though the P/E was high enough to scare off investors who look only at P/E ratios.
Tengler argues that it doesn't matter whether a company is considered growth or value across a few metrics. What's important to investors is that it is a strong company that trades at a discount relative to its own history and relative to its peers. Whether that company is a growth stock or a value stock, it is attractive and should be purchased.
Saj Karsan
http://barelkarsan.com
[img]file:///C:UsersericAppDataLocalTempmsohtmlclip1
Chapter 7
In a similar vein to the previous chapter, Tengler now describes specific stocks that she has bought as a result of using RSPR, the method described in Chapter 4. She notes that the types of stocks this method picks up, as opposed to RDY, tend to be more growth oriented, but are still fallen angels of sorts, since they would not qualify as bargains unless they had a relatively low price to sales ratios.
Throughout the technology boom, Tengler notes that RSPR underperformed the market, as the expensive, high-flying stocks were the securities that rose the most. But during the bust, RSPR stocks outperformed their peers, as stocks with high price to sales ratios came crashing down.
Intel (INTC, Financial) is a company that appeared cheap on an RSPR basis in 1988, 1991, and between 1995 and 1996. Despite a strong market position, Intel's earnings would be pressured near the end of a product cycle, as competition would compress the company's margins. This has allowed value investors to take advantage and get in at attractive prices. From 1999 to 2000, however, RSPR suggested Intel was a major "sell", and so the investor was afforded an opportunity to take profits prior to the crash.
Other stocks this method has resulted in identifying are Estee Lauder (EL, Financial) in 2002, Microsoft (MSFT, Financial) in 1995, Oracle (ORCL, Financial) in 1997, Disney (DIS, Financial) from 1999 to 2001, The Home Depot (HD, Financial) in the mid 1990s, Nike (NKE, Financial) in 1998, and Cisco (CSCO, Financial) in 1994, 1997 and 2002.
Occasionally, stocks will become undervalued according to both RDY and RSPR at the same time. These stocks are usually former high-flyers that have reached a stage of maturity. Tengler suggests investors switch to using the RDY method only for evaluating such stocks, as the RSPR method may not longer apply. RDY is also described as the more rigorous method.
Chapter 8
Now that the selection of individual stocks has been discussed, Tengler turns to portfolio construction.
The first thing the investor should determine is the level of concentration in the portfolio. Tengler argues that fewer than 20 stocks are needed for proper diversification, but in her institutional portfolio she carries between 25 and 35 issues. This is due to the fact that clients are decidedly against volatility. Spreading the wealth around helps reduce volatility, even if it means putting money in one's 35th favourite idea rather than putting more money in one's favourite idea.
Tengler argues that the second most important aspect to building a portfolio is buying only the "best" companies. Effort in fundamental stock research aids the investor in this endevour.
Tengler further argues that investors should incorporate both RDY and RSPR (described in Chapters 3 and 4) rather than choosing one or the other. Often, one of these forms will be out of favour while the other can boost results. Furthermore, as the universe of RDY-type stocks declines, investors will still have the ability to apply the value framework by employing the newer RSPR.
Investors should also consider the correlation between issues in their portfolios. Some sectors will do well while others will stall, and so stocks with low correlation to other stocks in a portfolio provide protection against volatility.
Finally, Tengler shares how she maintains buying and selling discipline. She prefers to average into a stock, since she doesn't believe she can predict the bottom. She will start with a position that's around .5% of the portfolio, and spread her buys over time until she has accumulated an amount representing about 3-5% of the total portfolio. At no point can one single position occupy more than 6% of her portfolio, therefore she will begin to sell if the prices moves up such that this occurs. Once the price hits the sell level, she will look to exit her position completely lest the price drop back down. Tengler will also use stop-losses (using money management software) to protect from large one-day or one-week declines.
Tengler closes the chapter by discussing some of the mistakes she has made in her portfolio. The lessons that are illustrated in these mistakes are:
1) Beware of newly merged companies with different operating profiles (e.g. AOL Time Warner)
2) Beware of new companies with short operating histories
Chapter 9
Various low P/B or low P/E indexes have been created in order to separate out value and growth stocks. However, separating out stocks based on a single metric can lead to misleading results. Tengler argues that investing in second-rate companies in slow-growth industries that trade at justifiably low P/E ratios does not constitute value investing. Instead, buying the best companies relative to their peers and their own valuation history is a more legitimate value-oriented strategy.
Furthermore, most companies will shift between value and growth categories repeatedly, making it difficult to pigeon-hole them into one particular style. Tengler illustrates this point using examples of defense stocks (which have gone from growth to value to back again depending on war policy) and technology stocks (which went from growth to value after the bubble of the late 90's).
Tengler discusses Buffett's purchase of Coke as a great example of there being a blend between growth and value. While Coke has been a growth stock for most of several decades, it has run into its share of temporary problems that made investors reduce its P/E ratio. This is a great example of a value purchase, even though the P/E was high enough to scare off investors who look only at P/E ratios.
Tengler argues that it doesn't matter whether a company is considered growth or value across a few metrics. What's important to investors is that it is a strong company that trades at a discount relative to its own history and relative to its peers. Whether that company is a growth stock or a value stock, it is attractive and should be purchased.
Saj Karsan
http://barelkarsan.com
[img]file:///C:UsersericAppDataLocalTempmsohtmlclip1
