Forbes:Going back to Al Frank, a real person. You cut your eye teeth with him. How would you describe your approach to investing? It’s not quite contrarian, not quite traditional value investing. You have your own metrics – algorithms as we call them. Please define them.
Buckingham:Sure. Well, I learned at the foot of the master, Al Frank, who was a self-taught investor. Al set out to learn what worked on Wall Street, and what he found is that companies trading at inexpensive valuations – low P/E ratios, low price-to-sales ratios, low price-to-book value ratios – those companies historically outperformed. And importantly these days, companies that pay dividends have historically outperformed.
My strategy is pretty much very similar to what Al would do, trying to find bargains. The amazing thing is, though, what we do is what people do in their every day life. You search for a deal. We just try to find the deal in the stock market supermarket, as opposed to going to the local grocery story.
Forbes:That gets to psychology, but you can define it as if you look for stocks on sale.
Buckingham: Right. Absolutely. Well, companies that are trading at inexpensive valuations. Over time stocks are seldom priced at fair value. They’re either cheap or they’re expensive. Our job is to try to exploit those pricing anomalies and try to buy low and sell high. It’s not always easy.
Forbes:Now, your universe is the Russell 3000?
Buckingham: Yeah, we screen on 3000 companies – that algorithm that you mentioned. We’re always trying to find companies that fall into our parameters with our initial quantitative screens.
Forbes:ADRs as well?
Buckingham: Absolutely ADRs. We like to look overseas. We have about 200 stocks in our universe that we’ll look at. You need to have sufficient volume and need to get financial information and so forth on them. But once we’ve got that quantitative review, then we’ll go ahead and do a qualitative review.
Forbes:Now, define qualitative review, because that’s where people think, “Okay, then the emotions start kicking in.”
Buckingham:That’s exactly something you have to guard against. What we’re trying to make sure is that stocks aren’t cheap for a reason, because many companies are inexpensively priced but their earnings may be heading off a cliff. They may have balance sheet difficulties. They may have obsolete products. They may have competitive challenges. It’s our job to do our homework and crunch those additional metrics.
But at the end of the day it’s still a human being who has to make those decisions. So it’s not a black box, by any stretch of the imagination, even though we certainly rely on a lot of technology to help us get to the right pond, as I like to say, so that we can conduct our fishing expedition with hopefully a little more success.
Forbes:Now, the performance certainly of the newsletter has been pretty good.
Buckingham: We’ve done well over the long haul, certainly. The newsletter was launched in 1977, and the annualized return on our model portfolios is somewhere in the 17%-18% range, which obviously is good. In interest of fair disclosure, of course, the last few years – especially in 2008, we could all do without 2008 – and even last year was a tough year for stock pickers. So, you’re not always not going to be able to top the charts. But we’re obviously focused on long term.
Forbes:Stay on that for a moment. Last year the averages were okay, but you make the point the average stock sucked.
Buckingham: Well, to put it mildly, yes. There were far more declining stocks than advancing stocks on both the New York Stock Exchange and on the NASDAQ. Last year was not a good year for the average stock. It was an okay year for the indexes – the Dow Jones Industrial Average being up 8% on a total return basis, S&P 500 up a percent or two, and even our benchmark, the Russell 3000 up a percent.
But the average mutual fund manager out there lost money to the tune of 3% or 4% last year. It doesn’t sound that bad when you think about all the volatility and all the things we had to face last year, but it wasn’t a great year. But still, if our newsletter portfolio’s down a few percent we’ll take it, compared to where we were, say, in August of last year when we were pushing bear market numbers for the full year.
Forbes:Why is that? How can the averages supposedly measure the market better than stocks in the market?
Buckingham: Well, it’s simple arithmetic in that the averages are capitalization-weighted. So if a handful of large cap stocks do very well and the rest of the troops, if you will – the generals do well but the soldiers don’t, you could have a situation where the overall market doesn’t do well but the averages do. So far in 2012 we’ve seen the same kind of thing in reverse, because the average stock this year is doing better than the benchmarks. Most of the fund managers are outperforming the benchmark this year, whereas last year they were underperforming.
Forbes:Now, in terms of picking value stocks, what isn’t a value stock these days?
Link to the remainder of the article:
http://www.forbes.com/sites/steveforbes/2012/02/21/believe-it-apple-is-a-value-stock-and-dividends-are-king/2/
Buckingham:Sure. Well, I learned at the foot of the master, Al Frank, who was a self-taught investor. Al set out to learn what worked on Wall Street, and what he found is that companies trading at inexpensive valuations – low P/E ratios, low price-to-sales ratios, low price-to-book value ratios – those companies historically outperformed. And importantly these days, companies that pay dividends have historically outperformed.
My strategy is pretty much very similar to what Al would do, trying to find bargains. The amazing thing is, though, what we do is what people do in their every day life. You search for a deal. We just try to find the deal in the stock market supermarket, as opposed to going to the local grocery story.
Forbes:That gets to psychology, but you can define it as if you look for stocks on sale.
Buckingham: Right. Absolutely. Well, companies that are trading at inexpensive valuations. Over time stocks are seldom priced at fair value. They’re either cheap or they’re expensive. Our job is to try to exploit those pricing anomalies and try to buy low and sell high. It’s not always easy.
Forbes:Now, your universe is the Russell 3000?
Buckingham: Yeah, we screen on 3000 companies – that algorithm that you mentioned. We’re always trying to find companies that fall into our parameters with our initial quantitative screens.
Forbes:ADRs as well?
Buckingham: Absolutely ADRs. We like to look overseas. We have about 200 stocks in our universe that we’ll look at. You need to have sufficient volume and need to get financial information and so forth on them. But once we’ve got that quantitative review, then we’ll go ahead and do a qualitative review.
Forbes:Now, define qualitative review, because that’s where people think, “Okay, then the emotions start kicking in.”
Buckingham:That’s exactly something you have to guard against. What we’re trying to make sure is that stocks aren’t cheap for a reason, because many companies are inexpensively priced but their earnings may be heading off a cliff. They may have balance sheet difficulties. They may have obsolete products. They may have competitive challenges. It’s our job to do our homework and crunch those additional metrics.
But at the end of the day it’s still a human being who has to make those decisions. So it’s not a black box, by any stretch of the imagination, even though we certainly rely on a lot of technology to help us get to the right pond, as I like to say, so that we can conduct our fishing expedition with hopefully a little more success.
Forbes:Now, the performance certainly of the newsletter has been pretty good.
Buckingham: We’ve done well over the long haul, certainly. The newsletter was launched in 1977, and the annualized return on our model portfolios is somewhere in the 17%-18% range, which obviously is good. In interest of fair disclosure, of course, the last few years – especially in 2008, we could all do without 2008 – and even last year was a tough year for stock pickers. So, you’re not always not going to be able to top the charts. But we’re obviously focused on long term.
Forbes:Stay on that for a moment. Last year the averages were okay, but you make the point the average stock sucked.
Buckingham: Well, to put it mildly, yes. There were far more declining stocks than advancing stocks on both the New York Stock Exchange and on the NASDAQ. Last year was not a good year for the average stock. It was an okay year for the indexes – the Dow Jones Industrial Average being up 8% on a total return basis, S&P 500 up a percent or two, and even our benchmark, the Russell 3000 up a percent.
But the average mutual fund manager out there lost money to the tune of 3% or 4% last year. It doesn’t sound that bad when you think about all the volatility and all the things we had to face last year, but it wasn’t a great year. But still, if our newsletter portfolio’s down a few percent we’ll take it, compared to where we were, say, in August of last year when we were pushing bear market numbers for the full year.
Forbes:Why is that? How can the averages supposedly measure the market better than stocks in the market?
Buckingham: Well, it’s simple arithmetic in that the averages are capitalization-weighted. So if a handful of large cap stocks do very well and the rest of the troops, if you will – the generals do well but the soldiers don’t, you could have a situation where the overall market doesn’t do well but the averages do. So far in 2012 we’ve seen the same kind of thing in reverse, because the average stock this year is doing better than the benchmarks. Most of the fund managers are outperforming the benchmark this year, whereas last year they were underperforming.
Forbes:Now, in terms of picking value stocks, what isn’t a value stock these days?
Link to the remainder of the article:
http://www.forbes.com/sites/steveforbes/2012/02/21/believe-it-apple-is-a-value-stock-and-dividends-are-king/2/
