The Most Time Efficient Way to Find Cheap Stocks

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Nov 11, 2012
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The most time efficient way to find cheap stocks is to read value investing blogs. Value investing blogs are by far the best source of new, unknown stock ideas.

Someone who reads my articles sent me this email:

“What is the most time efficient way to find undervalued stocks?”

I know a lot of people aren’t going to like my answer. Blogs have a bad name. They are casual and personal and full of typos. All that is true. Value investing blogs are also full of the best stock ideas you’ll ever find in print.

I know a lot of investors read Barron’s, The Wall Street Journal, The Financial Times, Fortune, Forbes, etc. Compared to value investing blogs – those are a complete waste of time. They may tell you more about the economy. They will definitely give you more financial news.

There is some value in all of those publications, less than there used to be. But still some. They are valuable as a balanced breakfast of background knowledge you consume to prepare yourself for stock ideas. They will not, themselves, actually present you with good ideas. And certainly not ideas a thousand other investors aren’t already thinking about.

Value investing blogs will.

Value investing blogs will give you actual ideas you’d never thought of. I’m not saying you should trust these bloggers’ judgment. You shouldn’t. Reading a value investing blog should be the start point of your search for a stock – not the end point.

Value investing blogs differ a lot from each other. Most of them are – like most of anything – garbage. But there are some good ones. Enough to keep you constantly supplied with posts worth reading. I use an RSS reader to follow a few dozen blogs.

Now, I’m going to talk about a few of my favorites. You can also follow a lot of these bloggers – and me – on Twitter. If you don’t use an RSS reader following these bloggers on Twitter is a good idea – because you’ll know when they post something.

Let’s start in the U.K. One of my favorite bloggers is Richard Beddard. He used to write a blog called The Interactive Investor Blog. It’s now called the Share Sleuth blog. The content is the same.

Richard is the perfect blogger to follow if you are interested in bottom up stock picking. You aren’t going to get a lot of macro commentary on his blog. You aren’t even going to get a lot of market commentary. What you are going to get is a parade of interesting stock ideas.

What kind of investor is Richard? He’s definitely a stock picker. And a lot of his blog posts make him sound like a Ben Graham investor. But I’m not sure that’s the whole story. Richard is willing to look at micro caps. The U.K. is a big market, so there are plenty of obscure little public companies just like in the U.S. Many of the companies you’ll read about at Richard’s blog are obscure little companies.

But they aren’t all cigar butts. Richard – like me – is a fan of Hemann Simon’s “Hidden Champions” book. So he has written about companies like Dewhurst, Games Workshop, and Haynes Publishing. Many of the companies in his Share Sleuth Portfolio were cheap on a price to average earnings basis when he bought them. So they are definitely Ben Graham stocks in that way. But they aren’t all stodgy old industrials. A few fit the Hidden Champion mold better than the Ben Graham mold. Of course, a lack of business quality does not create a Ben Graham bargain. Cheapness does. And sometimes – especially among small stocks – you can find cheap stocks with good competitive positions.

Bookmark Richard’s blog. Especially if you aren’t already investing in the U.K. market.

The next blog you should be reading is Nate Tobik’s Oddball Stocks. This is the blog to read if you’re interested in net-nets. But Nate doesn’t just write about net-nets. He really does write about all kinds of “oddball” stocks. Mostly micro caps. Often illiquid.

Nate has written a lot about Japanese net-nets. These are some of the world’s cheapest stocks. I’ve invested in them in the past. Right after the Fukushima Daiichi nuclear disaster. Nate bought some net-nets around the same time. And wrote about a lot of them. He even wrote a post calculating the return in the Japanese net-nets he wrote about. His results almost exactly mirrored mine. And there wasn’t too much overlap between our lists. Although a very good performer – because it was bought out – called Sanjo Machine Works was on his list of net-nets and was one of five Japanese net-nets I ended up buying.

This brings up an important point about why reading value investing blogs is a much better use of your time than reading general financial news. The financial media was focused on reporting on Fukushima Daiichi. And sometimes speculating about what would happen next. That is news. It is not news an investor can use. Actual names of actual stocks is news you can use. And that’s what blogs like Oddball Stocks give you.

Read through the past posts at Oddball Stocks. You’ll learn more about Japanese net-nets there than anywhere else. Many of these net-nets were up about 30 percent within a year of the nuclear disaster. And they tend not to move in lockstep with the Dow. So Japanese net-nets are a good source of diversification for American stock pickers.

I mentioned Student of Value in a past article. There aren’t a lot of past posts to read here. The blog is pretty new. I think it started this past summer. There are some posts on the Bulgarian stock market. That’s something you aren’t going to read about in a lot of places. This is a good blog to bookmark. We’ll see if it sticks around. If it does – I think it could become something special.

That brings me to one of the frustrating parts about following value investing blogs. They die. You will find a blog you love – and read it for a while – only to see there are no new posts. That’s normal. Get used to it. All these bloggers do other things. Their lives get busy and messy. They get bored. They move on. So you’ll need to keep finding new blogs.

That’s the other frustrating part of reading value investing blogs. There are always more good blogs out there than you know about. They don’t all link to each other. Sometimes it takes a while for a good, new blog to get noticed. Months or even years may go by before you stumble on a really good blog that’s been putting up a stream of good posts you know nothing about.

I don’t have a solution to this problem. My advice is to follow links from blogs you like, to blogs you’ve never heard of. “Taste” a couple of their posts. If you like them make sure you subscribe to the blog – or at least bookmark it. If you don’t like a blog after reading 2 or 3 posts – just forget about it. It’s unlikely to get better. There are a lot of bad blogs out there. Just move on to the ones that grab you right away.

Not all of my favorite blogs are all about micro caps. A good example of a blog that has written about stocks of all sizes is Portfolio 14. Remember what I said about there sometimes being a lack of posts at a blog you love. That’s true here. Portfolio 14’s latest post was in July.

Before that, you had a few posts on Microsoft (MSFT, Financial), a post on the 10 percent free cash flow yield club, and a couple posts on net-net type stocks (including cash shells) in the U.S. and Australia. This blog is a good example of what’s out there if you dig through the world of value investing blogs.

It covers things you will not read about in the financial press. Stocks you may want to research yourself. And it also covers Microsoft. Which proves that every blog is personal. You can’t just jam them into a style box. You may get posts about Microsoft next to posts about net-nets. If that’s the author’s style – that’s what you’’ll get. This is part of what makes reading value investing blogs a real treasure hunt.

Personally, I tend to think the best value investing blogs – in the sense of the ones that turn up the most useful value investing ideas – are those that cover micro caps and foreign stocks. When I say foreign I just mean non-U.S. Many of these bloggers are obviously living in the country where the stocks they cover trade. The important part is that they aren’t writing about the same 30 stocks every analyst covers.

Next is another micro cap blog. This one is OTC Adventures. OTC means over the counter. We’re talking pink sheets here. These are stocks that aren’t listed on the major U.S. exchanges. At any time, at least half of what I own tends to be OTC. Sometimes, it is close to everything I own. Right now, I don’t own any listed stocks. Only over the counter. And cash. Lots and lots of cash. I’m 75 percent in cash right now.

All stock pickers should take a look at over the counter stocks. The vast majority of them are super speculative. So do not just go to the OTC website yourself and start poking around. It’s very easy to lose everything in over the counter stocks. It’s also easy not to. The difference between solid companies that happen to trade over the counter and totally speculative stocks – and outright scams – is usually pretty clear.

Use blogs like OTC Adventures and Oddball Stocks to guide you through the pink sheets. Spend a lot of time with the SEC reports. A few companies that show up on blogs like Oddball Stocks may not actually file with the SEC anymore. But – even then – they will often put out press releases with much the same content.

The key to investing in over the counter stocks is reading the financial statements and treating the stock as a private company. Just analyzing the stock like you are making an investment in a private business where your money will be locked up – totally unmarketable for a few years. If you’d still make the investment on those terms, you can buy over the counter stocks. If liquidity is a big deal for you – if you like to trade your stocks rather than hold them – I’m not sure OTC stocks are the best place for you.

So what should you do when you find an idea you like on one of these blogs?

Simple. Steal it.

That’s what I do. A couple years ago, I was reading a blog called The Rational Walk. It talked about a company called George Risk Industries (RSKIA, Financial). I liked what I read. I learned more about the company. I started buying some shares. I kept buying for several months. Two years later, I’ve still got those shares. Sometimes one idea can last a long time.

Here are the blog posts: George Risk Post #1, George Risk Post #2.

That’s an idea that leaps out at you the second you read the article. It’s funny how investing ideas work that way. I’ve gotten over two years out of an idea that took me a couple minutes of reading someone else’s analysis. Sure, I did some more work on the stock after reading those posts. But the posts lay it out real well. That’s because a good idea is usually a simple idea.

Let’s go from simple to complex. Let’s talk Distressed Debt Investing. I’m not going to try to sell folks who are interested in distressed debt on this blog. There aren’t a ton of blogs on the subject out there. And this is a really good one. If you liked blogs and you were looking for a good one on distressed debt – you’d already be reading Distressed Debt Investing.

Instead, I’m going to try to sell you on reading this blog even if you don’t care about distressed debt. When someone’s thinking is good and clear and the writing gets out of the way and let’s that thinking show through – that’s a blog worth reading. This is one of those blogs. The recent post: “My Favorite Quote From the Recent Baupost Letter” sums up my thinking on the market – in my case it’s the stock market – better than I could. I’m 75 percemt in cash right now. Obviously, I’d rather not be. But there’s a reason I am. This post gets at the heart of that reason. I’m looking for a margin of safety in everything I do. Right now, I’m only finding a margin of safety in about one-fourth of my portfolio.

Are those all the good value investing blogs out there?

Of course not. There’s also Whopper Investments and Cheap Stocks and Value and Opportunity and too many more to name.

But that’s enough to get you started.

You shouldn’t read the same value investing blogs I do. Because your investing style is bound to be different Your tastes are bound to be different.

But you can start by reading some of my favorite value investing blogs. I stole a good stock idea from The Rational Walk. There’s nothing wrong with you stealing a good blog list from me.

Here it is:

Share Sleuth

Oddball Stocks

Student of Value

Portfolio 14

OTC Adventures

The Rational Walk

Distressed Debt Investing

Whopper Investments

Cheap Stocks

Value and Opportunity

Talk to Geoff about Value Investing Blogs

Read Geoff’s Other Articles

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