Today, we are interviewing Benjamin Graham follower Matthew Waterman. We talk about what he looks for in a stock, his investment tools and distressed opportunities, as well as his advice to new investors.
1. How did you get started investing? What is your background?
Although I have owned investments of various types for at least a couple of decades, things like 401ks for example, I didn't buy my first individual stocks until 2004. I made a couple of very bad decisions right off the bat and I would say that I didn't really get a serious handle on what I was doing until about 2006.
It was really an incredible coincidence that I just happened to be starting my college courses on accounting at the same time I discovered Benjamin Graham, and also working at Countrywide financial, one of the largest players in the mortgage crisis. I was just so perfectly prepared for that bear market.
2. Describe your investing strategy.
It's a combination of something Benjamin Graham calls "return to mean," and Warren Buffett (Trades, Portfolio)'s "durable competitive advantage". I look for companies that have long histories of basically doing the same thing, and buy them when they are having a temporary, but solvable problem.
When crisis opportunities are not around, I make judgments based on the yields that safe bonds are paying, compared to the earnings yields on stocks.
3. What drew you to that specific strategy?
I sort of always understood the concept of "buying low," but the mistake of trying to guess that based on just the stock price. What I learned was that you are looking at the future earning power of a business, or what value investors call "intrinsic worth", and then trying to purchase the stock at a price that produces an above-average return between now, and the time that the company reaches that point.
4. What books or other investors influenced you?
I was strongly influenced by Benjamin Graham. After reading just a few pages of "The Intellingent Investor", it started to click with me immediately. I've read that book cover to cover at least 4 times now, and refer to it frequently.
I also took some accounting cues from Mary Buffett's version of "The Interpretation of Financial Statements," which she claims are methods that Warren Buffett (Trades, Portfolio) uses. I tend to believe her, even though Buffett has more or less denounced her thoughts on the subject, as he buys a lot of companies with those characteristics.
5. How has your investing changed over the years?
Since that time, I've also learned to get a read on investor sentiment and how it relates to both the number of uninvested people who are "watching" a stock versus those who are serious about it. I have a couple of tricks I use that are pretty complicated to explain, but basically they involve the overall feeling of people who are talking about the stock, and I try to guage how well they understand the business. I have developed a technique from this that I haven't really explained publicly before today. It has internally been labeled by other Seeking Alpha authors as "Waterman Insult Theory." It isn't a concept I really invented, but I did do some things to expand on the methods used.
6. Name some of the things that you do that other investors do not.
I put emphasis on the future, and not as much the past of a business. Many analysts are hung up on looking at just the last few years of results, or a particular string of recent bad earnings. It's more important to consider what the business is worth in its good times, and if it can ever get there.
I also maintain a hedge in bonds, no less than 25% allocated there at all times, so that I can be prepared for market downturns. I am constantly surprised by the number of investors who have zero bond allocation.
7. Where do you get your investing ideas from?
Readers, for the most part. I usually get ideas to look at while I'm talking about a different idea. Somebody will mention that "Oh I'm also in this stock, what do you think about it?"
8. Do you use any stock screeners?
Not really, but I do use the tools at Yahoo Finance to track various things about a whole lot of stocks. I have lists of companies by sector that I sort using things like P/E ratio, dividend yield, things like that.
There is another tool that I've used in the past that has also been named after me: Something called the "Waterman Life Cross". It's a screen of my own that looks at the two metrics above, and creates a scatterpoint chart showing how a set of stocks compare to each other visually. It's not a tell-all picture, but it can give you an idea of when to buy, and when to think about selling. It's meaningless without further analysis, but it's like a radar for spotting things you would otherwise overlook.
9. Name some of the traits that a company must have for you to invest in.
Profitability, how long they have been in business and how well they can prevent competition from eating into their profits.
10. What kind of checklist do you use when investing?
I don't think I really have something like that, but I do like to look at the financial reports to make sure they show a certain history of being able to control costs.
11. Before making an investment, what kind of research do you do?
Remarkably little, and I think that would surprise most people. I usually stick to making investments in companies I am already familiar with. That's part of the trackers I keep at Yahoo. If I run across something I've never heard of, I add it to those trackers, do the comparison I mentioned, and then start breaking it down to see how it ranks against it's peers.
When I'm familiar with the business already, I can give you a potential buy/sell decision in literally a couple of minutes.
12. What kind of bargains are you finding in this market?
This answer is always the same: Where there is the most fear. Right now there is a lot of uneasyness in Europe, particularly Greece. Not every company will survive there, but for the ones that will, they are selling at ludicrous discounts.
13. How do you feel about the market today? Do you see it as overvalued?
I don't really pay attention to what the market as a whole is doing, just the individual opportunities relative to what bonds are paying.
14. What are some books that you are reading now?
I'm looking to expand my knowledge base in accounting, especially in distressed opportunities like companies where there is a legitimate risk of bankruptcy. So I have "Quality of Earnings" by Thornton L. O'Glove and "Dead Companies Walking" by Scott Fearon.
15. Any advice to a new investor?
Read "The Intelligent Investor" by Benjamin Graham before you read anything else. There is so much that book explains right from the start that it eclipses nearly every other book available. At the very least it will help you understand your own strengths and what you need to learn to do better.
Disclosure: No position in the stock mentioned.
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