Whitney Tilson on Value Investing

Whitney Tilson discusses what it means to be a Value Investor:

"I have encountered thousands of value investors over the years and am constantly struck by their differences – and their similarities.  Allow me to explain. Some value investors invest primarily in small-cap stocks while others stick to large-caps; some invest mostly overseas while others stick to U.S. markets; some run concentrated portfolios, while others are more diversified; some are activists while others never are; some invest only on the long side, others are long-short, and some only short stocks. But while styles may vary, the fundamental characteristics that unite value investors are many."

What are the fundamental characteristics that unite value investors? According to Tilson:

-We tend to buy what is out of favour rather than what is popular.

-We focus on intrinsic company value and buy only when we are convinced we have a substantial margin of safety, rather than trying to guess where the herd will go next.

-We understand and profit from reversion to the mean rather than projecting the immediate past indefinitely into the future.

-We understand beating the market requires a portfolio that looks different from the market and we recognise that truly great investment ideas are rare. Thus, we invest heavily in our handful of best ideas and don’t hide behind the "safety" of closet indexing.

-We are focused on avoiding permanent losses and on absolute returns, rather than outperforming a benchmark.

-We typically invest with a multi-year time horizon rather than focusing on the month or quarter ahead.

-We pride ourselves on in-depth and proprietary analysis in search of what Michael Steinhardt calls "variant perceptions", rather than acting on tips or relying on Wall Street analysts.

-We spend much of our time reading – business publications, annual reports, and so on – rather than watching the ticker or the television.

-We focus on analysing and understanding micro factors, such as a company’s margins and future growth prospects, and not trying to predict the direction of interest rates, oil prices, the overall economy, and so forth.

-We cast a wide net, seeking mispriced securities across industries and types and sizes of companies rather than accepting artificial limitations on market capitalisation or other criteria.

-We make our own decisions and are willing to be held accountable for them and do not just seek safety in whatever everyone else is buying or decision making-by-committee.

-We admit our mistakes and seek to learn from them.

In the rest of the column, Tilson goes on to argue that Berkshire Hathaway is a strong value stock, estimating its value at $125,000 per A share (or $4,167 per B share) versus current quotes of 91,750 for the A shares, and 3,056 for the B shares. In other words, Berkshire is about a third under valued.

As to Tilson’s rules — I would argue that many of these are applicable to other investing disciplines beyond value investing also.  Long term time horizons, variant perspectives, avoiding crowds, being patient and disciplined, having a well rounded understanding of business and economics — how can anyone argue against these approaches?

Most are not easy; As Tilson points out, "if it were easy, everyone would be doing it – which would make investing a lot less interesting and profitable."

Good stuf Whitney. Thanks!


Celebrate value investing . . . with a good investment
By Whitney Tilson
Financial Times, May 4, 2006

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  1. Larry Nusbaum, Scottsdale commented on Jun 4

    Jim Cramer’s approach is to buy great companies when they are on sale, in staged increments. He buys stocks when they are out of favor with Wall Street and sells when they become loved by Wall Street. Does that make him a contrarian or a value investor (at times)? (I DO NOT WATCH HIS TV SHOW)

  2. wcw commented on Jun 4

    Jim Cramer’s track record may indeed be as good as he claimed in his book, but from what I can tell of his thinking that has oozed into the public domain, he buys momentum and buzz, and sells when he thinks interest is peaking.

    Take a few momentum names, then a few great-companies-on-sale tickers, and run through his thinking on them via thestreet’s nice utility of same. Here’s Disney, say: http://www.madmoneyaddict.com/index.cfm?page=lookup&symbol=dis

    Sell at $24. Two thumbs down at $24 and again $25. Buy just under $29. Two thumbs up at $30. Currently at $30.60.

    There is no question that if you went long just under $29 with JJC, your position handily has beaten the market since. Further, I see pretty strong evidence here for my assessment of his style.

    I know that my n is 1 here, but then, I picked DIS out of a hat and couldn’t believe how fortunate I’d been in using it to tell my story. What’s your evidence for his scaling into “great companies on sale”?

  3. bjk commented on Jun 4

    I think the one thing value investors all have in common is immense self-congratulation for sitting on dead money for years.

  4. abe commented on Jun 4

    Larry, if you watched the show a few times you would see thru Cramer’s act. Buying great companies when they are on sale is a swell idea. But that’s not how the show operates. It is very difficult to go on the air several times a day with picks. An exercise in futility, in my opinion. Jim often goes for low hanging fruit, taking shots on volatile IPO’s in the aftermarket, CROX, UARM as recent examples. Friday he touted SPWR a day after they priced a secondary. In the recent selloff he’s made some picks the bordered on the absurd. SAFM, decent company, was touted because the recent Indonesian Avian Flu outbreak was human to human transmission. So Buy chicken plays. That’s not a reach in reason, it is just wrong. I agree with WCW’s take. The Cramer calls in SHLD are another example. Loved it at 160, Lampert is the best. Non committal at 120, might be too much for his old GS pal Eddie. After the recent spike on earnings it is a fabulous company at 157. This is a great post for anyone looking at Cramer picks: http://seekingalpha.com/article/11461 .

  5. Fred commented on Jun 4

    Value investing is the flip side of live fast, die fast. It’s more like live long and prosper.

  6. Larry Nusbaum, Scottsdale commented on Jun 4

    Yes, abe, I have become aware of that. In fact, the idea that he has to give out a few picks almost every night takes away from the Cramer that I respect and interviewed for my book.

    Btw, very few Cramer followers even know that a couple of years back he gave out KMRT as a short because it was the “worst retailer in the group” and before I knew what happened he had it as a buy. That’s the stock market and things (and people) change. (same with HAL, btw)

  7. Larry Nusbaum, Scottsdale commented on Jun 4

    Here are some fascinating statistics showing returns by style:
    Small Cap Value returns from 1927-2004: 14.7%
    Micro Cap returns from 1927-2004: 13.0%
    Large Cap Value returns from 1927-2004 : 11.7%
    Large Cap Growth returns from 1927-2004: 9.5%

  8. Larry Nusbaum, Scottsdale commented on Jun 4

    Btw, I was already long KRY (Crystallex) the day that Cramer pumped the stock and it went up about 25% in three days….to $6.25 on 4/10/06. I actually used his recommendation to Sell most of my stock ($5.92)

  9. whipsaw commented on Jun 4

    I understand not getting too obsessed with short term noise, but I would question this:

    “-We focus on analysing and understanding micro factors, such as a company’s margins and future growth prospects, and not trying to predict the direction of interest rates, oil prices, the overall economy, and so forth.”

    Aren’t margins and growth prospects directly impacted by things like interest rates, oil prices and the overall economy? Even if you are willing to sit on a bad decision for years (what he seems to call avoiding permanent loss), aren’t you more likely to walk into a loser by focusing on micro factors to the exclusion of macro factors?

    I have come to the conclusion that for me at least, position trading at the index and sector levels based mainly on macro factors makes more sense than chasing around after individual stocks. A sector ETF may or may not be a value at a given point in time, but I consider buy & hold a quaint notion for the foreseeable future and would rotate out within a year anyway.

  10. Brian commented on Jun 4

    I used his EZM pump to get out. Whew. Maybe I’m missing something, but as far as I can tell KRY has to be the single worst stock pick I have ever seen in my life, including during the Tech Bubble. A speculative junior gold miner in Venezuela? Holy ass.

  11. Larry Nusbaum, Scottsdale commented on Jun 4

    Brian: You think that KRY is the single worst pick by Cramer? Well, it is so news driven (or rumor driven) that it has made for a great trading vehicle.
    (btw, it’s not a junior mining stock)

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