How to Make Money in Value Stocks
There’s no shortage of great articles on value investing available on the web, including thousands on this website, but what the web gains in breadth and searchability it lacks in structure and organisation. For many, the best way to learn, think and discover is still through long form copy in a well structured book.
As a result we’ve brought together the best ideas, articles and research on value investing into an easily readable and concise 70 page ebook. The content has been completely rewritten from the ground up and covers everything from the origins of value investing to the behavioural reasons why value investing will continue to be the most profitable of all investment strategies.
Not only is the book an excellent stand-alone synopsis of a vast topic, but it also provides some of the necessary grounding for Stockopedia’s premium subscribers to get the most out of our burgeoning investor toolkit.
Some of the key highlights include:
- The teachings of Ben Graham and astonishing profits of his students
- How to find deep bargain basement stocks, net nets and profits from new lows
- How you can weigh intrinsic value and set an appropriate margin of safety
- Key findings of Greenblatt, Lakonishok, Piotroski, Buffett and Schloss
- A synopsis of modern quantitative strategies to ‘harvest’ value profits
Shortly to retail for £14.99 in online bookstores, we are offering the book completely free to site members and members of our mailing lists. If you want your copy you can download from the box below or from this link. It's a 10 MB PDF so it may take a few minutes.
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
33 comments
Ed,
I want to carry out an experiment over the next several years, will stockopedia help me with my endeavours please?
Let's call it the Isaac Index. How easy would it be for stockopedia to design a tool that follows ALL the Fully listed FTSE companies in the FTSE 350 + Fledgling/Small cap index.
You have a pot of £100k with 20 allocations.
The rules are
- Simply allocate 1/20th of the cash pot to a stock that is MAKING A NEW ALL TIME HIGH - i.e. the portfolio would be happy to stay in cash until such a stock is found.
- Automatically Sell any stock that drops 20% from it's peak
- Dividends are added to the cash pot and any subsequent purchases will take 1/20 of the cash pot + dividend
- No more then 3 holdings exposed to a sector at any one time
With this strategy I think one can be invested in the best sectors all the time and sell the losers early on in a trend as well as benefiting from LTBH gains.
If we look at the 10 year Soco chart :
Wit the above strategy I would have been in Soco during the uptrend - and would have sold around £4.80 i.e. £6 - 20% and would never have bought back in since that sale as it did not make an all time new high. And I probably would have made money from other stocks making new highs.
I would be very impressed if you guys can put something together, thank you.
Isaac, absolutely. This is precisely the level that I'd like the systems to get to.
At the moment we have been focusing on fundamentals, great data points and sequential screening systems to build long or short only portfolios. Our own screen tracking funds are built on mechanical time based sell rules - i.e. quarterly full portfolio rebalancing. But as time goes by we will gain the capacity to make more nuanced rules for position based rebalancing based on technical and fundamental rules such as the one you mention above.
Personally I'd like to be able to set up these kinds of simple algorithms to automate a fair part of my own trading using the website. We've a long way to go to fulfil these ambitions but step by step we get closer every day.
Next week, possibly this week, we'll be releasing a big upgrade to our fundamental dataset to what we believe will be the most up to date fundamentals on the UK market - with full TTM (Trailing 12 month) data that incorporates all interim and quarterly results as they are released. Ally this dataset with some of the precise fundamental scores, indicators and screens that we have collated and the site will be bleeding edge in comparison to some other sites. Each step we take is a step closer to the goal you mention - I can't promise when we'll get there but we will eventually - the foundations are getting stronger every day.
I was speaking with a fellow user of the premium features this weekend, and we both concurred that the site is fantastic, the only downside being the lack of data on US and European stocks. Are you able to give us a guess as to when you might be adding broader European or US market data?
Hi Jackalope.
We don't want to commit to any firm timings at this stage, although we are back of an envelope aiming for pan-European data to be available before the year end. The US is being much demanded by everyone. It will follow closely after I imagine, although many are more excited about Asia - it will certainly be one or the other first... but that remains to be decided!
There's a great & detailed review on our "How to Make Money in Value Stocks" e-book by value investing blogger, Wexboy_Value (@Wexboy_Value on Twitter) here: http://wexboy.wordpress.com/2012/05/17/good-show-chaps/. A few selected quotes:
He concludes:
And there's a discussion on the Stockopedia stock reports too:
As a reminder, all registered members can download their free PDF copy of the book using the Blue button above, and we're still offering a free 2 week trial for Stockopedia Premium!
Ed
Thanks - That is very interesting actually.....Over the weekend I was trying to run screens using some of Stockopedia strategy screens to see if I can work out some of the stocks displayed by Stocko....Results looked very different.
I intend to carry out the exercise again when I have more time.
Ed
Please note the market cap of Soco is now £885.7m rather then the £927.6m quoted by Stockopedia.
337.43 * £2.63 = £885.7m
Isaac - our fundamental data, stock reports and screening data update currently during sleeping hours and our quotes are currently 15 minutes delayed - calculating over 2 million ratios takes a fair bit of computer power as I'm sure you can understand. You are seeing the MktCap as of the close yesterday.
In our next version to be released this week or next we'll be printing more timely market-cap figures on the Stock Reports - they'll be 15 minutes delayed like the quotes.
In another version a bit further down the line this year we'll be aiming to recalculate every one of our valuation ratios and yields hourly.
Hope that helps. Better if you use the green feedback button for O/T requests and tickets like this - easier to spot and track that way.
Ed
Soco have 337,594,439 shares in issue * £2.75 = Market cap of £928.3m
Stockopedia market cap for Soco is : £994.7m
I think the data feed is broken, any chance this can be corrected please? thanks
Great to see the book featured in the article about Stockopedia in the FT last weekend. David Stevenson describing it as 'a good primer on value investing'. http://www.ft.com/cms/s/0/6362157c-8eb9-11e1-aa12-00144feab49a.html
Absolutely true.
On the one hand, if prices get to the initial selling targets, greed tends to take over (because there are usually rational arguments available for thinking the price may move higher). I know about this one only too well, having failed to take advantage of some quite attractive opportunities to sell in early 2008.
OTOH, it can be difficult to pull the trigger and buy when faced with an apparent bargain, because of the fear that "someone must know something" and the price may fall further.
It is even more difficult than either of those to crystallise losses.
Free book : http://monkeywithapin.com/
Thanks for the link Isaac - I watched the video. Couldn't agree more with the thesis that private investors as a whole under perform due to fees and charges and funds do too. I've found the same from my own research.
When he says that the solution is "Create your own rules, write them down and follow them" he's making a lot of sense. The trouble is that the average investor starts with a set of rules but bends them as prices shift. The discipline to follow a plan is too hard for most investors to implement. Process is all!
It is difficult for me to comment as I have not used any of the tools. Have you considered opening up the tool for the weekend? The truth is I rarely trade, infact I spend 90% of my time doing absolutely nothing in the markets so I ask myself does it makes sense for me to subscirbe to a tool I am rarely going to use? And when I do come to do something I have enough resources in the market place and enough ideas to Invest in.
Reading Investegate daily and using the FT.com and Digitallook screener seems sufficent for my needs & some of the best ideas are generated on the boards.
In my Investing career I have'nt really subscribed to newsletters/screeners or ever paid for any seminars.
I have learnt everything I know from reading books, bulletin boards and experience. Nothing beats experience, you can have all the tools and books in the world but it is the experience that matters most.
There are numerous studies which show that the best strategy over long periods of time to make money is Value Investing.
For those that want to lmake money from the stock market, there is a relatively inexpensive way to do so.....
I would take £59.23 out of my pocket and dedicate several hours into reading the following books :
Ben Graham's - Intelligent Investor (£7.92)
Value Investing Made Easy - Janet Lowe (£10.09)
Common Stocks and Uncommon Profits (£9.74)
One Up on Wall Street by Peter Lynch (£6.79)
The Zulu Principle: Making Extraordinary Profits from Ordinary Shares (£16.25)
The Naked Trader: How Anyone Can Make Money Trading Shares (£8.44)
I will add nothing beats reading Annual reports & Financial statements, Screeners are good for crunching large data sets in a short period of time.
No one is saying dumb it down, Investing and Business is not complex, it is the people that make it complex. What is difficult is sitting tight and having loads of patience, if you buy quality companies and your prepared to sit tight and see out the value then anyone can make money. I don't think it is more difficult then that. And reading the books above will educate one to learn how to find the quality as well as knowing what to avoid, knowing what to avoid is also very important.
If people followed any sensible quantitative strategy they'd have outperformed almost all of those tipsters that took the stage - Wray -67%, Winnifrith -59%, Cawkwell -20% etc - by a country mile. It's the hanging onto the every word of gurus that gets people into such trouble in the first place - so yes there's a lot of value in tools such as ours that can help cut through the bad advice out there.
Agreed. But it's not for us to prescribe which strategy investors should follow - some people need dividends, others love bargain stocks, others can't stand the risk - we just provide a toolkit to follow or build the strategy that works for you and use it as you see fit. I'm personally only interested in about 5 of the strategies we publish - but I fork and tweak the criteria to build my own lists.
There's certainly too much information out there and I'm sorry if you think there's too much on here - we've tried to simplify the understanding of difficult concepts but then again we don't want to dumb investment down and pretend that its easy. Oddly enough other products who do that for you often charge a huge amount more money for the privilege... e.g. VectorVest who have a fraction of the data for double the price. I'd personally though rather have more nuanced metrics as it helps to avoid catastrophes - e.g. the M-Score flagging the Supergroup debacle in advance.
So I guess people don't need all those screeners & strategies stocko are trying to sell to users?
I think readers only need 1-2 strategies to make money consistently in the long term.
I also think the package stocko are offering readers is more likely to confuse people then help them as they would be overloaded with info.
I think a good investor/trader needs to know what data/info to ignore as their is a lot of rubbish out there.
Brief book review posted here - http://valueandopportunity.com/2012/04/22/book-review-how-to-make-money-in-value-stocks-stockopedia/?utm_source=sendgrid.com&utm_medium=email&utm_campaign=Site%20Features
Good to see some familiar faces at Master Investor. My moment of the day was Mr Contrarian's spreadsheet highlighting quite how astonishingly badly the previous year's tips had performed. At least Mark Slater did well +25%... I guess showing yet more validation of the kinds of techniques that make the Zulu Principle criteria such a well followed strategy.
I know someone very close to home, who has been trading/investing for 5 years.
He truly only trades in penny and micro penny shares.
His investment style is purely speculative, starting from trusted posters and then digging deeper for E&P stocks only and waiting for newsflow.
Yes openly admits he has made many mistakes, bought quite a few that went bust/delisted.
However he has also made a killing primarily from firstly, GKP, HER,BLVN, RMP, a few others and now anything backed by the Lundin family like the Canadian AOI and HRN & SMB, turning himself into millionaire last month.
He admits, the majority of stocks he buys don't make it and he sells at a small loss usually, but the ones that do - yippee.
He also admits he hasn't got a clue about ratios or accounts nor does he care - he simply focuses on how good the story is and rides on it big time.
I suspect his confidence went ballistic on first success, and then a few more, despite some failures, re-enforced his belief in himself.
I do get get the occasional tips from him - but he has so many! and I don't have that much to play around with like he does now.
A touch envious and more than a touch happy for him.
Just goes to show, there is more than one way to skin a cat.
For all those who would rather read a copy on their Kindle - the book is now available on the Kindle store
http://www.amazon.co.uk/dp/B007VSQ41S
iPad version will be out soon
Today, I was searching for a good definition and explanation of the ROIC metric that Buffett prefers to evaluate quality of earnings. The best one that I found came from this intriguing little website: http://www.investingmba.com/index.html (look under "metrics" to find ROIC)
The site is not complete and, intriguingly there is no indication of who created the site. However, it contains some very useful reference material for "hard core" value investors and those wishing to learn more about value investing and its most successful practitioners. It includes brief biographies of and papers by "The superinvestors of Graham-and-Doddsville", chapter summaries of "The Intelligent Investor" and other good material.
I hope readers of this thread will find it interesting.
Regards,
Mark
PS though ROIC is simple in pricinciple, if you study the article, you will see that you really need to go through a company's accounts (and notes to the accounts) with a fine-toothed comb to determine what items to include and exclude in order to really calculate it properly.
...and more just out on "shadowy banking": http://ftalphaville.ft.com/blog/2012/04/11/955761/the-inevitability-of-shadowy-banking-and-how-to-regulate-for-it/
[but getting somewhat O/T now - prob best to start a new thread if people want to discuss bank/non-bank regulation.]
Mark
Interesting articles discussing the merits of fundamental and quantitative investing (When you have the time):
http://www.siliconvalleyaaii.org/images/20071103_zmyslowski.pdf
http://www2.blackrock.com/US/individual-investors/market-insight/special-reports/art-and-science-integrating-fundamental-and-quantitative-investment-strategies
That's a good article Sparks. It very much echoes some other work I've read such as this book chapter here: http://j.mp/Hz5H2a
Interesting that even for BlackRock they find that 50% of returns come from Fundamental and 50% from Quantitative sources. I think that's a sensible approach and it guides a lot of the development here. I've always felt that one of the key benefits of adding a quantitative aspect to your method is to guard against one's own behavioural biases - i.e. getting overconfident in bull markets, changing your rules mid-trade to justify turning trades into 'investments', being overly influenced to buy story stocks by 'gurus' and tipsters etc etc.
There are plenty of small cap managers that beat the market handsomely by starting fundamental analysis on stocks only once they show up on their more quantitative stock screens - Mark Slater is a good example - but there's also plenty of evidence that outright quant can beat discretionary decision making - James Montier's Ode to Quant is a good read on the subject http://j.mp/HvTqG2 .
The whole nature of the market has been changing in recent years as such massive volumes of money are being put to work in index funds - which essentially try to match the index through quant 'sampling' techniques - and the big fund managers and hedge funds are putting much more money to work in quantitative fashion. This is creating a 'risk on / risk off' environment where stocks are traded as baskets rather than individually. The risk on risk off nature of the market is quite befuddling to many old fashioned stock picking fund managers who are finding they are underperforming - certainly there's some really weird stock pricing going on at the moment - the market seems quite unfathomable at times in individual cases - some of the stocks discussed around here definitely fall under that canopy.
I find the big picture quite fascinating and the fight between quant & old school is something I've been musing on in recent articles http://j.mp/GRVvNe . Where this leads I don't know, but I'm sure this trend is going to continue and create some big dislocations.
Hi Ed, Sparks,
To me, that seems to create a pretty obvious opportunity for my favoured strategy:
To implement this strategy:
I don't think this strategy is especially new or original but it seems well suited to the current market environment. Moreover, though I haven't done the math, I suspect implementation of this strategy by significant numbers of investors explains why Fibonacci levels are significant in technical analysis: they represent the price points where several money managers using this strategy are likely to be buying or selling.
*NB note that my definition of risk is not the conventional one, where risk is equated with price volatility. Rather I consider risk to be the risk of a loss of fundamental long-run value. I.E. the risk of bankruptcy, or of an irreversible diminution in expected future profits or NAV.
Cheers,
Mark
PS, great little book, which I recommend - well done to its authors
Very good points Mark, and I very much agree on your definition of 'risk' which also echoes Graham's own sentiments - which I summarised once here http://www.stockopedia.com/content/how-can-you-measure-the-risk-of-a-share-63739/
PS - thanks for the nod on the book... we are thinking of doing a series - all around 50 pages long or so - on some other styles too. Current thoughts are to focus on growth investing, dividend investing or on market inefficiencies. If anyone has any preferences let us know.
Yes I agree with all of that. There is no doubt at all that the nature of investment (assuming that word is still reasonable, given the implied change in its meaning) has changed radically over the last 15-20 years. I am equally fascinated.
The central issue with stock pricing is whether there is a realistic prospect of an event occurring that can correct individual mispricings. In the vast majority of cases (in anything other than the very long term) the answer to that is "no".
I draw a number of conclusions:
This last point is, of course, massively controversial - and hasn't even yet been publically contemplated (as far as I am aware). But it will have to be - otherwise those who promote civil unrest will have increasingly well-justified reasons for their actions (IMO).
ee
ps. I agree with Mark about risk measurement.
ps....on (IMO) a related matter, there is a very interesting piece on Alphaville on the topic of mispricing of risk - pointing out that there is a flipside to the massive market focus on the risks of deflation and financial armaggedon......
ee
Hi ee,
I agree with your last point and I think Ben Bernanke is on the case... http://www.ibtimes.com/articles/326117/20120410/federal-reserve-bernanke-speech-shadow-banking-regulation.htm
The question is how long before such moves can gain political support? Especially in an election year, where a private equity manager is standing for the presidential election!
However, I feel there are a number of ways of dealing with the problem of "value outing", which you raise:
a) GARP investment. If you successfully identify a solid, growing company, "multiple-compression" won't continue forever. Returns can be compounded both by growing EPS and a re-rating based on evidence of sustainable growth.
b) Dividend investment. If a company is paying a high, sustainable , yield then you don't need value to be outed! E.G. Vodafone (LON:VOD) offers an historic yield of 5.4% with significant dividend growth forecast making this attractive simply as an LTBH. Especially when combined with the strategy I've outlined for trading volatile markets. Using that strategy, I've got my average entry price for VOD down to 157p, since entering last July and producing an IRR of over 15% at today's prices.
c) Takeovers. If companies deliver consistent sound results with some growth (or possess attractive assets), this will attract interest. This doesn't only apply to oilers but I was sad to lose two solid yielders from my porty (Lincat and Robert Wiseman Dairies (LON:RWD) ) when they were taken over last year. Many corporates (let alone SWFs) are well cashed up and good managements will take advantage of earnings-enhancing opportunities when they see them.
Cheers,
Mark
Alphaville's Markets Live today quotes the Nomura strategist Bob Janjuah making a very similar point to my point above:
...and he goes on to predict that the S&P will trade at 800 when there is a speculative blow-off as the Fed bubble unwinds. The S&P is currently 1358, having pulled back from 1420 in the last 9 days. S&P800 seems entirely possible when one remembers that it has previously been there in mid 2002 and again in late 2008/early 2009.
ee
Thanks for the interest in the book all, we'll be passing our 1000th download later today and are thrilled at the interest in it !
Sparks/Isaac... thanks for the feedback. We are well aware that its a competitive market out there for news and data. Some of those great brands you mention are terrific and we use them ourselves, but in my opinion there's no site that's dedicated to the art of fundamentals based stock picking as its core raison d'être. What I've learnt is that real time data and news flow actually are detrimental to making money - they encourage spontaneous decision making, herding and overtrading. The media (and the monkey brain that loves novelty) will make you believe you need that information, but every study out there shows that information overload leads to lower returns for investors.
What many smart investors focus on is signal rather than noise - as a result we are focusing entirely on the kinds of premium longer term stock picking indicators, rankings, checklists and filters that other sites such as those you mention don't provide. As time goes on you'll start to see more even higher quality product releases from us that will add more and more value to subscribers. We've barely scratched the surface of where we plan to take this.
IMHO, Stockopedia is currently offering cutting edge stock screeners backed by Reuters excellent data - and it needs to offer more to entice subscribers.
You can get a lot of the same fundamental data from FT.com/Investors Chronicle.
Digitallook offer some good(But not as good) screeners also, but it is backed up by daily RNS news, directors deals & brokers quotes along with its own slightly inferior fundamental data (But free), along with live data.
Yes each individual needs to have tools make their own decisions, but to entice them, you need clear reports of possible price projections from articles and broker reports -wrong or right don't really matter- James Montier called it anchoring -because people need to hook onto something.
Stockopedia is getting there, and in due course I may become a paying subscriber, provided above missing issues are addressed to some point.
Ed - when is the near real time Reuters news feed coming?
My friend has just sent me an email saying this site should be renamed Socopedia as it seems to be the only company with any detailed discussion. Do you agree?
I hope not. Let's prove him wrong.
I think Stockopedia can be great, the time, hardwork, effort and commitment definetly seems to be there from the staff at Stockopedia.
But I don't think the site has been rewarded with the traffic it deserves.
IMO the single biggest asset TMF has is the users that visit and posts on it's forums with new stock ideas, I read TMF all the time and the reason I do that is to gather new ideas.
One thing that is lacking with Stockopedia is the number of good ideas.
Some readers may prefer a bb with a low user base, but the truth is a large reader base is the lifeblood of a bulletin board.
I prefer Stockopedia to stick around in the long term as competition is good for the likes of myself.
It would be good if Stockopedia came up with atleast one good stock idea a week, it would encourage more posters to the site who in turn will share their research/ideas.
If it were my site then I would'nt spend any more time developing any new features, I think the site is sufficient in this area. I would be 100% focused on generating good stock ideas.
IMO