Read 20 Questions for Clyde Milton of Cheap Stocks

Clyde Milton became enamored with deep value, off the beaten path investment ideas through years of fundamental research, and ultimately, as a writer/editor for a now defunct personal finance magazine.

He strives to research stocks that few others will, using valuation techniques based on Ben Graham's ideas (such as stocks trading below their net current asset value) as well as some ideas he has developed himself.

Milton freely admits that his site is written under a pseudonym; Clyde and Milton being the first names of his beloved grandfathers, to whom the site is dedicated. While Cheap Stocks was originally launched primarily to keep Milton's research and writing skills sharp (and not as a public site) it has developed a following.

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Which do you tend to invest in - high quality businesses or cheap stocks? Why?

Well, in a perfect world you'd want a hybrid: high quality businesses at cheap prices. In practice though, I tend to invest in stocks that are cheap, and honestly, they are not always high quality businesses. There is huge risk, however, if you don't do your homework. You've heard it before: Stocks are often cheap for good reasons, and the art is to not fall into the value trap that you can easily become prone to.

What have your experiences with each been? What have you learned?

I've learned not to jump in too quickly, not to fall in love with an idea, to limit initial position sizes, to stagger purchases, and that it's prudent to throw in the towel on a bad idea before it fails. As investors, we are all prone to behavioral biases. Some are hard to shake, others you can learn to deal with through experience...usually a bad experience.

How focused a portfolio do you tend to keep?

My current portfolio is about 20 names, and there's definitely an asset focus toward water, land or other assets that I believe are not properly valued.

What are your views on diversification and concentration?

Diversification is a great word: it tends to disappear from investor's vocabularies during a great bull run, then re-appears when the market tanks. But the truth is, it is imperative to be well diversified. While my stock portfolio is somewhat concentrated, and not well diversified, it is just one piece of the puzzle: My portfolio’s beta exposure comes from other sources.

Diversification is the word you did not hear in the late 90's, and it's made a huge comeback! I say that in jest, but it's amazing what a bear market will do to investors. I am a huge believer in diversification, especially in the context of building a portfolio designed to meet an investor's goals. It's not a one size fits all proposition.

How do you deal with general market risk and specific business risks?

I'm not all that concerned with market risk in terms of my stock portfolio; most names have fairly low correlations with the overall market. In terms of business risk, I limit initial position sizes, and will occasionally use trailing stops. Keep in mind, though, a portion of my portfolio is in thinly traded issues, where trading is rare--a trailing stop is of little use here.

Do your very best investment ideas tend to greatly outperform your inferior investment ideas?

Any self respecting portfolio manager might say that all of his ideas are the very best, but it certainly is not true in my case.

There are times when I am taking additional risk, perhaps the business is not great, and is selling for $5, but I believe it is worth $10, regardless of whether the business improves. Those situations usually take longer to pan out, if they pan out at all. I am less inclined these days to take a position in such a situation — that’s from experience, and learning lessons about value traps, and poor assumptions.

Can you normally identify which ideas you are most confident in – in other words, do you often have "higher conviction" ideas and "lower conviction" ideas?

Definitely. Part of that comes through analysis, but you also develop a gut for it as well. You learn to separate truly good ideas from those where the risks are much greater.

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Read 20 Questions for Clyde Milton of Cheap Stocks

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20 Questions for Clyde Milton of Cheap Stocks

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20 Questions for Todd Sullivan of ValuePlays

Clyde Milton became enamored with deep value, off the beaten path investment ideas through years of fundamental research, and ultimately, as a writer/editor for a now defunct personal finance magazine.

Milton freely admits that his site is written under a pseudonym; Clyde and Milton being the first names of his beloved grandfathers, to whom the site is dedicated. While Cheap Stocks was originally launched primarily to keep Milton's research and writing skills sharp (and not as a public site) it has developed a following.

Visit Cheap Stocks

1. Are you a value investor?

There’s no doubt about that. I am a dyed in the wool, card carrying, unapologetic value investor. That’s generally how I’m wired. I don’t understand how to value growth companies for the most part, perhaps I’m just not smart enough.

2. What is value investing?

Value investing is the ultimate pursuit, the ultimate treasure hunt, the extremely rewarding (financially and otherwise) quest to buy a buck's worth of assets for much less than a buck – be those assets land, cash, marketable securities, pieces of other companies, water rights, or what have you. It’s the attempt to find that situation where true value is not reflected in the current price (market cap or enterprise value) of a given company. There’s a huge dependency here: that the markets ultimately discover what your analysis has revealed, and that your analysis was accurate. It doesn't always work that way in practice, and patience is paramount.

3. What is your approach to investing?

It’s “off the beaten path” for lack of a better description. I try and turn over the rocks that few others do (maybe they are way smarter than I am, and know not to waste their time). For example, I will buy illiquid securities such as profitable companies that have “gone private”, and no longer file with the SEC, and are not required to comply with Sarbanes Oxley, but still trade on the Pink Sheets. Sometimes, liquidity is over-rated….if you can afford to be patient.

4. How do you evaluate a stock?

I start by identifying a potentially interesting situation. It may be that I discover a little-known thinly traded company that has some “hidden” or undervalued assets on its balance sheet. It might be a down and out company with a relatively large amount of cash relative to market cap, that is on the verge of profitability. It could be a situation where inventories are carried at lower of cost or market, and these inventories, in our estimation, are worth several times carrying value—this situation is rare. Could be land holdings that are undervalued. Most of these situations require some digging.

5. Why do you buy a stock?

When I’m convinced that there’s a real opportunity that the market is ignoring. It’s very difficult to quantify in a mathematical sense. There’s analysis behind it, but you also have to use your gut, and rely on past experience, both positive and negative.

6. Why do you sell a stock?

When I’m convinced full value has been realized, when the story does not unfold as I believed that it would, or when the reasons I took a position in the first place are no longer true.

7. What investment decision are you most proud of?

PICO Holdings (PICO), which I stumbled onto a few years back, when it was trading in the low teens. As a value investor, it’s great to see your ideas finally being discovered by the market.

8. What investment decision do you most regret?

A little known net/net (company trading below its net current asset value) that went up in smoke…literally. Allou Health and Beauty was a distributor of health and beauty products, profitable, and seemingly cheap. That’s until the arsonist struck, destroying the company’s main warehouse. The good news was that the company had adequate insurance to cover the loss. The bad news was that management/owners were behind the fire. They allegedly paid an arsonist to set the fire. An inside job, which meant that the insurance company did not have to pay, and these crooks went to jail. Turns out that there was an earlier fire that insurance covered, but even that may have been suspicious.

9. Why do you blog?

It’s a labor of love. I entered the world of financial “journalism” several years into my career, but unfortunately, one of the publications I wrote for went under, thus ending that part of my career. This blog was an avenue to continue writing, to continue the research. The blog was never meant to be “discovered” as it has been. The truth is that now I would do this full-time, with much more frequent postings, perhaps a premium newsletter, if I could feed my family doing so. Currently the site does not generate any revenue, there’s no advertising.

10. What’s your best post?

Some of the earlier posts, research on companies such as Circuit City (CC), Ambassadors International (AMIE), and Duckwall Alco (DUCK). All were net/nets, all have had nice runs.

11. What’s your worst post?

The postings that we’ve done on Jones Soda (JSDA) may be the worst – but not because of the results. The company has been a 4-5 bagger since we initiated research, but the fact that we covered a company such as Jones shocked some of our readers, and was seemingly out of character. This is not the typical company we research, it seems very expensive using our typical metrics. But we saw value in the brand name, which is very difficult to quantify.

12. What financial publications do you read?

The Wall Street Journal, Financial Analysts Journal, and a couple of magazines that may surprise you: Kiplinger's and Money. Both have come a long way, but I’m still amazed at some of the stuff I read that can lead “do it yourself” investors down the wrong path. Investors should beware of retail publications. Sometimes the writers are not that well informed, they are journalists first, and some of the stories are misleading fluff. I know this firsthand, because I worked in the industry. Also, monthly publications require a great deal of lead time, and by the time the stories are published, the material is old.

13. What investing blogs do you read?

Seeking Alpha covers a wide array of great blogs, yours included. I really like Jim Picerno’s Capital Spectator, which I consider to be the finest site out there regarding markets, the economy, and asset classes.

14. What’s the best investment book you’ve read?

I thought David Dreman’s "Contrarian Investment Strategies" was excellent. Hagstrom’s "The Warren Buffet Way" was another great. Peter Lynch’s "One Up on Wall Street" is a classic. Not exactly a value investing book, but great nonetheless. "The Intelligent Investor" goes without saying. Sorry, that’s more than one, but I can’t help it.

15. What’s the last investment book you’ve read?

Chris Browne’s “The Little Book of Value Investing” which may be on its way (in my mind) to becoming a classic. Browne is terrific at keeping investing simple. I’ve long been a proponent of Tweedy Browne and their investment philosophy, and have had funds with them for years.

16. When did you start investing?

Started with funds in college, then stocks in my early 20’s. I was fascinated by the research/due diligence process as an investor. Was also fascinated by financial statement analysis. It never got old or boring, and I felt it armed me well to make good investment decisions

17. How have you improved as an investor?

I am more likely to throw in the towel earlier on a situation that’s going bad. I also limit my position sizes much more than in the early days, won’t take large positions in any single name. I’m also more conscious of avoiding the classic value trap. The hope is that as you mature as an investor, you make better decisions, don’t jump to conclusions too easily, and generally invest better. That’s certainly true in my case, but I hope to continue to improve.

18. How do you need to improve as an investor?

I need to expand my opportunity set. There’s more to value investing than net/nets, undervalued land and water rights, and GPT’s (going private transactions).

19. Where are the bargains in today’s market?

I hate to say it, but for me the bargains are few and far between these days. That could mean that the markets are pricey, or more likely that I’m just not looking hard enough.

20. What’s the most interesting company we haven’t heard of?

Pennwest Energy (PWE) is a Canadian Income Trust that recently came under a great deal of pressure (along with all the other Canadian Income Trusts) due to a tax law change in Canada, that will take effect in 2011. The current yield is more than 11%, but expect that to decrease. The company owns 4 million acres in Canada, and is sitting on a vast amount of oil (For full disclosure, I do own this stock).

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(If you are interested in meeting Clyde Milton, he'll be in attendance at the Value Investing Congress in Hollywood, May 8th and 9th.)

Sites Mentioned

Seeking Alpha

Previous 20 Questions Posts

20 Questions for Bill Rempel (a.k.a. No DooDahs)

20 Questions for MarketWizWannabe of RVB's Market Musings

20 Questions for George of Fat Pitch Financials

20 Questions for John Bethel of Controlled Greed

20 Questions for Robert Freedland of Stock Picks Bob's Advice

20 Questions for Joe Citarrella of Joe Cit – Intelligent Investing

20 Questions for Jay Walker of The Confused Capitalist

20 Questions for Richard Beddard of The Interactive Investor Blog

20 Questions for Todd Sullivan of ValuePlays

If you write an investing blog and would like to be featured in an upcoming 20 questions post, please send me an email with the URL of your blog.

Likewise, if you want to suggest a possible candidate for a future 20 questions post (or propose better questions to ask) send me an email.

Todd Sullivan is a value investor who writes the ValuePlays blog. ValuePlays is a value investing site focusing on individual stock analysis, investing concepts, and market commentary.

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1. Are you a value investor?

Yes.

2. What is value investing?

Purchasing a piece of a company at a price that is below a reasonable valuation.

3. What is your approach to investing?

Look for the current "red headed step children" and pick out the gems.

4. How do you evaluate a stock?

I look for industry leading companies who:

- Have a valuation that is equal to or at a small premium to other shares with a comparable earnings growth rate.

- And are increasing cash flow from operations.

All that takes about 20 minutes, if it passes those tests, I begin to dig deeper into SEC filings, annual reports, etc. Earnings call transcripts on Seeking Alpha recently have been providing me a ton of insight, not necessarily for the details, but the general "tone" of management.

5. Why do you buy a stock?

To own a piece of a company.

6. Why do you sell a stock?

The business deteriorates or its valuation becomes irrationally high.

7. What investment decision are you most proud of?

MO at the height of the litigation woes in 2003 and MCD during the "mad cow" scare of Jan 2003.

8. What investment decision do you most regret?

Selling USG in June of that year.

9. Why do you blog?

I love the market and love to write. It also makes me a better investor by forcing more detailed analysis and making me stick to my guns.

10. What's your best post?

Did SBUX's Donald Really say that?

Picked up in the WSJ Online

11. What's your worst post?

SHLD: What Will Eddy Do? Just guess work. Of course if I turn out right, pure genius. :)

12. What financial publications do you read?

WSJ, Barons.

13. What investing blogs do you read?

Value Investing News, The Stockmasters, Seeking Alpha, Fat Pitch, Gannon, Peridot, Interactive Investor.

14. What's the best investment book you've read?

"Buffett: The Making Of An American Capitalist"

15. What's the last investment book you've read?

"The Intelligent Investor" – I try to read it at least once a year.

16. When did you start investing?

At 19. I've always loved the idea of being able to buy a piece of a company and "go along for the ride".

17. How have you improved as an investor?

One word: Patience.

18. How do you need to improve as an investor?

Believe in my choices more, my biggest mistakes have not been picking the wrong companies but getting out too soon or not buying at all because I doubted my reasoning.... (see USG, CHD).

19. Where are the bargains in today's market?

I am sky high on Owens Corning (OC)... SHLD: Eddie Lampert + $4 billion in the bank.

20. What's the most interesting company we haven't heard of?

Based on its small float and daily volume, Owens Corning. It is a leader in all its product categories, fresh off asbestos bankruptcy and just posted strong results despite the housing market and a benign hurricane season. When things turn around in those areas, they take off. Trades at about 6 times earnings.

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Sites Mentioned

Seeking Alpha

Fat Pitch Financials

The Peridot Capitalist

Previous 20 Questions Posts

20 Questions for Bill Rempel (a.k.a. No DooDahs)

20 Questions for MarketWizWannabe of RVB's Market Musings

20 Questions for George of Fat Pitch Financials

20 Questions for John Bethel of Controlled Greed

20 Questions for Robert Freedland of Stock Picks Bob's Advice

20 Questions for Joe Citarrella of Joe Cit – Intelligent Investing

20 Questions for Jay Walker of The Confused Capitalist

20 Questions for Richard Beddard of The Interactive Investor Blog

If you write an investing blog and would like to be featured in an upcoming 20 questions post, please send me an email with the URL of your blog.

Likewise, if you want to suggest a possible candidate for a future 20 questions post (or propose better questions to ask) send me an email.

Richard Beddard is the editor of Interactive Investor, one of the UK's leading financial websites, and the main contributor to its blog. He's a keen private investor in smaller UK stocks and larger American ones.

Visit The Interactive Investor Blog

1. Are you a value investor?

My starting point isn't value. I look for stocks I can pigeon hole: growth, income or recovery usually value always has the last word though. Knowing why I'm buying the company helps me decide how to evaluate it. For example, if I'm looking at an income share I focus on the dividend yield and cashflows . If I'm looking at a growth share I look at earnings growth, return on capital, and margins initially. If I'm looking at a recovery share the price needs to have tanked and management must have a credible plan. But it all comes down to price in the end, and how it relates to the other factors.

2. What is value investing?

It's buying good companies on the cheap. The price is one side of the equation, what you get for it is the other side. I like my companies to have little debt or, better still net cash in the bank. Partly that's about safety - a cash rich company is unlikely to go bankrupt tomorrow, and partly it's about potential, because cash can be reinvested or returned to shareholders. A growing company needs cash to fund expansion. A recovering company needs cash to see it through difficult times. I don't mind if a company I own takes on debt, but I like to get in there before it does. Other signs I look for are less tangible: straightforward accounts, companies that put substance ahead of style, insiders buying, reputation...

3. What is your approach to investing?

I'm a long-term bottom up investor. I don't pretend to read the markets, but I buy the stocks I do for specific reasons which means they are often un-correlated. That protected me from the savage downturn between 2000 and 2003. I suppose you could say I'm a contrarian, though I don't set out to do the opposite of everyone else. I just set out to do my own thing.

4. How do you evaluate a stock?

It doesn't take me long at all. Maybe an hour or two. But finding the stocks to evaluate takes a lot longer than that. I follow all the US shares covered by the Value Line Investment Survey, and all the shares listed on the London Stock Exchange. I reckon that's 4,000 odd companies, so you can imagine - I don't have much time to spend on each. I don't use screens to whittle down the number as I think they are too literal. If a company has one year of low growth in five, it's not a growth share. That's mad. I think the 'fuzzy logic' of the human brain is a better filter. But Value Line and similar UK services (I use Sharescope) allow you to page through data very quickly. It takes me about four hours a week for both markets and I get through all 4,000 shares in about three months. I do a lot on the train, commuting to and from work. When I've found a company I like, I check for recent key developments and then read some of its latest annual report. I check the financials because data from third parties can be wrong, or misleading, and I read what the executives say. I don't spend more than a couple of hours on a single stock. If I can't make up my mind, then I just move on. I'll come back to the stock in three months time anyway.

5. Why do you buy a stock?

That depends on what sort of stock it is :-) Fundamentally I buy a stock because I can see potential in it, and the price seems low. I compare earnings to cashflow to make sure the profits have substance, and I use the conventional ratios (price to earnings, price to sales, price to cashflow, and dividend yield) and compare them with ratios for previous years and the market in general. But ratios are often useless for cyclical and recovery shares where, for example, earnings can be very low but the price relatively high in anticipation of the rebound. That's why I tend to avoid cyclical shares, and exercise more judgement with recovery shares.

6. Why do you sell a stock?

Usually because I have to! Buy-out firms are very active in the UK and because they're on the prowl for profitable, undervalued, cash-rich companies they tend to single my portfolio out for attention. It's unwanted. I know some traders specialise in picking stocks likely to fall to private equity but I'm in for the long-term. Otherwise I sell when I want to buy another stock, which I think has demonstrably more potential. Hopefully that's because the original company has increased in value, but it could be because I think I got it wrong.

7. What investment decision are you most proud of?

The ballsy recovery plays. I think, perhaps Inchcape. I bought it in 2000 for 52p (adjusted for splits), and it's worth £5.35 today - a ten bagger! It's pretty easy surviving a crash with one of those in your pocket.

8. What investment decision do you most regret?

I bought Dialog (which became Smartlogic) a week before I bought Inchcape. It delisted when my shareholding was worth pennies, a dot.com share in every sense. For some reason my broker couldn't remove my phantom Smartlogic holding from my account. It remained there for years, haunting me.

9. Why do you blog?

Because I've got a story to tell. Being the editor of an Internet site I could write regular features - we have plenty of those. But I think blogging has more potential. I've got to know you because I blog, and lots of other people. I think life's more interesting if you put yourself about a bit. You learn more when you blog. Although I'm lucky in that I'm paid to blog, I also have a personal blog - which gives me just as much satisfaction.

10. What’s your best post?

I think it's the "The cheapest six shares on the market". It's an exclusive, it got loads of comments, and it's about value investing!

11. What’s your worst post?

Right now, I'd have to say Win a copy of Ken Fisher's "The Only Three Questions that Count" because I've got five copies of a great book to give away and nobody wants them. Perhaps the question was too difficult!

12. What financial publications do you read?

I really don't. I used to read the Financial Times, The Economist, The New York Times and Fortune but I canceled the subscriptions when I decided to blog. I figured if I wasn't using the Internet, what was the point of blogging? I'm glad actually, because I felt guilty about buying those newspapers and then only reading a portion of them. A colleague gives me the FT after he's finished with it - but it's full of holes left by the stories he's cut out. I do read the newspapers online, sometimes.

13. What investing blogs do you read?

Here is a selection: A is for... The Adam Smith Institute, Alphaville, BBC's Nick Robinson's News Log, CXO Advisory, Gannon on Investing - I particularly liked this post, Google Earth, Stumbling and Mumbling, Value Investing News, Value Plays, and Wallstrip.

14. What’s the best investment book you’ve read?

I recently said Ken Fisher's book "The Only Three Questions that Count" was the most stimulating investment book I'd ever read. I stand by that because it caused me to re-evaluate everything. But in doing this interview, I realise I owe an enormous debt to Peter Lynch, and "One Up on Wall Street". Everything I said about debt and knowing what type of company you are investing in (cyclical, growth, recovery etc.) that's straight from him.

15. What’s the last investment book you’ve read?

That would be "The Only Three Questions That Count". In fact it's so challenging (in the right kind of way) I'm still reading it. And I intend to read it again.

16. When did you start investing?

I started in 1995. I got an interest only mortgage and needed to find a way to pay off the capital. First I bought mutual funds, then I set up an investment club and finally I started buying shares on my own.

17. How have you improved as an investor?

I think I am more aware of my limitations. Although I believe the only way to progress is to innovate and try out new things, I do it iteratively now. Also I pay more attention to the past. One way to learn about a company is read its annual reports last time its price slumped (assuming it did).

18. How do you need to improve as an investor?

There are a hundred million ways I could improve as an investor. All I can do is keep on plugging away, evaluating what I do, and trying new things. Actually, that's from Fisher - be more scientific.

19. Where are the bargains in today’s market?

It looks like larger companies to me and that's where my US/international focus is. I'll continue to focus on smaller UK companies too because there are always bargains there, though they might be slightly harder to find. Also I think we may be in for a period of supremacy for growth stocks, in which case I'll be looking for the value in them :-).

20. What’s the most interesting company we haven’t heard of?

Well, that's easy for me because most of the UK companies I own, I suspect you won't have heard of. I think HMV is very interesting. It's an iconic British entertainment retailer with lots of stores in Japan and Canada. Amazon, Apple and the supermarkets are eating into it's CD, DVD and book sales. Digital media is threatening to make its products redundant. You'd have to be a be a contrarian with balls of steel to stick with HMV , but it's still profitable, it has a new chief executive who launched a recovery plan a few days ago and it's not very indebted. Either it's facing extinction or it's a classic recovery story. I need to re-evaluate HMV but, despite recent falls, I won't be rushed or shaken out. I cycle through the market alphabetically by sector. Right now I'm on 'Food Products', 'Specialty Retailers' is at least month and a half away.

Visit The Interactive Investor Blog

Previous 20 Questions Posts

20 Questions for Bill Rempel (a.k.a. No DooDahs)

20 Questions for MarketWizWannabe of RVB's Market Musings

20 Questions for George of Fat Pitch Financials

20 Questions for John Bethel of Controlled Greed

20 Questions for Robert Freedland of Stock Picks Bob's Advice

20 Questions for Joe Citarrella of Joe Cit – Intelligent Investing

20 Questions for Jay Walker of The Confused Capitalist

If you write an investing blog and would like to be featured in an upcoming 20 questions post, please send me an email with the URL of your blog.

Likewise, if you want to suggest a possible candidate for a future 20 questions post (or propose better questions to ask) send me an email.

Jay Walker's passion for investing was kindled in 1996 when he was given a modest amount to invest, and within a couple of years of studying, had written his own book, "The Brink's Truck Burst Open on Wall Street! A Holistic Approach to Finding The Easy Money In Common Stocks". Jay began writing The Confused Capitalist in early 2006. He's Canadian (as his spelling attests).

Visit The Confused Capitalist

1. Are you a value investor?

Yes. However, I think that almost all investors consider themselves value investors. It seems to be a popular delusion – perhaps I suffer from it too!

2. What is value investing?

Value investing is buying a physical asset or perceived income stream at some level below its true value. Like Warren Buffett, however, I don’t think you can really separate “growth” and “value” investing. They are inextricably entwined.

3. What is your approach to investing?

I try to invest about 50% to 70% of my portfolio in areas that I think are favourable to my strengths (my circle of competence is financially-related companies) and that market is weak at pricing correctly (under-explored areas of the market, like small and micro-caps).

I achieve some level of diversification, however, by using ETFs or ETF style investing for the balance of my portfolio. On that side, I tend to focus on sectors that pay and grow dividends regularly, as the market still hasn’t really priced those correctly. I’m also not afraid to use leverage-type stocks/ETFs on this side of my portfolio.

4. How do you evaluate a stock?

I have a process that I go through that I illustrate on my small/micro cap blog; an example is located here.

I can usually discard most stocks I scan fairly quickly, especially since in the small and micro cap field there’s so many poor quality stocks. However, the better ones have to make it through the aforementioned process. This usually takes at least several hours, once I’ve determined it appears to be a suitable candidate. This process also helps me hold a stock longer, as I can truly consider whether my investment thesis remains intact at various times after the initial investment.

5. Why do you buy a stock?

Because I perceive that the risk/reward is favourably skewed towards buying this stock. Typically, I have to perceive the potential gain over the next year as 20% or better. Using 20% as a benchmark helps me to establish my margin of safety.

6. Why do you sell a stock?

It’s usually because I perceive that another stock holds a better chance of achieving that minimum 20% gain. Then, I usually pick the stock with the weakest future risk/reward ratio to eliminate from my portfolio.

7. What investment decision are you most proud of?

Buying American Oriental Bioengineering (AOB) in the summer of 2005 at under $2/share. It was growing its earnings at better than 50% annually, and the PE was only nine; it more than doubled within a couple of months. However, any dummy could have spotted this beauty – my regret is that I only loaded up to the tune of 12% of my portfolio – I should have upped this to at least 15% to possibly to as high as 20% of my portfolio.

Opportunities like this are rare, and should be taken advantage of to the extreme.

8. What investment decision do you most regret?

Getting caught up in the “spec tech” bubble in 1999/2000. I realized that I was taking tremendous risks with my portfolio and it ended up I couldn’t sleep well at night. I finally cashed out of all the trash I was in; the decline stung me, but fortunately, I left this part of the market before the worst damage happened. On the flip side, this was the genesis of my true conversion as a value investor in my heart, and not just in my mind.

9. Why do you blog?

To learn more and to consolidate the most important parts of that learning by writing it down in a format that makes sense to me. And also to teach others; to help them avoid mistakes and point out how to invest with favourable odds.

10. What’s your best post?

I like ones where I highlight some important, but not often thought about, information. Like you Geoff, I think that stock returns into the future aren’t going to look like the favourable 20th century returns. A paper I highlighted here is probably my favourite in that regard.

11. What’s your worst post?

They’re like my children, I love them all (just differently).

12. What financial publications do you read?

As a Canadian who invests almost solely in the Canadian market (I fear what I see as the inevitable drag on Canadian currency returns, due to what I believe will be fate of the US currency over the next decade: down. Which is why I’m generally avoiding US stocks at this time), I read publications like “Canadian Business”, “Money Sense”, “Canadian Money Saver”. However, I also read “The Economist” and “Fortune” magazines on an irregular basis.

13. What investing blogs do you read?

Of course, I have all the links on the right hand side of my blog – and I follow them up regularly. In the category of providing active market commentary, I enjoy The Big Picture (Barry Ritholtz) and Random Roger (Roger Nusbaum) and James Picerno’s The Capital Spectator.

Research or aggregators I read regularly include Abnormal Returns and CXO Advisory, and for thinking more deeply about particular stocks and specific value issues, I enjoy your blog, Gannon On Investing, Rick Konrad’s Value Discipline and Cheap Stocks.

14. What’s the best investment book you’ve read?

I know it’s not the deepest book ever, but I really enjoyed my first “primer” if you will, “One Up on Wall Street” by Peter Lynch. I’ve re-read the book many, many, times, and it’s still as full of nuggets as ever.

I also enjoy books that get you to think differently about investing. “Warren Buffett Speaks”, by Janet Lowe, provides sayings and homilies from Warren Buffett. These too don’t seem to be deep, yet they continue to work and chip away at the mind, and after a time really help you to become a better investor.

15. What’s the last investment book you’ve read?

“The Only Three Questions That Matter”, by Ken Fisher. I review it on my blog in two parts.

16. When did you start investing?

About 1996. I started with a small amount and an acquaintance of mine at the time was a mining stock promoter. He’d talk about stocks as if he really knew something about them, and this somehow challenged me to go out and learn more.

I was also arrogant enough to believe that I could immediately outperform the market. Unfortunately, as Rick Konrad says, being good at stock picking involves probably the “longest apprenticeship” in the business or work world.

Over the ten year period, I would have been better off in an index fund, although my track record appears to be improving over the past few years.

17. How have you improved as an investor?

I have a better process, better knowledge, and more willingness to completely ignore some types of stocks, whereas previously I dabbled in this, that, and the other thing.

18. How do you need to improve as an investor?

Patience. I need to continue to work on this to become better. Realizing that you’re going to stick with a stock for a longer period of time, forces you to become more discerning and discriminating at the “cash register”, if you will. To decide that many stocks don’t really meet all the buying criteria.

19. Where are the bargains in today’s market?

I think that health care/pharma looks good in terms of historical comparisons. It’s kind of down and beaten up in most investors’ minds, yet this is an area with long-term advantages and favourable long-term trends. However, I wouldn’t even really term that area as a “bargain”, only that it seems relatively cheap given the overall quality and longevity of its’ business advantages.

I also see a lot of investors I respect kicking tires - or more - in the lumber sector. I have to admit I don’t know that much about this area, and generally don’t like investing in capital-intensive industries, although I understand that a wave of industry consolidation is expected here, meaning that – over the short-term anyway, capital expenditures will probably be light, as plants are shuttered.

20. What’s the most interesting company we haven’t heard of?

Private equity and hedge funds seem to be all the rage. One company in this regard that’s produced very good returns is Canada’s Onex Corporation (OCX on the TSX). After a recent period of underperformance earlier this decade, the stock seems to have turned around over the past few years and is doing well. Anyone interested in a public company (at a reasonable price) doing private equity should explore this stock.

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Sites Mentioned

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Previous 20 Questions Posts

20 Questions for Bill Rempel (a.k.a. No DooDahs)

20 Questions for MarketWizWannabe of RVB's Market Musings

20 Questions for George of Fat Pitch Financials

20 Questions for John Bethel of Controlled Greed

20 Questions for Robert Freedland of Stock Picks Bob's Advice

20 Questions for Joe Citarrella of Joe Cit – Intelligent Investing

If you write an investing blog and would like to be featured in an upcoming 20 questions post, please send me an email with the URL of your blog.

Likewise, if you want to suggest a possible candidate for a future 20 questions post (or propose better questions to ask) send me an email.

Joe Citarrella is a student at Yale University who began investing as a teenager in order to debunk family myths about the stock market. Joe writes JoeCit - Intelligent Investing, a value investing blog that combines research and advice. Joe is a devoted value investor whose portfolio holdings and results can be seen at the About section of his blog.

Visit Joe Cit – Intelligent Investing

1. Are you a value investor?

Absolutely.

2. What is value investing?

Value investing is the practice of buying a security for less than it’s intrinsically worth. Arguably the most important element of successful value investing is the concept of a margin of safety. If you feel a stock is worth $20, for instance, but it sells for $18, that’s simply not enough of a cushion. $10-$15 might be more like it, in my opinion. Looking for the no-brainers is a hallmark of “true” value investing.

3. What is your approach to investing?

On a very broad level, I look for simple, easily understandable businesses that sell for less than they’re worth. Because of their general scarcity, that often means focusing on just a few really good ideas and putting a large chunk of my portfolio to work in just one or two “theses” that I believe have a high probability of outsized returns. In seeking out these opportunities, my approach is a combination of following the so-called paper trail and, occasionally, using quantitative screens to find stocks matching certain filters. In general, I’ll use guiding criteria that, most of the time, lead me to say "no" quite easily. But this narrows the playing field, forces efficient use of time, gets rid of noise, and enhances returns while lowering risk.

4. How do you evaluate a stock?

After a stock passes some basic filters and meets my criteria of a simple business that appears undervalued, I’ll take a look at the most recent 10-K. I’ll read management’s discussion and check the company’s financial position and operating results over the past several years. Normally, before digging very deeply, I’ll already have an idea what the thesis for an investment is.

Naturally, buying a company for half of book value is an entirely different ballgame than buying a company because of its growth potential or operating successes. Because I’ll do both, I need an idea of why I’m looking into the company in the first place. Doing so also allows me to know what to look for and where to look. This seems obvious but it’s often forgotten. Lots of mistakes are made by people who forgot what they were setting out to do.

As I continue digging into the numbers, management, etc., the stock will have to continue passing filters and tests. In the process, I look for reasons to say "no" rather than reasons to say "yes". When it’s tough or impossible to say "no", you can be more confident in your affirmative decisions when you make them. Buffett’s twenty punch rule should absolutely be taken into account by every investor.

Lastly, while I used to be very big on spreadsheets and fancy valuation models to figure out an intrinsic value, I tend not to rely so heavily on them today since I won’t invest unless the opportunity smacks me in the face. Because valuation methods are by nature imprecise and sensitive, they’re of little use when you’re in the game of looking for huge margins of safety. By the time I put a significant amount into a company, I’d estimate that anywhere between 20-40 hours of research has been done.

5. Why do you buy a stock?

I buy a stock when it’s so undervalued as to give at least a 30-40% margin of safety. Naturally, opportunity costs are considered seriously, so that this margin is a minimum and may be quite a bit higher if other opportunities offer as much or more of a margin.

6. Why do you sell a stock?

I’ll sell “cigar butts” when they reach what I estimate to be their fair value, but I try to hang on to the great businesses unless they become absurdly overvalued. Obviously, I’ve broken my own rules on occasion, but this is the basic goal.

7. What investment decision are you most proud of?

It’s hard to say which decision I’m most proud of, but in terms of annualized performance the best to date has been my relatively recent investment in Concord Camera (LENS). I bought in around $2.40 split adjusted in October/November, and it’s currently trading around $4.80.

8. What investment decision do you most regret?

I wish I knew where to start on this one. I’ve definitely made some stupid decisions, and most of my mistakes were when I tried doing things I didn’t fully understand. For instance, one of my worst investments was in Vitesse Semiconductor (VTSS) back when shares traded around $1.50.

I was basically trying to piggyback on Robert Chapman’s 13D filing, but didn’t know much at all about the business. In fact, the business stinks and I had no good reason to be in it as the whole thing was way outside my circle of competence. Not surprisingly, I ended up getting out at about 60 cents on the dollar, and I probably deserved much worse than that.

9. Why do you blog?

I blog for three reasons. First, it helps me crystallize my own thoughts and focus on what’s important. Second, whether or not it’s true, I feel like I’m helping others handle their own investments instead of relying on brokers or mediocre mutual funds – “giving back” in some small way, you might say. Third, it’s fun and I get a kick out of it.

10. What’s your best post?

I’m personally a big fan of two posts in particular, namely my second post on Concord Camera and my post on Whole Foods Market (WFMI), which actually defers to Gannon On Investing on homebuilders.

11. What’s your worst post?

By far the worst post was on Winn-Dixie Stores (WINN). I completely botched the facts, which was both ironic and embarrassing given that the posts talk about how important it is for investors to “read the fine print.” I should have taken my own advice, because I used the much larger pre-bankruptcy share base to calculate a market value, which dramatically overstated the true numbers. For posterity and a good laugh, I’ve left the post up with editing notes added in.

12. What financial publications do you read?

I read the Journal, NYT Business Day, and Seeking Alpha. I’ll occasionally pick up Investor’s Business Daily or the Financial Times, but those are much rarer than my quotidian visit to NYT. Also, I’ll read tons of books on investing – anything I can get my hands on. At any given point I’m typically reading 2 to 3 books on finance or investing.

13. What investing blogs do you read?

I stop by several blogs on any given day (probably too many to mention). I suppose some of the most notable are Yaser Anwar’s Investment Ideas, The Kirk Report, Clyde Milton’s Cheap Stocks, and, of course, Gannon on Investing.

14. What’s the best investment book you’ve read?

It’s hard to comment on the best investment book I’ve read, since any good one offers something different but no less important. In terms of the book that I believe is an absolute must read, it’s got to be Ben Graham’s "The Intelligent Investor" (I think any edition is fine). Phil Fisher’s "Common Stocks and Uncommon Profits" is also an important read. And, of course, reading "Warren Buffett: Essays on Corporate America" should be on the list since it’s a coherent and well-edited compilation of Buffett’s letters to shareholders, which are essential for any business person or investor.

15. What’s the last investment book you’ve read?

I just finished Michael Moe’s "Finding the Next Starbucks", which I wrote about in a recent post.

16. When did you start investing?

I started reading and learning around 16 or 17, and actually put real money to work around 17 or 18. I started because my family had little to no understanding of finance, so I decided to go on a mini crusade to prove that it can’t be that hard. I wanted to learn what made businesses tick and, of course, how to value them. I became consumed by the process and started having fun, so I stuck with it and I haven’t looked back.

17. How have you improved as an investor?

I’ve improved a great deal since I started. The two most important things I’ve come to figure out are patience and knowing thyself, if you will. While I had known in theory that an investor needs to be patient and stay within his or her circle of competence, it was a lot easier said than done.

As humans, we have psychological tendencies to want results immediately and to think we are better and know more than we actually do. But successful investors can do neither. So in that way, investing is a great exercise in humility and self-control. The ability to stomach volatility and wait while prices fall or stagnate is not an easy process.

Coming to know what you don’t know (and in my case, there’s been a lot of that) is also not an easy process. But if you stick with it and come to learn this through experience, it pays off big time in the end, if for nothing else than growing as a person.

18. How do you need to improve as an investor?

I still need to work on patience and self-control, but aside from that I think I need to work more on my start-to-finish approach to finding investments. It doesn’t lend itself well to covering a lot of ground, and while that’s never the goal per se, I feel I can be more efficient in my research by tweaking the process a bit. Some friends have commented that I should work on portfolio management/allocation, since I tend to be very heavily focused on some highly volatile, tiny companies. This doesn’t bother me a bit, but I’ve taken some heat for it.

19. Where are the bargains in today’s market?

I’m generally bad at pinning down broad areas to find bargains, but I’d say micro to small cap stocks are (usually) where the biggest bargains can be found. It should always be taken on a case-by-case basis though.

20. What’s the most interesting company we haven’t heard of?

I could put in a shameless plug for Concord Camera, but my blog has enough of that. I guess it depends on how you define “interesting.” There are some nifty business models, like Harris & Harris (TINY), the publicly traded nanotech fund. There are also some dominant franchises with products used in everyday life that no one thinks of or knows about.

For instance, Schweitzer-Maudit (SWM) manufactures the papers used in about 70% of the world’s cigarettes. Everyone knows the cigarettes, but no one even thinks of the papers. It’s fascinating that they have such a huge market share, but remain totally uninteresting to investors. In fact, I’m doing some research on the company now, and it looks pretty attractive. I’ll probably write a post on it soon.

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Sites Mentioned

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Previous 20 Questions Posts

20 Questions for Bill Rempel (a.k.a. No DooDahs)

20 Questions for MarketWizWannabe of RVB's Market Musings

20 Questions for George of Fat Pitch Financials

20 Questions for John Bethel of Controlled Greed

20 Questions for Robert Freedland of Stock Picks Bob's Advice

If you write an investing blog and would like to be featured in an upcoming 20 questions post, please send me an email with the URL of your blog.

Likewise, if you want to suggest a possible candidate for a future 20 questions post (or propose better questions to ask) send me an email.

Robert Freedland has been a stock market enthusiast longer than he has been a practicing physician. Starting at the age of 13 with a single investment he has developed his own investing and trading strategy drawing from value and earnings momentum writers. Sharing both his passion for investing as well as politics, he started writing online in 1998 on the Delphi Boards. His current blog, Stock Picks Bob's Advice, has been active since 2003.

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1. Are you a value investor?

Quite frankly, value is an important part of my evaluation of stocks, but not the entire driving force behind deciding on a stock pick. I view myself as an eclectic investor, who is part momentum, part value, and part technician. If I can find a stock that fits my other criteria, I am reassured if I can find everything that I am seeking at a reasonable valuation. Even though I look at price/earnings, price/sales, return on equity, balance sheets, and free cash flow, probably I would be best described as a GARP investor, Growth at a Reasonable Price.

2. What is value investing?

In general, I would suggest that a value investor is someone who is interested in the intrinsic value of assets, minus the liabilities, and what a 'break-up' valuation might be for a company. They might be interested in buying stock in companies, as they would say, 'under book'. I also believe that growth investors need to take into consideration valuation when making purchases which simply suggests that instead of a static, or break-up valuation, they also consider future earnings and cash flow in determining an appropriate valuation of a stock.

3. What is your approach to investing?

There really are three parts to my investment approach. First of all, I have chosen to profile the 'perfect stock' that meets my criteria of consistency in financial results. I like to find companies that first of all have good momentum on the day I decide to purchase them; that is, they are on the list of top percentage gainers that particular day. After that, I review the most recent quarter expecting them to have increasing revenue and earnings. If they can exceed expectations that is an added plus. Also, if they raise guidance, I give them extra "points" in my evaluation.

Next, utilizing Morningstar's "5-Yr Restated" financial page, I check to see that revenue growth is persistent, that is it is more than a one quarter event. I also wish to see persistence in earnings growth, an increasing dividend is a plus, a stable number of shares outstanding, positive and if possible growing free cash flow, and a reasonable balance sheet with a current ratio of 1.25 or greater.

I take a look at valuation, looking for a moderate P/E if possible and a PEG between 1.0 and 1.5 if possible. In addition, I check the price/sales ratio relative to other companies in the same industry. I also review the return on equity. Finally, I take a look at the short interest. If the company has a short interest over 3.0, and if they have just reported good news, I find this encouraging.

The other part of the approach involves deciding when to buy and when to sell shares. And when after selling stock to either 'sit on my hands' and shift money into equities or to shift in the other direction. I use the activity of my own portfolio to determine my 'course of action'. In other words, if I sell stock on 'good news' (appreciation targets reached) I use that as a signal to add a new position (unless I am at my maximum of 25). In the same manner, if I sell a stock on 'bad news' (either fundamental information or a stock price decline such that it hits my sale target on the downside), I 'sit on my hands' shifting money from stock into cash (unless I am at my minimum of 6 positions--in which case I do go ahead and replace the equity).

4. How do you evaluate a stock?

This process is generally fairly quick, using the internet , I can review stocks fairly quickly and pick a stock probably in 10 minutes of work. However, I may go through many individual evaluations before arriving at a suitable candidate.

5. Why do you buy a stock?

I purchase a stock when I have a signal from my portfolio (see question #3) to indicate the 'need' to purchase a new stock. After that, I go through my usual screens to find a new name.

6. Why do you sell a stock?

I sell stock either on 'good news' or 'bad news'. My general philosophy involves selling poorly performing stocks quickly and completely and selling appreciating stocks slowly and partially.

On good news, as I like to put it, I sell 1/6th of my holdings at targeted appreciation points: 30, 60, 90, 120, then 180, 240, 300, 360, then 450, 540% etc. appreciation points.

On the downside, I sell a stock if it incurs an 8% loss after an initial purchase, if it goes back to break-even after a single sale at a 30% appreciation target, or if it retraces to 50% of its highest appreciation sale after being sold partially more than once. For instance, if I have sold portions of a holding 4 times (at 30, 60, 90, and 120% appreciation points), I would allow the stock to retrace back to 60% appreciation over my cost before unloading the entire position.

Furthermore, I always retain the right to sell any position on any announcement that I construe as fundamentally 'bad news' for the company. This might mean an SEC investigation, lawsuit, or whatever.

7. What investment decision are you most proud of?

Probably my best pick was the Coach (COH) stock that I purchased at a cost basis of $8.33 in February, 2003; I have sold portions of that holding 9 times (at 30, 60, 90, 120, 180, 240, 300, 360, and 450% appreciation points.) Coach closed at $49.98 on February 16, 2007.

8. What investment decision do you most regret?

On July 18, 2003, I wrote a post on Hansen Natural (HANS) when the stock was trading at $5.38. Adjusted for subsequent two-for-one and four-for-one stock splits, this worked out to a basis of $0.6725 for my blog post! With the stock closing on February 16, 2007, at $36.90, this represented a 5,487% increase in price since my post. And I didn't buy any shares!

9. Why do you blog?

I have been investing and following the stock market for over 39 years. I believe that most individual investors do not have any disciplined approach to investing. I believe that with a little effort and homework, an individual can put together a portfolio of high quality stocks that will outperform the general indices. I write my blog to provide both a discipline for myself to follow my own trading rules, but also to test out my ideas in a public forum. I enjoy sharing ideas with readers, I enjoy the discussions that ensue (like this one) and believe I am a better investor for this effort.

I am also a bit of a dreamer and hope that my writing can lead to something more substantial. I am not sure what this might take the shape of. But I try very hard to give each reader more than what they could expect from a blog and maybe just maybe I can make a difference in the investment world.

10. What's your best post?

Probably the best idea I ever wrote up was Hansen (see question #8).

11. What's your worst post?

Quite frankly, with more than 1,000 entries in the blog, I am not sure what the worst idea I ever shared was. However, I continue to review past stock picks, sharing with readers the "good, bad and the ugly" (with apologies to Clint Eastwood).

12. What financial publications do you read?

I read a lot of the popular magazines like Money, Business Week, Fortune, Forbes, Smart Money, and Kiplinger's. I enjoy reading the Investors Business Daily when I get a chance, and also occasionally read The Wall Street Journal. Much of the financial information I read comes from the internet as well.

13. What investing blogs do you read?

I dabble in reading other blogs. I read Random Roger, Seeking Alpha, 10Q Detective, Mark Cuban, The Kirk Report, The Big Picture, Footnoted.org, Controlled Greed, and of course Gannon On Investing among others.

14. What's the best investment book you've read?

I have to say that my investment philosophy has been shaped by three books, first on the list is "How to Make Money in Stocks" by William O'Neil, then "100 Best Stocks to Own in America", by Gene Walden, and "How to Make $1,000,000 in the Stock Market---Automatically" by Robert Lichello. These books led me to the concept of profiling stocks for potential appreciation, and also developing a way to respond to the market by examining one's own portfolio.

15. What's the last investment book you've read?

Probably the last book I read on investing was Pat Dorsey's "The Five Rules for Successful Stock Investing".

16. When did you start investing?

I made my first stock purchase at the age of 13 (back in 1967) when I took my Bar Mitzvah gifts (total of $350) and purchased five shares of Global Marine at about $62. My soon-to-be brother-in-law Bart told me he had just purchased 20 shares and it was a great idea. When I was younger, my dad used to have me read out the stock prices to him from the paper. Anyhow, after this purchase, even though the company announced they were suspending gold exploration activity the week after my purchase and the stock price collapsed, I was soon hooked on investing.

A year later I purchased 5 shares of Litton Industries with my odd jobs money and lost that too. I started reading, I believe the first book I read was Louis Engel's book on the stock market and have been involved since.

17. How have you improved as an investor?

It has taken me literally years to develop any disciplined approach to investing. For years I have been "seat of the pants" buying and selling without any particular strategy. With my blogging and the rules I have developed I have become particularly disciplined and have a successful portfolio as well!

18. How do you need to improve as an investor?

I need to get out of margin once and for all and to segregate my funds so that I am not using my investment portfolio to do things like make payments on my car (I am) or re-roofing my house (I did).

19. Where are the bargains in today's market?

My entire approach is based on the premise that I allow stocks to present to me for analysis. I do not know what stocks will be "picked" on Tuesday. I respond to market activity rather than presupposing that I can determine where the values are. This attempt, which I call my "Zen" approach to investing, allows me to find stocks that are "coming to me" rather than the other way around. To answer your question, "I don't know."

20. What's the most interesting company we haven't heard of?

Every once in awhile, I come across a small company that shows up on the top percentage gainers list with great numbers that nobody has ever heard of (almost). A company that I recently wrote up, that I personally do not own any shares (but that my stock club did recently purchase shares in ) is Chase Corporation (CCF). This stock has a relatively low P/E, pays a dividend, and is growing its revenue and earnings fairly consistently. It's a tiny company with only 4 million shares outstanding yet which has a lot of criteria that fit my "profile" of a successful stock market pick.

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Sites Mentioned

Visit Seeking Alpha

Visit 10Q Detective

Visit Footnoted.org

Visit Controlled Greed

Previous 20 Questions Posts

20 Questions for Bill Rempel (a.k.a. No DooDahs)

20 Questions for MarketWizWannabe of RVB's Market Musings

20 Questions for George of Fat Pitch Financials

20 Questions for John Bethel of Controlled Greed

If you write an investing blog and would like to be featured in an upcoming 20 questions post, please send me an email with the URL of your blog.

Likewise, if you want to suggest a possible candidate for a future 20 questions post (or propose better questions to ask) send me an email.

John Bethel bought his first stock in 1986, and became devoted to value investing that same year after reading Warren Buffett’s “Superinvestors of Graham-and-Doddsville.” He became self-employed in 1994, and began investing all his own money at that time.

John writes Controlled Greed, a blog reporting his adventures as a stock picker. He personally owns every stock recommended on the site. Controlled Greed launched in April 2005; John's reported stock picks have averaged +36.9% for the life of the blog through 2006. His stock picks averaged +27.5% for the year 2006 (both figures include dividends).

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1. Are you a value investor?

Yes.

2. What is value investing?

Stated simply, it’s buying a stock that’s trading for less than the underlying value of the company it represents. There may be different ways of measuring this, such as discounts to tangible book value or sum-of-the-parts analysis, among others, but that’s basically what it is.

3. What is your approach to investing?

I want to buy a company that’s undervalued, and that I can see a way or several potential ways for the value to be realized over the long term. Sometimes I get lucky and the stock price rises in several months, but my window upon buying is three to five years.

4. How do you evaluate a stock?

The process of finding a stock to invest in can take days or years. I start by reading, reading, and reading some more. I think you need to love reading generally to be a good value investor. My memory is that Warren Buffett told Charlie Rose on Rose’s PBS show that when he comes to the Berkshire Hathaway office every day he starts by reading newspapers, business magazines and annual reports. And that reading is the bulk of his job.

I also follow the holdings of some of my favorite investors. One of the things I like about Christopher Browne’s "The Little Book of Value Investing" is that he writes about this very approvingly. If the guys at Tweedy Browne are looking at what Peter Cundill, Mason Hawkins and Marty Whitman hold, and they’re all looking at each other’s portfolios, then it’s something you and I should be doing too. It’s a great way to build a list of candidates for investment.

That said, you shouldn’t buy a stock just because one of your favorite investors owns it. They may have bought it at a much lower price than what it’s going for once it’s reported, for one thing. And you still need to research it to make sure you understand it. Plus, many of the top-notch investors have portfolios with billions of dollars of assets -- meaning they can’t take advantage of some smaller bargains.

Reading all this stuff as the years go by builds up a knowledge base. Sometimes I come across a story that makes sense, I research to confirm it, and make the stock purchase. Other times, it takes longer.

An example is my investment in 3i Group (TIGRF), which trades on the London Stock Exchange under the symbol "III". I first read about 3i in the Financial Times in the 1990s. It had been around since the 1940s but was going public at the time. It got caught up in the tech bubble.

Then fast-forward to January 2005 and Meryl Witmer of Eagle Capital Partners recommended 3i in that year’s Barron’s Roundtable. I researched it myself and everything checked out -- the company had new management committed to returning cash to shareholders, it traded below net asset value, and it had a competitive advantage in doing small-to-medium sized deals in Europe. All this, and it was just beginning to make private equity deals in Mainland China and India.

Anyway, once I have a portfolio candidate, I look at its financial statements, search Barron’s, WSJ.com, FT.com, Bloomberg and Reuters. I also do Google searches and sometimes review analyst reports.

5. Why do you buy a stock?

I have conviction it is undervalued relative to the underlying business the shares represent, and see one or more potential reasons for its value to be realized over the next several years.

6. Why do you sell a stock?

The easy answer is because it has become fully valued. The reality is much harder -- though it’s a good problem to have. I used to have a set rule that if the stock doubled in price, I’d sell half of my position to get my original capital back. Then the position became a free ride. I still do that when the situation arises. But now, I sometimes sell 25% of a holding when it’s appreciated a third or more.

This is something I’m still working out. Basically, I probably buy too soon and sell too soon.

7. What investment decision are you most proud of?

This predates the blog, which launched in April 2005. I’m most proud that I stayed true to my value orientation throughout the tech bubble. I never bought AOL, Yahoo!, Cisco, JDS Uniphase or any of that crowd. I was never even tempted, really. Looking at my brokerage statement was like watching grass grow, but I was patient.

8. What investment decision do you most regret?

This also predates Controlled Greed. I’m a stock picker and I’ve had more winners than losers, but I’ve had losers just the same. The two I most regret are LTV (the steel company) and Friedman’s (jewelry store chain). LTV went completely bust and I dumped Friedman’s for a big loss before it filed bankruptcy.

This is a good time to reference something Sir John Templeton said. My memory is him saying that successful investors get six out of 10 stock investments right, and mediocre investors get four out of 10 right. So anyone following my blog should understand that if I list 20 stock picks, six would be losers -- if I live up to Sir John’s standard! I just hope that my losers will be dead money as opposed to blowups. But there are no guarantees.

9. Why do you blog?

I enjoy writing and I enjoy investing. I’d always had a fantasy about writing my own investment newsletter, because most of them are awful. But I didn’t want to borrow the money needed for renting mailing lists, paying paper and printing costs, marketing expenses, and paying postage. So when I started hearing more and more about blogging, I decided to give it a try. I see stock-picking blogs like Controlled Greed “taking on” investment newsletters, if they take on anything.

I also like serving my readers -- whether through letting them see what I’m buying or selling, or perhaps helping speed-up the learning curve if they’re newer investors. One of the most rewarding developments has been the complimentary emails I’ve received from industry professionals as well as retail investors.

Finally, blogs and blogging are still relatively new. It will be interesting to see what blogs become and it’s fun being at least a tiny part of that.

10. What’s your best post?

Well, since I’m a stock picker, I guess it’s the post recommending Deckers Outdoor Corporation (DECK), since it has more than doubled since being mentioned.

11. What’s your worst post?

With the stock picks, I guess the worst are where I’ve recommended Media General (MEG) and Takefuji Corp. (TAKAF), since they’re both down a lot. But I remain cautiously optimistic about their long-term prospects and continue holding them.

Aside from stock picks, the worst was linking a Bloomberg columnist who slammed Warren Buffett’s currency hedge against the US Dollar, writing that Buffett hadn’t done well with the investment. The columnist didn’t factor in the entire length of time of Buffett’s currency play -- which had, in fact, made money. Several people corrected that and I wish I’d done better due diligence. It was one of those times I wish I had an editor!

12. What financial publications do you read?

Barron’s, The Wall Street Journal and The Financial Times -- all online. I also subscribe to Outstanding Investors Digest.

13. What investing blogs do you read?

Yours, Clyde Milton’s Cheap Stocks, Fat Pitch Financials and Vinvesting are the value blogs I read regularly. I also read Bill Rempel, The Big Picture, Bill Cara, Maoxian, Random Roger and Trader Mike. I really need to give a tip of the cap to Trader Mike -- he got me into Blogads and anytime I’ve emailed him a question he’s been very generous with his time answering. Even though I’m not a trader, his blog is a big inspiration to me.

14. What’s the best investment book you’ve read?

No surprise -- "The Intelligent Investor" by Benjamin Graham. The single best piece of investing writing I’ve ever read is Warren Buffett’s “Superinvestors of Graham-and-Doddsville”, which is reprinted as an appendix to Graham’s book.

15. What’s the last investment book you’ve read?

The Little Book of Value Investing by Christopher Browne.

16. When did you start investing?

In 1986. I was out of college just a few years and mentioned to someone older that I figured stock market investing was just something you did after you bought a house. He set me straight, got me to read some investing books, and I bought my first stock.

17. How have you improved as an investor?

As time goes on, and we live through events like the October 1987 market plunge, the Asian crisis of the late 1990s, and the tech bubble bursting in 2000, I find it’s easier to take the long view of things, to fight the headwinds, and to be patient.

18. How do you need to improve as an investor?

I need to remain patient, because things aren’t cheap right now.

19. Where are the bargains in today’s market?

Well, I’d like to say the Japanese consumer lenders since I own one -- Takefuji Corp. But anyone going in there needs to understand the risks and threats of government regulation on hampering the profitability of these companies. Here in the US, stocks are mostly fairly valued.

20. What’s the most interesting company we haven’t heard of?

ArmorGroup International (AMGPF) trades in London and the symbol is ARG. You might find some shares trading OTC ("over the counter") in the US under the symbol AMGPF, but you’d have a hard time filling a decent sized order. The stock is up more than 30% in US Dollar terms since I recommended it last September. ArmorGroup provides security protection, security training and mine clearance services for militaries, governments and private companies. And they provide these services in risky places like Iraq, Afghanistan and Nigeria.

The stock was bought at net tangible asset value and is a play on overstretched US and UK militaries and the increasing need for security in third word countries. ArmorGroup is getting more work from companies in “extractive industries” in dangerous regions, so it could be a play on a long-term commodities boom.

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Sites Mentioned

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Previous 20 Questions Posts

20 Questions for Bill Rempel (a.k.a. No DooDahs)

20 Questions for MarketWizWannabe of RVB's Market Musings

20 Questions for George of Fat Pitch Financials

If you write an investing blog and would like to be featured in an upcoming 20 questions post, please send me an email with the URL of your blog.

Likewise, if you want to suggest a possible candidate for a future 20 questions post (or propose better questions to ask) send me an email.

George has been active individual investor for 15 years, but only "saw the light" of value investing five years ago. He is the author of Fat Pitch Financials, a value investing blog inspired by the writings of Warren Buffett. One of the most popular features at Fat Pitch Financials is an exclusive detailed list of current going private transactions that is made available to members of the site.

1. Are you a value investor?

Yes, I'm a value investor. My investment philosophy is closely aligned to Warren Buffett's. I look for wide moat companies selling at a price that provides a margin of safety. While I wait for those opportunities, I also invest in risk arbitrage and special situation opportunities.

2. What is value investing?

Value investing in my book is investing with a particular emphasis on intrinsic value. I view the intrinsic value of a company as the amount of money a rational person should be willing to pay for a company if it is viewed solely as a money printing machine. Value investing is then just the process of finding money printing machines that are selling for less than the present value of the future money that they will print. The key is buying the opportunities at a discount sufficient to provide a margin of safety.

3. What is your approach to investing?

My approach to investing involves breaking the process down into different components. I do a ton of reading to identify potential opportunities, especially those that appear to be giving a company a sustainable competitive advantage. I also run some fundamental stock screens to identify potential investment candidates. Then I usually run a preliminary analysis using my Fat Pitch Finder spreadsheet. If the numbers look acceptable, I then dig into the various SEC regulatory filings for that company. I look for corporate governance issues, competitive weaknesses, and hidden liabilities. Finally, I create a more refined intrinsic value analysis and determine my margin of safety for that stock. If the price of the stock is trading below my margin of safety, I buy it.

I also have created an elaborate system for scanning SEC filings for special situation opportunities. I then track them using Fat Pitch Financials Contributor's Corner. These opportunities are assigned phases or stages and I also calculate their potential percent gain. I then determine the "expected" payout adjusted for risk of each opportunity and select the best options.

4. How do you evaluate a stock?

I avoid just evaluating a stock, but instead I try to focus on the business and its management. I determine the competitive position of the business, the reliability of management, and finally I estimate the intrinsic value of the business.

5. Why do you buy a stock?

I buy a stock when it is selling for a price that provides for a significant margin of safety and its business has a wide moat.

6. Why do you sell a stock?

I sell a stock when it becomes significantly overvalued and/or its moat narrows. I also sell when I discover that I have made a mistake or when it appears management is going to run away with the castle's treasure.

7. What investment decision are you most proud of?

I'm pretty proud of the fact that I stuck with Merck (MRK) even after the negative feedback.

I'm also very proud of my decision to figure out a way that individual investors could also participate in arbitrage and special situations. Hedge funds were all the rage these past few years. I knew that some of them were taking advantage of opportunities that Warren Buffett has referenced on occasion about special situations. After some research and experimenting, I discovered that going private transactions involving reverse splits provide great opportunities for small investors.

8. What investment decision do you most regret?

I'm not sure if it is my biggest regret, but my recent purchase of Parlux Fragrances (PARL) was not a moment that I was proud of. I really should have been more patient with this special situation opportunity and I should have sold immediately when management reneged on their going private proposal.

9. Why do you blog?

I started off blogging because I didn't want to continue paying for posting in stock forums. I believe writing and taking feedback really sharpens your focus when researching investment opportunities. Most of my investment learning has come from participating in online discussions.

I really enjoy Internet technology, so when blogging services started becoming freely available I decided I wanted to try it out. I've been hooked ever since.

10. What's your best post?

I'm pretty proud of my research regarding the problem with the cashing out of shareholders of FragranceNet.com. I actually spoke to the CEO of FragranceNet.com in order to get to the bottom of what was going on with BrownCo's decision to only partially cash out FragranceNet.com shareholders.

11. What's your worst post?

I really did not like the response I got to my post regarding my decision to purchase Merck. I guess this was a post that gave me quite a bit of grief. The comments and emails from traders started getting to me, but in the end I've prevailed and Merck is now performing nicely.

12. What financial publications do you read?

I read Barron's, Morningstar, and lots of SEC filings.

13. What investing blogs do you read?

I read your blog (Gannon On Investing), Controlled Greed, Pink Sheets, Footnoted, Cheap Stocks, Buffetteer, Mike Price's Blog, 10Q Detective, Value Discipline, and several other newer blogs.

14. What's the best investment book you've read?

The Intelligent Investor, The Warren Buffett Way, and You Can Be a Stock Market Genius are my favorite investment books. I guess I owe The Warren Buffett Way credit for opening me up to value investing. My real education however came from Warren Buffett's shareholder letters.

15. What's the last investment book you've read?

I'm just about finished reading The Little Book of Value Investing by Christopher Browne.

16. When did you start investing?

I started buying stocks when I was 15 or 16 years old but I really only started investing about 6 years ago.

17. How have you improved as an investor?

I have improved dramatically as an investor. I have really improved my understanding of intrinsic value and the importance of sustainable competitive advantages. I have also only recently really discovered special situation investing as a direct result of my blogging efforts.

18. How do you need to improve as an investor?

I need to improve on my focus and find more time to do research. I guess that is one of the pitfalls of blogging.

19. Where are the bargains in today's market?

As you have probably noticed, I've been picking up some bargains in industries associated with housing. I recently purchased Realogy (H) and USG (USG). I think there could be some additional opportunities in this sector as the housing sector deflates.

With fuel prices coming down, I'm also interested in gas pipelines and coal distribution, but I'm not sure I'm ready to select any bargains yet. I think we need to look internationally for opportunities here.

This is a real tough question given the market's recent run-up. I thought I was going to get lucky with opportunities in Thailand but I was too slow and prices are too high now given the risks.

20. What's the most interesting company we haven't heard of?

I'm not sure many people have heard of FactSet Research (FDS). I think they have an amazing moat with their unique historical market data. The only problem is that their stock price has not gone down low enough since I've been following them to provide me with a margin of safety.

I'm also looking at a company that caught my attention recently during a tender offer I participated in. Birner Dental Management Services (BDMS) is a network of dental practices in the Southwest. I haven't finished my homework on this one, so I probably shouldn't even be sharing this one. However, I really like the dental sector since they do not share as many insurance and regulatory problems as the medical sector. I have also been told several times that dentists are in short supply.

Finally, I bet some of your readers haven't heard of Unilever (UL). However, I'm sure everyone is familiar with their food products. This European company has a great set of brands and was selling for a considerable discount. I've owned the stock for several years now and it has performed really well.

Visit Fat Pitch Financials

If you write a value investing blog and would like to be featured in an upcoming 20 questions post, please send me an email with the URL of your blog.

Likewise, if you want to suggest a possible candidate for a future 20 questions post (or propose better questions to ask) send me an email.

MarketWizWannabe is a former Engineer who dreams of someday running his own hedge fund. Currently he is an MBA student in the University of Wisconsin's Applied Security Analysis Program (ASAP) . His blog is devoted to continual learning about stocks and how the markets move, because he believes that the best way to profit from the markets is to understand them from all directions.

1. Are you a value investor?

Yes, but not in the classic sense. I define “value” as a stock whose share price is too low in the market, whether it is a typical “value” or “growth” stock. I am not a big proponent of the value/growth partisan battle, because I feel that different times and different sectors call for different measures of value – it is not always a low price-to-book ratio, high yield, low P/E, etc… Often times markets underestimate the growth prospects of a company, and that can make a stock a “value” as well. And in certain sectors there are different ways to evaluate value – especially true in tech stocks.

2. What is value investing?

At the simplest level, value investing to me, is buying when the fundamentals say that the stock is significantly underpriced. The devil is in the details of my simple definition, however.

3. What is your approach to investing?

I try to stay in touch with what’s going on in the world by not living in front of the computer. By doing this, I can better understand what a company does and often times I ask people about businesses. In the retail sector, for example, my girlfriend gets asked about stores all the time. I also try not to make things too complicated. I should have an MBA and a CFA in the near future, but hopefully those things won’t hinder my ability to be a great investor. The best ideas are simple, and don’t need a discounted cash flow analysis. If you’ve ever read “The New Market Wizards”, you may have read an excerpt about the “Zen” of trading – which is a good analogy for the art of investing. That book also happens to be the source of my chosen nickname on Blogger – MarketWizWannabe.

4. How do you evaluate a stock?

The first thing I do is look at a chart, but not for the technicals like you may think. I look to see what days had impact and find out what the news was on those days. This lets me get an initial idea of what the market thinks about the companies and what drives the stock. At this point, I usually lose interest but if I am still curious, I’ll move on to the financial statements and compare the company to others in terms of profitability, ROIC, stability, etc. ROE and ROIC are important metrics for me, unless the company just has staggering growth potential and the market isn’t priced for it. I tend NOT to look for a low P/E per se, but many of my stock screens do use the P/E as a starting point. I was once told early in my investing days that a P/E below 7 usually indicates trouble for one reason or another. That number may vary from sector to sector, but the idea is an important lesson – really low P/E stocks are likely to stay there unless some kind of macro event changes the situation for its sector.

5. Why do you buy a stock?

It’s all about, “Do I think that this company can earn more than what Wall Street thinks?” If yes, I dig in. Sometimes a stock is just too cheap because big institutions got caught in capitulation and then analysts get too pessimistic. This happens perhaps everyday, but that doesn’t mean I find a stock like that every day. In the case of stocks that go up all the time but are still cheap, I look for a reason to support more growth than Wall Street predicts. I will also look for one particular technical setup for investing. With that one setup, I need very little fundamental confirmation, however, it does require some fundamental stability. I also still do some trading, but again, that is completely different than investing – it’s just hard to not take a trade when you see it right in front of you.

6. Why do you sell a stock?

I sell because of several reasons. 1) When everyone jumps on the bandwagon, who is left to buy? So, when a stock has reached the point where it has become invincible, I get out. I think Google (GOOG) is there now, but I could be early on that call. This means that I will allow the momentum players to push a stock higher for me, even if I don’t think it has great value at that point. 2) If the technicals are simply ugly, I will get out and reassess later. I can always change my mind. 3) If I believe the market has fairly priced the stock and I see no advantage to holding on, I’ll sell it.

7. What investment decision are you most proud of?

Leaving my engineering job in the big cog of corporate America. Just a short 7 months later, it has already been the best investment I have ever made in my health and happiness. It’s amazing how much career happiness or unhappiness flows over into personal lives. Too many people do things they don’t like – and to me it’s just not worth it.

8. What investment decision do you most regret?

Honestly, I can’t say that I’ve ever regretted an investment. The reason is that I actually learn more from investments that go awry. I have bought my share of losers – to that there is no doubt. But, when the market humbles you, it is a beautiful thing because there is an important lesson to be learned. I know I will lose on more investments in the future. I am completely ok with that.

9. Why do you blog?

I love to write, plus given my background the web development piece is easy and still fun. I also want to try to help others figure out this complicated Wall Street world because there are so many people who have money in places that they don’t understand. I have some former co-workers who visit my blog, so I try to link to definitions as much as possible. I used to have money in places I didn’t understand too, which is a bit of an unsettling feeling. The notion of having been a client of investment funds without understanding them certainly provides me with more motivation in my newly chosen path. Most importantly, though, the blog allows me to be me, even if for only a few minutes a day.

10. What’s your best post?

I like the post you linked to, about the value vs. growth battle that investors like to get into. It’s a silly battle. I also had a post early on in my blog about “The Investment Mindset” or something like that about how average Americans would complain that gas costs were rising yet didn’t think to maybe hedge their costs.

11. What’s your worst post?

Oh, I probably have a lot of posts that I don’t like, but I will keep them up there – that’s what my blog is about – continual learning.

12. What financial publications do you read?

Investor’s Business Daily and The Motley Fool. That’s it. I get everything else from the web. My Bloglines subscription list is long.

13. What investing blogs do you read?

Here’s my full list:

Absolutely No DooDahs

Gannon On Investing

Cheap Stocks

Footnoted.org

Gross Speculation

Hard Right Edge’s Morning Trader

Jeff Matthews

J Navin

Phil Town’s Rule #1 blog

Tim Knight

Ugly Chart

VInvesting.com

Controlled Greed

Catablast

Investor Intelligence

Bill Cara

Inventing Money

14. What’s the best investment book you’ve read?

Despite the fact that the book is written for traders, Trading in the Zone, by Mark Douglass is the best investment book ever. It’s all about getting your mind ready to play in the markets, because, in reality an investment can only do three things – go up, down, or stay flat.

15. What’s the last investment book you’ve read?

I am just a few pages away from finishing The Warren Buffet Way, by Robert Hagstrom.

16. When did you start investing?

In 2000, the world was different. At age 23 I began my engineering job and almost immediately had extra cash because my salary was more than enough to live off of – for a recent college grad. I am not a guy who has lots of material needs, so I opened an E-Trade account and bought Nokia (NOK) shares in January of 2001 – and lost half of my investment. It didn’t matter, I never was comfortable with buying funds when I don’t really know what those guys do on a day-to-day basis, nor what they are motivated by. Ever since then I got serious about learning about the markets – so much so that I found my true passion and it should hopefully be a full time career for me - provided I get a job!

17. How have you improved as an investor?

I’m more patient when looking to buy something I like. I also don’t chase stories for the sake of chasing them, like a lot of people do. Doing that is silly.

18. How do you need to improve as an investor?

I haven’t found that one thing that I am great at yet. So, I guess you could say that I haven’t found my favorite investing style yet. Maybe I will stay that way because of my belief that all common methods are good and can be applied – but knowing when and how is hard. Hopefully I will find ways to combine ideas and develop my overall style. I started this game more as a trader than an investor, but trading and investing are not the same thing. There are many parallels, but I need to get better at understanding what the true value of a company is. I’m very analytical, but sometimes I do rely on the “art” part a little bit too much.

19. Where are the bargains in today’s market?

Small caps, but only the good ones. I think this will always be the case, because they are less looked at. If you’re just looking for typical bargain basement prices, I also think that there are some financial companies who are bargains as well – some have been beaten down because of all of this rate hike talk. Rates are low. If we see a recession soon, I think it’ll be the softest recession in a while. Check out Accredited Home Lenders (LEND), or Impac Mortgage Holdings (IMH). The investing community hates IMH - and for good reason from what I understand with their internal practices - but it’s probably worth more than $8.80 per share. Yet the “hatred” is what has pushed the P/E under 2. On the flipside, Institutions love LEND, yet it’s still awfully cheap. Take your pick.

20. What’s the most interesting company we haven’t heard of?

Raven Industries (RAVN). It’s a tiny conglomerate, which sounds like a contradiction in terms…but as a value investor you might want to watch for a bargain on the stock. It’s somewhat undervalued in my opinion, but there’s not a big margin of safety at $32. Maybe you can get lucky and they’ll make another acquisition that sends the stock down $10 bucks, which is what I was able to find about a year ago.

Visit RVB’s Market Musings

If you write a value investing blog and would like to be featured in an upcoming 20 questions post, please send an email to geoff@gannononinvesting.com with the URL of your blog. I can’t promise you will be featured, but I can promise a response within 24 – 48 hours.

Likewise, if you want to suggest a possible candidate for a future 20 questions post (or propose better questions to ask) send an email to geoff@gannononinvesting.com.

Bill Rempel, a.k.a No DooDahs is a regularly updated blog covering (in Bill’s
words):

Absolutely just stuff that I’m interested in, including investing ideas, especially value and contrarian investments, politics from the anarcho-capitalist P.O.V., and current events.

1. Are you a value investor?

Most of the time, with most of my money.

2. What is value investing?

The textbook says it's investing in assets whose market price is below
intrinsic value, whatever THAT is. I'm fond of calling it a mean
reversion stock market trade with a long payoff horizon. In essence,
the stock market is inefficient in several different ways, and value
investing is taking advantage of a longer-term negative overreaction of
the market. In general, I think value investing appeals to me because
I'm naturally pretty frugal, and so is my wife. We drive old cars with
lots of mileage on them, buy clothes at Wal-Mart, eat ground beef and
(Sanderson Farms) chicken, and have made a practice of living below our
means. We spend a lot of time deciding if things we want are really
worth the money. So stepping off into value investing was a natural.

3. What is your approach to investing?

Eclectic. Primarily it's data-driven, and value investing is where the
majority of my money goes, but there are other opportunities that I try
to take advantage of. I've back- and forward-tested some models that
look like they could be used to time the S&P 500 with some alpha.

4. How do you evaluate a stock?

For a value play, I have a screening routine based on some data mining
I did, which suggests I should fish from a certain pond of stocks that
have PE, PB, DE, and 52-week total return for value longs (or shorts).
I add some other criteria that make it easier to winnow down the pool,
then I hit them with a spreadsheet that simplifies some accounting
analysis to see if the company looks healthy. I'll do some technical
analysis to see if the stock has hallmarks of change, or something that
might make a good trade. If the stock passes the value play checks,
I'll download 3 or more research reports, the most recent 10K and 10Q,
the most recent Proxy, and read them. It's several hours for each
stock that I might actually buy, and sometimes several hours for some
of the stocks that I would not be interested in. Some of the potential
value plays get watched for trades. I've got some screeners for
possible trades, and I'm also evaluating some value short screens for
finding stocks that might be worth shorting, once they top out (or if
the general market looks like a bear for a while).

5. Why do you buy a stock?

Because I believe it has a much better chance of trading at a higher
price than a lower one, or