From week to week you will find that my thoughts on the opinions on the overall market do not change very much. Right now I still think we are on the high side of fair and am very well aware of comments from folks like James Montier and Seth Klarman that are far smarter than I that paint a pretty ugly picture of the market right now. However I have disciplined myself over the year to strictly follow a simple rule. I try to ignore the market for the most part and if I can find something that is safe and cheap I just buy it. I actually bought three stocks this week, all right around 75% of book value with sound balance sheets and fundamentals. They pass my tests for safe and cheap and following the “find it, buy it rule” I bought them. Two of them have sparkling dividends over 7% so they went into both Deep Value and the Income Letter portfolio. Safe and cheap trumps market opinion and noise every time.

When I buy a stock for the portfolios I generally post in the blog a description of the company along with the price to book value, the Ongoing Concern Value, Liquidation value and credit and fundamental scores. I am often asked what was the catalyst for buying the stock and what did I anticipate to happen to unlock the value? The truth is that the catalyst was the price to asset value discount being steep enough and the Credit and Fundamental score being high enough to justify purchase. There usually is no story or catalyst involved. I have no idea how long it will take to get to fair value or exactly what will drive the price higher. I just know that I found it, it as the characteristics of a winning stock based on my strict value principles. Think of it as semi-quantitative value investing.

I hear talk all the time about catalyst for unlocking value and there is a ton of fund managers who boast that they look for stocks that have a catalyst.. Usually this means they have a really good story to go along with the stock. I can usually tell you a story about each of my stocks but it would be exactly that-a story about what I hope and think is going to happen. There is a story for all the shipping stocks, the energy stocks and the banks stocks that I buy and it is a real powerful one in most cases. However I cannot tell you when the story will play out or how long I think it will take to realize the full value of the stock. I bought it because it was safe and cheap not because there was a catalyst. Even with the banks ,as powerful as the Trade of the Decade story is, at the end of the day I bought each individual stock based on the numbers.

There are 3 catalysts that I have found almost always deliver value in cheap stock situations. Management change, insider buying and the presence of a powerful activist have all been shown to get a stock moving in the right direction. I consider all of these when doing the drill down on stocks before putting them into the portfolio. Remember only the all too rare stocks with a C&F score of 12 or higher go into the portfolio without much question. These are the true bullet proof stocks. These ranked above the buy level of 8 but below the bulletproof 12 threshold get a through drill down. However they are just a part of the process and may take years for the so called catalyst to actually move the stock higher.

During the course of my life Ace-King offsuit, blonde hair and a good stock story have cost me enormous amounts of money. Today I am married to the most wonderful brunette in the world, only go all in with absolute best hand and prefer the numbers that identify safe and cheap stocks to any story, no matter how good it may sound. I buy safe and cheap stocks and have adopted the private equity mindset that is willing to hold the stock until I can sell for more than it is worth no matter how long that takes.

Cheers,

Tim

Song of the week

https://www.youtube.com/watch?v=HTBv4kAdk_w