I spent some time with the new Third Avenue Funds commentary that just came out and a usual Marty Whitman was as insightful as ever. His time around however he included something to at I would be remiss not to share with your. It seems he folks at Third Avenue have been doing a little back testing. According to Marty:

TAM analysts recently ran a statistical analysis,1 i.e., a screen, for a broad universe of global stocks,2 based on the following three criteria:

1) Ten year book value per share increased by at least 10% per annum

2) The common stock was selling at 1 times tangible book value, or less

3) Market cap > $1 billion

For the top 100 most well capitalized companies on this list based on total debt to capitalization (which ranged from 0% to 30%), the results were very interesting:

For the ten year period, all but ten of the common stocks in the screen had a positive total return

Of the ten common stocks without positive price appreciation, the largest annualized loss was only 6.7%

55% of the companies in the screen enjoyed, at least, double digit annualized returns. Thirteen of the issues in the screen enjoyed ten year annualized returns in excess of 20%.

This book value stuff world and it works pretty well. I spent a lot of time reviewing all the academic literature and talking other practitioners of the deep value approach to the markets and everything point so to the same conclusion. Buying stocks under Book Value is the single best way for individual investors to select stocks for long term performance. In spite of this the number of folks who actually use this method is incredibly small in fact. Lots of folks talk value but almost no one actually practices it. Which, of course, is great news because it increases the opportunities for those few of us who are deep value types.

The Third Avenue guys also talked about bank stock investing this quarter .They said “TAM has a long history of investing in companies in the financial sector. After the most recent global financial crisis our analysis found regional banks more attractive than money center banks. The focus on regional banks is driven by three main dimensions:

1. Attractive price to tangible book basis with better return profile

2. Well capitalized

3. Provide downside protection when you need it most

Again this sound suspiciously familiar. It is very similar to the criteria we use for small regional and community banks in the Banking on Profits Portfolio. Even in a more normalized time period buying small banks based on these criteria is a wildly successful endeavor. Right now with the demographic, economic and regulatory situation that has developed in the industry the opportunity is greatly magnified. If you are not investing in this space you need to have a long conversation with yourself about what anchors or personal biases are keeping you from claiming your share of the rather large sums of money that will be made in these stocks over the next 5 to 10 years.

I had a chance to interview the CEO and CFO of a small regional bank this weekend that is dong a fantastic job. The CEO talked about how difficult the regulatory structure has made it for small banks and the opportunity it has created for them as buyers is eye opening. The CEO say that the government has raised the bar significantly on the size you need to be to be in the banking business. It really is buy and grow or die for the small banks and either one of those makes us money as investors.

It has been a busy week around Chez Melvin. I have barely had time to keep up with pennant races as we put together the September Edition of the Banking on Profits Monthly and compiled the new monthly Bottom Decile Report that will be out shortly – shortly as in next week or heads will roll. This report is going to look at those stocks that trade in the bottom 10% of all stocks based on price to tangible book value and track thinks like insider and institutional buying, dividend yields, Piotroksi F-scores and Altman Z-scores and other valuation metrics. I’m pretty excited to be rolling this report out this week. I also had a lot of reading and research that needed to get it all done time to head off to the beach. It is the wedding anniversary weekend and while I was shooting for maybe beautiful downtown Gainesville and the Florida-Kentucky game I have as usual lost the battle, surrendering before the first shots were fired and we are off to Sanibel to celebrate the fact she made it another whole year without succumbing to the urge and killing me in my sleep or simply abandoning me a some strange library or baseball stadium.

The usual weekend reading lists and video review will be delayed until Sunday as a result. I’m looking forward to hitting up Doc Fords Rum bar, an establishment owned by one of my favorite writers and named after the literary character I consider ot ne the heir of Travis McGee and doing some beach reading.

Have a great weekend everyone!

Cheers,

Tim

Song of the week. Everyone should be lucky enough to marry a

https://www.youtube.com/watch?v=j5OSfuUuRoo