# Value Investing



## stock nub (12 March 2010)

Was looking around the place and couldnt see a thread on value investing, so here we go!

Does anyone follow a value investing approach to stock picking?
If so what do you look for to indicate that the stock is undervalued?

Do you look for things like the stock trading at a discount to book value/NTA, or do you look for shares with have high dividend yields or Low PE, or are you a more of a "trading at less than 10 times free Cashflow" sort of person ? 

Feel free to share your experiences/methods behind choosing a particular stock.


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## UBIQUITOUS (12 March 2010)

stock nub said:


> Was looking around the place and couldnt see a thread on value investing, so here we go!
> 
> Does anyone follow a value investing approach to stock picking?
> If so what do you look for to indicate that the stock is undervalued?
> ...




Hi nub,

I take a value investing approach and look for stocks that offer extreme upsides. 

I look for undervalued stocks based on DCF and and preferably an increasing PEG ratio. I am then prepared to wait for price to catch up with value. Ben Graham wrote in 'Security Analysis' something along that lines that opportunities to find undervalued stocks had become non existent. If he were here today, with short selling & algorithmic trading etc, I'm sure he would take back that view. Opportunities are plentiful to find undervalued stocks.

On the subject of DCF, it's 'rubbish in rubbish out', so I plug in a few different revenue forecasts, betas, and if the discounted value still comes back way above current price, then I think about buying in. 

I do not look at P/E when valuing a stock as those that I buy are generally startup spec tech stocks and the P/E has little relevance.

I do not buy stocks for the sake of diversification. I prefer to back my own judgement and buy the best that I can find (I have only bought 2 stocks in the last 3 years - TZL and UNS)


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## So_Cynical (12 March 2010)

stock nub said:


> Was looking around the place and couldnt see a thread on value investing, so here we go!
> 
> Feel free to share your experiences/methods behind choosing a particular stock.




As covered in a few threads here...first and foremost the share price has to be falling or recently fallen and now going sideways, second the current SP has to be close to the last major capital raising price (below it even better) and thirdly
the stock has to have a good story and the financial's have to make sense.

Also like business that have high barriers to entry and cant easily be duplicated in china etc...i don't have any hard rules about debt/equity or EPS, ROW etc etc...unlike UBIQUITOUS ive brought into over 25 stocks in the last 3 years, currently hold 20 stocks with 4 open positions, 'open' as in yet to move profit over to the capital column, 19 exits with 17 of those in profit.

Good luck nub


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## ROE (27 March 2010)

it's a pretty easy topic to talk but practicing is hard I can tell you 

picking good stock is not just about the number it requires a person with a certain temperament .. Patient...Independent and Conviction.

You bound to get scare by the herd and act irrationally if you are not independent and don't have strong conviction. 

These techniques are not new it been around for many decades
and you find lot of information on the internet and books that cover it
but eventually it comes down to you and how you applied it...

There is no wrong and right in how people do this it come down to personal preferences.

As for me I use Quality over Quantity.
The market and analyst love to chuck around
P/E ratio, dividend yield, as a measurement of cheapness

that tell you nothing about the business or is the business good enough
to with stand a storm...

plus how can you tell if something trading at a PE of 10 is cheaper than a PE of 15  I buy many stocks trading higher than the market average PE
and many at PE 15 compared to PE of 10.

A stock trading at PE 15 or PE of 20 can turn out to be a 10 baggers and the one people think it's cheap at 9 8 or 10 could sit there for years or go to corporate graveyard....

I get PM all the time and I will write a guide on how I think people should look at company if I have time.. number is the last thing on your mind and you probably don't even go there if the company failed the test so save you lot of time and effort, save those effort for company that pass the test and you sure want to buy...takes me 5 minutes if I want to waste more time on the company.

ASX is a big place but when you weed out all the rubbish there isn't many company to invest in really  probably about 100 past the test
then it come down to that 100 which 10-20 stocks I really want to buy and sit on my ass for a decade...

Here are some of the one I consider Wonderful a term Uncle Warren would say .... but you got to know what price to pay for ... My favorite quote from Charlie Munger

Price is what you pay, Value is what you get... you ALWAYS want value

WOW CAB BKL TRS REH DMP ARP JBH WWA CCL CCV ONT BBG CSL COH

you would think blue chip would dominate the list but my list of 100 doesn't include many blue chip and I am apply to stack money into these
smaller one.


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## Julia (27 March 2010)

ROE, your list of stocks is interesting.  I have several of these.
None were chosen on any indepth analysis but rather because they were in a recognisable uptrend when I bought them.

I've just had a look at the charts for those I was less familiar with to see if the same held true for them, and with only two exceptions, yes it does.

So we can be choosing the same stocks by quite different approaches and I expect we do what we find most comfortable.  Personally I wouldn't have the patience to analyse a company in as much detail as you're obviously happy to do.

I remembered a long ago post from Bunyip about this which made a lot of sense.



> "Researching stocks takes a lot of time and it prevents me from doing other things."
> 
> I agree - researching stocks is time consuming.
> But there's a simple solution to your problem.....don't do any research. There's no need to - tens of thousands of traders and investors have already done the research for you, and their findings are reflected in the trend of the stock.
> ...


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## So_Cynical (27 March 2010)

Julia said:


> ROE, your list of stocks is interesting.  I have several of these.
> None were chosen on any indepth analysis but rather because they were in a recognisable uptrend when I bought them.
> 
> I've just had a look at the charts for those I was less familiar with to see if the same held true for them, and with only two exceptions, yes it does.
> ...






			
				Bunyip said:
			
		

> Researching stocks takes a lot of time and it prevents me from doing other things."
> 
> I agree - researching stocks is time consuming.
> But there's a simple solution to your problem.....don't do any research. There's no need to - tens of thousands of traders and investors have already done the research for you, and their findings are reflected in the trend of the stock.
> ...




This thread is suppose to be about value investing...while trend following is a valid, well tested, simple and easy to understand method of trading, i would think trend following principles would be of limited use when it comes to investing in a sideways market like we have now and quiet possibly will have going forward for quiet some time.

I wonder what Bunyip's thousands of investors and traders would make of many charts at the moment :dunno: what's to be concluded from a sideways chart? should stocks trending sideways simply be dismissed because the uptrends are short lived and the stock seems somewhat range bound.

I think sideways trending stocks can present easy opportunity's to profit and or build positions in great company's, that investors and traders and report writers have mixed feelings about....the chart below is of a ASX 100 stock that's clearly been going sideways and slightly down for 3 years.

I've read a few broker reports and media story's about this stock over the last few years (all negative) and yet i could care less, i want long term exposure to this stock, and was determined to ignore the negativity and buy the dips and take profits early to establish free carry shares, which i have done with great success.

Also interesting to note with this stock, buying any of the significant lows (dips) over the whole 3 years (circled blue) would have presented opportunity's to exit in profit soon afterwards 100% of the time. 

Discretion and confidence in the obvious can be rewarding.
~


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## ROE (27 March 2010)

No two person think alike on value investing let a lone people with opposite view like technical vs fundamental vs trend 

this is an age old debate that will go on for many more decades 

I don't know which one is correct and I don't know many other techniques of buying and trading shares...I just know only 1 

I found Value Investing to be the only logical choice for me, other techniques doesn't seem to get me excited plus I'm bad at reading charts and trends.

in Foxes vs Hedgehog I'm probably the Hedgehog and seek out Hedgehog
directors and many company I buy has leaders that exhibit hedgehogs characteristics.  

This guy sum up foxes and hedgehog pretty well for those who want to know

http://www.ianbell.com/2009/05/19/the-fox-and-the-hedgehog-which-one-are-you/


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## Julia (27 March 2010)

ROE, you're quite right:  we all do what suits us best.

So Cynical:  I wasn't trying to have an argument about what's the best approach, for goodness sake.  Just found it interesting that ROE's list of stocks, chosen on his careful fundamental analysis, was closely aligned with my own, chosen on a trend basis.

Re range trading:  I'd prefer to use my funds in a stock that is actually still going up or sit on the sidelines in a sideways market.  You only miss a small amount of profit by waiting for an uptrend and don't get stuck in something that's going nowhere if you're wrong.

But its absolutely a personal preference.  It's just a discussion, not a competition about who is right or wrong.


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## robusta (28 March 2010)

ROE that is a great list of companies. I was wondering how do you determine how much to pay for them? They all seem to have great growth prospects but a company like ONT seems to be pretty tightly held. Do you just buy it anyway in the knowledge that it will be a great return in the long run, or are you patient and prepared to wait to buy on bad news or a change in market sentiment?


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## bunyip (29 March 2010)

So_Cynical said:


> This thread is suppose to be about value investing..._*while trend following is a valid, well tested, simple and easy to understand method of trading, i would think trend following principles would be of limited use when it comes to investing in a sideways market like we have now and quiet possibly will have going forward for quiet some time.*_
> 
> I wonder what Bunyip's thousands of investors and traders would make of many charts at the moment :dunno: what's to be concluded from a sideways chart? should stocks trending sideways simply be dismissed because the uptrends are short lived and the stock seems somewhat range bound.
> 
> ~





At present there are at least 35 companies in the ASX Top 300 that are in strong uptrends, and have been for months. A search outside the Top 300 would reveal many more uptrending stocks. 
For trend followers it's business as usual.
Even when markets are a bit choppy like they've been over the last few months, trend trading can usually still be used to good advantage by those who know how to find decent trending stocks.
Sector analysis is the key to zeroing in on the strong trenders. Even when most sectors are dead, you can often find one or two with some life in them. The stocks in these sectors are where the good opportunities can be found.

Sideways markets? Nobody forces you to stay in a stock that's drifting sideways, going nowhere. Not only do you tie up your capital in a non-performing stock for prolonged periods, but at the same time you miss the opportunity of having that capital gainfully employed in a stock that's rising strongly.

I'm not here to argue the pros and cons of one method over another. I simply wanted to answer your view that _'trend following principles would be of limited use when it comes to investing in a sideways market like we have now and quiet possibly will have going forward for quite some time.'_


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## bunyip (29 March 2010)

Julia said:


> ROE, you're quite right:  we all do what suits us best.
> 
> So Cynical:  I wasn't trying to have an argument about what's the best approach, for goodness sake.  _*Just found it interesting that ROE's list of stocks, chosen on his careful fundamental analysis, was closely aligned with my own, chosen on a trend basis.*_




That stands to reason, Julia, because by analysing trends you are in effect conducting a form of fundamental analysis. 
When you identify a strongly uptrending stock, what you've done is find one that the fundamental analysts like. How do you know they like it? Because they're proving it by buying enthusiastically at increasingly higher prices.
They only do that if they've examined the company's fundamentals and they like what they've found.


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## kermit345 (29 March 2010)

bunyip, isn't that a little too over-simplified. Your basically assuming that everyone who purchases shares has completed detailed and correct analysis on a company.

Couldn't some of those buyers producing the up-trend be buying in because their mate Joe Blogs recommended it to them (Joe may have no idea about the stock either and just saw that stock name in some new article).

Obviously this is a bit of an extreme example. However to assume that all buyers within a stock have completed correct fundamental analysis is a bit over the top in my view. People may just search for stocks that have gone up by greater than 5% in the last week and say 'hey that SP has gone up, i'll jump on board too' with know real knowledge of the stock at all.

That may support trend analysis, but I don't think that supports fundamental analysis. Assuming all market transactions are completed by people who have completed their analysis is a large assumption I myself wouldn't be willing to make.

Heading home from work at the moment, will do another post later with my views on value investing. Just wanted to reply quickly to what bunyip's post.


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## bunyip (29 March 2010)

kermit345 said:


> bunyip, isn't that a little too over-simplified. Your basically assuming that everyone who purchases shares has completed detailed and correct analysis on a company.
> 
> Couldn't some of those buyers producing the up-trend be buying in because their mate Joe Blogs recommended it to them (Joe may have no idea about the stock either and just saw that stock name in some new article).
> 
> ...




No, I'm not assuming _'that everyone who purchases shares has completed detailed and correct analysis on a company.'_

On the contrary, pure technical analysts don't do any fundamental research on a company at all, preferring to leave it to the fundamentalists to do the research.
Blue chip stocks are moved primarily by fundamentals. 
By identifying trending stocks, a TA is able to see where the consensus of opinion lies with fundamental analysts.

The two main analysis camps are technical and fundamental. Then there's the _'haven't got a clue'_ camp who buy on tips from their mates or the taxi driver or whoever.
In his book 'How I Made Two Million Dollars In The Stockmarket', author Nick Darvas talks of how he lost money hand over fist by trading on tips.

Technical analysis is basically the study of price and volume and chart patterns. The bloke who buys a stock because it's gone up 5% is employing the first step in technical analysis - the study of price.

The large institutional buying is all fundamentally based, and a majority of private investors do some form of fundamental analysis as well. 
But there are a growing number who realise that you can still make damn good profits by simply following the strong trenders, without doing any fundamental analysis at all.

My definition of 'value investing' is buying stocks at prices that make you money from the day you buy them. 
Have you really bought 'value' if you buy a stock that you consider is cheap based on fundamentals and price, but it spends months or sometimes years going nowhere, tying up your capital without decent performance for prolonged periods of time, and preventing you from investing that capital in stocks that could be making you 50 or 100% a year?
To my way of thinking, you haven't got 'value' in that situation - all you've done is buy a dud that's caused you to miss out on making big money from stocks that are performing strongly while your dud is asleep.


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## ROE (29 March 2010)

robusta said:


> ROE that is a great list of companies. I was wondering how do you determine how much to pay for them? They all seem to have great growth prospects but a company like ONT seems to be pretty tightly held. Do you just buy it anyway in the knowledge that it will be a great return in the long run, or are you patient and prepared to wait to buy on bad news or a change in market sentiment?




As long as it trades at a discount to what I think it's worth I buy
I don't have to wait for share price to fall, that why stock can trades
at PE 20 or PE 15 I still buy 

I don't care too much about liquidity as I'm not a trader I buy in to stay in the business and collect increasingly more dividend as time goes by.

but eventually the stock will hit a premium to what it is worth I'm selling out...this is true at a later stage when everyone discover them and buy into it... 2 stocks of mine has a bit of a run lately due to goods coverage
and they making a bit of headlines with double digit growth rate when most company going backward....nearly time to bail out and stack money into 2 others stock I think trading at a 30%-40% discount..

When I bought ONT I bought at market price  I get whatever available
until my quota is reach for that stock..cos the dam thing is trading 35% discount to that I think it worth 

You tend to find them in small caps as most analyst stay away and it's all for your picking when you find one..

Hard to find bargains in CBA and QBE and BHP because just about every man and his dog has research going for these guys...

but everyone now and then every man and his dog can get it wrong about a bluechip that when I buy into bluechip...doesn't mean I'm better than them it just mean  I have different views and calculate it differently.

Most of the time the market is efficient, only occasionally it isn't and that
what I want to do occasionally.

It was close for me to buy WOW but then the management has to come out with their share buy back stuff and reverse the trend 

oh well I will  wait till I get a good shot


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## doctorj (29 March 2010)

ROE said:


> As long as it trades at a discount to what I think it's worth I buy
> I don't have to wait for share price to fall, that why stock can trades
> at PE 20 or PE 15 I still buy



How much of a discount do you look for and over what period do you typically look to realise that value?


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## robusta (29 March 2010)

Thankyou for the insight ROE I hope I have the patience to wait for a great value stock to come along and the knowledge to spot it when it does. 
Love your style


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## ROE (30 March 2010)

doctorj said:


> How much of a discount do you look for and over what period do you typically look to realise that value?




30% or more is always good....according to my analyst WOW is trading at a discount but not at the discount I want, maybe I should break rank and give WOW a bit of slack else I cant get it but I wait a bit more and see.

for you to predict earning or growth you must fist find quality company because only they can provide you with reliable number projection going forward... stock like Qantas where it earning go up and down depending
on oil and many other events I cant predict its earning so cant value it...


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## robusta (30 March 2010)

ROE said:


> You tend to find them in small caps as most analyst stay away and it's all for your picking when you find one..
> 
> Hard to find bargains in CBA and QBE and BHP because just about every man and his dog has research going for these guys...




Do you require a larger discount when investing in small caps because of the danger of key personel losses and often a shorter trading history to research?


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## ROE (31 March 2010)

robusta said:


> Do you require a larger discount when investing in small caps because of the danger of key personel losses and often a shorter trading history to research?




Nope I find Small caps with qualities I like performs no worse
than the big blue-chip, some operate in a captive market where it actually command far better return than blue-chip.

I give you an example, ONT is a small company but I think it has a very good moat..it operates in market where it very profitable for one large operator but another one come in will kill the return so it stop anyone from trying and let ONT slowly expand its market and make incredible return year after years  

I don't know what you call these I would call them captive market moat 
so it goes down as some kick ass wonderful company for the right price.

and for those who like Airlines (I dont)   Regional Express would command a moat, you would think QAN do better but I reckon REX is better because it operate again in a market where a single player profit handsomely, two players become crowded and killed all return
so it left REX to kick some ass


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## doctorj (31 March 2010)

robusta said:


> Do you require a larger discount when investing in small caps because of the danger of key personel losses and often a shorter trading history to research?



Good question. I think it's perfectly reasonable to demand more upside (ie. a greater discount) when looking at more risky situations. There are many reasons why smaller companies are more risky and you've already mentioned a few. 


ROE said:


> Nope I find Small caps with qualities I like performs no worse
> than the big blue-chip



It is interesting to note that you're return on smaller caps matches that of your larger cap holdings - is there also an increase in the volatility of returns?


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## Julia (31 March 2010)

ROE said:


> Nope I find Small caps with qualities I like performs no worse
> than the big blue-chip, some operate in a captive market where it actually command far better return than blue-chip.



I agree.  There is often an assumption that the best return will be from blue chips.  Frequently it just ain't so.


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## kermit345 (1 April 2010)

My assumption is that the smaller stocks have the potential to provide greater returns then blue chips due to their scale and number of shareholders on issue. While the blue chips generally provide a more steady return once again due to their scale and shareholders on issue.

So it becomes a bit of a trade off, small caps can provide greater opportunities with hightened volatility (in my view), while blue chips can provide more steady results and less volatility. This is a very generalised statement though and can vary depending on the individual company.


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## bunyip (1 April 2010)

kermit345 said:


> My assumption is that the smaller stocks have the potential to provide greater returns then blue chips due to their scale and number of shareholders on issue. While the blue chips generally provide a more steady return once again due to their scale and shareholders on issue.
> 
> So it becomes a bit of a trade off, small caps can provide greater opportunities with hightened volatility (in my view), while blue chips can provide more steady results and less volatility. This is a very generalised statement though and can vary depending on the individual company.




The smaller the company, the wilder its price action and the more difficult it is to trade for most people except for a few skilled individuals who specialise in small stocks. I've met hundreds of traders and investors over the years through my involvement with the ATAA, and so many of them have told me they've blown one account after another by chasing what they believed would be astronomical returns from small stocks. Sometimes they do in fact get those astronomical returns, but all too often they would have been far more profitable with a simple strategy of  buying strongly uptrending blue chips and sticking with them as long as their trends continued.

If blue chips are too slow-moving, then mid cap stocks offer an alternative that's kind of half way between the blue chips and the cheapies. Mid caps in my experience tend to be less choppy than smaller stocks while at the same time making generally larger percentage moves than blue chips.

Another alternative is to buy blue chips and then write options on them each month. The return from the options premiums can add an extra 15 to 20% yearly to your profit from blue chips, and two or three times that much if you write options on US blue chips. However, there are limited numbers of ASX blue chips suited to this strategy.
Most people never use options to produce extra income, because they know nothing about them and they never take the trouble to learn.
One of the big benefits I've found by being an ATAA member is that you get exposed to various strategies that you otherwise may never have come across. 
When you talk to someone who's profiting from a strategy that's not being used by many people, you're more inclined to learn that strategy yourself to see if you can profit from it. 
Hence, as a trader you grow and learn strategies to profit under _*all*_ market conditions, rather than only when the market is bullish.


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## Laohu (1 April 2010)

Hi All, new to ASF, hope u all well 

Great thread; some very intelligent people posting here, I have learnt already and hopefully will be able to contribute something useful in return.

Have taken note of your username ROE - an investor after my own heart - and would love yours and others advice re some good titles regarding stock valuation; I am trying to hone my intrinsic value calculations.

It's going quite well, but would like some other ideas if possible, especially re valuing Retained earnings; hopefully someone can perhaps point me in the right direction.

Enjoying your previous posts and looking forward to some more, cheers


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## So_Cynical (1 April 2010)

bunyip said:


> The smaller the company, the wilder its price action and the more difficult it is to trade for most people except for a few skilled individuals who specialise in small stocks. I've met hundreds of traders and investors over the years through my involvement with the ATAA, and so many of them have told me they've blown one account after another by chasing what they believed would be astronomical returns from small stocks.




I've had some success with small stocks, at least the non resource/energy/biotech variety of small stocks...there's a few small/micro caps with niche business that have been very good to me...just a matter of using the volatility to your advantage and buying the bottom of the range when the opportunity presents its self.


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## ROE (1 April 2010)

doctorj said:


> Good question. I think it's perfectly reasonable to demand more upside (ie. a greater discount) when looking at more risky situations. There are many reasons why smaller companies are more risky and you've already mentioned a few.
> 
> It is interesting to note that you're return on smaller caps matches that of your larger cap holdings - is there also an increase in the volatility of returns?




I don't subscribe to the theory more volatile = more risk

This theory pay no attention to the quality of the company, its business
and how much cash or asset it has etc...

I measure risk on the probability if I could lose my capital investing
in a company based on its merits and quantitative measures....

I think it's a crazy idea, just because something move from 32.00 to 4.50
like FLT it's become riskier, it's a bargain that some people missed.

or Credit Corp 11 bucks to 40 cents bargain not to be missed..

Yes some company do move from dizzy high to low price and it deserve to
be so as it business model is weak and its debt laden culture isn't worth
putting the money at risk..that is risky not because the movement of price or company size

I wouldn't buy SIP for any price even from $2.00 to 50 or 20 cents
I used to think SIP was cheap once but not after I dig a lot deeper so
never got involve 

I wouldn't buy PRY or ISF from any price to any price

to me those companies are hell a lot more risky than a small fry like ONT
same industries many time the size of ONT but I would put 30K into ONT than
3K in any of those mentioned.


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## bunyip (1 April 2010)

So_Cynical said:


> I've had some success with small stocks, at least the non resource/energy/biotech variety of small stocks...there's a few small/micro caps with niche business that have been very good to me...just a matter of using the volatility to your advantage and buying the bottom of the range when the opportunity presents its self.




Fair enough. 
There are so many stocks and markets and lots of different strategies to profit from them. We're truly blessed to be living in this day and age when there's a veritable smorgasbord of trading and investing opportunities under every conceivable market condition.


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## doctorj (1 April 2010)

ROE said:


> I don't subscribe to the theory more volatile = more risk



Sorry, what I meant was this - say you do 5 transactions in big companies and 5 in small and your returns are as follows:

Big cap: 12%, 15%, 7%, 11%, 12%
Small cap: -75%, -10%, 30%, -18%, 200%

Or are your returns relatively comparable?


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## So_Cynical (2 April 2010)

I think small/micro caps need to be clearly divided into 2 groups...1 group that basically don't make money and are looking for something, gold, oil, Iron, cure for cancer etc etc...and the small/micro caps that actually have a business and make money or at least have some cash flow and or are very close to making money.

Two very different beasts....however fair to say the small/micro cap end of the spectrum is dominated by stocks that fall into the "don't make money/looking for something" group...so unfortunately (fortunately for me ) many many investors, punters, traders, and mums &  dads completely over look the entire sector due to the "looking for something" dominance.

Ill post the charts of some of my micro and small cap holdings to demonstrate what i mean....money making, niche market, small and micro caps, and my entry's/part exits in CLV, SND and PFL
~


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## ROE (3 April 2010)

doctorj said:


> Sorry, what I meant was this - say you do 5 transactions in big companies and 5 in small and your returns are as follows:
> 
> Big cap: 12%, 15%, 7%, 11%, 12%
> Small cap: -75%, -10%, 30%, -18%, 200%
> ...




Probably but I never do any charting to compare because I find there is not much use for me personally...So_Cynical is the man for that , he seem to know a lot more than me on a wide range of topic ....I prefer to spend time on probability of me losing capital 

The small caps that do have a decent business model and make money and has good quality management  I see it to be better an investment....stuff like TRS, DMP, JBH and NVT .. Use volatility to your advantage for these stocks.

I dont play much in the mining area except select few mining services company like FGE so I don't see many crazy wild ride.

Mining is getting out of my circle of competence so I don't want to go there.


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## Errr (3 April 2010)

bunyip said:


> Another alternative is to buy blue chips and then write options on them each month. The return from the options premiums can add an extra 15 to 20% yearly to your profit from blue chips, and two or three times that much if you write options on US blue chips. However, there are limited numbers of ASX blue chips suited to this strategy.
> Most people never use options to produce extra income, because they know nothing about them and they never take the trouble to learn.
> One of the big benefits I've found by being an ATAA member is that you get exposed to various strategies that you otherwise may never have come across.




An old lecturer of mine provided some research showing that selling or buying vol was roughly fairly compensated; it would depend on the holding time frame and other objectives. I think was with respect to buying and holding the underlying for the long-term then writing (can't remember too well). Also on the same token markets can be irrational and if you have the stock specific understanding it's sound. In my opinion/an assumption writing options on large bluechips would be more likely to be fairly priced than less followed stocks. I just wouldn't categorically write options on a portfolio of bluechips that you intend to hold for the long-term.


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## bunyip (3 April 2010)

Roe - are there times when you find a stock that shapes up well in terms of both fundamentals and value, so you buy it and then it stagnates and goes nowhere for a prolonged period of time?

How long would you be willing to stick with a stock that doesn't go up like you expected it would?


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## ROE (3 April 2010)

bunyip said:


> Roe - are there times when you find a stock that shapes up well in terms of both fundamentals and value, so you buy it and then it stagnates and goes nowhere for a prolonged period of time?
> 
> How long would you be willing to stick with a stock that doesn't go up like you expected it would?




As long as it paid me the dividend yield of long term bonds or more I'm happy I don't mind a couple of them stay in the lager for a while as long a dividend stream keep coming in.

I haven't had any experience where the majority of them are like that...

Most of my investment I give it 3-5 years to judge whether it's a keeper or something I need to let go....

My investment horizon is very long probably another 25-30 years to go..

I pure as much cash in as I can and I do the best I can, I don't try any fancy tricks to beat the market but to get steady return if it turn out to be 8% one year or 15% another or 50% another then so be it.....

Just good old fashion conservative save and invest and compounding


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## bunyip (3 April 2010)

ROE said:


> As long as it paid me the dividend yield of long term bonds or more I'm happy I don't mind a couple of them stay in the lager for a while as long a dividend stream keep coming in.
> 
> I haven't had any experience where the majority of them are like that...
> 
> ...




So you might hang on to a sleepy stock for as long as five years before you tire of it's poor performance and decide to let it go?

You have a lot of patience, my friend. In fact I'd suggest that your patience is at times costing you big money by causing you to miss out on stocks that sometimes make gains of well over 100% in less than a year while your funds are tied up in a sleeper.

Your policy of _*'good old fashion conservative save and invest and **compounding' *_  can be applied to these powerhouse stocks just as well as to any other stock.


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## ROE (4 April 2010)

bunyip said:


> So you might hang on to a sleepy stock for as long as five years before you tire of it's poor performance and decide to let it go?
> 
> You have a lot of patience, my friend. In fact I'd suggest that your patience is at times costing you big money by causing you to miss out on stocks that sometimes make gains of well over 100% in less than a year while your funds are tied up in a sleeper.
> 
> Your policy of _*'good old fashion conservative save and invest and **compounding' *_  can be applied to these powerhouse stocks just as well as to any other stock.




Lot of stock that pass me by that make 100% or 1000% gain 

Lot of people make money with margin loan and amplified their growth

Probably a Billion people on this planet make more money than me.

Do I care? Not really, I don't want to be someone else I want to be me,  I'm very content of what I have and to be me I keep doing what I do with very little influence from the outside.

Come GFC and other world events I can sleep and buy more stocks cheap
while everyone is out to safe guard their capital and get out of stocks 

“True contentment depends not upon what we have; a tub was large enough for Diogenes, but a world was too little for Alexander.”


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## bunyip (4 April 2010)

ROE said:


> Lot of stock that pass me by that make 100% or 1000% gain
> 
> Lot of people make money with margin loan and amplified their growth
> 
> ...




That's fair comment.
We're usually happy and contented when we're doing something that suits our personality.
And happiness is *the* most important thing of all.

Happy Easter to you, Roe. And to everyone else on ASF.


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## ROE (5 April 2010)

bunyip said:


> That's fair comment.
> We're usually happy and contented when we're doing something that suits our personality.
> And happiness is *the* most important thing of all.
> 
> Happy Easter to you, Roe. And to everyone else on ASF.




Same to you and everyone else, enjoy your easter and may you make a reasonable return for your money.

Enjoy life and be happy


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## Sirloin Steak (7 April 2010)

Well for me this is more a theological thread than anything else.
Value investing is my religion.
The best thing about it is that its not too complicated.
As Ben Graham said in the Intelligent Investor only elementary maths should ever be required.
Now more than ever the hardest part is remaining emotionless.
This is something that I am generally good at but I still slip up from time to time.
The best source of information for me personally is the gospels.
I consider these to be the intelligent investor and security analysis.
Reading up on Buffett is fantastic but I dont leave room for interpretation.
I only pay attention to things that he has written or said.
Berkshire Hathaway annual reports are great for this.


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## doctorj (7 April 2010)

Sirloin Steak said:


> As Ben Graham said in the Intelligent Investor only elementary maths should ever be required.



I've always wondered how the rule of simple maths reconcile with Buffet's exposure to Gen Re (who reinsure all manor of long tail risks).  Any thoughts?


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## Sirloin Steak (7 April 2010)

robusta said:


> ROE that is a great list of companies. I was wondering how do you determine how much to pay for them? They all seem to have great growth prospects but a company like ONT seems to be pretty tightly held. Do you just buy it anyway in the knowledge that it will be a great return in the long run, or are you patient and prepared to wait to buy on bad news or a change in market sentiment?




They are great stocks. The problem is that they are very expensive.Theres nothing to say that they wont keep going up for years to come but there is little margin of safety. People are paying a huge premium for the quality of these companies so if something goes wrong this premium may be eliminated and the share price will dive.


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## Sirloin Steak (7 April 2010)

ROE said:


> I don't subscribe to the theory more volatile = more risk
> 
> This theory pay no attention to the quality of the company, its business
> and how much cash or asset it has etc...
> ...




FLT got slammed because of their highly leveraged business model. If they had have hit a bump in the road during the GFC they may have been ruined. I didnt buy in because I dont think it was a bargain I think it was a gamble. I would also like to emphasise that in my opinion its not that this stock was cheap at $4.50. It was overvalued before hand. Credit corp was an even riskier proposition. Luck can be an amazing source of high returns.


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## Sirloin Steak (7 April 2010)

doctorj said:


> I've always wondered how the rule of simple maths reconcile with Buffet's exposure to Gen Re (who reinsure all manor of long tail risks).  Any thoughts?




My understanding is that the intelligent investor is more pitched at the average Joe investor like myself rather than a CBS graduate like Buffett. The man does a lot of things that I will never be smart enough to really understand, especially when it comes to derivatives and insurance. 

What have your findings been on this one?


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## Julia (7 April 2010)

Sirloin Steak said:


> They are great stocks. The problem is that they are very expensive.Theres nothing to say that they wont keep going up for years to come but there is little margin of safety. People are paying a huge premium for the quality of these companies so if something goes wrong this premium may be eliminated and the share price will dive.



Could you explain your basis for the conclusion that these stocks are "very expensive".  That's a very generic term and needs some justification imo.

What research have you done into the success or failure of the recommendations from "The Intelligent Investor"?  What's the win rate for their recommendations, and the percentage capital gain over, say, one year?  Five years?
In other words, what is your basis for placing your trust in this tip sheet?


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## doctorj (7 April 2010)

Sirloin Steak said:


> My understanding is that the intelligent investor is more pitched at the average Joe investor like myself rather than a CBS graduate like Buffett. The man does a lot of things that I will never be smart enough to really understand, especially when it comes to derivatives and insurance.
> 
> What have your findings been on this one?



I haven't come across Gen Re and I'm certainly no Buffet expert.  That said, my gut feeling is that Gen Re writes a lot of very long tail risks and uses the cashflow to finance the rest of the Berkshire empire.  I'm not sure if any of their large long tail bets have gone (very) bad yet, but it would be interesting.  I know September 11 placed significant losses on Gen Re in particular, but unlike a lot of other insurers/reinsurers, had the attack been worse, it could very well have wiped them out.


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## Sirloin Steak (8 April 2010)

Julia said:


> Could you explain your basis for the conclusion that these stocks are "very expensive".  That's a very generic term and needs some justification imo.
> 
> What research have you done into the success or failure of the recommendations from "The Intelligent Investor"?  What's the win rate for their recommendations, and the percentage capital gain over, say, one year?  Five years?
> In other words, what is your basis for placing your trust in this tip sheet?






Julia said:


> Could you explain your basis for the conclusion that these stocks are "very expensive".  That's a very generic term and needs some justification imo.
> 
> What research have you done into the success or failure of the recommendations from "The Intelligent Investor"?  What's the win rate for their recommendations, and the percentage capital gain over, say, one year?  Five years?
> In other words, what is your basis for placing your trust in this tip sheet?




Thanks for your questions.

Im glad that you gave me an opportunity to clarify this.
My references to The Intelligent Investor refer to the 1949 book that Warren Buffett said was by far the best book on investing ever written. It was written by Benjamin Graham the founder of modern value investing.
I am in no way referring to any kind of newsletter that may or may not have reccomended Timbercorp as a strong buy soon before it collapsed. 

The stocks mentioned are too expensive for my liking for a few reasons. The main reason is the premium to net tangible assets. 
This means a smaller margin of safety.


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## ROE (8 April 2010)

Sirloin Steak said:


> FLT got slammed because of their highly leveraged business model. If they had have hit a bump in the road during the GFC they may have been ruined. I didnt buy in because I dont think it was a bargain I think it was a gamble. I would also like to emphasise that in my opinion its not that this stock was cheap at $4.50. It was overvalued before hand. Credit corp was an even riskier proposition. Luck can be an amazing source of high returns.




That where we differ 

FLT is high leverage????

little debt, rarely raise equity, most of their expansion fund by retained earning and cash flow ..where is the risk??? I wouldnt call that leverage...I called that  excellent in capital management and protect shareholders interest.

FLT was rock solid business, their business model is stunning
low capital out lay for a quick profit from all shop they open.

their margin is 2-3 times higher than any internet business

all business are profitable except they buy the US business at the top of the cycle and that turn out to be a disaster but nothing that threaten FLT business model
but Uncle Turner is quick to put a stop to that ...an exceptional manager who know when to hold and when to fold...

but then again people fear what dont understand and it generate bargains

and CCP people missed one little important detail ..fear Clouded people judgement 
they have an army of direct debit from people who own them debt
that mean these guys are commited to pay their debt
and regular cash keep coming in on fortnightly basis while they sort out their mess
without resort to equity raising and cash flow problem...

again nothing can generate fear like media headlines 

this stuff going around for many decades, it came during Benjamin Graham life time
it came to Warren Buffett and it will comes to those who know what to look for


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## awg (8 April 2010)

doctorj said:


> I've always wondered how the rule of simple maths reconcile with Buffet's exposure to Gen Re (who reinsure all manor of long tail risks).  Any thoughts?




I read a book on this topic once.

He employs the very best actuaries, the guy that runs it is regarded as a genius of actuaries and is mooted to take over the shop when Warren gives it away.

Sorry I cant remember his name, as it is a long time ago. Indian guy I think.

There would be a ton of references on the Net, if u wanna surf.

btw, you can download a pdf of "Intelligent Investor" by Ben Graham for nix... cant beat that for value

sorry dont have the web addy, but I googled and downloaded it within the last year.


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## ROE (8 April 2010)

Insurance is about risk management and probability, if you can calculate the risk, you can write the policy and you need people with heavy maths to do this stuff

Ajit Jain  is the man Warren use to come up with the risk-reward equation for him.

Warren and Charlie use probability a lot to make his investment decision.

wouldnt you invest in something knowing 95% of the times it make you money?

there is that 5% that you lose but over the long run the odds favour you
same deal with Casino they only wins by a few % points in probability
but over the long run money will go their way.

if the chance of me losing money sits at 51% on an investment I walk away 
very useful stuff to know, probability, permutation and combination ...


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## doctorj (9 April 2010)

ROE said:


> Insurance is about risk management and probability, if you can calculate the risk, you can write the policy and you need people with heavy maths to do this stuff
> 
> Ajit Jain  is the man Warren use to come up with the risk-reward equation for him.
> 
> ...



I've heard the story of Ajit Jain and know that he's considered by Buffet to have some sort of mastery of long tail risks.

Coming back to my point, I agree that 95% of the time they'd money (in fact, its probably higher than that) - but what if something like a 1 in 400 event (meaning you're profitable 99.9975% of the time) was enough to wipe out your capital?  I'm not rehashing the old argument that in the long run all insurers go to 0, but I'm just speculating about the nature of the underwriting and reinsurance programme based on things I've read.


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## UBIQUITOUS (9 April 2010)

doctorj said:


> I've heard the story of Ajit Jain and know that he's considered by Buffet to have some sort of mastery of long tail risks.
> 
> Coming back to my point, I agree that 95% of the time they'd money (in fact, its probably higher than that) - but what if something like a 1 in 400 event (meaning you're profitable 99.9975% of the time) was enough to wipe out your capital?  I'm not rehashing the old argument that in the long run all insurers go to 0, but I'm just speculating about the nature of the underwriting and reinsurance programme based on things I've read.




I can relate to this. I held only one stock (TZL). Everything seemed to be going great but then the black swan event happened. Let's just say that the former board are now fighting off multiple court cases by multiple unrelated parties - ASIC, TZ etc. So the worst can happen to any stock. I am quite happy to own one stock, but never happy to have my entire capital in the stock market just incase such an event happens and removes me from the game permanently.


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## ROE (9 April 2010)

Not really ....
Imagine you know how to calculate the risk to some degree of confident
nothing is 100% certain, most business decision are made on the probability of winning is higher than losing..

you then formulate your policy premium based on these events happening
so there is no way Warren would lose in the long run, the risk may look huge
but the statistic and probablity is stack to his side....

and if a black swan do happen he is well covered based on the premium he charged
it works like a casino no matter how hard people tried they always pocket
$1 and give back 95 cents, yes sometimes **** happen and they pay out $1.10
but the probability of that happening too often is so  close to a zero that
you make the money back quickly in the following years...

have you seen QBE lose money, black swan did hit them sometimes ago and then what happen?
they keep racking more and more money years after that and increase premium
because a chance of another black swan hit them in a near future is fairly close to zero.

the pepsi $1 billion dollar prize, Warren works out the risk and take
on the insurance for it when no one else can...he pocket nice easy millions..

because the probablity of that happening is close to zero 

he can do this a hundred time and make his money and invest the proceed to generate more
wealth one day he may pay out that billion but until that day he keep racking in

the cash and he generates more wealth from collecting the premium  it will easily cover the billion dollar prize...and if it never happen because probablity is so low, rainny man.

Insurance is a very profitable business if you got smart people working for you
that can accurately calculate risk and probability...

and your black swan is not managing risk where a big even wipe you out...
there is no big event that would wipe Warren or QBE out, it has to be multiple of
those events happen in close proximity and that comes to close impossible 

each one of these events are so rare that you take a few and multiple in a combination 
the number you come out is pretty low


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## So_Cynical (9 April 2010)

ROE said:


> .
> and if a black swan do happen he is well covered based on the premium he charged
> it works like a casino no matter how hard people tried they always pocket
> $1 and give back 95 cents, yes sometimes **** happen and they pay out $1.10
> ...




Casinos have massive surveillance systems and know how much they are up or down by the minute...casinos can and do ask gamblers (professionals) to leave if they are making too much money, they don't need a reason or any proof of anything illegal....casinos only cater to gamblers who they can profit from and that's not every one, just the vast majority....they spend millions on keeping the pros out....that's there black swan insurance. 

So you'll have to come up with another comparison.


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## Sirloin Steak (11 April 2010)

ROE said:


> That where we differ
> 
> FLT is high leverage????
> 
> ...




I made a detailed post about this but something went wrong. Really what I was saying though is that Graham takes into account all liabalities, not just bank debt. A liability still has to be paid back in a certain time frame whether it bears interest or not. I have seen a lot of the professionals in Australia who 'claim' to be value investors only including interest bearing debt in their analysis. I dont know where this came from.


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## sageintraining (12 April 2010)

Sirloin Steak said:


> I made a detailed post about this but something went wrong. Really what I was saying though is that Graham takes into account all liabalities, not just bank debt. A liability still has to be paid back in a certain time frame whether it bears interest or not. I have seen a lot of the professionals in Australia who 'claim' to be value investors only including interest bearing debt in their analysis. I dont know where this came from.




Many add there own twist to value investing but many of the underlying factors are the same. Wasn't it in securities analysis which mentioned that management should never be trusted? or something along those lines... Doesn't buffett often place some weighting in the management before he commits his money? 

Personally I think the most dangerous (in a good way) guys are the ones that can apply fundamentals and technicals.. you know the guys who have the nice long term investments but have the ability to take on the wild swings of the market?


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## Tysonboss1 (16 April 2010)

Insurance Companies are the power house behind Warrens company.

The simple reason he likes them is that people pay their insurance policy up front long before claims start to roll in. So he has a $50 Billion float to invest interest free in the mean time.

plus most years he will collect more in insurance premiums than he will pay out in claims, last year he collect $52B but paid out less than $50B. so he got a $2B profit + interest free use of $50B


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## Sirloin Steak (18 April 2010)

sageintraining said:


> Many add there own twist to value investing but many of the underlying factors are the same. Wasn't it in securities analysis which mentioned that management should never be trusted? or something along those lines... Doesn't buffett often place some weighting in the management before he commits his money?
> 
> Personally I think the most dangerous (in a good way) guys are the ones that can apply fundamentals and technicals.. you know the guys who have the nice long term investments but have the ability to take on the wild swings of the market?




Wont get much consensus from me there. I understand that some technical analysts use fundamentals and get good returns. However, our whole approach as value investors is all about the wild swings of the market. Stocks go down. If they are cheap enough we buy. They go up to the point where they are overpriced, we sell. I dont see how trying to second guess a popularity contest can be assisted by three pages of formulas that you need to be a mathematician to understand. And if you want to know who the most dangerous guys are, look at the people who dominate the rich list year after  year. What investment books are you reading? Have you checked out Graham? I cant get enough.


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## New Stratos (8 September 2011)

Julia said:


> Could you explain your basis for the conclusion that these stocks are "very expensive".  That's a very generic term and needs some justification imo.
> 
> What research have you done into the success or failure of the recommendations from "The Intelligent Investor"?  What's the win rate for their recommendations, and the percentage capital gain over, say, one year?  Five years?
> In other words, what is your basis for placing your trust in this tip sheet?




Julia,
   one of the fund managers which was founded by someone who studied under Graham publishes papers reasonably often - one is on which strategies work (with lots of evidence cited). It's on their website under 'resources', i think, Tweedy Browne (or something similar)


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## McLovin (8 September 2011)

New Stratos said:


> Julia,
> one of the fund managers which was founded by someone who studied under Graham publishes papers reasonably often - one is on which strategies work (with lots of evidence cited). It's on their website under 'resources', i think, Tweedy Browne (or something similar)




I think you're talking about the book, Julia was talking about the newsletter, which like almost every other newsletter is at best only good for providing a starting place. I certainly wouldn't buy anything purely on the strength of what is written in there.


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## Julia (8 September 2011)

McLovin said:


> I think you're talking about the book, Julia was talking about the newsletter, which like almost every other newsletter is at best only good for providing a starting place. I certainly wouldn't buy anything purely on the strength of what is written in there.



Quite so, McLovin.  Many years ago I accepted a trial of the Intelligent Investor newsletter.  It all sounds pretty to the inexperienced investor, but the actual recommendations were largely crap.
Perhaps they got better.


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