That evil guy Warren

[Warren Whitmore]

I have always invested like a robot following the advice of Ben Grahm in his 1936 book Security analysis. I know its old advice but it works for me. I have beaten the S&P by atleast 10% every year for the last 10 years. Any way whenever I am asked what I am currently invested in I invariably get the comment "How could you invest in that company they make bulletts, cigaretts, bombs, pollute the atmosphere, ect?" I always answer that it is irrelevant which companies that I own stock in as it has no bearing what so ever except in the following 3 areas.
(1) Initial public offereing.
(2) The company is in finatual trouble and the stock price could be tied to thier finance rate.
(3) My vote will affect how the company performs.

Outside of these (none of which apply to any of the stocks I own) I argue wheather I own a stock or not is irrelevant to what the company does. Am I right about this?

[midas]

Warren:

You are very right. When you buy a stock technically you own a piece of the Company and a right to vote for the Board of Directors. But as a small investor, your vote is insignificant and management could care less if you own the stock - your only true right - is the right to sell and potentially drive down the stock price.

On your points:

1. As a small investor, you're unlikely to effect an IPO going well.

2. Financing rates are rarely tied to stock price.

3. You're vote doesn't matter and in most cases large institutional investors mostly vote for mgmt.

If you actually beat the S&P 500 by 10% each year, you should quit your job and become a fund manger. Stansky (the guy who runs Magellan for Fidelity) can't claim the same record and gets paid $15 million+ per year.

[GeorgeF]

If you own stock in a company, you tend to want laws and other events to go in favor of that company. So you vote in general elections in a differnent manner and if people ask you you opinion you are likely to answer in a way favorable to your positions.

For example I have invested alot in international bond funds. I find myself hoping for a fall in the US$ even though I know that will create hardships for many of my neighbors, especially low income types that drive to work. Some Americans would however benefit from a fall in the US$ depending on circumstances.

[FatOtt]

[ QUOTE ]
Outside of these (none of which apply to any of the stocks I own) I argue wheather I own a stock or not is irrelevant to what the company does. Am I right about this?

[/ QUOTE ]

I don't think you're right at all. Obviously, you buying shares of stock on a secondary market rather than in an IPO doesn't put money into the coffers of the firm. However, the fact that there will be willing investors in that secondary market is what makes IPO investors willing to purchase shares in the IPO to begin with.

Your willingness to buy shares increases the ease with which a firm can issue them, even if you're not buying from the firm directly. So yes, if you’re willing to buy shares in, say, a tobacco company, you are helping that firm.

Bad Analogy: You buying hamburger from a grocery store doesn’t kill a cow directly. What you’ve bought was already dead. However, you buying the hamburger will lead to future dead cows because you’re part of the overall demand.

[Nemesis]

Who really gives a [censored]... it's like taking money from bad players in poker. If you don't do it somebody else will... why not profit off of it yourself?

[holman3rd]

[ QUOTE ]
Warren:
If you actually beat the S&P 500 by 10% each year, you should quit your job and become a fund manger. Stansky (the guy who runs Magellan for Fidelity) can't claim the same record and gets paid $15 million+ per year.

[/ QUOTE ]

This comment is laughable on so many levels. If you put that track record in a cover letter and sent it to a fund company, you'd be lucky if someone in HR even read the letter, let alone gave you an interview.

[MaxPower]

If you refused to invest in any company that might do harm in the world, there would be no companies left to invest it.

[Warren Whitmore]

Hi midas,

A mutual fund could not invest the way that an individual can. They must obey rules which essentially nullify value investing.

[Warren Whitmore]

Hi Fat,

There is enough controversy about this that I have sent the origional question to Marion von savont. If she sends an answer I will be sure post the link.

[midas]

What rules? There are mutual funds and managers who are value investors.

[midas]

Finding it hard to get a job? I'll adjust the response to make it an easier career path.

Get a job as a stock broker (no brainer), get some friends and family to invest some dough and start building a track record. Start an investing newsletter to attract more clients and build track record. Beat the S&P 500. Build a managed asset base of individuals. Beat the S&P 500 for 5 years. If you work for a big firms - sell yourself to the funds side of the business. Become a fund manager. Get a rep for consistently beating the S&P 500 - you will manage billions and billions and your salary will dwarf any future 1st place WSOP win!!!

[Warren Whitmore]

From "One up on wall street" by Peter Lynch

"The SEC says a mutual fund such as mine cannot own more than ten percent of the shares in any given company, nor can we invest more than five percent of the fund's assets in any given stock. The various restrictions are well intentioned, and they protect against a fund's putting all its eggs in one basket and also against a fund's taking over a company a la Carl Icahn. The secondary result is that the bigger funds are forced to limit themselves to the top 90 to 100 companies, out of the 10 000 or so that are publicly traded.
You are forced to choose from a list of 40 approved stocks, via the inspected by 4 method. Since you're only allowed to invest five percent of your total stake in each stock, you've got to buy at least 20 stocks, with $50 million in each. The most you can have is 40 stocks, with $25 million in each.
In that case you have to find companies where $25 million will buy less than ten percent of the outstanding shares. That cuts out a lot of opportunities, especially in the small fast growing enterprises that tend to be the best.......You don't have to invest like an institution. If you invest like an institution, your doomed to perform like one, which in many cases isn't very well....Your not forced to own 1400 different stocks, nor is anyone going to tell you to sprinkle your money on 100 isssues. You're free to own one stock, four stocks, or ten stocks. If no company seems attractive on the fundamentals, you can avoid stocks altogether and wait for a better opportunity. Equity fund managers do not have that luxury either. We can't sell everything, and when we try, it's always all at once, and then there's nobody buying at decent prices."

[midas]

Warren;

Nice quote from Peter's book - I've met him - he's a decent guy. Remember, Peter was the fund Manager of Fidelity's Magellan Fund one of the largest and most sucessful mutual funds in the world. Peter's success drove tremendous amount of money into the fund - thus limiting the scope of Magellan to large cap stocks (IBM, GM, Exxon, etc.) where it can buy meaningful positions (to Magellan) and not violate the 10% rule. Also, since Magellan is forced to large positions - quick selling can depress the market.

There are thousands of mutual funds - buy a smaller one ($500 million) and you'll avoid Magellan's problems.

Also, portfolio diversity - definitely effects return. By buying 1 stock at a time, you have a better chance of beating the S&P 500 but if you choose wrong you're dead. Diversity allows you to have some duds with some winners and sleep better at night.

[stoxtrader]

While I also invest in companies from purely a financial perspective, I disagree with your hypothesis that buying stock of a "harmful" company in the secondary market has no bearing.

[ QUOTE ]
I always answer that it is irrelevant which companies that I own stock in as it has no bearing what so ever except in the following 3 areas.
(1) Initial public offereing.
(2) The company is in finatual trouble and the stock price could be tied to thier finance rate.
(3) My vote will affect how the company performs.

Outside of these (none of which apply to any of the stocks I own) I argue wheather I own a stock or not is irrelevant to what the company does. Am I right about this?

[/ QUOTE ]

first of all, no bearing on what?

You are implicitly supporting/enabling their type/method of business by buying stock in such a company and this is why I think so...

You are allocating capital to management of that ocmpany by buying their stock, in essence you are making their cost of capital (equity portion) cheaper when buying stock in the secondary market. You are also fattening their currency that can be used for acquisitions.

you disagree with this?

[midas]

I think you're getting a lttle ahead of yourself if you actually think one person selling will have an impact on stock price but let's take you theory to the outer limit.

You own Phillip Morris, you convince everyone who owns the stock to sell - stock drops to $1 what do you think happens in the real world?

1. PM will all its profits - buys back all the stock and goes private.

2. As the stock drops, another Company raids PM and takes over.

An irrational drop in stock price in a stable business will usually have little impact on on the future of the particular business.

[eastbay]

[ QUOTE ]

If you refused to invest in any company that might do harm in the world, there would be no companies left to invest it.

[/ QUOTE ]

I think there's a pretty clear difference between "might do harm" (all companies) and "are incontrovertibly doing (or facilitating) grievous harm." (say, a tobacco company)

eastbay

[digdeep]

I agree with Midas, beating the S&P by 10% is one excellent achievement. Quit your job and become a professional money manager, start your own LLC and manage the money of people you know.

[playerfl]

If everybody in the world sold their stock in a large tobacco company, guess what, some huge financier would do a leveraged buyout and take it private and become one of the richest people on the earth. Watch a movie called "barbarians at the gate".

[AdamL]

Dear Warren,

By what method do you hunt for stocks that conform to the Graham methodology?

I have been just pouring through Yahoo! Finance and trying to find "hints", but there must be a more efficient way of doing it.

Please let me know how you normally hunt. (Which websites, journals, etc.)

Thanks Warren.

Adam

[Warren Whitmore]

"By what method do you hunt for stocks that conform to the Graham methodology?"

Hi Adam,

Thats a tough one! There have been many books written on the subject covering many thousands of condensed pages. Thats a cowards way (me) of saying what follows is one mans opinion (mine) and may or may not fully reflect the two greatest minds in the field of Graham & Buffett. I highly reccomend that you follow thier works directly and not my intepretation there of. The best books to start with are
(1) Security analysis
(2) The intelligent investor
(3) The intepretation of finantual statments
(4) Storage & stability
(5) World Commodities and world currencies
(6) Warren Buffett
(7) The essays of Warren Buffet
1-5 where written by Benjamin Graham
6 by Robert Heller
7 by Warren Buffett
Remeber read all of those first because what follows will be to condense to keep track of without that background.
These gentlemen contend and they have the data to prove it, that the market is no where near random. That stock "values" change on the order of 0.0001% daily on average and that the stock "price" changes by several percentage points in a single day frequently. Because of the the efficient market theory cannot be correct or close to it. What they have done from there is to determine what is a good "sign" and what is a bad "sign" when shopping for bargain stocks.
The first criterion is PE
Which mean Price to earnings ratio.
A simplified way to look at this is if you buy a stock at its current price and earnings the number tells you how many years assumming earnings stay constant it will take you to get your money back. Benjamin Graham believed that it was fairly obvious that a company with a low PE was superior to a company with a high PE because you would be getting your money back faster everything else being equal. (note here that Warren Buffett does not agree with this) Ben was a statistition and felt that the best thing to do in a case like this was to but stocks only if they have a PE of 2 or more standard deviations below the mean or so. Lets say 12.5 (because thats what he said).
Now the next variable Ben likes is a Dividend (Warren Buffett does not agree with this either) Once again Ben believes that the more money the company gives you the better for you. He likes 3 percentage points above the treasury bond rate so lets say 5%. Something else though it has to also be less than 60% of what the company earned to allow for growth of the company in addition to the dividend. He felt that if companies keep all of thier earnings they tend to blow it all on CEO's pay, diversifications, and other ways of pissing it away down a rat hole.
The next thing Ben likes to see is lots of cash and lots of cash flow lets say a quick book ration of greater than 0.3 and a cash flow of greater than 10%.
Ben also likes a high ROE (Return on equity) averaged out over atleast a 5 year period. The bigger the better but nothing less than 2 standard deviations above the mean (19%)
Ben also likes a high ROI (Return on investment) averaged out over atleast a 5 year period. The bigger the better but nothing less than 2 standard deviations above the mean (19%).
Lets check his logic
(1) Its better for a company to be making a whole lot of money than losing money.
(2) Its good for the company to have a whole bunch of cash around than to need to borrow money to stay a float.
(3) Its good if the company gives you that money (in the form of a dividend.
Well I cant argue with any of that. Ben viewed buissness as a whole series of gaussian curves that if one took the top standard deviation of each one it would be impossible to do worse than average. I agree with him. So now lets set up a spread sheet (I find excel best). In column 1 lets put ROE and because we want > 19% lets take the company in question and put its value/19%. In the next Col lets put ROI and the same thing for this col which is the stock in questions ROI/19%. In The next col lets put Profit and because we want > 10% lets put the stock in question here/10%. In the next column lets put EY (expected yield) which is the 1/PE so for our formula here we will have 12.5/EY. In the next col we will have Div which will be the dividend of the company in question/5%. In the next col we will have the quick book value and the formula will be The quick book of the company in question/0.3. In the next column lets call it Graham And in it lets multiply the cells from ROE,ROI,Quick book, dividend, PE, and Profit. If the number is greater than one buy all of it you can afford. When the number drops below 1 sell it all immediatly. To get which companies will fall into this go to MSN stock screener and type in the above variables and it will sort them for you (dont be surprised if only one or 2 companies meet your criterion). That is after all the whole idea seperating the wheat from the chaff.