I found the loan application one particularly interesting… haven’t seen that one before.
I still own a few shares of GOOG. It’s felt overpriced recently, but I’m holding onto a minimal amount at all times and trying to add more over time. So I’m hoping the price drops a bunch so I can pick up more cheaply.
Do a search here for GOOG for my previous thoughts (years old), but I basically think that the world will continue to be drowned in data. Google’s goal to organize the world’s information and their expertise at scaling Internet apps puts them in a great position to be a contender in just about any future technology.
Anyway, I’ve recently read Phil Town’s new book Payback Time. The title there, like most investing books lately, takes advantage of the recent drop in the stock market to entice readers. However the content and tone of the book isn’t as whiny as you might think, and is generally applicable to investors in all markets.
We were big fans of the first Phil Town book, Rule #1, mostly because it described things in layman’s terms and gave readers a clear method for putting the books theories into practice.
Payback Time works the same way and repeats a lot of the ideas in Rule #1. There are still the 4 M’s (Meaning, Moat, Margin of Safety, and Management) for example, but instead of using technical analysis (in the form of Rule #1’s red/green arrows) Payback Time recommends a form of dollar cost averaging, Town calls “stock piling”.
Of course, Town has a section in the book titled “Why This Isn’t Dollar Cost Averaging” that I’ll try to summarize here. Town says (emphasis his), “DCA means investing a fixed dollar amount at fixed intervals no matter what the price of a given stock.” He then goes on to list the numerous flaws and criticisms of dollar cost averaging.
So Town calls stockpiling “DCA with a brain”. You don’t buy any time or on predefined schedules. You buy when the stock price is within your Margin of Safety. And you don’t hold indefinitely. You sell if the stock price goes about your Margin of Safety.
I’ll buy that. And I like this a little better than using “the tools” or “the arrows” or technical analysis to judge a stock because it’s one less thing to calculate. If you are calculating a “sticker price” and MOS price anyway, might as well use them to trade. If you thought of stocks as commodities or discounted dollars, this kind of trading would make even more sense. I value $1 at $1. If the market is pricing it at $0.80, I buy. If the market is calculating it at $1.10, I sell. Sure I could have waited for the price to drop to $0.70 before buying, or $1.20 before selling. I would have made a better trade, but I’m always making a winning trade if I buy when the price is lower than what I value it at (plus my MOS) and sell when the price is higher than I value it at.
So the Payback Time strategy should be a little easier to follow than the technical analysis from Rule #1. Well, to a certain extent. Town introduces another calculation called “the payback time” (maybe that’s the true meaning of the title) to pretty much calculate the MOS from a different angle. And he brings technical analysis back in, talking about support and resistance levels. Here’s a good recent analysis from Hipegg on Google.
Alright, so that out of the way, let me share some of my calculations on Google stock (GOOG). I’m basically running through the Payback Time Spreadsheet found on the Payback Time website. It’s a handy tool.
Here I would want to do a large Google Moat analysis, but I’m lazy. So I’ll say hey, they have a huge margin and virtual monopoly in search. And while there stance is vulnerable (MSFT is gaining ground lately), this moat is fairly stable because (1) it takes a lot of knowledge and investment to serve billions of searches a day quickly and (2) advertisers and publishers benefit from consolidation and drive the market towards one winner.
Charlie Munger and Warren Buffet at Berkshire Hathaway like Google’s moat. Not sure if they are investing. Buffet shies away from tech.
Here I would want to do a large Management analysis, but I’m lazy. I’ll say hey, these guys strive to do no evil. Page and Brin seem like great folks who are in it for the long term. They are standing up to China vs. going for short term profits. They don’t fudge their numbers (other than tweaking the Adsense lever). They don’t mess around with finance gimmicks like splits, etc. They are smart and clearly have a better understanding of the future than the average C-Level exec.
* 5 year EPS Growth has averaged 34%.
* 3 year OPS (operating cash flow per share) Growth has averaged 17%.
* 5 year Sales Growth has averaged 40%.
* 5 year BVPS (book value per share) Growth has averaged 58%.
Nice all around. You usually want to go as far back as you can on these numbers. We can’t go much further back than 5 years because Google only started trading in 2004. If you wanted to be more conservative, you could use more recent (last 2-3 years) numbers since Google basically went from nothing to a top 10 company in 2 years and since then has grown a little slower.
Some more numbers:
* ROIC (Return on Invested Capital) = 18%
* ROE (Return on Equity) = 18%
Nice again. BTW, you can get some of these numbers in chart and spreadsheet form at YCharts.
Google has no debt!
Now, let’s calculate a sticker price and MOS.
* EPS = 21.97 (according to Yahoo)
* Earnings Growth = 14% (That’s my number. Historically we’re looking at 34%, and analysts are estimating 19% for next year. Should do more “main street” analysis of this considering how large Google is.)
* Future P/E = 24 (that’s about average for Google. 2x earnings would be 28)
* MARR = 15% (This is my “minimal acceptable rate of return, i.e. I want to make at least this much per year)
* MOS% = 25% (Ideally you would want 50%, but that is hard to get with GOOG and I’m pretty confident in them.)
I get MOS numbers then like:
* EPS = 21.97
* EPS in 10 Years = $81.45
* Stock Price in 10 Years = $1,954.74
* Sticker Price Today = $483.18
* MOS Price = 3/4 = $362.39
So according to this, I am a seller above $483.18 and I am a buyer under $362.39.
For completeness, here is the Payback Time Analysis using these numbers. To recoup my investment in 8 years, I’d want to buy GOOG at $331.43. That basically means that if you bought all of GOOG at $331.43, you would earn that back in Revenues (assuming our growth numbers) in 8 years. That would be a good investment if you were buying a franchise, and should be a good investment when buying stock as well.
I hope this was informative. Feel free to pick apart my numbers. In particular, I am always interested in pondering what a company that grows at 14%+ for 10 years would look like in the future. I’ll do that in a future post.
I’ve been reading Paul Krugman’s blog at NYTimes.com daily. Paul won a Nobel Prize for economics, so obviously a smart guy. He’s very thoughtful and always bases his opinions on research and current economic thought.
Make sure you also check out his larger “columns” which are featured elsewhere on the site. There is usually a list of current/popular ones in the right sidebar of his blog.
I am currently reading The Snowball: Warren Buffett and the Business of Life in bits and pieces. It’s very entertaining.
This is not the type of book I would normally purchase or maybe even pick up at the library. I’m as interested in Warren Buffet as anybody, but this thing is pretty thick and daunting. Lucky for me, publishers send me books to review all the time. (And there just hoping for a link like the one above and maybe an Amazon review. I should give them that more often.) So anyway, I picked it up between books and have gotten into it.
Warren’s life is interesting. And then there is this payoff that you know the guy eventually becomes the wealthiest (or damn near) man on the planet. It’s fun to read about all the deals and trades he made: everything from selling bubblegum as a kid to stealthy acquiring a majority share of some company and ousting the board. Worth a read.
The folks behind the new documentary Stock Shock: The Short Selling of the American Dream asked me to share the trailer with our readers. This would be an interesting movie for any of you who at some point owned shares in Sirius (SIRI) or XM (XMSR) Satalite Radio.
From the homepage:
Sirius XM Satellite Radio (SIRI) is one of the lowest priced stocks in the market. This, despite the fact the company is a virtual monopoly (having merged successfully with XM radio) and generates nearly 2.5 billion dollars each year with its 19 million subscribers. Even as Sirius XM has a growing number of fans and market potential, the stock has traded for as little as 5 cents per share making “short sellers” filthy rich.
More info at the official Stock Shock homepage.
This is a paid review…
I haven’t been doing many paid reviews lately, but have a couple extra minutes and could use the $15 (or so?) for InvestorGeeks and this site looks pretty cool anway.
Wall Street Survivor is a free fantasy stock market game. You’ve probably seen many of these around. CNBC does a pretty popular one. Like the CNBC one, this game comes along with prizes you can win. Currently there is a contest to win $100k.
Now, these contests I imagine are extremely hard to win. And you basically would have to do a balls out trading strategy to make it since you’re competing with thousands of others. Then again, maybe it is good to practice balls out strategies. (Like Christopher’s last post.)
I created a portfolio, which started with $100k. I had $300k of buying power, so I guess I have margin. That is pretty cool. You can buy stocks, short stocks, and trade options. The interface isn’t too bad, though some of the ads get in the way sometimes. But after a while, you will be able to execute things smoothly.
They also seem to have a lot of research and reading to browse through on the site. Not bad. There are quotes and charts, and “advanced charts” to look through. The charts are decent, with predefined moving averages and stuff like stochastics. You will probably want to use another service for your charts though.
So check it out. If someone knows of a better fantasy stock site, let me know.
That clever dude Ugly is at it again. With the Zimbabwean dollar reaching a record exchange rate of around $20 Million Zimbabwe Dollars per $1 US Dollar, Ugly has decided to repurpose a web classic by launching the Million Zimbabwean Dollar Homepage. I used it to launch an ad for my newly created MoneyShui.
Wasn’t this done before?
If you spend any time on this internet, this probably sounds familiar. However, this time around, pixels are practically free at 900 pixels for $0.01 USD vs. $1 USD per pixel for that other site.
I bought the maximum 9000 pixels, and it came out to $3.60 USD after PayPal’s fees. And at the rate of inflation in Zimbabwe (about 100,580%), Ugly may have to give away the entire site soon.
Check out the Million Zimbabwean Dollar Homepage.
MoneyShui is a little social network for folks who read investing books. (That’s you.) We are trying to build a large collection of ratings and reviews on investing and finance books, so hop on over, create an account, and share your knowledge.
If you see mention of something called “DietShui” in the site, this is because the site is basically a copy of DietShui.com (another Stranger Studios site) featuring a collection diet book reviews. (We still need to get some cleanup done.)
We’re launching a bunch of these sites over the next year. Some more for other book categories, and some more in completely different domains. I’ll let you know how it works out.
Check out MoneyShui now.
Here’s my latest post about AMD.
Here’s an excerpt from a Frobes article:
“Intel’s latest desktop processors have faster clocks speeds and use
smaller transistors–45 nanometers as opposed to 65 nanometers–that
allow them to do more work with less power, _all else being equal_.
“We think that Intel is consolidating its performance lead in
desktops,” Wachovia analyst David Wong wrote in a note to investors
!! “All else being equalt.” All else is not equal. Sure, Intel can
brute force faster speeds with the working capital that they have, but
AMD is going to finesse it’s way into the chip spotlight, just like
they did a few years ago.
You should be able to see my recent posts here.
Question: are we in a bull market or bear market? What if there was a third option? In Active Value Investing: Making Money in Range-bound Markets, Vitaliy Katsenelson makes a case that the current market is actually a "range-bound market" and then gives you the tools to take full advantage of the fact.
What is a Range Bound Market?
Range-bound markets are characterized by their roller-coaster-like volatility and the fact that despite this volatility, money invested in the beginning of the cycle will have close to 0% gains by the end of the cycle. In fact, range-bound markets are more common than bear markets. Katsenelson says:
"…if you look at the U.S. stock market during the entire twentieth century, most of the prolonged (greater than five years) markets were actually bull or range-bound markets. Prolonged bear (declining) markets happened in the past only when high market valuation was coupled with significant economic deterioration, similar to what was going on in Japan from the late 1980s through 2003 or so."
This chart from the book shows the past 107 years bull, bear, and range-bound markets as labeled by Kevin A. Turtle.
You’ll notice that each of the big bull markets was followed by a dip into a prolonged range-bound market. Our current market looks like it is trading in a range (with us on the upswing right now). And though we’re at an all-time high, the market-wide average P/E is still way below it’s pre-2001 levels.
The past shows us that we are due for a range-bound market. I’m not a huge fan of the "since this is how it worked in the past century, this is how things will work now" argument. Many authors stop at just that. Luckily for Katsenelson, he kept my interest by going deeper into things and explaining WHY he thinks the cycle will continue.
This was huge for me. Instead of using faith in history to predict the market, VK discusses human psychology and how the act of going through a long-term bull market (where you never lose going long and your biggest weakness is taking things too slow) affects your investment decisions going forward. What follows is a market of investors who are just more conservative than they were in the bull run, and the end result is a long period of "PE contraction". VK explains this in easy-to-read, convincing language.
Another great summary of why range-bound markets exists comes on page 168:
"If we can agree that the difference between low- and high-P/E stocks is the expectation of growth, this means that in the beginning of a range-bound market investors are willing to pay 200 percent premium for growth, whereas at the end of a range-bound market investors are willing to pay only a 40 percent premium."
Why do I care? What should I do?
Learning about range-bound markets will give you several "aha" moments that will help you think of the current market environment in new ways. But, understanding range-bound markets is just the first part of the book. The more applicable lessons come in the later sections.
The "analytics" section introduces the QVG framework (for quality, valuation, and growth). The basic gist is that because market-wide P/E depreciation is going to eat into profits, you need to be more diligent across these three "vectors" to choose outstanding stocks that will provide greater returns.
Some of the material in the QVG section may be familiar to those of you have read a few investment books. But I think it is still valuable to read these sections closely as there are a lot of good gems in the details. I found VK’s treatment of stock buy backs especially pertinent to some of the tech stocks I trade.
I also appreciated the discussion on sources of growth. We all know to look for Google-like stocks with high earnings and return on investment capital (ROIC) growth rates, but it is also important to know where a company’s growth is coming from so we know how long the growth will last or if something material might happen to affect that growth.
These are the types of details you’ll get out of the book. And even if you’ve been exposed to this stuff before, it is always great to be reminded of it. Additionally, thinking of things from the range-bound angle will bring new meaning to old concepts.
Putting the Value in Active Value Investing
The chapter on value has a cute story about "Tevye the Milkman" and his cow "Golde", which does a great job of explaining how stock evaluation work. It’s a bit elementary, but a fun read anyway. Later in the chapter VK gets into a discussion of "Relative" vs. "Absolute" valuation tools. An example of a relative valuation tool would be the P/E, which is a measure of price relative to earnings. Absolute valuation models are great because they ground your observation in the real world. This is similar to Peter’s Main Street vs. Wall Street analysis or my balking on my GOOG analysis (though I still went long GOOG then and am long now).
If you are a numbers geek (like me), you’ll really like Katsenelson’s treatment of "Absolute P/E". We always say stuff like "I am willing to pay more for the quality of stock x". VK puts specific values on statements like these. What is quality management worth? What is best of breed worth? All of these impact V’s "absolute P/E" calculation, which is very much like calculating the base P/E that we are used to and then adding or docking points based on how the company stands up across a number of factors.
I also like some of the additions VK makes to the typical margin of safety (MOS) discussion. In general stocks with higher growth and dividends can be invested in with lower MOS because less of the gain in stock price will be due to MOS. whereas a stock with 0 growth will gain ALL of its price from MOS.
The typical Graham/Buffet/Town rule-of-thumb is to shoot for a 50% MOS. Katsenelson gives a method for adjusting the required MOS (based on a number of risk factors) before jumping into a stock. This is great because in bull runs, it can be very hard to find solid companies with 50% MOS. Phil Town will tell you that "if you are more familiar with a company, you can lower your required MOS". Vitaliy Katsenelson gives you mathematical way to figure out the exact MOS you can buy at.
Again, the math in the book isn’t too complicated, but it’s there. It shouldn’t scare anyone away from reading the book, but it may get those of you who thrive on quantitative frameworks excited. One of the reasons folks like me like bringing math into investing and other activities like playing poker, is that it allows us to remove our emotions from the game. The goal is to find a formula that makes money that you can replicate over and over. If your formula loses money on a trade (because we’ll all lose money on trades some of the time) it’s easier to handle than if you make the decision based on "feeling" or other less concrete methods.
The Formula. The Strategy.
The strategy section of the book puts forth a pretty simple three-part strategy and then dives further into each part.
By the time you get to this section, you’ll have all of the tools (based on the QVG framework) to achieve each of these objectives. The remaining pages include a number of anecdotes and examples that will help you execute the strategy. You’ll see headings like "Think Long Term, Act Short Term", "Decide How the Game Will End Before It Starts", and "Location of Corporate Headquarters Abroad May Not Constitute a Foreign Company". Again, these are anecdotes you may be familiar with. Chances are there are a few in there, you’re not. I enjoyed VK’s fresh view on these concepts and came away with a greater understanding than I had before.
Overall, Active Value Investing is a good read. The concept of a range-bound market is one that you may not have been exposed to yet. Understanding how the range-bound market comes to be and the properties it has will help you understand the current market.
Additionally, while the active value investing model is presented as the best strategy to use in a range-bound market, it’s also not too shabby in a bull (or even bear) market. You’ll have to dig into the book to learn why, but the system VK describes will earn you the most money in a highly volatile market like we are in and save you the most money in a full on bear market. In bull markets, you might be giving up a few % points of return, but this may be worth it for the extra sleep you’ll be getting. And it will defiantly benefit you when the market eventually falls.
This book was a risky one for Katsenelson to write. As he admits in the introduction, books about bull markets sure do sell better… they’re just more exciting. Also, if the market continue to shoot up, VK runs the risk of having a book on the market with a failed prediction at the core. I admire and appreciate VK for writing this book. I think it’s an especially good read in today’s market environment but also a book that you could learn from no matter what.
At $50 for the hard cover, you might want to go-in on this with a buddy or spend a couple days at your local bookstore. If you’re rich, you can buy it now from Amazon and support our site a bit. Link below.
Update: Amazon has been selling the book in the low $30s, which is a good deal. Follow the link below to get the latest price.
Rating: 4 out of 5 stars
Best Suited For: Value-minded folks managing their own portfolios.
Buy the Book: Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance)
Kristin Friedersdorf, from WallSt.net, has posted her interview with me. Goto her Financial Blog Watch page over there to hear me talk about the history of InvestorGeeks and my lessons learned in trying to start a blog network.
I had a great (if brief) time on the phone with Kristin. Her other podcasts are worth a listen, so be sure to check them out too.