Value Investing 101 - How to make money in value stocks

Hi,

came across a value investing guide prepared by www.stockopedia.co.uk. All credits to them.

Of course, they are trying to sell a proprietary service, which is a stock screen for value stocks (for the UK market).

It's a good refresher for value investors like us. What I find interesting is the use of the Piotroski F-Score, Altman Z-Score, Beneish M-Score.

Wish I have the time/energy to do up the scores for some of my stock picks.

For what it's worth. Enjoy the read.

Quite a concise guide and easy to swallow for beginners.
This guide should accompany with a guide in understanding financial statements. That will form the basis of stock investment.

I like the part on diversification though especially for a weak-in-analysis investor like me.

Does diversification reduce your portfolio gain?? Any opinion?

Personally, I favour diversification of around 4-6 stocks minimally since even the best stock that you can find are subjected to uncontrollable risks.

Thailand Flood - All the hard disk manufacturers + Cerebos + other companies in Thailand
Arab Spring - Boustead
SARS - SIA, Hotels

Diversification reduces your potential maximum portfolio gain if you can select that 1 particular stock. In the long run, i supposed it will benefit your gain since your potential losses coming not from your mistake will be reduced.

In the aggressive growth phase of my investment, around 5 stocks maximizes percentage growth a lot. I believe in no more than 8 good holdings at one go. If anyone holds something like 15 to 30 companies, sure that he may get say a few multi baggers but the impact to his total wealth is minimal. After spending so much effort on deciphering and monitoring under 200 companies, the least I can do is to select the best 5 to 8 to maximize my portfolio gains when the bull runs. For some whose goal is to accumulate dividends, it may not be wrong to hold many companies if all their yields are similarly high.

When it comes to Diversification, I find this quote by Warren Buffett very meaningful,

"Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing"

The key qualifier is you need to have the time and skillset to do a good job analysing the stock. BUT, the majority of us do not have the time or skillset, so it'd be better to be diversified.

Still, in my case, even though I may have up to 15-20 stocks at any 1 time, that has not stopped me from having heavier weightages of even up to 20%+ on a single stock IF I find one which I think is undervalued and have spent a lot of free time checking, rechecking the financials, getting others inputs + legwork (checking their biz) and which is in a biz that I can easily understand,... etc. However, I'm aware that my skillset is limited and if there should be any developments / news that proves that I'd been wrong, I'd be very quick to admit my mistakes and do a quick exit if necessary....

May I just say I feel that diversification is required/good but that's not the main point in value investing.

It's a portfolio management/risk management concept so that you don't get financially exposed/crippled to a specific risk. Adding more stocks to a portfolio is 'good' be it a value or growth approach.

Having said that I find myself taking relatively huge new positions without clearing off all the old stocks. Or I do not rebalance my portfolio cos it is not economical to do so for us small investors.

5-10 stocks you are looking for alpha.
>20 stocks I feel that you might be better off investing in etfs for the beta.

(28-04-2012, 08:24 PM)KopiKat Wrote: When it comes to Diversification, I find this quote by Warren Buffett very meaningful,

"Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing"

The key qualifier is you need to have the time and skillset to do a good job analysing the stock. BUT, the majority of us do not have the time or skillset, so it'd be better to be diversified.

Still, in my case, even though I may have up to 15-20 stocks at any 1 time, that has not stopped me from having heavier weightages of even up to 20%+ on a single stock IF I find one which I think is undervalued and have spent a lot of free time checking, rechecking the financials, getting others inputs + legwork (checking their biz) and which is in a biz that I can easily understand,... etc. However, I'm aware that my skillset is limited and if there should be any developments / news that proves that I'd been wrong, I'd be very quick to admit my mistakes and do a quick exit if necessary....

I would say that diversification is necessary and of course, diversification does affect your portfolio returns. In investing, it is always high risk high gain, low risk low gain. Diversification lowers your risk so of course you would have lower gain. Henceforth, if you only invest in one good stock, that would be high risk high gain. What would happen if, due to unforseen circumstances, the one good company becomes bankrupt (e.g. Enron, Worldcom)?

Therefore, it all depends on your risk appetite. For me, I am quite like what kopikat wrote. I invest in approximately 15 to 20 companies and has huge positions in some of them. Within the 15 to 20 stocks, I am currently overweight on the Oil and Gas sector.

(28-04-2012, 09:25 PM)valuenewb Wrote: 5-10 stocks you are looking for alpha.
>20 stocks I feel that you might be better off investing in etfs for the beta.

Since we are on the subject of Value Investing, I have another favourite Warren Buffett quote,

"Read Ben Graham and Phil Fischer, read annual reports, but don't do equations with Greek letters in them"

I wonder what he means by that??

If you are good, you focus. If you are average, you diversify. If you are hopeless, you hand your monies to the advisers, fund managers, insurance companies and hope that you have chosen the right ones. That is better than trying to DIY because you think you know how to invest, but you are really a rookie in this hugely complicated game.

The main problem of trying to have a more focused investment is "how to select a small group out of a big group of value stocks".
And, may be I am not that good in analysis, therefore it is hard for me to determine whether stock A or stock B is better if both stocks are inherently undervalued.

Besides, the performance of any stock in the future is basically unknown. We can only predict and provide with it a probability that it can rise in value in the future based on its current earnings and assets.

In that case, it became harder to favour A over B or B over A. One may outperform the other due to unforseen events in the future(delisting, special dividend, won a big contract, sell away undervalued assets at inflated value).

Since performance of any stock is not for certain, why should we be so certain of our stock selection especially a small portfolio??