1 Any specific stock, bond, industry, country, or asset picks that you feel strongly about?
- The P&C insurance & reinsurance industries — they are very good at compounding earnings, especially the ones that are good underwriters, conservatively reserved, and shareholder focused over the long haul.
- Selected energy and information technology stocks, so long as the valuations are inexpensive.
- RGA, National Western Life, Stancorp Financial, AFLAC, and Industrias Bachoco SA
- Emerging market bonds — their policies are mainly more orthodox than the developed world, for now.
2 What strategies do you use to determine if a company is worth a deeper look into, in the first five minutes?
There is this article: GE Does Not Bring Good Things For Your Life. If you have a Bloomberg Terminal, that is a useful article.
But even if not, the five-minute drill is easy:
- Look at price to expected earnings. Look at past earnings.
- Look at indebtedness and goodwill. Ask: is this a stable industry? Does the goodwill represent anything valuable, some barrier against competition?
- Compare cash flow from operations versus earnings. An excess is usually better.
- Look at price-to-book for financials and price-to-sales for utilities and industrials — lower is better.
- Ask yourself if this is an industry with increasing, stable, or decreasing pricing power.
- Look at whether the share count is rising or falling. Falling is better.
- Does it pay a dividend? Yes is better.
Beyond this, for corporate bonds, I have a similar arrangement. And I call that the one-minute drill, because in institutional fixed income, you have to be fast when the market is hot.
3 What have been valuable resources that you would recommend to up-and-coming investors?
Look through the book reviews that I have written — there are almost 200 of them. I have read a lot of books by eminent value investors, bond investors, growth investors, alternative asset managers — you name it, I have read a lot of investment books.
But let’s add in another question:
4 What advice would you give to a student who wants to start investing but has not prior knowledge?
My friend Niall O’Malley gave a good answer to this when he said create two lists of stocks — one that you think will do well, and one that you think will do badly. Then track them, and learn from the companies that violate your expectations.
My answer would be more plebian — paper trade. I did that in my early 20s, long before I had money to invest. I came close to winning the Value Line contest in the mid-80s.
But the biggest thing is making a commitment to improve your investment knowledge. When I was 26, I said that I would spend one hour per day, except Sundays, to improve my investment knowledge. I went all over the map. I read practical stuff. I read academic stuff. I read stuff on stocks. I read stuff on bonds. I read stuff on industries, sectors, companies, etc. I read stuff on management, operations, financial management. I read, read, and read.
Investing requires continual self-education. Read and learn and profit.
Final episode tomorrow.
Full disclosure: Long RGA, NWLI, SFG, AFL, IBA