Yesterday I wrote about my first approach to value investing and today I’m going to write about my second one. My second value approach is called the Wise Owl Model, so named because I wanted everybody to think that the approach is wise. (Clever, eh?) The methodology is based upon a meeting between Benjamin Graham and my former college professor, Dr. Wilson Payne.
In the meeting, Benjamin Graham and Dr. Payne developed a method for estimating the intrinsic value of a company. From that came methodologies for calculating the Maximum Buy Price and a Minimum Sell Price. Dr. Payne then taught me and many other students these methodologies. The estimated prices are not perfect, but when intelligent analysis is added, results are outstanding.
My goal in the Wise Owl Model is to find sound, high-quality companies with positive outlooks. Buying industry leaders with annual 20% to 30% price appreciation potential makes sense to me, especially if losses are few and far between.
The system is not infallible (none is), but as Benjamin Graham once said, “Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices.”
Ward’s Words of Wisdom: Buy an industry leader at a low price and sell at a higher price. Buy low and sell high–it’s that simple!
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I download a large amount of data into my computer each month and then turn my computer loose to determine preferred buy and sell targets for my stocks. My database includes 10-year histories of sales, cash flow, earnings, dividends, book value and price per share for about 1,000 companies.
The initial objective is to organize the numeric history of each company, so that future stock prices can be predicted. Calculations can be a little tricky, because anomalies such as deficits, exceptionally good or bad years, or a multitude of other variables could throw the predictions out of whack. But I’ve programmed my computer to deal with anomalies, and the resulting stock price forecasts are quite accurate.
Each month, I publish my price predictions for 250 companies in the Cabot Benjamin Graham Value Letter. I recommend that investors buy at or below my Maximum Buy Price and sell when the stock reaches my Minimum Sell Price. It’s that simple.
Everybody wants to buy when a stock is undervalued and sell when the stock price is fully valued. But the trick is having a proven, time-tested system that helps you spot bargains, and rip-offs. It’s taken years to hone, but that’s what my system is able to do!
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3 responses so far ↓
1 W. Gerald Fowler, M.D. // Nov 22, 2008 at 7:22 pm
I have read your rants, and those of your readers, with interest. Now. my rant.
A government, like a company, runs on money. It must protect its tax base, as a company must protect its customer base.
The thousands of tax-payers who would lose their jobs, and the hundreds or thousands of tax-paying companies that would lose their income if the auto industry could not borrow to retool (as in the past) because nobody is lending, makes it imperitive that we, the tax-payers, act as lender of last resort and charge to auto industry a premium on our money.
The auto industry, like a good prostitute, provides what the customer wants, be it gas-guzzlers SUVs or mini gas savers. If we, neophites in the auto industry, tell the company to make only gas-savers, the scarsity of SUVs will, like scarse gold, run up the price of full size gas-guzzlers.
The idea of letting the auto industry fail is not economically sound for the government or for me and my fellow tax-payers.
W. Gerald Fowler, M.D.
2 Mthra Neuman // Nov 23, 2008 at 3:57 am
Change, is such a big word!
I feel water (markets) must find it’s own level. If there is loss of money, loss of jobs, loss of property and most of all loss of stature, it is all not bad. The problem: to much spending on credit. By the government’s idea of bailout is just a further expression of this same behavioural problem, borrowing to give i.e. banks money so they can lend and we as citizens become further in debt as we are the people of the government. The sooner we accept prognosis/medicine the sooner the cure.
Perhaps becasue I am secure financially, I speak from a position of comfort. But, this is becasue I practice what I preach.
3 hazeleyes // Dec 1, 2008 at 2:13 pm
M. Neuman, yes, I believe this is the philosophy that should have prevailed. No need to explain to you why I feel that way, I know.
But the water is over the dam and we’re all beneath the surface. Many folks feel that instead of having to swim, someone should have to drag them to the surface. I guess that’s supposed to be us, and we’re being pushed to do it without thought of whether once dragged to the surface those folks will help those who rescued them. I doubt it, they are vampires. That doesn’t make me hopeful or confident about the future of this country.
Dr. Fowler, I acknowledge the truth of what you say, but unfortunately it’s hard to make an argument for ‘rescuing’ a company that has not, over many decades, rescued itself.
I’m not an advocate for the Soviet system of dictating what should be manufactured, because buyers want what they want, and the last time I looked none of us could be forced by government or other institutions to spend our money any way but the way we want to.
“Green” cars are going to be part of the package. There will be buyers for ‘green’ automobiles, but their price is very high relative to their value and relative to the value of other cars, so I doubt that over time the initial rush-to-purchase trend will continue, especially since price is high relative to value, and because once the folks who can afford a higher price for a lesser car have purchased, the remaining folks will be the ones who are in position where they have to get best value of their purchasing dollar. These are folks who don’t have high-paying jobs and endless discretionary income that you and your colleages may have – though that’s shrinking, I know, and may shrink more if the US is forced onto the medical quota system. So there goes more ‘green’ car sales.
It might be 5-10 years or so, but as those who purchase ‘green’ cars mature and their lives change they’ll want larger more powerful cars. I’ve seen it before.
Government intervention will work against a ‘green’ Detroit over time, not for it.
Detroit should be very skeptical of getting government any more involved than it already is, and should, in fact, try to claw themselves out of the grip of Washington. And Washington should, before they throw money at Detroit, pry the grip of the labor unions off the car companies and demand that robotic car factories be built in the US. Yes, that will hurt many folks who work in auto manufacturing, but better a few than the whole nation.
Detroit’s story is the same as all bailout recipients. If they don’t find their own way, they have to do things that are against the interests of their businesses AND against the interests of taxpayers who’ll foot the bills or decide later whether or not they can afford the products those companies offer. This FACT is, I believe, the reason no one has confidence in the American system anymore, and may not regain confidence for a long long time. I won’t, I assure you. I’m purchasing little and am out of the financial markets, probably permanently. Unless I can be convinced that government will not do things, or allow things to be done that are against investor-and taxpayer interests, I have NO confidence in our system. Lost 50% of my investments and my home value (on a 25 year-old home on which I’ve been paying govenment-inflated property taxes) has deflated over 25%. Congress caused Fannie/Freddie troubles that brought on this domino effect. Why should anyone trust their plans or decisions, ever?
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