Saturday, October 22, 2011

Globe & Mail - Me and My Money

I was interviewed recently by Larry McDonald from the Globe & Mail.  It was published yesterday and you can read the article here:

If I could make one tiny clarification.  It says,"Mr. Graham is now an adherent to “deep value investing,” which involves looking for stocks trading close to, or below, their “intrinsic value.” "

I actually look for stocks trading substantially below their "intrinsic value", preferably 50% or more.  This provides a margin of safety.  If I am wrong about part of the analysis or the future doesn't turn out quite as I expected, the result should still be satisfactory.  Preventing a permanent loss of capital is paramount. 

If I could make one other comment regarding value investing.  It seems that today everyone wants to be a value investor.  I mean, who wouldn't?  Warren Buffett has made it an investing catch phrase and his success is what everyone tries to emulate.  The problem is this, who is going to publicly state their investment is fair or overvalued?  Nobody.  Everyone want capital appreciation.  Thus, every investment is justified as a "value investment" to somebody.

So buyer beware.  Next time someone tells you that a stock is cheap take it with a grain of salt.  When I started blogging I read an article that Petrobank & PetroBakken were "excellent risk/reward scenarios".  The problem was the article was big on future hype and very lacking in facts and figures.  When I subsequently did my research, I came to quite the opposite conclusion.  In fact I said it was a, "terrible risk reward scenario."  To read the article and back and forth Click Here.  You see the other fellow was going off of an analyst's report which is very dangerous.  Petrobank and Petrobakken are down around 75-80% since our debate around a year ago. 

The other problem with valuing a stock is that you have to make predictions about the future.  These are never going to be accurate.  This is why a margin of safety is required.  If you look back over history Buffett prefers to minimize this risk by buying companies that have predictable operations.  This allows an analyst to much more accurate predictions about the company.  Buffett also sticks to companies that are NOT effected by technological change and produce products that we have consumed for the past 100 years and will consume 100 years from now.  He has often said that change is the enemy of the investment analyst.  Examples would be razors (Gilette/P&G), ice cream (Dairy Queen), machine tools (ISCAR), insurance (Geico), paint (Benjamin Moore), Bricks, (Acme Brick), and Candy (See's Candy/Kraft) to name a few. 

So remember, always buy at a large discount to intrinsic value. 

Best Regards,

Kevin Graham

Disclosure - Long BRK.b, JNJ, KFT (Personally or For Family)


  1. I left my congratulations and best wishes at the Globe and Mail.

  2. Kevin, before you congratulate yourself on PBG/PBN,you should realize that the story on this one is still being written. I could easily congratulate myself on not buying RIM @$50 or selling TD at $74.30 27 July 2010, since it hasn't gone anywhere since then. But the fact of the matter is that PBN is probably worth a lot more than its current share price, as I and a few others correctly bet on DAY, a similar company, which is being taken out by Sinopec at double its market value (before the offer).

    You berated me for buying PBN without that I should understand intricacies of the technical terminology used for oil reserves. Now I wonder if you really understand shareholder's reports for banks. As one commenter on the Globe and Mail, they called it "a black box"--i.e., no one can understand something that is intentionally hidden from public scrutiny. Zero Hedge, e.g., has suggested that the banks are fudging data. But one thing is for sure, banks are highly leveraged products--I understand that the average is something like 20 to 1 debt to equity. And yet, in your view, Petrobakken which has assets far in excess to liabilities, is not a good investment.

    In the end, you and I, we have different ways of looking at the world. You are a commodity bear, an acolyte of Buffert who thinks gold is stupid. I look at the fiat money that we trade with and say that it is just a matter of time before that collapses and we just better have some real somethings that we are holding in our portfolio--hence I am overweight precious metal and oil & gas companies: unlike you, I have eschewed bank stocks and the US market. I believe the US is in serious trouble, and that the dollar is going to collapse.

    Well, lets keep in touch and see who ends up right. Cheers, P. W. Dunn

  3. Hi Peter,

    Glad you are beginning to understand what makes a market. Personal attacks are egocentric tendencies that get the better of us.

    Unlike you, I don't make short term market calls on RIM or TD. I try to look big picture and longer term.

    I know you don't care for my advice, but commodities have done very well over the past ten years and make up a large portion of the TSX. Funny how ten years ago it was nearly all tech stocks like Nortel. I hope you don't learn a hard lesson like those who bought tech during that era.


  4. Nice article Kevin.
    A. DesRoches