Tilson & Heins on Staying Disciplined

Warren Buffett has said that investing is simple, but it’s not easy, and in their latest Kiplinger’s column, value investors Whitney Tilson and John Heins explore that subject.

“In The Little Book That Beats the Market, published in 2005, star money manager Joel Greenblatt describes a ‘magic formula’ for success that ranks stocks based on only two factors: share price relative to a firm’s earnings and return on capital,” Tilson and Heins write. “After reading his book, we asked Greenblatt if widespread adoption of his simple plan might undermine its effectiveness. He was unconcerned: ‘Value investing strategies have worked for years and everyone’s known about them. They continue to work because it’s hard for people to do, for two main reasons. First, the companies that show up on value screens can be scary and not doing so well, so people find them hard to buy. Second, there can be one-, two- or three-year periods when a strategy like this doesn’t work. Most people aren’t capable of sticking it out through that.’”

Tilson and Heins say that touches on the main challenge for value investors — the fact that in order to beat the crowd you have to go against it, and in going against it you can run into short-term underperformance that can make you look very, very bad.

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Tilson & Heins on “Lottery” Picks

While they are value investors, Whitney Tilson and John Heins say that it’s okay to swing for the fences on riskier stocks.

“Overpaying for stocks is always a bad idea,” the duo writes in their latest Forbes column. “But there are times when the market offers what we consider mispriced options on success. We will happily make an investment even when we know there’s a decent chance we’ll lose most or all of our money, as long as the upside is great enough to offset the risk. If we’re investing $100 in something that has a 70% chance of being worthless but a 30% chance of being worth $1,000, the expected value of the investment is $300, which would triple our money. If over time our assessment of the odds proves sound, investing in such mispriced stocks will prove beneficial to our portfolio.”

There’s a big “but”, however: “We devote only a tiny portion of our portfolio to these types of hit-or-miss opportunities,” Tilson and Heins write. “That’s especially true today, when the market is far more likely to misprice global blue-chip stocks like Berkshire Hathaway, Microsoft, Intel and Johnson & Johnson — all of which we own.”

Tilson and Heins also offer a couple of riskier picks they say are currently “well worth taking cuts at”.

 

 

Tilson, Heins Like Money Managers

In their latest column for Kiplinger’s magazine, Whitney Tilson and John Heins say they are high on an unloved area of the market: money management firms that specialize in stock funds.

In the article (not yet available on Kiplinger’s web site), Tilson and Heins write that money management is a fairly simple and very profitable type of business. “One of the beauties of the business is that costs don’t march in lock step with revenues,” they say. “If a fund grows from $1 billion to $2 billion, you don’t need twice as many people to manage it. You may not need any extra people.” In normal times, they say, such businesses can have “eye-popping” net profit margins of between 25%-30%.

We have not, however, been in normal times, and the weak performance of stocks in recent years has driven down the share prices of money management firms that specialize in stock funds. And that has created some big bargains, Tilson and Heins say. Using research from colleague Zeke Ashton, whose Tilson Dividend Fund has a strong record of outperforming the market, they offer a couple picks from the industry. Among them: Calamos Asset Management (CLMS) and Artio Global Investors (ART).

 

Why The “Dissonant” Market Is Great News

In their latest column for Kiplinger’s, Whitney Tilson and John Heins say the current investment climate is among the most dissonant as they’ve ever seen — and that the contradictory stances investors have toward stocks are making for a myriad of opportunities.

Tilson and Heins say investors are “torn between wanting safety and craving yield”, and are piling into Treasury bonds while at the same time pumping cash into emerging markets and junk bonds. In the stock market, the duo says, investors are “torn between their disgust at the lousy returns of blue chips over the past ten years and their expectation that stocks should outperform other investments.” As a result, they say, “many of the least-risky blue-chip stocks are extremely cheap, while the shares of some firms with less-predictable or speculative prospects are expensive.”

That has Tilson and Heins feeling good. “We consider investors’ contradictory stance toward risk in stocks to be great news,” they say. “Everywhere we look, we see wonderful opportunities both to own stocks and to sell them short.” To see some of their blue-chip picks, click here.

Tilson & Heins on Circles of Competence

In their latest column for Kiplinger’s, Whitney Tilson and John Heins discuss the importance of investing within — while trying to expand — your “circle of confidence”.

“Staying within your circle of competence is a central tenet of value investing,” Tilson and Heins write. “It’s clear that you’re more likely to succeed by investing in situations, companies and industries you know well rather than by dabbling in the unfamiliar.” Over the years, they say, they’ve seen many examples of investors “swing[ing] at pitches outside of their investing strike zone,” often leading to trouble.

You can, however, widen your circle of confidence, Tilson and Heins say. They quote value investor Bill Miller, who once said, “There’s no reason to say, ‘Here’s my circle of competence, and it’s never getting any bigger because I’m not going to learn anything new.’ We’re trying to understand new things if we can.”

Tilson and Heins say they agree. They offer three examples of recent picks that show how they have expanded their circle of confidence: Microsoft, CIT Group, and BP. To see why they like those stocks, click here to read the full article.

Tilson & Heins on Shorting Opportunities

In their latest Discovering Value column for Kiplinger’s, Whitney Tilson and John Heins discuss the ins and outs of short-selling, and offer some insight into where they are currently focusing their short-selling efforts.

Tilson and Heins say they are value investors, and in choosing their long positions they take a classic value approach. But while short-selling has many pitfalls (and has gotten some major criticism in recent years), they say they incorporate it into their overall approach for two main reasons. “The first is simple,” they write. “We believe it’s a moneymaking opportunity. The market often overvalues certain companies, and we can profit when their valuations return to earth.”

The second reason, they say, is that shorting is “an excellent tool for hedging against risk — particularly in a market trading at a 20% premium to historical valuation levels despite significant areas of concern, such as the housing market and sovereign debt risk.”

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Tilson & Heins Play Defense

In their latest “Discovering Value” column for Kiplinger’s, Whitney Tilson and John Heins say they are “playing defense” as the U.S. and world continue to deal with the fallout from the “bursting of the greatest bubble in history”.

“As Americans, we’re hoping for a sharp, V-shaped economic recovery. But as investors, we’re not betting on it,” Tilson and Heins write, pointing to housing as their greatest concern. It will take “forceful action” by both the government and banks to avoid another downturn in the housing market, they say.

Tilson and Heins say they are doing two main things to play defense and protect their investments right now: Adding to their short positions, especially homebuilders, and stocking up on “dominant blue-chip companies” like Microsoft, Berkshire Hathaway, and Anheuser-Busch InBev — the latter of which they discuss at length in the article.

Tilson & Heins on How the Mighty Fall

At the heart of good stocks are good companies, and in their latest Kiplinger’s column Whitney Tilson and John Heins offer their perspective on what causes some companies to falter.

Tilson and Heins do so in discussing the new book from Jim Collins, How the Mighty Fall. “Investors can gain a lot of insight from Collins’s new book,” they write. “He finds, for example, that failure is much more likely to result from corporate overreaching than from complacency.” Executives confuse “big” with “great”, according to Collins’s book, and overdiversify, move into businesses in which they can’t be leaders, and grow too big for management to be effective.

Another problem to which executives fall prey: denial. “Executives discount negative results and blame setbacks on external factors,” Tilson and Heins write.

Tilson and Heins also explain why they think Warren Buffett’s Berkshire Hathaway is the “antithesis of Collins’s well-described disaster-in-waiting scenario”, and they offer a stock pick involving a company that “has reversed what Collins describes as the difficult-to-stop death spiral that many failing companies enter.”

Tilson & Heins: “Buy-and-Forget” a Losing Proposition

In their latest Kiplinger’s column, Whitney Tilson and John Heins examine a 10-year-old Fortune magazine article to stress some of their core beliefs about investing — including the idea that buy-and-hold investing (or, perhaps more accurately, “buy-and-forget” investing) can be a dangerous practice.

The Fortune piece, entitled “10 Stocks to Last the Decade”, highlighted 10 stocks that investors might add to their portfolios and be able to hold for the next decade, because these firms were poised to capitalize on overarching trends. Among them: Nokia, Morgan Stanley, Viacom, and … Enron.

All in all, Tilson and Heins say, an equally weighted portfolio of the ten picks would’ve lost 44%, almost twice what the S&P 500 lost during the “lost decade”. The duo says they point all of this out not as a critique of Fortune, but as a way to examine a number of important lessons. Among them:

Buy and hold isn’t what it used to be: Tilson and Heins by no means recommend fast-paced trading. But, they say, “buying and forgetting in a world roiled by rapid change is an increasingly risky proposition — especially when it comes to technology. … Now more than ever, you need to maintain constant vigilance in monitoring your portfolio.

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Tilson & Heins: Healthcare Fears Overdone

Add two more top strategists to those who say that healthcare reform fears are creating some bargains in the sector.

In their latest Kiplinger’s column — a piece on contrarian investing — Whitney Tilson and John Heins say they think the healthcare fears are overblown. “Investors fear that health-care reform will hurt the entire industry, a key reason that the sector trades at just 12 times earnings, or 36% below the P/E of the S&P 500 (historically, such high-quality businesses have commanded higher P/Es than the index),” Tilson and Heins write. “We think that the pessimism is overdone.”

One good way to play the sector, they say: Pfizer.

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