Deena Friedman manages the Fidelity Select Retailing Portfolio, which has the highest 2015 return among mutual funds. With a return of over 18%, Barron’s notes that her “stock-picking easily outperformed comparable index-driven strategies,” given the 10.4% average return of ETFs investing in consumer discretionary shares. Friedman is a classic value investor, following Graham and Buffett, among others. “I found the way to generate alpha,” she says, “by thinking very long-term.” She also says that the American consumer “is increasingly value-conscious in an economy that is slow and steady, grinding upwards” – an outlook that fits well with her value investing approach.
Chuck Myers, who heads the Fidelity Small Cap Discovery Fund, shared some of the lessons he has learned as a value investor at the recent CFA Institute Equity and Valuation Conference. As reported in Enterprising Investor, these include:
- “Learn from the best, but think independently.” Myers cites some of the best known investors, and those with excellent records, as influences, but has developed his own “low expectations” approach to value investing by seeking out-of-favor stocks ripe for a turnaround. Myers cites great investors such as Warren Buffett, Benjamin Graham, and Seth Klarman as some of his top influencers in investing. Myers explains that studying Buffett’s shareholder letters and reading Ben Graham’s The Intelligent Investor have helped him develop a strategy for finding value stock opportunities.
- “Stay within your ‘circle of competence.'” Myers has an excellent stock-picking record, but his fund suffered early when he bet on sectors and became overweight in international stocks.
- “Aim for the ‘middle of the fairway.'” Focusing portfolio construction on his strengths as a stock-picker to avoid big bets that could go awry has served Myers well.
- “Relative valuation matters.” Myers looks at both absolute and relative returns, combining the approach of hedge fund and mutual fund managers.
- “When it comes to turnover, patience is a virtue.” Myers cited Morningstar data to suggest that lower turnover is associated with funds that outperform over the long run.
- “Focus on a margin of safety.” Myers asks whether a company can weather a severe storm without having to dilute its shareholders during a crisis.
With the NCAA’s college football playoff only a couple weeks away, Validea CEO John Reese recently took a look at some stock market “playoff” matchups that feature several global powerhouses, including Apple, Coca-Cola, and Google.
In a column for Forbes.com, Reese looks at how four pairs of market rivals stack up against each other. The matchups: Apple vs. Google, PepsiCo vs. Coca-Cola, Exxon Mobil vs. Chevron, and Anheuser-Busch InBev vs. Molson Coors.
Reese uses his Guru Strategies to analyze each firm on a purely quantitative basis. “The numbers might not tell you everything, but they tell you more than you might think,” he says, using Warren Buffett’s “durable competitive advantage” or “enduring moat” concept – seemingly a subjective characteristic – as an example. “In her book The New Buffettology, Mary Buffett–who worked closely with Mr. Buffett and is his former daughter-in-law–said that companies with durable competitive advantages typically have distinct quantitative characteristics,” Reese writes. “They tend to have high long-term returns on equity and total capital; long-term debt that is less than five times net annual earnings; and a lengthy history of persistently increasing earnings.”
To find out whom Reese declares the winners of the four market matchups, click here.
Conventional wisdom has long held that, in investing, greater risk leads to greater reward. But over the past couple years, new research has turned that idea on its head, and in his most recent Seeking Alpha article, Validea CEO John Reese looks at some of the implications for investors.
“In Betting Against Beta, Andrea Frazzini and Lasse Pedersen found that [Warren] Buffett’s Berkshire Hathaway has beaten the market over the long haul by focusing on low-beta stocks, and using leverage – other people’s money – when buying them,” Reese says. “Most investors can’t use large amounts of leverage, however. Instead, they turn to volatile stocks in search of high return, Pederson and Frazzini said. In doing so, they bid up the prices of those stocks, which has led to high-beta assets underperforming among U.S. equities, 20 international equity markets, Treasury bonds, corporate bonds, and futures.”
Reese looks at research that supports this idea, and he examines 5 low-beta stocks that currently get high marks from his Guru Strategies, which are based on the approaches of Buffett and other investing greats. Among them: Wells Fargo and IBM.
Asked what he is optimistic about, Warren Buffett reflects on some key points of progress over his lifetime and suggests some things we might all be thankful for. “If I’d been born 200 years ago my life would have been just a tiny, tiny, tiny fraction of what it is now,” he noted, continuing: “I tell the students [they] are actually living better than John D. Rockefeller Senior lived when I was born.””
Buffett’s optimism persists even where he sees challenges, such as in education: “I think students are generally throughout the world getting a better education, certainly than they did when I was getting my education,” while acknowledging that “we like to say we have equality of opportunity in this country but unless everybody has a shot at a similar education there is no equality of opportunity. We’ve got a long way to go on that.” Asked about deficits, Buffet commented: “Our output per capita goes up year after year. How it gets divided is another matter. But if you look at real GDP per capita it’s six times what it was when I was born.”
Going forward, Buffett suggested, “even at 2% GDP [growth annually] that’s over 1% per capita and in one generation that means the next generation is going to live 25% better than we live per capita in the United States .” Although he acknowledged distributional issues, he also maintained that progress is made on such issues over time in the United States.
It’s extremely common to hear investment commentators talk about “growth” and “value” as though they are polar opposites. But Validea CEO John Reese says not to buy that false notion.
“When it comes to investing’s great ‘either/or’ – that is, the growth or value debate – you can have your cake and eat it, too,” Reese writes for Canada’s Globe and Mail. “That’s because the great growth versus value debate is, in fact, a false choice. … Confining yourself to either value stocks or growth stocks is only limiting your portfolio’s potential. At certain times, you’ll be able to find more attractive growth-type picks; at other times, the market will be offering more value-type plays. Having a portfolio of growth-focused and value-focused stocks can also help smooth your returns over the long haul, since the two styles take turns leading the market.”
Reese says the “fallacy of the growth-versus-value notion goes even deeper. … That’s because implicit in the debate is the idea that any given stock is either a value stock or a growth stock, and that’s just not true.” He highlights a pair of stocks that currently get approval from the growth strategy he bases on the writings of renowned quantitative investor James O’Shaughnessy — and a separate value strategy he bases on O’Shaughnessy’s writings. One of them: AXA, a Paris-based financial company that’s involved in life insurance, property and casualty insurance, asset management and banking.
How do Apple, Facebook, Berkshire Hathaway, and other market giants stack up against the strategies used by history’s greatest investors? In his latest column for Forbes.com, Validea CEO John P. Reese takes a look at how 10 market titans fare, and the results might surprise you.
Reese notes that, historically, small stocks have beaten large stocks by a significant margin. Small stocks have an advantage because they can fly under the radar in a way that larger stocks cannot, and they usually come with an added risk premium because they tend to be less stable and more susceptible to bankruptcy. But, he says, that doesn’t mean you should ignore the big guys.
“Mega-cap stocks have advantages of their own,” Reese writes. “Their size and name recognition can give them what [Warren] Buffett would call ‘durable competitive advantages’ over their competitors. They also tend to be less volatile and safer plays during tough times. … And often times the big guys will offer nice dividends or implement major share buyback plans because of their more stable cash flows, making up for the slowing of growth that inevitably occurs when a company gets to be as big as these firms.”
So how do the 10 largest companies by market capitalization score using Reese’s Guru Strategies, which are based on the approaches of Buffett and other great investors? Apple, for one, fares quite well, earning strong interest from Reese’s Buffett- and Peter Lynch-based models. Facebook, on the other hand, misses the mark. To see how the others stack up, click here.