Investment Strategies 03 (Jul 13 - Mar 19)

[winston]

What I Learned From Our Most Successful Recommendation By Mike Barrett

Four years ago, in the June 2011 issue of our Extreme Value newsletter, my colleague Dan Ferris and I recommended the best portfolio holding in our publication's 13-year history…

Readers who took our advice to buy wine producer and beer importer Constellation Brands (STZ) up to $25 per share back then have made more than five times their original investment. From our $21.24 reference price back in 2011, the total return including dividends is 555%.

There are three important lessons every investor can learn from this successful recommendation…


Lesson No. 1: Skate to Where the Puck Is Going, Not to Where It Is

Buried deep in that June 2011 issue is an analogy about successful investing I still consider one of the most insightful things Dan has ever penned. Here's what he wrote (emphasis added)…

I view Constellation as a "Wayne Gretzky" stock. Gretzky was arguably the greatest professional hockey player in history. He's famous for saying, "A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be."

Well, a good investor evaluates the present condition of a business and buys with a margin of safety. A great investor sees into the future better than others and buys today where the profits will be tomorrow.

Buying tomorrow's profits with a margin of safety today is the essence of successful investing. The key is looking into the future and imagining how the story will change.

Constellation is the No. 1 premium wine producer in the U.S. and 100% owner of the No. 1 beer importer to the U.S. (Crown Imports). We correctly anticipated that Constellation Brands' distinctive wine and beer assets would continue to generate growing amounts of cash flow.

We also correctly viewed the shares as undervalued in relation to this upside. Fiscal 2011 operating cash flow was $620 million. For the last 12 months, this figure has almost doubled to $1.2 billion. That equates to operating cash flow growth of about 16% per year since 2011.


Lesson No. 2: Don't Get Complacent About an Undervalued Stock

When we issued our recommendation to buy Constellation Brands up to $25 in June 2011, shares were trading near $20. They continued to do so for the next 12 months. In other words, month after month, Constellation remained an "extreme value" and well within buying range.

As a subscriber, it was easy to get complacent and not take action.

Then out of the blue, on June 29, 2012, Extreme Value holding Anheuser-Busch InBev (BUD) announced it would divest the 50% interest in Crown Imports it was acquiring as part of the Grupo Modelo deal… and sell it to Constellation. This meant Constellation would now control 100% of Crown Imports, the largest beer importer to the U.S.

Shares rocketed higher 25% that day, closing near $27. Constellation Brands hasn't fallen back into buy range for even a single day in the three years since.

Keep this story in mind as you ponder current buys. Don't make the mistake of assuming that because they're a buy today, they will be tomorrow as well.

A quality business selling at a bargain price is an anomaly you can safely assume will eventually get corrected. Better to be a few months early than to be one day late.


Lesson No. 3: Let a Winner Run… But Regularly Ask Two Crucial Questions

When a stock becomes a big winner like Constellation has, fighting your emotions becomes a big challenge. If the stock suddenly starts declining, you wonder if you should lock in profits. If it starts surging, you wonder if you should sell amidst the sudden euphoria, particularly if the broader market has been on an extended, multiyear run.

Don't give in to these evil temptations. Avoid acting irrationally and prematurely closing a big winner by asking yourself these two questions…
1. Is the original investment idea still valid?
2. Have the shares become fully valued?

For Constellation, the monitoring process has been more complicated than usual the past three years due to heavy (but temporary) capital spending.

Back in 2012, when Constellation agreed to acquire the 50% of Crown Imports it didn't already own, it also agreed to expand the Nava, Mexico brewery from 10 million to 20 million hectoliters by the end of 2016. The first 5 million hectoliters of this expansion is expected to be online by the end of 2015.

Last year, in response to the beer business exceeding internal expectations, Constellation added another 5 million hectoliters to the buildout, raising total capacity to 25 million hectoliters.

Recently, the company said it's evaluating plans for even more capacity beyond 25 million hectoliters. The current brewery expansion (to 25 million hectoliters) won't be finished until fiscal 2017, and this will be the primary use of operating cash flow until then.

Continued expansion of the Nava brewery is precisely what we want to see. A larger plant is likely to manufacture more in-demand alcoholic beverages like Corona at lower unit prices and thus earn higher marginal profits.

We've re-evaluated Constellation's story each quarter over the past four years. Thus far, it has remained in alignment with our original growth thesis.

Compared with last 12 months' (LTM) free cash flow, the current share price appears to be extremely overvalued (about 52 times free cash flow). That's because expanding the Nava brewery has been (and will continue to be) the primary use of operating cash flow… and is therefore depressing free cash flow (operating cash flow less capital expenditures).

By the time fiscal 2017 begins on or around March 1, 2016, management expects the major brewery expansion to be done, leading the way to much higher free-cash-flow growth.

If capital expenditure (CapEx) spending returns to a more normal 3% of revenue (it's currently more than 10%), Constellation could generate $1.15 billion of free cash flow during fiscal 2017. That would be about five times higher than this year's projection of $200 million to $300 million. If this cash-flow surge does materialize, management maintains it'll use it to continue paying down debt, grow the dividend, and buy back shares.

At a recent price of $135 per share, Constellation trades at about 23 times our fiscal 2017 stabilized free-cash-flow estimate. That's not cheap enough to recommend buying again, but it's also well below our intrinsic value estimate (about 30 times free cash flow).

When we first recommended Constellation in 2011, shares were trading about seven times LTM free cash flow. Today, they're trading at about 23 times our estimate of 2017 free cash flow. This growth accounts for a big part of our gains. And it perfectly illustrates why we are obsessed with buying a quality business at a bargain price.

This is the kind of analysis we've been doing quarter after quarter. Monitoring Constellation's performance in relation to our original investment idea – and keeping track of its rising valuation in relation to our estimate of intrinsic value – has helped us stay in the stock and avoid the temptation of selling too early.

As you search for future big winners like Constellation, imagine how a given company's story is likely to change. Skate to where it is going, not just to where it is currently.

Then, when you find a stock that's undervalued, don't get complacent. Remember that quality companies selling for bargain prices are market anomalies that usually get corrected.

Finally, once you have a big winner, don't put it on autopilot. Regularly ask yourself if the reason you bought it is still valid and if the shares are fully valued.

Asking these questions will take emotion out of the decision-making process as much as possible and help you avoid selling a big winner prematurely.

To sum up, the three important lessons to learn from our Constellation recommendation are:

1. Skate to where the puck is going, not to where it is.

2. Don't get complacent about an undervalued stock.

3. Let a winner run… but regularly ask two crucial questions.

I highly recommend applying these lessons to your own investing today.


Source: Extreme Value

[winston]

Stringent vetting of stocks before investing

Source: The Star

http://www.thestar.com.my/Business/Busi ... ?style=biz

[winston]

Use This Simple Secret to Find the Best Stocks By Dan Ferris

One of the secrets to finding the best investments is so simple and so obvious, most people don't pay attention to it…

If you'd known about this secret back in 1994, you could have bought Colgate-Palmolive for less than $10 a share and made more than five times your money.

If you'd known about this secret back in early 1995, you could have bought Microsoft for $4 a share and made more than eight times your money.

If you'd known about this secret back in 2003, you could have bought McDonald's for $13 a share – and made more than seven times your money, including a growing stream of dividends.

When you take into account the crashes of 2000-2002 and 2008-2009, it's especially amazing investors could make this much. What's the secret?

Look for companies with the highest sales in their industry.

I realize this sounds so obvious it's almost laughable. That's just because the real secrets to successful investing aren't complex. They're so simple, anyone can understand them. For example, "Buy low, sell high" is laughably obvious. It's just that almost nobody has the discipline to actually do it.

Generating the most revenue in an industry is the definition of success in business. Microsoft Windows runs about 90% of the world's personal computers. Intel sells about 80% of the world's microprocessors. Campbell's sells more than 60% of the world's packaged soup. More than 60% of the world's credit and debit cards say "Visa" on them. Colgate-Palmolive sells more than 40% of the world's toothpaste. These are all excellent businesses with huge, consistent profits.

Once a business sells more than any other company in its industry, it becomes incredibly difficult to compete with. Imagine trying to build a home-improvement business today. You'd have to compete with Home Depot and Lowe's. Imagine trying to build the world's most popular retailer. You'd have to try to compete with Wal-Mart. Wal-Mart has put dozens of grocery chains and mom-and-pop shops out of business. Imagine trying to make better french fries and sell more of them than McDonald's. Never gonna happen. There's no substitute for being No. 1.

Think about Amazon. It used the Internet to sell more books to more customers than any brick-and-mortar bookstore chain ever could. Other book retailers can't compete with Amazon, because Amazon will always be able to sell more books.

If you'd bought Amazon shares in 2006, when they were less than $30 each, you'd have made more than nine times your money during a time when most stock market investors lost money. Even during the lowest point of the financial crisis, in March 2009, you wouldn't have lost money. Buying the company that sells the most was all you needed to know.

If you sell a product people like and want and then figure out how to sell it to more customers than any other company, you will rule your industry. If investors are smart enough to know what you're doing, they can make a fortune owning your stock.

Whether it's burgers, bandages, or books, investors owe it to themselves to know about the company that sells the most. In most cases, if the stock is cheap enough, the top seller is the best investment you can make in that industry.

Not all the world's best businesses sell more products than their competitors, but many of them do. And these companies should be on your investment radar screen – if they're not already in your portfolio.

Source: Daily Wealth

[winston]

How ISIS Could Derail This Bull Market

by Alexander Green

As an investor, now is the time to do a reality check. You might begin by asking yourself four important questions:

1. After a six-year bull market, do I need to rebalance my portfolio to make it more conservative?
2. Am I holding stocks - in sectors like food, drugs, healthcare, consumer staples, utilities and defense contracting - that are largely recession-resistant?
3. Am I favoring stocks that have historically fared better late in a bull market? In other words, value stocks over growth stocks, large caps over small caps and dividend-payers over non-dividend-payers.
4. Do I have a sell strategy in place - like trailing stops - to protect my principal and my profits?

Source: The Oxford Club

http://www.investmentu.com/article/deta ... lJJn3YrKM8

[winston]

This simple strategy has returned more than Berkshire Hathaway since 1999

Source: Meb Faber Research

http://thecrux.com/what-is-a-better-str ... ock-picks/

[winston]

The Hidden Impact of the Fed’s Impending Rate Hike… and How to Profit

By Shah Gilani

Source: Money Morning

http://wallstreetinsightsandindictments ... g#deeplink

[winston]

The No. 1 Way to Be a Better Investor by Andrew Snyder

This one powerful tip will make you a better investor.

It’s a simple idea, and yet, despite all the evidence I’ll show you, I’m willing to bet the majority of readers won’t take advantage of this easy moneymaking strategy.

They’ll continue to think they are an outlier... that they, unlike the masses, can beat the odds.

Let’s start with a question that has a startling answer. What’s the average holding period for a share of Apple (Nasdaq: APPL)?

A decade? Far from it.

Five years? Much lower.

One year? Even lower.

Proving that investors are quickly losing their patience, the average share of Apple changes hands once every five months.

That’s a crazy figure. It proves investors are trading on headlines, emotions and gut instinct... not the sort of fundamentals that we know truly lead stocks higher.

After all, just like all publicly traded companies, Apple announces its latest sales and profits just once every three months. If shareholders (if we can even call them that) are holding for a mere five months, most hold for just one earnings announcement.

That means they aren’t buying a true stake in the company... they’re buying a few months’ worth of headlines.

It’s a dangerous - and stupid - trend.

Of course, this goes far beyond a single stock...

Our research shows that throughout the modern investing era, the average holding period for a stock has been four years. But it peaked in the 1960s and has been falling ever since.

These days, it’s reached an all-time low... 17 weeks. According to Credit Suisse, the annual turnover rate for American stocks is 307%. (If you were to hold a stock for a full year, the turnover rate would be 100%.)

But wait... there’s more.

The news gets worse for the market’s most popular ETFs. When we look at the buying and selling rate of the 20 largest ETFs, the annual turnover rate soars to over 1,200%.

Each share is held an average of just 29 days.

Meanwhile, the average holding period for the popular S&P 500 SPDR (NYSE: SPY) is a mere five days.

Yes, the advent of high-speed trading plays a role in the figures. But we must not discount the fact that the current trend has some mirrors throughout history... like in 1901 when annual turnover spiked to over 300% as speculators poured in and out of the market.

Computers certainly didn’t play a role in that trading frenzy. There’s something larger going on today. We attribute it to the “short-termism” that’s present throughout our modern culture.

We spend less time in our houses... our jobs... and, gulp, our marriages.

No matter the cause, with so much moving in and out of stocks, we’re not surprised the average investor can’t keep pace with the markets... let alone the leading sectors and industries.

It leads us to our favorite chart - a chart we show our Members regularly.

The chart shows the annualized returns of nearly every asset class over the last 20 years. High performers are on the left... while the paltry returns of the average investor are on the right, barely ahead of inflation.

Again, with so much in-and-out trading, it makes perfect sense. Virtually every trader has likely owned the market leaders over the last two decades. But they almost certainly didn’t hold them long enough to reap their outsized rewards.

Most likely, as history begs to remind us, they bought too high and sold too low.

It takes us to what we believe is the simplest moneymaking tip... that you won’t use.

Hold your positions longer.

It’s hard. I know. It’s quite easy to be an emotional investor who reacts to the hyperbolic headlines and nonstop news feeds.

But there’s a simple and super-effective way to force emotion out of your trading. It’s been the backbone of the Club’s success for more than two decades. Simply outline your exit strategy before you buy - and stick to it.

At the Club, we most often use trailing stops. They work best. But there are other options. You can plan to sell when shares hit a preset price. You can sell when earnings growth slows to a certain percentage. You can sell when the CEO leaves.

Just don’t sell when your gut tells you to. Your gut is wrong.

There’s an unspoken secret on Wall Street - some call it “time arbitrage.” The longer you can hold a position, the higher your odds of success. It’s 100% true.

Source: The Oxford Club

[winston]

The Secret to Making 10,000% in the Market

By Chris Mayer

Today, I'm going to share some highlights with you from an excellent presentation I heard at Grant's Fall Investment Conference in Manhattan.

These are essential for making 100 times your investment.

The speaker was Markel Chief Investment Officer Tom Gayner. Markel, which has an outstanding long-term record, is a corporation that is often compared to Warren Buffett's Berkshire Hathaway.

Gayner's approach is simple and much like my own. He looks for profitable businesses with good returns on capital that do not have a lot of debt... businesses that have ample opportunities to reinvest profits and earn high returns again and again.

He wants to acquire the stocks at favorable prices. And he wants an honest and talented management team.

The most important of these is the ability to reinvest at high returns. Gayner called it the "most nuanced aspect of investing." He said: "A fair price might be a lot more than you think it is if profitable reinvestment can really take place."

He had three striking examples. All of them prove that a fair price for an investment might be a lot more than most people think...

The Mistake in New England: The first is Berkshire Hathaway. In 1965, when Buffett took control, it was a struggling New England textile manufacturer. The share price was $19. It was a high-cost producer in a commodity business. Nothing indicated that buying it would be a good move. Buffett himself called it a mistake.

"The only thing that made it better is that he realized his error and set about investing whatever funds Berkshire produced into more economically productive assets," Gayner said. "He did that relentlessly and continuously."

So while $19 was not justified at the time, Berkshire became an astounding investment. Shares today go for around $200,000. "Even if you paid 10 times as much [as $19]," Gayner pointed out, "you would still have had something special."

The point is that people spend most of their time thinking about what something is worth right now and over short time frames. They ask things like: Can it trade for more over the next 12 months? What's the Fed going to do with interest rates? What about the refugee crisis in Europe? What's going to happen with U.S. budget issues? Who's going to be the next president? What about China? And so on and so on...

"All of those are important questions," Gayner admitted, "but they are all fundamentally unknowable."

He continued: "What is somewhat knowable, or at least worth working on, is the task of finding a manager who can successfully produce earnings growth and reinvest those earnings properly over long periods of time. The example of Berkshire shows there is no more important task."

He related a good anecdote from the financial writer John Train. (Read his books!) Assume you had been on the committee of the Sistine Chapel and had the task of getting the ceiling painted. You wouldn't focus on the training of various painters, what kinds of paints to use, how many people you should hire, etc. "Instead, you go out into the world and look for a Michelangelo," Gayner said.

"We spend all of our time trying to find the Michelangelos of today," he said. "Sometimes they are specific individuals. Sometimes they are teams or systems that produce great results over time."

Markel's portfolio represents "a congealed pudding of our vision of companies and leaders that fit this ideal." The portfolio includes companies like Berkshire-Hathaway, Walgreens Boots Alliance, Walt Disney, Brookfield Asset Management, Marriott International, Home Depot, and Deere. "If we get just one or two ideas right, we will continue to produce outstanding results," Gayner said.

Fair prices often scare investors. What if something bad happens, they ask? Gayner continued with his second example: American Express.

The Salad Oil Scandal: The year was 1963. American Express had already been a successful business for more than a century. In 1963, though, it did something stupid. "It lent a large amount of money based on warehouse receipts of salad oil to a man named Tino De Angelis," Gayner said.

De Angelis was 47 years old at the time. And he was already a shady character with a documented history. American Express should have suspected something. But the company did not. Turns out, the receipts were bogus. When his scheme collapsed, AMEX collapsed, too.

Buffett bought 5% of the stock, about $20 million. It would become one of the building blocks of his great subsequent track record. "Bold, daring, and brilliant," Gayner said of the move.

But what if you bought AMEX the day before the scandal came to light? You would've thought you were a dummy. But your investment returns over time would've been close to Buffett's. So close, "it's not worth arguing about," Gayner said. "You would've compounded your capital at high-double-digit rates."

Time is the key. The mind-blowing 100 times returns often come after 10 or 20 years. Looking at his own portfolio over the years, Gayner says the one-year return for any one of his holdings was random at best. In one year, any particular stock could be way ahead or way behind the market. "I have no way of knowing which one will do what," he said.

As time goes by, however, the underlying returns earned by the businesses themselves start to dominate. "As [Charlie] Munger says, investors are doomed to earn the same returns in their shares that their businesses earn on their equity over time."

This brings us to his final example.

The Nifty Fifty: The Nifty Fifty was a group of large-cap stocks that dominated the market of the 1960s and early 1970s. They were popular. They were also expensive, trading for price-earnings ratios more than double the market's average. McDonald's went for 86 times earnings; Disney, 82; Polaroid, 91. These stocks collapsed in the ensuing bear market and sunk to gut-wrenching lows by 1982.

"It's trotted out as a cautionary tale," Gayner said, "about the danger of growth stocks and being price insensitive. But a closer look reveals those lessons are not so cut and dried."

A $50 investment in the S&P 500 in 1972 would've grown to just more than $2,900 by the end of 2014. How did the Nifty Fifty do? There is no definitive listing, but Wal-Mart is included in almost every one.

In 1972, Wal-Mart had 50 stores in five states, sales of $78 million, and net income of $3 million. Today, it has 11,000 stores in 27 countries, sales of $480 billion, and $16 billion in net income.

In the early 1970s, Wal-Mart's return on capital was in the low 20% range. Today, it's in the teens. One dollar invested in Wal-Mart in 1972 would've grown to just more than $1,800. While that's not enough to top the market, you had 49 other stocks to go.

"They did not all go to zero," Gayner said. You would have had $1 in Philip Morris (now Altria) and $1 in Anheuser-Busch. "Your $3 handily outperforms the market by double digits," Gayner said, "even without including any of the returns from the remaining 47 stocks."

These 47 did include some giant losers, such as Polaroid and Kodak. But you also would have had Disney, Johnson & Johnson, and Procter & Gamble.

So Gayner finished where he began: Why is this investing stuff so hard to do? It's hard because we don't give our investments time. And we need to recognize something else: "You only need to get one right." This is something I like to repeat as well. It's true.

The greatest investors are often great investors because of one, two, or three really great moves. And even if your timing seems awful at first – as with Berkshire in 1965, American Express in 1963, and the Nifty Fifty in 1972 – time and patience will do the work for you to succeed.

In the quest to make 100 times your money, these lessons from Gayner are indispensable.

Source: Mayer's 100x Club

[winston]

5 Things All Investors Should Watch in 2016

China, the USD, margin debt, and share buybacks will be closely watched in 2016

By John Jagerson and Wade Hansen

Source: SlingShot Trader

http://investorplace.com/2016/01/china- ... o8j5BV96M8

[winston]

Time to sell? by Alexander Green

Talk about an inauspicious start…

Many market pundits now claim this is it, the beginning of the long-awaited bear market. Is it time to panic?

Of course not.

Panicking is for when a toddler in your charge suddenly darts into the street. It has no place in portfolio management.

Let’s do a reality check here.

Trees don’t grow to the sky and stocks don’t rally in perpetuity. History shows that every bull market is followed by a bear market.

And that’s okay, because every bear market is followed by another bull market. The market’s long-term trend is higher highs and higher lows.

As for all those confident market prognosticators, recall what Peter Lynch, the legendary manager of the Fidelity Magellan Fund, wrote in his investment classic One Up on Wall Street:

Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can’t predict the markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.

Almost without exception, the folks proclaiming the end is nigh have a long history of making similar predictions. And all they have to show for it – aside from a complete inability to feel embarrassment – is the yolk running down their faces.

As Vanguard founder John Bogle often notes, there are two types of market timers: Those who don’t know what they’re doing and those who don’t know they don’t know what they’re doing.

Remember that the next time you hear some CNBC contributor confidently pronouncing what the market is likely to do next.

Given the uncertainty inherent in financial markets, what does a sophisticated investor do?

1. He makes a workable plan in advance.
2. He responds unemotionally to market volatility.
3. He sticks to his discipline.

Take a long-term investor, for example. He knows that bull and bear markets are a fact of life. So he sets an asset allocation and sticks with it. That means every year he sells down the assets that have appreciated the most and adds to those that lagged the most.

(Again, I’m referring to asset classes – equities, bonds, real estate investment trusts, Treasury inflation-protected securities, etc. – not individual stocks. You most definitely should NOT add to the worst stocks in your portfolio.)

Rebalancing doesn’t just reduce portfolio volatility. It forces you to sell what’s high and buy what’s low. That gooses annual returns.

A short-term trader, on the other hand, uses a different sell discipline. In the case of The Oxford Club, it means using trailing stops. That protects your profits in the good times and your principal in the bad.

However, you must actually implement them rather than simply imagine you will. Some investors so detest taking small, short-term losses that they end up with big, long-term losses instead.

Not good.

Occasional losses are a fact of life. That means you must be capable of acting resolutely and unemotionally. If you can’t do this, you may need to turn your portfolio management over to a trustworthy, low-cost investment pro. (As Harry Callahan famously said, “A man’s got to know his limitations.”)

Understand that I’m not suggesting you shouldn’t feel emotional occasionally. That’s too much to ask of flesh-and-blood human beings when financial markets come unbound from time to time, as they will.

But you can’t act on those emotions and expect to prosper.

It may seem simplistic to some that you need only have a workable plan, respond unemotionally and stick with your discipline.

But history demonstrates that the key to long-term investment success is not doing something absolutely brilliant. It’s not doing something terribly foolish.

Source: Oxford Club