Welcome and 3GV Philosophy

Though a fundamentals-driven, value-oriented investor, I am agnostic between favoring the expected returns from focused investments in deeply researched companies versus returns derived from "statistically cheap" and impersonal baskets of stocks. This blog will explore the latter philosophy, partially to stand apart from the Buffettized legions, but mostly because I must conform my methods to my environment, which is characterized by a shortage of time.

By way of justification, I offer these words from the founder of value-oriented investing, Ben Graham, spoken at the witching hour of his peerless career:

"I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. ...I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. Essentially, [my approach to portfolio formation is] a highly simplified one that applies a single criteria or perhaps two criteria to the price to assure that full value is present and that relies for its results on the performance of the portfolio as a whole--i.e., on the group results--rather than on the expectations for individual issues. [Approaches of this sort, ideally, combine] the three virtues of sound logic, simplicity of application, and an extraordinarily good performance record..." (Source: The Financial Analysts Journal; Sept-Oct 1976 http://www.bylo.org/bgraham76.html)

The three Grahamian virtues (3GV) are the inspiration and guiding principles of this site. As time goes on, I will present formulaic investing methods that pass the 3GV test. I will also propose refinements to these methods and ultimately construct actual portfolios to subject the methods to the stress test of reality.

Thank you for your interest and constructive feedback as this site develops.

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And now, some philosophy...

Any investment theme ought have strong, well-understood foundations. Without strength, it will not work over time. Without understanding, a practitioner will not give it time to work. Ben Graham reduced the concept of formula investing to the following three critical elements.

Sound Logic: Business owners are rewarded when their operations provide more cash than they consume. Someone buying a business in full or in parcel care about the future excess cash flows discounted by a proper rate of return and today's asking price relative to that discounted figure. Human behavior being what it is, prices will constantly fluctuate above and below the "true" value of a firm. A value-oriented investor attempting to do better than average will look to pay less than the discounted figure, over and over again. To find companies selling on these terms, there must be some factor, company-specific or generalized, that is pushing the asking price particularly low. An intelligent investor must have confidence that the stock or stocks they select are pieces of companies whose future results will exceed the expectations priced into the shares.

Investors can choose to delve deep into a particular company -- to explore all its nooks, crannies, and characteristics -- and to conclude that they are buying $1 of earnings for 50 cents. Alternatively, investors can study the characteristics of company groupings which appear to have misappraised futures as evidenced by persistently outsized subsequent returns. A few fundamental rules of thumb that sort companies into these value baskets are powerful tools, indeed, if identifiable. The happy news is that they are identifiable, and plentiful, but are they easy?

Simplicity of Application: Some value-oriented formulas, in their raw form, identify hundreds of stocks each year meeting certain criteria. They are not practical, of course. A virtuous formula will pare the candidates to a managable quantity, but not so small as to dry up as conditions change. A formula that takes a lot of time to apply is not desireable because it misses the point. Unless you are genuinely turned on by this stuff, there are many other worthy ways to spend one's precious time.

Extraordinarily Good Performance Record: Naturally, a good formula should not start working suddenly. If it is sensible, then it will have worked from the beginning of capitalism (provided the data-points were available). The beauty of a formula is that it is possible to look back and see if it did well and in what conditions it did better or worse. Pitfalls of formulas that go extinct can be avoided by returning to the first virtue. If the formula was constructed with an eye on intrinsic value using factors that indicate underpricing, then the formula can be viewed credibly. Statistical methods lacking a value-orientation have no gravity and cannot be deemed reliable or logical.

Effective formulas are variations on a theme and essentially paraphrase each other. This is good because it means we can probe the subject and apply our critical thinking in a focused way in order to optimize our approach and maximize our results.

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An Open Letter...

First of all, thank you for your interest in this web site. Your time is invaluable.

If this site holds water with you, and you happen to be a professional financial-type or are a would-be patron, I have two requests.

Being young, with a new and growing family, I suffer from limited financial resources. However, I want to help people grow their family's assets by being the best money manager I can be when I am ready and able.

To that end, I would very much like the opportunity to back-test the various formulas (and particularly the modifications) that I will present at grahambuffett.com. If you have access to Compustat or a similar database and are willing to help me on my way, the opportunity to explore the long-term power of these formulas would be deeply appreciated.

Secondly, I am trying to assess the realistic prospects of raising enough capital to quit my day job and make a living at wealth management. If you are looking for a few good money managers (I am priviledged to know a few individuals whom I consider to be the future of the investing vanguard), please introduce yourself and/or bring us to the attention of some of your friends and associates.

Thanks again!

Very Sincerely,

Ian