Drawbacks of Deep Value Investing

Comment on “Uses and Misuses of Ben Graham–Style Investing,” by John Mihaljevic, in the June 2016 AAII Journal.

I’ve tried to embrace deep value, but simply can’t primarily because so many of the companies are garbage. Maybe underpriced garbage, but still garbage. As the article mentions, Graham’s approach is also a diversified quantitative approach that advocates buying a basket of many positions and turning that portfolio over.

Personally I don’t think a contrarian mindset is required to follow this approach, but rather a mindset that is in sync with understanding that you are buying garbage with the intent of selling it for a bit more money so you can exchange it for new, cheaper garbage. Psychologically, that is, at least for me, a difficult investing approach.
—Shane Milburn from Florida

Don’t Discount Cash Flow Analysis

Comment on “Cash Flow and Allocation Strategies for Retirees,” an interview with Jane Bryant Quinn, in the June 2016 AAII Journal.

Quinn states “You say, ‘Well, how much money am I going to need,’ which is backward.” I would disagree with this statement, as doing a proper cash flow analysis—using what you believe to be a reasonable estimate your expenses in retirement—is key to seeing if you have enough assets to retire, or whether you need keep working. I agree with her that “right-sizing” your lifestyle is a good approach, but to do that solely by trying to fit your lifestyle into the projected income seems to be a somewhat haphazard approach. A well-thought-out cash flow analysis, with contingencies built in, is a useful and effective tool in determining whether or not you should retire or delay the decision until you are in a better financial position.
—Andrew Shuman from Maine

Thoughts on Cloonan’s New Investing Approach

Comment on “Why a New Allocation Approach Is Needed,” an interview with James B. Cloonan, in the June 2016 AAII Journal.

Having collected and, for no particular reason, saved all of AAII’s annual hard-copy mutual fund guides during my AAII life membership tenure and having read thousands of investment articles and model portfolio guidance permutations over the decades, it’s a pleasure to anticipate a book more closely articulating my 40-year small investor’s experimental trek (including a few down blips): 95%+ equities, tilting small value, very few bonds and little cash.

With this year’s “retirement,” maybe it’s finally time to shorten my personal durational investment horizons and lower my retirement portfolio’s diversification/volatility risks. Why not start that process by reading Cloonan’s “Investing at Level3,” a copy of which I ordered immediately after skimming this Q&A article between two of our long-term AAII fiduciary-minded mentors?
—Joe McCollum from Idaho

Bias in Health & Retirement Study?

Comment on “Work Longer to Live Longer,” in the Briefly Noted section of the June 2016 AAII Journal.

There has to be some selection bias here. I would bet a dollar that the interviews with most “healthy” early retirees showed burnout or stress from forced retirement. Conversely, those who continue to work are the ones who have the cognitive ability to continue to do so, or the ones whose work is healthful or psychologically beneficial, i.e., not stressful.
— Frederick Schmidt from Missouri

Graham First Cut

Comment on “Graham Stocks With a Low Price Relative to Net Current Assets,” by John Bajkowski, in the June 2016 AAII Journal.

Companies often fail when receivables default and inventories lose value. I would set additional criteria based on receivable aging trends and inventory turnover trends. Like all of your stock screens, there are too many penny stocks that are probably highly speculative.
—Marcus Hamilton from New Jersey

Charles Rotblut, CFA, responds:
Screens are database filters designed to identify stocks with specific characteristics. Unless the criteria specifically has minimum market capitalization and/or share price requirements, any stock with the characteristics the screen is seeking will pass.