When did you discover that you were a value investor?

Are you still a portfolio manager for a large insurance and healthcare provider?

What motivated you to write A Modern Approach to Graham & Dodd Investing?

What were some of the biggest challenges you faced in writing your book?

What was the most important thing you learned as a result of writing your book?

I thought your modified investment value approach was interesting. Have you back tested your modified investment value equation, (book value)*(ROE)^2 + 10*Dividends when ROE is > 15? Does it outperform just plain old book value or Graham’s net-net evaluation? What margin of safety do you require with this valuation?

What process do you use to search for value opportunities?

Do you still maintain your "Real-Time Experiment" portfolio that you discussed in the book? How has it done lately and what does it currently hold?

You included an interesting chapter on investing in real estate in your book. Should a Graham and Dodd investor be looking at real estate now? If so, how should they be evaluating real estate investments?

Buffett recently recommended during the Q&A session of the Berkshire Hathaway Annual Meeting specialized bonds and small cap stocks for portfolios with smaller sums of money. What do you think Buffett meant by specialized bonds?

Do the market's recent actions conform to your thesis regarding generational cycles in the stock market that you discussed at the end of the book? Any revisions? Is 2020 still a date of concern?

Can you share with us some of your current favorite value opportunities?

What are the most important fundamentals/ratios value investors should be examining?

Do you have any plans to write another book in the future?

Thank you for your responses to my questions, Tom. Now we will open it up for questions from other members of Value Investing News community.

Question from alexg: What seperates your book from the other value investing books?

Graham and Dodd's "Security Analysis" was written for the 1930s, an unusually depressed environment. The hypothesis of "A Modern Approach to Graham and Dodd Investing" is that we should now invest in a similar manner, because the U.S. and global economies are headed to the "modern 1930s."

Many post World War II value investors adopted the value "bent," but loosened Graham and Dodd's very strict rules to suit more accomodating times than the 1930s. To take one example, Warren Buffett is a better fair-weather investor and better investor overall than Graham and Dodd. So are the authors of many other value investing books. But I would take the "old masters" in a "stormy weather" environment like the one I foresee coming up.

My first book is a "throwback" toward 1934's "Security Analysis" and away from Ben Graham's own (later) "Intelligent Investor." In this regard, it is "more royalist than the king, more Catholic than the Pope." Perhaps the next book will be closer to the "Intelligent Investor."

Question sent in by StockJockey:

How did you reconcile your value philosophy at Value Line,which is essentially an earnings momentum approach?

Also, where do you rank Sam Eisenstadt in the history of Wall Street, is he father of quants?

That's a good question, and it relates to the evolution of Value Line as much as anything else.

Value Line was founded in 1931 as a Graham and Dodd type house reflecting its times. It remained a value shop through the 1950s, with an ideology of "buy stocks below the 'Value Line,' sell stocks above it." But then it moved into the earnings momentum camp in the 1960s along with the then prevailing ethos.

While there, I studied the old archives from the 1930s because I thought the knowledge might come in handy some day. When the 1990s Internet bubble turned out to be a modern facsimile of the 1920s radio craze, I decided that we were headed to the modern 1930s, in which case the Graham and Dodd and Value Line methodologies would be most useful in something approaching their original (1930s) form, not the "evolved" post-1960s version of either G&D or VL.

Tom,

I had one other question. Do you ever try to anticipate shifts between growth and value, and if so, is there any ratio or metric that alerts you too a shift? Valuation?

And does time have anything to do with it, value had a good run this decade, is there enough data to say the cycles run 4-5 years, etc?

Thx

1440WallStreet.com

I always want to be on the "value" side of the equation, although what constitutes value varies from time to time.
To determine this, I study "universes," such as Value Line, and look for stocks with below market P/Es, below market P/Bs, and above-average dividend yields, sometimes all three. In general, however, I don't like to pay more than about 20 time normalized earnings for a stock, Ben-Graham style. (This does not refer to situations where the P/E is high because earnings are miniscule, but where the P/B is low.)

One test that I use relates to whether a stock represents "value" relative to its own trading history. For instance, I once recommended Intel at 18 times forward earnings (then a market multiple), on the theory that one was unlikely to see it at such a low valuation for a long time to come. Microsoft, now a mature company, is beginning to look interesting at a mid-teens (below market) multiple. But I considered and rejected buying it just over 20 times earnings in 1989, not feeling comfortable making an assessment that it would go to 40 times earnings sooner than 14.

My internal debate has to do with absolute versus relative value. On average, the median growth stock has a P/E ratio about twice that of the average value stock (and earnings growth potential that's also about two times higher). When this ratio is greater than two, as it was earlier in the decade, buying (absolute) value was an easy call; I'm not going to pay 3 times the P/E for only twice the growth).

Now, the difference in P/E ratios is about 2 to 1, say 25 versus 13. At a time like this, relative value becomes important. Intel was "cheap" relative to its own history, but I'd never pay 18 times earnings for a utility stock. I'm now avoiding certain cyclicals that are trading 15-20 times normalized earnings; a price too "rich" for them.

At market bottoms, the ratio of growth to value P/Es is about 1.5 to 1, e.g., 12 to 8. At this point, the "value" trade is in the "expensive" growth stock. Around 1980, you could get drug companies or Phillip Morris for 12 times earnings, so why pay 8 times for a cyclical with only half as much growth? But those reversals are rare, and come around once or twice in the average career.