Value Investing: An Interview With J. Royden Ward
Success Has Many Fathers Failure Is An Orphan
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More than 70 years have passed since Benjamin Graham first outlined the concept of value investing in the 1934 book Security Analysis. Warren Buffett is one of many investors who’ve proven the value of Graham’s system, and still today it’s one of the surest ways to find undervalued stocks in the marketplace. Cabot Benjamin Graham Value Letter, which takes its inspiration from Graham, works on an adapted system developed by editor J. Royden Ward--who was taught by one of Graham’s own students.
This week, we’re chatting with Roy about why he chose value investing, his personal outlook on the market right now and how the global economy has affected the value investing philosophy.
Matt Delman
: What initially attracted you to value investing?
Roy Ward: Several factors channeled me toward value investing. First and foremost, I received a great education at Babson College as a finance and investment major. Luckily, my professor for several of my investment courses was Dr. Wilson Payne, who focused tirelessly on teaching how to evaluate companies using fundamental analysis.
Fundamental analysis consists of learning how to differentiate strong balance sheets and financial data from weak data that could lead to investment disasters. In addition, past income statements from companies were examined and formulas were applied to determine the intrinsic value of each company.
Professor Payne’s teachings were based on his interaction with Benjamin Graham, his friend and former professor. Mr. Graham wrote The Intelligent Investor and Securities Analysis, which were the primary texts we studied.
During my early career after Babson, I was introduced to various growth and momentum systems and analyses, but I could not be distracted from my in-depth knowledge gained earlier.
Matt: What do you like most about this system?
Roy:
The system that I have developed during the past four decades provides my subscribers with maximum buy prices and minimum sell prices. The system is simple: buy at my buy price, wait patiently, and then sell at the recommended sell price!
In addition, I generate numbers and ratings, which evaluate a company’s quality, value, growth and stock price momentum. Recently, within the past five years, I developed a rather good system to estimate annual and quarterly sales and earnings, too.
The most important factor for my subscribers is knowing that my evaluations are derived from sound principles and can be relied on no matter what is happening in the stock market.
Matt: What’s your current outlook on the market?
Roy: As a value investor, I focus on finding undervalued companies that ideally will perform well in any stock market environment. Therefore, I avoid trying to “time the market.” Investing when the market is going up and divesting when the market is declining is difficult at best. I rely on my undervalue/overvalue indicators to tell me to invest aggressively when the stock market is undervalued or to invest defensively when the stock market is overvalued.
In my opinion, stocks are selling at normal levels. Therefore, the stock market could advance from current levels or it could decline.
Matt: How has turmoil in the global economy affected the stocks you pick?
Roy: Several years ago I began recommending gold stocks and gold ETFs to offset the uncertainty in Europe, North Africa and the Middle East. The decision turned out to be a fortuitous call in 2011, but lately the turmoil has subsided just a bit and gold prices have dropped. Gold prices might be over-reacting here, but the outcome depends on unforeseen and unpredictable future events.
Matt: If you could pick one stock to hold forever, which one would it be?
Roy: That’s a really tough question, because I am a firm believer in portfolio diversification. If you are an aggressive investor, Apple (AAPL) is my choice. The company is selling at a reasonable price, pays a decent dividend, and is the most innovative company on the planet. Buy Apple and hold forever.
For conservative investors, Wal-Mart (WMT) is the best. What I particularly like is WMT’s ability to attract new customers when the economy is sagging. Low prices and a huge selection of goods, including groceries and gas, will continue to be a winning combination.
Matt: Are you happy with the performance of value stocks this past year?
Roy: I am delighted with my performance during the past year. My two model portfolios have increased an average of 12.7% while the Standard & Poor’s 500 Index has advanced only 6.5%. The out-performance clearly indicates that when you invest in low risk, high quality companies, you will beat the market indexes most of the time.
Matt: Thank you very much for talking with us, Roy!
Here’s this week’s Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.
Success Has Many Fathers Failure Is An Orphan
Who said it first is unknown. But it’s widely accepted, because it’s true. I don’t think you can use it to be a better investor, but when people claim to have bought a big winner way back when it was cheap, you can remember that they’ve conveniently forgotten to mention their losers.
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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Cabot Wealth Advisory 4/2/12 - Love Your Family, Not Your Stocks
On Monday, Cabot Market Letter and Cabot Top Ten Trader Editor Mike Cintolo wrote about how important it is to not fall in love with the stocks in your portfolio. Rather, Mike says, you should fall in love with your portfolio’s performance. Featured stock: Francesca’s Holdings (FRAN).
Cabot Wealth Advisory 4/5/12 - How Would You Keep Jobs in the U.S.?
On Thursday, Cabot China & Emerging Markets Report Editor Paul Goodwin asked readers for insight into how best to keep jobs in the United States instead of having them flow overseas. Paul also wrote about how important it is to not judge the quality of an investor by what system he uses. Featured stock: Spreadtrum Communications (SPRD).
Happy investing,