Last night I headed across town and went to the meeting of the American Association of individual Investors here in Orlando. I have been a member for some time and like the monthly magazine, use the screens but had never made it to a meeting. The Orlando chapter has had some great speakers and I always intend to go but during baseball season I tend to get distracted rather easily around 7 p when the meetings are held. That being behind us I headed out last night to hear Dr. Joseph Belmonte, the author of Buffett and Beyond, talk about his approach to picking stocks

He was a very entertaining and informative speaker. He has bells and whistles to his approach but at the core is the idea of buying companies with high and consistent returns on equity and holding them for a long time. It is not my cup of tea but it does work fairly well. He presented information showing that his model portfolios had since January 1, 2003 to October 31, 2014 returned a cumulative 270% compared to the stock markets 126%. That’s not too shabby but this is the moment that I could have predicted the questions to come. The professor’s method earned plus or minus 2-3% most year when compared to the market. However coming off bad year like 2003 and 2009 it smoked the market the next couple of years as institutional money poured into higher quality companies once the selling deluge slowed down. It was a high return over time but it was lumpy.

This was of great concern to many in the audience. They want that approach that beats the market year in and year out and never lags. It doesn’t exist. It a purple unicorn with a golden horn. Any approach that claims to do that is a Madoffian fantasy of the highest order and the search for such an approach is why individual investors tend to do so badly in the stock market. Switching from system to system and philosophy to philosophy is why so many people underperform by far more than should be statistically possible.

All winning approaches to the stock market are lumpy in one form or another. Price and earnings momentum works very well ( not as well as value but it does work) but it has lumps. When markets are rising it seems like free money from the sky as the mo-mo stocks fly. When they fall the dollar bills turn into boulders falling on your head and in the early stages of a market recovery mo-mo investors will feel left out as their stocks just can’t keep up.

Deep value works very well over time but it also has lumps. In rising markets you will feel like you have lost IQ points as you lag the rising tide. However in bad markets you will do much better than most and in the early days of a market recovery your intelligence factor will reach Einsteinian levels before leveling off as the bull ages.

As an aside before all the budding geniuses out there decide that switching between these two methods is the opportune time is the source of investment nirvana let me just tell you one simple fact. You can’t do it, I can’t do it and I have never met anyone who could. First you will always miss the opportune time and be too early or too late and lose your outperformance edge. Second the two skill sets and mindsets are so different than anyone who could do both well would be in urgent need of psychiatric attention. You have to pick an approach and stick with it through cycle to win at this game.

From the deep value perspective not a lot has changed in the past week. The economy is the best in the world but that’s a lot like saying we are the least ugly girl at the dance. The inventory of safe and cheap stocks outside the community bank sector is still very small. We have seen some energy stocks fall recently but those that are safe as well as cheap are staying for the most part stubbornly above our buying range. We are still finding community banks to buy at large discounts to tangible book value and sound loan portfolios and balance sheets. We are even finding these games that have a strong activist investor or three involved in the stock but have not yet moved up to overvalued levels. I am pretty excited about the prospects for continued strong returns from our little banks as we move into the New Year. If you haven’t already looked into our Banking on Profits newsletters you can do so here:

http://www.marketfy.com/item/banking-on-profit-monthly-newsletter/

http://www.marketfy.com/item/banking-on-profit/

Next week we won’t have a letter for you as I will be enjoying my favorite holiday of the year, How can you not like excessive amounts of food , wine and football on a day where you do not have to buy one present for anyone ? I will be whipping up a batch of sausage stuffing to stuff the bird and the wife has promised a white potato pie (don’t knock it until you tried. It is delicious)along with the pumpkin and pecan offerings We will have the usual raucous crowd of family and friends for Thanksgiving and I wish you the same.

Cheers

Tim

Song of the week: It is never a straight road in life or markets. Its always a https://www.youtube.com/watch?v=Xqu9qhBHWNs