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This episode is a conversation with Nick Rossolillo, money manager and one of the brains behind the Chip Stock Investor research methodology and YouTube channel. Chip Stock Investor's portfolio has been beating the S&P quite nicely, thanks to Nick and his research, business, and life partner, Kasey Rossolillo's deep research and understanding of the semiconductor industry. In today's episode, Nick walks us through the semiconductor industry flowchart and explains why there are more stable and consistently profitable chip stocks that we can invest in instead of chasing Nvidia. He also gives us five stocks to consider investing in and shares his latest chip stock pick. Those are some of the best and uncommon stock ideas I have heard in recent months. Toward the end of the conversation, Nick also shares one of the best tips for finding unique stock ideas to buy, which I really liked. Today's episode is a conversation with Matt Wolodarsky, the brain behind the Wealthy Owl portfolio that has been beating the S&P quite nicely. Over years of investing in technology companies, Matt has developed a 6-part methodology to research and pick stocks. Even more interesting is that he recently created a custom GTP (ChatGPT) to research and find multi-bagger stocks using the Wealth Owl multi-bagger methodology. Matt and I discuss how you can use his custom GPT to research stocks. We go through each of the six components of the methodology and discuss four stocks that have passed the test of the Wealthy Owl methodology that you may want to consider researching and possibly buying, too. All of you long-term, multi-bagger investors would love this episode! We all have heard it: value investing is dead. Stocks like Alibaba and PayPal are classic value stocks with 10 to 15 times price-to-earnings ratios. They are priced significantly lower than the market average and their peers but haven't moved much in the last five years. On the other hand, stocks like Nvidia boast almost 100 times the price-to-earnings ratio, and investors are still pouring money into them. Examples like these have led to the conclusion that the stock market is broken. No one cares about stocks' value anymore. But there is one man who has beaten the odds! David Einhorn, the famous hedge fund manager and founder of Greenlight Capital, is a value investor who has managed to beat the market for quite some time (13% annualized return vs. S&P 500's annualized return of 9% in the last 28 years). In today's episode, I will break down David Einhorn's market-beating VALUE investing method and give you two stock ideas that you may consider researching and buying now.  I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of our educational series to help you hone your fundamental investing skills. Catch up with past blog posts on How to Invest Like Buffett? How to Invest Like Charlie Munger, or how to Find the Highest-Returning Stocks? Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask your name and email address when you sign up. Index Investing Is Killing Value InvestingEven David Einhorn believes the stock market is broken and value investing in its traditional sense is gone and may never return. According to Einhorn, for value investing to work, you need active investors in the market who look for discrepancies between stock price and the company's value and who will be willing to invest their capital in those undervalued opportunities. However, because of two structural changes in the market, undervalued stocks could stay undervalued for a long time. Those structural changes are: Passive index investing where no valuation analysis is done. Algorithmic trading with a focus on momentum and upward price movements where, again, there is no room for valuation analysis. In other words, index passive investing and algorithmic trading are killing value investing. Here's David on Bloomberg Television answering the question of when value investing will be back: "I don't I don't know that it ever comes back you know there have been serious changes to the market structure and pretty much most of the value investors have been put out of business so if value investing is trying to do security analysis think about what companies are worth think about why they might be misvalued or misunderstood and then do valuation analysis that tells you that that in fact is true there's just very a few of us left most Market participants these days they either cannot do value they're just not trained or experienced and knowing how to do valuations or they they their structure doesn't allow them to like if they're an index fund or a passive thing the last thing you're you're doing is value or their system is a quantitative system or a trading system or an algorithmic system and or or your style is to just buy things that are have charts that go up into the right right and none of those participants are really doing value so it used to be you know that that on every conference call of every company there were like dozens of analysts from all of these competing long only hedge fund long short people and stuff like that trying to hear what companies were doing and saying and trying to figure it out and and those staffs have been gutted because the world has moved passive and so there's just a lot less competition for what we do." In the old days, value investors would find and invest in companies with low valuations compared to their intrinsic value. When enough value investors pick up the stock, the rest of the market would wake up to the opportunity and invest, too, and that volume would bring the stock price back to the market averages. The value investor who found the stock early would make good money and then repeat the process. These days, none of the price vs value discovery is happening. So, as a value investor, you could find undervalued stocks, and no one could care less about it. Everyone is pouring money into indexes and or trading based on technicals. You'd be sitting on an undervalued stock for an eternity. That's why David Einhorn believes value investing will never be back. How Does David Einhorn's Style of Value Investing Works?But we know David is a value investor, and his hedge fund, Greenlight Capital, has overperformed the market. Mind you, Einhorn is also a short-seller. Some of his fund's return is due to his short positions. At the same time, he has lost money to his short bets, famously, his Tesla short, which he backtracked from. Today, we are focusing on his long-term value bets. His value investing methodology works because he has adjusted it to take advantage of the market's index investing and algorithmic trading structural changes. What David Einhorn explained about the stock market's structural changes logically means there are many undervalued stocks, potentially deeply undervalued stocks in the stock market, that no one cares about, and you can buy them for an extremely cheap price, such as 4 or 5 times price to earning ratio. Then, you need a catalyst for these stock prices to go up. In the past, that catalyst was the rest of the market waking up to the undervaluation. Now, the companies themselves recognize they have a gem on their hands and start buying their shares. An undervalued company that has the cash to buy back its own shares has two advantages: 1) They have savvy management who understands its company is undervalued and is allocating capital to the highest potential investment opportunity, their own stocks, and 2) It reduces share counts, increasing the valuation of the stock, causing upward movement of the prices. Eventually, indices or technical indicators would notice the stock, and then the stock is in for a significant rally. That means the structural changes to the stock market have created a new value investing methodology: Finding companies extremely cheap and screening for those who have the cash and earnings to buy back their own shares, enjoying the higher prices coming thanks to the buybacks, and wait for a long time for the stock to be recognized by the algorithms and indices to pick them up for even higher returns. Here's David Einhorn again, this time on the Money Maze Podcast, explaining his adjusted value investing approach: "You have these washed out securities and if they're trading now, instead of buying it at 10 times earnings because you think that they're going to be, you can buy that same type of situation at four times earnings or five times earnings. And then, you may not know whether it's going to be. If you're wrong by 10 percent a five multiple becomes five and a half. There's nobody who cares anyway. Nobody's going to sell because they missed by 10 percent so. You don't really have to get your forecast right. You need to just start at such a low value and if you do it in unlevered companies that are taking the vast majority of that earnings yield and giving it to you in dividends or BuyBacks this has to work itself out over time in a favorable way if you are buying back 15 of your company the stock goes up or in six and a half years there's no stock left and the last share is the golden share and that's what we want to own." In summary, David Einhorn buys super deep value stocks that don't have a lot of debt, and use their earnings to buy back shares or pay dividends, and hold them for a long, long time waiting for that last batch of stocks that are left and are extremely valuable. Value Stocks To Buy NowOf course, as stock pickers, we can't hear about a methodology that beats the market and not be curious about how to find stocks that meet the criteria. In my research, I learned David Einhorn focuses on small companies, typically under $5B in market cap, with no financial debt and positive earnings, with shareholder-friendly management who allocate some of their earnings to buybacks. You can screen the stock market for companies like that. I used Stock Card's stock screener tool to find stocks like that, using a market cap lower than $2B, strong financial, no cash concerns, and undervalued filters, and I got to roughly 118 stocks that met the criteria. I leave a link to this screener here in case you'd like to continue the research. But, there is a more interesting way to get to a few stocks that meet the criteria. David Einhorn’s Hedge Fund, Greenlight Capital, has to release its holdings every quarter through the 13F filing. Since we know the fund is extremely long-term oriented, what's on the list from the end of the last quarter is still very relevant and a good stock to research and buy if you want to follow this value investing style. From Greenlight Capital's latest 13F, two stocks grabbed my attention: The first one is Kenvue Inc., ticker KVUE, the latest addition to Greenlight Capital’s fund. It is a $36B consumer packaged goods company behind brands such as Neutrogena and Listerine. It's not that small, but it owns iconic brands. The stock is valued at 2.3 times sales and 16 times forward earnings. It generates solid free cash flow and has lots of cash and a rather solid balance sheet. The stock doesn't strictly meet the criteria we discussed a few minutes ago, but it is certainly interesting to research. The fact that not many financial analysts cover the stock means it can be sliding under the radar while it pays a nice 4.2% in dividends. The next stock is even more interesting. It is called Alight Inc, ticker ALIT. Greenlight started buying it in Q4 2023. It is roughly $5 billion in market cap and offers an employee benefits management platform for more than 36 million employees. It reminds me of ADP but in baby stages, but much more technologically advanced. Its core platform is already AI-powered, generates solid recurring revenue, and has an almost 100% retention rate. The stock is priced at 13 times forward earnings, 1.3 times price to sales, and one times book value. This is certainly an interesting company to keep an eye on. I'll be researching this in more detail for my own portfolio. Talking about good stocks to buy now, I discussed how to find quality stocks at a reasonable price two weeks ago and shared a few stocks to buy now based on such investment methodology. If you missed it, it's a good next post to read. I leave a link to it here. I'll see you next time! GMO Asset Management is a firm that manages $61B in capital. It’s been actively picking stocks in its GMO Quality Fund for ten years, and it has managed to beat the market in every single year of the last decade with an annualized return of 13.4%, beating the S&P 500 quite nicely. In a world where most stock-pickers either lose money or underperform the overall market, consistently beating the market is rare. The good news is that the team behind this high-quality, active investment fund has just launched an ETF we all can invest in with whatever amount of money we want to. In today’s post, I dig into the fund’s stock-picking strategy that has beaten the market for a decade and give you a list of stocks based on the fund’s market-beating strategy that you can consider buying now. Let’s talk about them!  I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of our educational series to help you hone your fundamental investing skills. Catch up with past blog posts on How to Invest Like Buffett? How to Invest Like Charlie Munger, or how to Find the Highest-Returning Stocks? Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask your name and email address when you sign up. Quality Investing Isn't Value InvestingThe methodology behind GMO’s fantastic return is investing in quality companies at a reasonable price. This may sound familiar to many, but how GMOs define “quality” is very interesting. Also, the ways the fund managers explain “reasonable stock price” is fascinating. When you hear the term reasonable price, it's natural to think of undervalued stocks with low multiples, such as low price-to-earnings ratio or low price-to-book value ratio. GMO’s partner, Tom Hancock, explains the difference between quality and low-value stocks with a perfect analogy: Quality and value investing are very different approaches. Quality doesn’t always mean paying a low price and picking a low price to earn earnings or price book value multiples. Quality investing is like when you buy a bit more expensive house in a good neighborhood with good schools around and can sell the house at a great return a few years down the road, vs. buying a cheap condo in a not-so-good neighborhood, hoping for an up-an-coming investment opportunity which doesn't happen as fast as you had hoped. An even more insightful thing I learned when researching this investment strategy is that investing in quality defies all the commonly accepted logic about risk and return. Everybody says higher return requires higher risk. In practice, investing in high-quality businesses leads to less risk in the form of less price fall during a downturn and several sustained years of generating better-than-market returns. This becomes quite clear when we define risk as the probability of a permanent loss of capital. With that definition of risk, investing in high-quality companies has less risk because the business isn’t as prone to market noise and macroeconomic cycles. What's A High-Quality Stock?Quality is the ability to deliver high return on capital. To deliver that you have to have something competitors can’t replicate. It used to be a physical asset or brand. In the tech era, it is network effect or platform companies. Management quality is also a part of the company’s overall quality. Good management keeps the balance sheet strong to create stability across economic cycles and allocates money when required. The good news for stock-pickers who want to focus on quality companies is that they tend to stay high quality for a long time. Therefore, you don’t have to recognize them right off the bat. You can be wrong early on and ignore the stock; when you see the evidence, you can turn 180 degrees, admit it, and invest in it. For example Apple is a quality company and both GMO and Warren Buffett were late to Apple’s quality party and their eventual investment still did great. Even though Warren Buffett didn't invest in Apple’s IPO or the dot com crash. Still, it turned out to be one of its best investments ever. How To Find Quality StocksThere are two ways to find quality stocks based on GMO's definition of quality we just discussed:
In the rest of the post, I’ll use both methodologies to find quality stocks at a reasonable price that you may want to invest in after doing your own research, of course. First, let’s discuss the financial metrics we can use to find quality stocks. Tom Hancock gave a few such metrics in my research. Let me summarize them for you:
I plugged these criteria into Stock Card’s stock screener tool, and I got about 100 stocks that turned in the screener results. Here's the link to this screener if you want to download the list or adjust the screener. But think about it! Of thousands of stocks listed in the US, only 100 meet the criteria. Also, because we are using return on capital, return on asset, and similar return ratios in the screener, there are a lot of bank stocks showing up in the results. I tend to put them aside. Without bank stocks, you’ll end up with an even smaller number of stocks that meet the criteria. Some interesting companies that attracted my eye are Alphabet, Applied Materials, and Dropbox. QLTY ETF's Top HoldingsNow, let’s turn to the second approach of finding high-quality stocks at reasonable prices by looking at the top holdings of GMO’s new quality ETF. The ETF’s ticker is QLTY, which is very well-named. Because the ETF is less than a year old, it’s fair to assume stocks picked for the ETFs are still truly representative of GMO’s reasonable price picks. On the list, I see some of the usual quality stocks such as Alphabet, Apple, and Meta. I also see some names that i wouldn’t have normally paid any attention to me. Otis, ticker OTIS, the big leader in elevators, escalators, and moving walkways, is one example. Elevance Health, ticker ELV, is another one I have not heard much about. TJ Maxx, ticker TJX, would be my third pick to research just because I have always wanted to look into it but never did. You notice that stocks such as NVIDIA weren’t in the top holdings of the ETF. NVDA is definitely a high-quality company but may not be reasonably priced even if it is the undisputed kind of AI semiconductor market. Talking about high-quality stocks tending to be low-risk stock picks, a post I published recently explained what risk means and how you can calculate your portfolio’s risk. That’s a good one to read to next. I’ll see you next time!
Let's admit it: we always look for ways to beat the market's average return. Right? Well, I found a violin that had just done so.
Had you invested in world-renowned Stradivarius violins in 2010, the average annual price appreciation between 2010 and 2022 was 9.7%. Other violin brands, such as Joannes Pressenda and Lorenzo Storioni violins, have had 10.7% and 13.4% annualized returns in the same period, respectively. Compare that to the inflation-adjusted yearly return of 9.76% by the S&P 500 index, including all dividends reinvested in the same period, and sit down with the terrible realization that investing in a music instrument could have been your answer to beating the market. Putting that initial reaction aside, if the ultimate goal of investing is to grow our wealth, even if we don't want to invest in violins, in today's post, I discuss three critical investment lessons we can learn from Stradivarius violins. 
I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of our educational series to help you hone your fundamental investing skills. Catch up with the other post on How to Invest Like Buffett? or how to Find the Highest-Returning Stocks? Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask your name and email address when you sign up.
Such market-beating performance by violins comes from a few criteria they share with good investments. They can teach us critical investment lessons by looking into how Stradivarius violins's price appreciated.
Investment Lesson One
The first of such lessons is the value of scarcity in investing. Antonio Stradivari, a Luthier, or simply a violin maker who lived in the late 17th - early 18th century in Cremona, Italy, made roughly 1,100 violins. His sons continued the business with more violins. However, today, only about 650 remain. Those original violins are highly desirable instruments that can be priced as high as $16 million in global auctions. They are inherently scarce, loved by violinists and collectors worldwide, and no more will ever be made.
Scarcity is loved by investors. Investing in gold or commodities such as Silver, Copper, and even Oil pays off because of their limited supply. That's also why stock market investors hate when a company they invested in issues new shares. It dilutes current investors by making more shares available in the market and each share becomes less valuable. In contrast, when companies buy back shares, in most cases, investors applaud. Buying back shares makes each individual share more scarce and valuable. Scarce things tend to grow in value. Investment Lesson Two
The value of a well-reputed brand is another lesson we can learn from a highly sought-after violin. A good brand is an accumulation of quality and market perception. Some studies have shown that not only did Antonio Stradivari build a limited number of high-quality instruments, but he also had his proprietary method of wood processing, resulting in pristine sound. The violins by Stradivari are known for their unique sound quality, differentiating them from many other brands that have come to market since the 17th century.
A strong brand, such as the Stradivarius trademark and name, is considered a moat in investing. It refers to a company's ability to protect its products, services, and price level against its competitors. Establishing a brand representing prestige, status, and quality takes years, making it almost impossible for competitors to compete in price. In that context, Stradivarius violins are similar to Apple Inc. Both brands are known for quality, well-protected intellectual property, and luxury image. Investing in either is an excellent high-returning decision. Investment Lesson Three
The lessons we can learn about investments from Stradivarius violins don't stop at scarcity and brand moat. The most valuable Stradivarius violins are those built by Antonio Stradivari in his lifetime, at least three centuries ago. Today's investors in those violins have enjoyed excellent returns in the early 21st century. Time and the power of compounding over time are as important in investing as moats and scarcity. A good investor understands it takes time for the price appreciation to compound and result in a market-beating performance
Bonus Investment Lesson
Many stock market investors may not believe investing in collectibles like vilions is appropriate. Warren Buffett, the legendary investing mentor to a few generations of investors, focused on income-producing assets such as companies' securities. He would likely not consider violins an asset in his investment portfolio. I agree. I also don't have $16M in free cash to invest in a violin. The aim of this show isn't to persuade you to invest in violins, either. However, we can still learn a lesson or two from them, even if we agree with Warren. And that's the most crucial lesson Stradivarius violins can teach us. Investment lessons are all around us. All aspects of day-to-day life can teach us about investing. We can look into other aspects of life and draw parallels between them and investing. Those life lessons are even more memorable and long-lasting.
So we talked about three + a bonus investment lessons Stradivarius violins can teach us. It reminded me of another post I recently published about looking into the top 10 holdings of the portfolio of super investors such as Buffett, Howard Marks, Bill Achman, and Michael Burry. If you missed that one, watching and listening to it after this episode is good. Link in the show notes. I'll see you next time! |
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