Thursday, March 09, 2006

Deep Value Investing Situations: Use a Scorecard - Part I

One of the things this site promises is a "value" investing orientation. And one of the things most needed to properly assess deep value" situations is a scorecard. Without a scorecard, it's too easy to get caught up in the pessimism of the investment situation, or to become too euphoric because you think you've found the greatest thing since sliced bread.

What you need is a scorecard - and hopefully one that's been tested as having some utility over time. Over the next few days, I'm going to present one that's been used fabulously by its creators, The Contra Guys, North American deep-value investors, Benj Gallander and Ben Stadelmann. These gents run a very fine newsletter service indeed, with an enviable record has produced a 40% annual return over the past five years, and over 26% over the past ten. As with most deep value situations, trading costs are minimized by relatively long holding periods.

(Note: Since these returns are stated in Canadian dollars, the past five year record would be even higher for those whose investments are denominated in US currency.)

In their book and other places, they have produced an investing scorecard that aids them in deciding whether or not to invest in a deep value situation. Their scorecard consists of twenty-three items, to which ordinal values of between -2 to +4 can be scored for each particular measure. The scorecard will be shown over two postings here, so this only consist of approximately one-half of the measured items:
  1. Recent downward share price spiral -1
  2. Single, double, triple, quadruple price upside +1 to +4
  3. Negative margin of safety -1
  4. Stock is likely to undergo a share consolidation -1
  5. Good or excellent management +1 to +2
  6. Management ownership position +1 or +2
  7. Insider trading -1 to +1
  8. Excessive versus equitable executive compensation -1
  9. High research and development expenditures +1
  10. Favorable demographics +1
  11. Excessive, or reasonable debt -2 to +2
  12. Dividend payout +1
The rest of The Contra Guys scorecard will be presented later, within the next day or two.


The Confused Capitalist

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