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Wednesday, October 18, 2006

what works

We re always looking for that new fancy way to beat the stock market, running reams of spreadsheet data, looking for new ways to pick stocks etc,et all forever and ever amen.Looking for that new edge. I am the worst of the bunch in all likelihood. The worst part here is I know better, Ive written about what does work in the market extensively and sat at the big table with the grownups who practice this method all the time. What wonderous thing is it that I refer to? Buying stocks below book value in companies with little or no debt or strong credit ratings on small amount of debt..a debt to equity ratio less than .5 lets say. The best stocks I have ever bought in my life have been those that met these criteria. Yet I continue to look for new methods and date blondes. Neither has worked out so good for me.

The track records of the big guys who practice book value investing, seth klarman and Marty Whitman come to mind, have long term track records that are beat even most of the big time hedge funds. I look at guys like tudor jones, simon and the ilk and realize that buying stocks below book cannot compete with their sophisticated methods. Unless of course we applied the same 8 to 1 leverage these guys ue. Then Martys unlevered 17% a year for 20 yrs and seths 20%..or the schloss brothers 22%.. and they are right there in the league.

All my own testing has confirmed it. Stocks below book value with good balance sheets outperform.Net-nets and liquidations may be hard to find but they average something on the order of 40% a year return. Combine below book with the occasional net-net and you should beat just about everybody out there.No rocket science here, just a little basic accounting. The academics have proved the point over and over. No need to figure out which new super widget is the best. Just buy assets cheap. From now on, I buy assets and date brunettes that wear glasses exclusively.With a little common sense market timing and using options in some cases to enter,exit and protect positions and there is a built in edge.When you find one of these names that has other smart guys in it like klarman, brnades, Whitman et all(in truth I often steal the ideas from their filings) or an activist such as shamrock, pirate or barrington involved I am even more confident about putting the trade on.Insider buying is another great confirmation tool.

Some of the things I am looking at now include jakk pacific the game maker trading below book with 20% of the stock price in cash, CALL, a small telecom vendor with a stock price of 2.60 and almost 3 a share in cash net of debt, the reinsurance company PAMCA, a 9.65 stock at .8 of book and 3 a share in cash,WON, the radio empire at 7.54 stock with a 5%+ dividend yield trading at .95 of book,electonic payment processor OPMR, hard hit by the internet gaming bill trading now at 9 with 7 in cash and still capable of generating a fair amount of free cash from non gaming business’. I also like TSCC, the it consulting firm trading at 8 with 5 in cash.The larger names include such gems as insuresr ANAT,KCLI, department stores DDS and telephone company S.

I still think the market is heavy after the extended run so I am not in a hurry to throw the positions on. In the case of opmr,dds,s ,jakk and won, they are optionable so I like selling oct and nov puts one strike down to gain my entry.With CALL, the net, net, I am just in the stock. Net-netds are rare and should be bought when discovered.

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