A comprehensive look at the inner workings of the mispriced markets portfolio. What is it? Why am I publishing it? How often is it updated? How do I choose which stocks make it onto the list and how might you use it in your own investing?
What Is The Mispriced Markets Portfolio?
Let’s face it. Value investing is hard. It takes time and effort. It takes a stubborn, bull-headed, contrarian temperament. It takes patience, perseverance and a willingness to be dumped-on by the market. Repeatedly. In the end, isn’t it easier to just put your money into an ETF and call it a day? After all, you can’t beat the market, right?
Or can you? After more than 20 years in this game, I think you can. It may not be easy, but I think it’s possible. My track record certainly supports the notion. The markets are constantly changing and evolving. I can’t be certain that my success over the past 20 years will mean that I’ll continue beating the market going forward. But the potential rewards are great enough that I’m going to bloody well try.
The Mispriced Markets Portfolio is a portfolio of undervalued stocks very closely based on my own personal stock portfolio. I will only add stocks to this list that I have put my own money into first. Virtually all of my personal net worth is tied up in this ever-evolving list of 10 – 20 carefully chosen companies.
It’s Not Always About The Money
What’s my motivation for making this list public? A very relevant question for anyone considering adopting any of my ideas as their own. You can pay hundreds of dollars a year for subscriptions to investment newsletters. I’m charging nothing. According to The Hulbert Financial Digest, no newsletter over the past 20 years has come close to the returns I’ve been able to achieve in my own portfolio. Theoretically, my stock picks should be worth many times what people pay for most newsletters.
Believe it or not (and I have trouble believing it myself some days), money is not my motivation here. I can’t guarantee that I won’t have a change of heart and start charging for this information at some point in the future but for the moment, I’m not prepared to put the effort into self-promotion that a paid newsletter subscription would require.
I love investing. I love combing through annual reports looking for those hidden gems. I love the thrill of finally coming across an opportunity that it seems everyone else has missed. I happily spend a decent chunk of my free time combing through the markets looking for those mispriced opportunities. But after doing this for more than 20 years, the financial incentive to keep dedicating so much time and effort to the process is waning. I could just put all my money into an ETF and spend my days golfing. But I hate golf. I’m looking for a reason to keep having to fire up the spreadsheets and get to work. Providing the investing community with my best thoughts and analysis helps keep that fire going.
This website has been a lot of fun. I’ve connected with people in my own community and investors from around the world. There is a thirst out there and a real need for unbiased investment advice. I have no financial credentials and can’t officially make any specific recommendations, but I’m free to tell everyone who cares to listen what I’m doing with my own money.
Value Investing Is Hard
Value investing can be a real slap in the face sometimes. Your brilliant ideas can prove to be not-so-brilliant. You’ll lose money. Companies you invest in may turn out to be fraudulent or go bankrupt. You may underperform the market for months, even years at a time. You’ll miss out on all the most exciting investment fads. The media will tell you you’re a dinosaur. Friends will tell you you can’t beat the market. Stocks you buy will go down. Stocks you sell will go up. All of this is hard. My hope is that this website might make it all a little easier.
Seasoned veterans may see stocks on my list that they think are worth investigating for themselves. New investors may benefit from seeing how someone else manages an actual real-world stock portfolio. You’re welcome to join me on my journey at any time by buying any names in my portfolio that appeal to you and that stand up to your own due diligence. However you end up using it, know that I take the responsibility of publishing this list very seriously.
Putting My Money Where My Mouth Is
As I’ve mentioned, I won’t include a stock on the mispriced markets portfolio list if I have not put my own money behind it first. There can be a lag, though, between when I first start buying a stock and when I write about it on this website. Especially with smaller, more thinly traded stocks, it can take me days or weeks to accumulate a position for myself and my family. Sometimes a stock runs away on me. I’ll start buying only to see the share price climb out of my price range. In those cases, I won’t include it in the mispriced markets portfolio. I will only add stocks to the portfolio that I think still represent compelling value at the price prevalent on the date I issue my buy report. If, in the future, a stock that’s run away from me drops back down, I may have the opportunity to continue accumulating it for my own account. When I’ve had my fill at the trough, so to speak, I’ll write about it on this website.
The more cynical among you might point out that I stand to benefit if I write about a stock I’ve just bought and trigger an avalanche of buying as the hordes of investors out there who are hanging on my every word do the same thing. To the extent that that ever happens, well that would be just dandy. It seems unlikely that my little corner of the internet would create much of a stir, but do be careful. When I write about a stock, I’ll post its current share price. If I’m writing about it, I believe it offers good value at that price. It’s up to you to decide if you think I’m right or not and to determine if whatever price you end up paying for the stock still represents good value. Please discuss any moves you make in your own portfolio with your financial advisor first.
On the other end of the transaction, once I have finished selling a stock, I’ll post a sell report on this site to let everyone know. Again, this could take time. If it’s a thinly traded stock, it could take weeks after bad news comes out for me to finish unloading my position. I’ll make no comment until I’m done selling for my own accounts. Once I have finished buying or selling, it is no skin off my nose to be completely transparent about my activities and post them online. But I won’t show my hand until I’ve finished playing my cards.
If I Own It, I Like It
The goal of this website is to empower investors to take their financial future into their own hands by investing in individual stocks. I am railing against the growing tide of passive, ETF investing that I believe is going to deliver very mediocre returns to investors going forward. But I’m not getting paid for this. I have to be disciplined about how much time I devote to this crusade. I’ve found that managing a website can be a massive time suck and I’ve been making efforts to streamline the process so I can focus on delivering as much meaningful content as I can.
Part of this means that updates on the various stocks that make up my mispriced portfolio are going to be limited. I’ll write about my rationale for buying a stock when I first add it to the portfolio and my rationale for selling it when it gets removed. In between, I’ll post periodic portfolio reviews a couple of times a year. Other than that, I’ll largely stay silent.
Circumstances are constantly changing. The prospects for a company and the relative value of a stock can change dramatically over months, weeks or even days. However, as long as I still own a stock, I must, by definition, consider it to be undervalued to a greater or lesser extent. It doesn’t matter if the price is up 50% from where I bought it or down 50%. If I still own it, I still like it.
My Investment Approach
To get a proper perspective on the mispriced markets portfolio you need to know where I’m coming from as an investor. How do I go about selecting the companies that make up this list?
Every investor looks at the market in a slightly different way. There are no “right” answers here. My own approach to investing hasn’t changed much over the years. I’ve definitely widened the scope of what I do and what sorts of stocks I consider and I’m a lot more efficient than I used to be, but the basic principles remain the same. I look for companies that have a history of profitability that I can use as a guidepost. I want to get in at a cheap price, relative to those earnings or to my expected earnings. I’ll pay more for a company whose profits I expect to grow rapidly and much less for one whose future prospects are in doubt. But everything has a price and I don’t shy away from the dogs if I think I can get them cheaply enough. Finally, I want financially strong companies with low levels of debt. Too much debt makes companies weak and vulnerable. I don’t want those in my portfolio.
The stocks that make up my portfolio are a real mixed bag. I’ll buy big blue chip behemoths and tiny little micro caps. I’m not afraid of a good penny stock but I’ll also shell out $50 a share if I think that represents good value. I’m excited if I can find a dynamic, young company that is growing quickly at a still-reasonable price. I’m equally excited when I come across the carcass of an aging dinosaur, again, if I can get in at a low enough price. For me, it’s all about the price I’m paying for the expected stream of future earnings. If a stock is cheap, I’ll buy it. My home market is Canada but I’ve often ventured further afield, finding stocks I like in Hong Kong, the UK and the US. I’ll go wherever I can find value.
Some of the stocks I buy are quite risky. They can and have gone to zero. Because of this, I try to aim for somewhere between 10 and 20 stocks in the portfolio. More than this and I can’t keep proper track of everyone. Fewer than that and I start to get nervous that I’m putting too much money into too few, volatile names. Over the years, I’ve occasionally had friends looking for a hot tip. Until I learned my lesson, I would give them one. But picking one or two names from my list of holdings can be dangerous. With a diversified portfolio of 10-20 names, a complete wipe-out in one or two is not going to break the bank but if all you’ve bought is those one or two, the consequences could be disastrous.
I consider all the stocks I buy to be value stocks of one flavour or another. But cheap can always get cheaper. Owning an undervalued stock is no protection, in the short term at least, against a falling market. When the tide goes out, everyone goes down with it. As well, my stock picks tend to be skewed towards the small cap end of the spectrum and these usually fall more in a major market rout than the bigger names. In the financial meltdown of 2008, my portfolio lost about 53% from peak to trough, pretty much in line with the drop in the overall small cap market. Owning a bunch of undervalued stocks offered me no protection and it won’t next time either. You’ve been warned.
When I look for new stocks to buy I’m looking for dollar bills that I can buy for 60 cents. That is, I’m looking for stocks whose share price would have to rise by 70% or more to get to my estimate of the company’s true worth. That gives me a lot of breathing room if things don’t turn out exactly as planned. I sell a stock when it reaches what I consider it’s fair value. If everything has gone according to plan, that means the stock price will have climbed 70% and I’ll make a tidy profit. Things rarely go according to plan. Sometimes they go much better and sometimes they go much worse. I’m constantly re-evaluating my estimate of a company’s fair value in light of new developments. If a stock drops 50% but my fair value estimate has only dropped by 20% then I’ll stay in for the ride. If a stock only drops by 10% but my fair value estimate has dropped even more, I may end up selling. It doesn’t matter one iota to me what price I bought a stock at. All that matters is how the current share price relates to my current estimate of fair value. This is a far less stressful way of approaching your investments than trying to base your decisions on arbitrary share price levels.
I tend to end up holding my stocks for a year or two but I have no control over that. It takes however long it takes. I’ve owned some stocks for 5 years or more. Others I’ve sold after a few weeks. I sell when a stock hits my estimate of its fair value and when that happens is up to other investors. They need to see what I’ve seen and bid up the price of the stock to a more reasonable level. Sometimes that happens quickly and sometimes it happens very slowly.
I never know which stocks are going to be my big winners and which are going to be my dogs. The biggest winners are often the unexpected ones. So I keep my bets spread pretty evenly, at least to start. Over time, the winners will grow in size and the losers will shrink. Sometimes, if I can’t find any new stocks to buy, I may add some more funds to some of the laggards and occasionally, if a stock has been wildly successful and I start getting nervous about how big a position it has become, I may take a little money off the table. But I tend not to fiddle around too much. I like to keep things simple.
Hopefully you’ll be able to find something of value in my eclectic list of mispriced stocks. If you don’t have the time to do your own digging, feel free to use my ideas as your own. The world is full of companies with great people doing interesting things. It’s fun to be a part of all that. Good luck and happy investing.