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Me and My Money

Digging for deep value Add to ...

Kevin Graham, 30

Occupation

Mechanical engineer

The portfolio

Core positions in Wells Fargo & Co., Bank of America Corp., Goldman Sachs Group Inc., Fairfax Financial Holdings Ltd., Berkshire Hathaway Inc. and Peyto Exploration and Development Corp.

The investor

Kevin Graham invested in technology mutual funds in 1999, near the peak of the technology bubble. “I got burned badly,” he reports. Mr. Graham’s large losses prompted him “to go on a mission to understand investing.”

How he invests

Mr. Graham is now an adherent to “deep value investing,” which involves looking for stocks trading close to, or below, their “intrinsic value.” Book value is an important consideration. If a company’s value on the stock exchange is less than its book value, there is a margin of safety to owning the shares – the company’s liquidation value exceeds its market value.

Not just any undervalued company will do. Mr. Graham also screens for companies “that can consistently earn above-average returns on equity” and may even own some at a premium to book value. They usually have a strong market position and are able to cope well with competition from other firms.

It may take time for such opportunities to come along or for the discount on a holding to be eliminated, so Mr. Graham is in for the long haul. “I am patient and tend to hold positions for long periods of time,” he says.

A significant portion of his portfolio is in U.S. financial stocks. “Many U.S. financials sell at very cheap levels relative to tangible book value,” he observes. Tangible book value excludes intangible assets, such as goodwill, and provides a greater margin of safety when valuing companies.

Best move

Buying Peyto after the company announced it was converting to an income trust. Growth investors ran for the exits and drove share prices down by 25 per cent, presenting a deep value opportunity. Since then, Mr. Graham’s total annual compound rate of return on Peyto – once again a corporation – has been greater than 20 per cent.

Worst move

“Investing in technology mutual funds in 1999 …”

Advice

Mr. Graham is passionate about value investing and blogs about his analyses and picks at Canadian Value Investing (canadianvalueinvesting.blogspot.com).

If you wish to actively manage your own investments, “you must commit to continuous learning,” he urges. “Begin by reading The Intelligent Investor by Benjamin Graham … Do not spend any time listening to investment advice on TV or from an investment analyst. Be patient …”



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