Investment Master "hand in hand" teaches you how to select stocks.
The annualized return was 72%. What is the strategy of concentrating on investing in 15 stocks?
Michael Lauer's investment experience and philosophy
What are the top traders in the world like? In the “Financial Geek” series of bestsellers, futures and hedge fund expert Jack D. Schwager (Jack D. Schwager) interviewed dozens of such people.
One of them is Michael Lauer (Michael Lauer), which we are going to introduce today.
Michael Lauer's life experience was actually quite tortuous. Before going to the US, he and his family traveled to different countries. While studying, he was able to complete his studies by driving a taxi, and eventually obtained a bachelor's degree in international relations and a master's degree in financial business administration. After graduation, he did not directly start a job in the financial field; instead, he first served in the US intelligence service.
It was only after being introduced to Oppenheimer (Oppenheimer) by a friend that Lauer actually began to set foot on Wall Street. He worked there as an analyst, researching the high-tech industry, and later held similar positions at two other companies. During his career as an analyst, Raul was selected as a member of the Institutional Investor All-Star Analyst Team for seven consecutive years.
In 1993, Raul founded his Lancer Management Group (Lancer Management Group) and acted as fund manager. Jack wrote in “Stock Market Wizards: Interviews with America's Top Stock Traders” (Stock Market Wizards: Interviews with America's TopStock Traders) that the flagship fund (flagship fund) managed by Lauer reached a compound annualized return of 72% in the 7 years since its establishment, beating the 13% and 20% annualized returns of the Russell 2000 Index and the S&P 500 Index, respectively.
Well, you're probably curious. What kind of investment philosophy does Raul, who has achieved such results, have? He is a value investor and tends to focus his investments. His stock selection criteria are very strict, and he usually holds up to 15 positions.
But the turning point came. Raúl was sued by the US Securities and Exchange Commission in 2003, accused of inflating valuations, manipulating prices, and defrauding investors. In 2011, he was acquitted again. How do you say that? It was indeed a tortuous experience!
Michael Lauer's Stock Selection Criteria
Having said that, I mentioned earlier that Raul's stock selection criteria are very strict, so what exactly? Raul's 6 standards are mentioned in Jack's book.
1. It must be a company and industry that Raul fully understands.
I know enough about the industry and company I'm investing in. This is actually a pretty basic principle, but in reality, many investors can't do it.
However, this standard varies from person to person, because different investors can understand different companies and industries.
For Raul, one way he understood the industry and the company was to use and expand his resources and reach out to corresponding executives.
2. The stock must have experienced a significant decline (50% or more below the market average) relative to the market average.
What needs to be distinguished is that this standard actually refers to investing in stocks that have plummeted, not investing in stocks whose stock prices have been weak. Because the sharp decline may have been brought about by temporary events, which may well contain opportunities.
It seems to explain why Raul only focuses on stocks that have gone through large-scale liquidations, and such stocks may not be seen by other managers and won't hold.
3. The company must have a strong balance sheet and reasonable cash flow.
Compared to profit, Raul values balance sheets more. He feels that debt must be manageable compared to cash flow.
4. There must be an insider purchase or company buyback plan, or both.
Whether it's an insider's purchase or the company's repurchase plan, it may show a sign that they think the stock price is undervalued, there is limited room for downside, and they are optimistic about the future.
5. Stocks must have compelling value; for example, they have a large income compared to total capital, and the stock price is close to or below the book value (book value) per share — that is, the net market ratio is around 1.
According to Raul, the most important valuation indicator should be the ratio between the total market value of the stock and the intrinsic value of the company, or using the total market value to compare “the estimated price of selling the business to a competitor.”
Here, what Raul uses to measure intrinsic value is book value, which is obtained by subtracting all assets from all liabilities.
6. There must be a catalyst to enable stock prices to rise in the future.
The main effect of the previous standard is to reduce risk and limit decline. However, without a “catalyst,” stock prices are likely to stagnate, then there is no real opportunity to make money.
What is considered a catalyst? Some events can change the investor community's expectations of a company, such as a restructuring plan that makes the company look forward to going from loss to profit.
In summary, these six standards cover valuation levels, momentum, financial conditions, level of understanding, and other fundamental information (including repurchase plans and catalysts). They are indeed quite comprehensive and strict.
How do we apply this strategy?
So how can the above standards be applied? Let's take a look at the few aspects mentioned above.
Valuation level: In this regard, Raul actually gave a direct quantitative standard, that is, the net market ratio is close to or below 1.
Financial status: It is relatively difficult to measure that debt is manageable in relation to cash flow. However, by measuring “the ability to use the most liquid assets to repay short-term debts,” it may play a similar role, so a quick ratio (equal to liquid assets divided by current liabilities) can be used here. If the company's speed ratio is greater than 2, it is generally better.
Momentum situation: There has been a sharp drop, which was not easy to achieve during the initial screening phase. What may be achieved, however, is to look at stocks that have experienced new lows in the last year, but this aspect requires further analysis after preliminary screening to avoid running into individual stocks that have been weak and lack hope for a rebound.
Level of understanding of stocks: There are two ideas about this aspect. The first is to start screening from industries and sectors you are familiar with and are optimistic about. Second, after initial screening, further in-depth understanding of specific stocks, and then further screening is carried out.
Information on the news: There are two main aspects to consider here. One is whether there are insider purchases, company repurchase plans, etc., and the other is whether there is a catalyst. This is difficult to achieve during the initial screening stage, and can be considered during further screening.
What else can be done in specific practical terms?
Next, let's take US stocks as an example and use a bull-bull stock selector to practice.
91 stocks were initially screened (based on 2023-11-2 data). Next, let's take a look at the parts we couldn't do during the initial screening phase.
For example, you can further filter the industries and concepts you are interested in.
For example, take a look at these stocks, whether their stock prices have always been weak or have plummeted before, and then analyze the reason behind the sharp decline to see if it is temporary or far-reaching.
For example, combine important fundamental information and conduct a detailed analysis to see if there are any insider purchases, company repurchase plans, and analyze whether there are catalysts, etc.
Of course, every strategy has its limitations, and it doesn't guarantee profit. But hopefully Michael Lauer's strategy presented today will inspire you.
