Paul Price, Market Shadows, and Lowenthal Capital Partners have formed a partnership called Arrow Loop Research (ALR). ALR has created a unique investment newsletter at Seeking Alpha in which we show you how to implement our medium to long-term investing strategy and provide you with specific, timely trade ideas. Take a free trial by clicking here.
- We discuss our value-oriented investing philosophy.
- We discuss our methodology for buying quality stocks when they are trading at attractive levels.
- We share our guidelines for building a portfolio from scratch.
A. Our Investing Philosophy
Our investing philosophy is captured well by these famous quotes from Benjamin Graham and Warren Buffett:
“Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.” ~ Benjamin Graham, The Intelligent Investor
“The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in that market.” ~ Warren Buffett, speaking at Columbia Business School in 1984
1. Price Assessment
We love to take advantage of price vs. value divergences when we find them.
Stocks go “on sale” for various reasons such as earnings misses, company-specific setbacks, and/or general market weakness. Sometimes there is no clear explanation. Whatever the cause, price weakness often leads to very favorable risk/reward profiles – i.e., a good time to buy.
Buy/sell decisions can’t be made until we establish “fair value” – our target price – for the stock in question. To arrive at that, we use a combination of fundamental analysis along with the stock’s historical valuation metrics. Applying normalized metrics to forward estimates, we determine a reasonable 12-month target price range.
Experience shows that “reversion to the mean” occurs predictably over almost all six- to 18-month time periods.
Identifying inaccurately priced shares is key to success. However, keep in mind, not all stocks trading near their lows are being mispriced.
2. Averaging into Positions
We generally begin by initiating a partial position in a new name. If the price drops, we may add to our position. Our analysis is based on a disparity between price and our assessed value, thus a lower price means the stock is a better bargain (unless new information conflicts with our original analysis).
3. Stop Losses
We never use mechanical stop loss orders. Why intentionally take the thought-process out of decision making?
4. Holding Periods
Our actual holding periods vary….
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