The greatest challenge now: Allocation of Capital

The short and intermediate term outlook for both the domestic and global economy has probably never been more uncertain in my lifetime.

Companies with superb track records, strong management, excellent liquidity and minimal debt are available at valuation ratios not seen for many years. Benjamin Graham criteria for stock selection is so rigorous that most years since I started investing either no stocks in North America qualified or only a couple. Today there are 270 stocks that meet his criteria on the US exchanges alone! Interesting times, eh? BTW, to review those criteria:

Benjamin Graham's Criteria for the Defensive Investor

1. P/E Ratio less than 15
2. P/Book Ratio less than 1.5
3. Book Value over 0
4. Current Ratio over 2
5. Earnings growth of 33% over 10 years
6. Uninterrupted dividends over 20 years
7. Some earnings in each of the past 10 years
8. Annual revenue of more than $100 Million (1950).
   Source: The Intelligent Investor, 4th Revised Edition (pages 184-185).

I belong the school of thought that the macro economic picture is inherently unpredictable. Those few who successfully perceive the future are really only guessing and statistically some of them are going to be right, sometimes even several times in a row. It's similar to slot machines. The danger is that after going on a statistically inevitable winning streak you start to believe that you have a special skill or insight that others do not. Of course, you don't and the casino walks away with all your winnings (eventually) and more. The stock market is really no different.

The vast majority of successful investors with a long term track record of profitable investment decisions (i.e. Buffett, Klarman, Berkowitz, Schwartz) take only a faint and detached interest in the macro economic picture and/or what the stock market is "doing". He/she is doing that for one reason only-- to find high quality companies on sale for pennies on the dollar.

I've been spending a lot of time reading through SEC filings and conference call transcripts, trying to find companies that have at least a narrow moat and the financial health to survive a downturn in the global economy, even a protracted one. I have quite a few prospects, many of which I already own and have analyzed on this blog and intend to buy more of. A few new ones I'm intently interested in and will review when I have time:

ISCA
FSTR
NTRI
POW.to


Vitaliy Katnelson is an offkey but insightful value analyst/money manager. He comments on his favourite stocks here.

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