Screening - Recent Losses
I was just reading “Value Investing Today,” a book by the Forbes 400 member, Charles Brandes and I had a couple thoughts. I realize it’s way too early (5:15) to be up, let alone reading and having thoughts, but here they are.
In the book, he details a list of characteristics by which an aspiring value investor should screen. Although he does say that one or more of the criteria can be waived in certain circumstances, I take issue with some of the criteria he uses. Of course, I’m not the billionaire, so you’ll have to make your own judgment.
One of the criterion he uses is that the company should not have any losses for the last past 5 years. The problem with that is that there are many circumstances in which you would want to buy something with recent one-time losses. In fact many of my best performers have fit this criterion.
For example, I invested in both BLX and AES back in 2003. BLX is a Latin American bank that had just written off a large portion of its loans due to the Argentinian financial crisis. AES is an international power company that wrote off a large portion of its assets during some volatile times when some of its hedges broke.
The reason both of these companies survived was (1) losses due to write-downs are usually short-lived, (2) both companies were producing positive cash flow from operations before, during, and after their respective crises.
If you are looking at companies with recent losses make sure that the losses are probably short term and the company is still producing positive cash flow from operations. Or, of course, you could listen to someone who invested his way on to the Forbes 400.
