Top 50 Microcap Investor List: David J. Flood
This week’s Top-50 feature is David J. Flood, a private investor from the United Kingdom. David’s investment approach is “grounded in the fundamental precepts of value investing based upon Ben Graham’s core concepts of ‘Intrinsic Value’ and ‘Margin of Safety’.” His strategy primarily revolves around “looking for 'deep value' investments such as stocks selling at a discount to Net Current Asset Value or Net Cash.”
Read our Feature on David J. Flood Here
A Lost Decade?
“You make most of your money in a bear market. You just don't realize it at the time.” —Shelby Cullom Davis
Stock markets experienced another volatile week. The S&P 500 lost about 3% on the week and is now down close to 19% from its record high earlier this year.
Despite this decline, the market remains at high levels. Many of the analysts that we follow estimate that the S&P 500 would still need to fall another 20-40% in order to reach fair value, and some valuation metrics suggest that we’re even more overvalued. But on the flip side, some people think interest rates are likely to stay lower for longer, and that the “Fed put” still exists, so higher valuations are justified.
In case the former are correct, let’s do some math by making the following assumptions:
To get more normal valuation multiples and profit margins, the S&P 500 must fall another 20-40%. From this level, we’ll assume constant multiples and margins going forward.
Sales growth per share averages about the same as it has over the last decade, which is about 3.7%.
On top of the sales growth, we also get the current dividend yield of about 1.5%.
Under these assumptions, each dollar we put into the S&P 500 is immediately worth 60 to 80 cents because we are still overpaying. And then each dollar grows at about 5.2% per year going forward. Due to the nature of compounding (e.g., A 20% loss takes a 25% gain to recoup the loss, etc.), if the math underlying our assumptions is approximately correct, then it’ll take about 4-10 years for each dollar put into the S&P 500 today to get back to breakeven.
Maybe we will see another lost decade for stocks. We don’t make those kinds of predictions. We try to lay out the risks and opportunities and possibilities and stories to help guide and, hopefully, entertain our readers. But as we wrote earlier this year, “In a bull market, the narrative is all that matters…. In a bear market, the narrative takes a back seat to fundamentals.”
The S&P 500 was down about 50% in 2000-2002 and closer to 60% from the October 2007 highs to the March 2009 lows. Those declines took place over about 18-24 months and had plenty of ups and downs along the way. While we can't predict that will happen again, it's probably wise to think about what will happen to your portfolio if it does.
As we’ve said again and again and again, there are always cheap stocks somewhere. Pick your investments and your investment managers carefully.
“All intelligent investing is value investing—acquiring more that you are paying for.” —Charlie Munger
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I don’t think a lot of “new” investors that have entered stock market in the last few years are ready to hold on to their “losers” for over 5 years (probably not even 2 years) for those “losers” to become “winners”