Professor James Berman has taken a new investing research platform (Trefis) and made it even more valuable.
His new investment advisory newsletter, the Berman Value Folio, integrates interactive modeling tools to create what I think is one of the first mashups of next generation investment research.
James is our guest this week on Tradestreaming Radio to talk about the investment research process, the next generation of research tools (including Trefis), and how he’s created his investment product.
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Zack: Hey, I’m Zack Miller, and I’m your host for Tradestreaming Radio. This is the place where investors come to learn directly from experts. I help bubble up tools, tips and technologies to help you make better, smarter investment decisions. Today’s guest is James Berman. He is the Founder and Editor of a new investment advisory newsletter called the Berman Value Folio. It’s the first interactive investment letter that uses Trefis tools.
If you remember our long-term listeners to this program, Trefis is a technology platform that uses sort of crowd sourced analytical tools to help establish the fair value of a company. James is also an investor in Trefis, as a disclaimer as well. This is an example, and the reason I asked James to appear on the show. One of the first examples I’ve seen is sort of a mashup of some of these new tools out there. Trefis is a very powerful platform, and James writes a newsletter on top of it that provides this sort of analytical layer to help investors make sense and use some of those new tools out there. I think that’s very interesting. I think we’re going to see a lot more of these types of tools in the future.
So, I asked James to come on the program to talk about the genesis of his newsletter, how he develops his research, and then how he distributes it. That was interesting to me. I thought that would be interesting to you. Check out the Berman Value Folio. I have links up to it as well. It’s distributed jointly by Forbes and by Trefis and was launched just recently at the end of 2011.
Thank you, James, for appearing on the program. And thank you guys for coming and listening. I’m appreciative to every second you give to this program; you help to make this a great show.
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Thank you guys, and we’ll check you out again next week. Great, so can you introduce yourself?
James: Yeah. I’m James Berman. I’m managing member of JBGlobal.com LLC which is a registered investment advisory firm. I manage separate accounts and limited partnership that invests in global equities. I teach at NYU in the SCPS division. I teach corporate finance.
Zack: You just launched, I guess, recently an investment report.
James: I did. I’m excited about it because it’s being distributed through Trefis and through Forbes and it uses Trefis interactive tools. It takes the traditional investment letter and adds a layer of interactivity which allows the reader to change the assumptions using Trefis tools and see if they agree or disagree with the thesis of the newsletter. I think it adds a whole new dimension to the idea of an investment advice letter.
Zack: Yeah. I mean I was excited when I saw it. To me, it’s one of the first versions of kind of like a mashup, I would call it. You’re doing the analysis, but you’re also providing this layer of interactivity. Before we go further and talk about the Berman Value Folio, can we talk a little about Trefis? It’s a site, I have spoken about it on my site before. Can you describe a little bit about what the value proposition is there?
James: Trefis is a very interesting site. I should disclose now, I’m an investor at Insight Guru, which is the parent company of Trefis. But I became an investor because I read about it in the Wall Street Journal and started using it. That day I called the founder, Manish Jhunjhunwala, and asked if they were accepting money from investors because I was so impressed. What Trefis does is it analyzes the key drivers of a business. Trefis covers publicly traded companies. It also covers some private companies. For example, they have an evaluation of Facebook.
James: What it does, as I say, underlines the key drivers of the business. It uses a discounted cash flow valuation to reverse engineer and derive a present value, which should equate to the intrinsic value of the price per share of the company. It’s a great tool for a value investor, like myself, who believes that you can determine a range of intrinsic value per share for any given business. I found it to be a very useful tool and I got so involved with it through being an investor and using in my own business that Manish and I were talking one day about the idea of a newsletter that could be used with this interactive feature.
Zack: I tell you one thing, James, why it’s kind of close to my heart because I’ve been sort of experimenting at Tradestreaming with a similar concept providing an analytical layer and combining it with some tools. I launched the Insider Trading Newsletter about two months ago. And I’m going to be launching a new newsletter in partnership with SumZero which is sort of an expert investor network.
I love the concept of combining your analysis with some of these new interactive tools on the market. Can you talk to me about the process? Do you use Trefis to bubble up the idea and then write about it? Or you’re independently researching the idea and then integrating the Trefis analysis into the newsletter? In which direction is it working?
James: I’m using Trefis as one of several tools that I use in my business as a whole. I do my own discounted cash flow valuation of stocks. I use other independent third-party research tools.
Zack: Can you talk about those if you’re comfortable?
James: Yeah. I mean one of the main tools I use is Morning Star.
James. Because Morning Star similarly uses a discounted cash flow valuation approach to securities. I start with a whole variety of my own criteria, and then I look to the Trefis valuation. I don’t always agree with the Trefis valuation. One of the great things about Trefis is you can go in and through an intuitive process of dragging and dropping assumptions, you can see where you end up.
Zack: And see where others have ended up, right?
James: Absolutely. People are able to post their own models, and you can see by going into their models how they got there. One of the things that I think Trefis really illustrates is the whole idea of garbage in and garbage out for models. I mean, a model is only as good as its inputs.
James: If the inputs are bad, not only is the model bad but it’s especially dangerous because it has the veneer of false precision and intelligence which only a model can bring. If it’s false, it’s false. I like the way, by using Trefis you can see the way how sensitive a model is to the inputs, and you can develop a range of inputs that can avoid this problem of false precision. I’ll give you the realities, we all know valuation is more art than science, and it’s important to have a tool that recognizes that.
Zack: It’s more than just linking to the tool. It’s really embedded as a core part of your research of your newsletter. You sent me a copy of the most recent newsletter, and you did the case study on IBM. I see that there’s both a screen capture and a link off to the Trefis analysis. Within your analysis, you’re saying 6% change in…you’re using 6.5% growth rate assumption. I’m trying to find the right words. You’re trying to create a way to make your analysis less static, right? You’re trying to say, “Well, here’s what would happen if X happens, right?” In some sense it’s another dimension to typical financial analysis that doesn’t exist elsewhere.
James: Yes. I mean, avoiding the static is really the idea, capture valuation for a company. What I did in that issue with IBM was I was really trying to get at the heart of a real evaluation of the Dow 30. Because the Dow Index is made up of 30 components all of which are now covered by Trefis. So, you can actually just fill that to a Trefis valuation for the Dow which comes out to 14,000, roughly.
IBM being such a disproportionate piece of the Dow, given the Dow is a price weighted index and IBM trades in the 200s. IBM really has an unusually distorted impact on the value of the Dow. But as you said, if you look at IBM and you assume certain growth rates, the assumption of growth rates are going to change DCF value for IBM per share, and hence they’re going to change your expectation of the present value of the Dow.
The idea that anyone can precisely peg a value for IBM is just a wrong idea. That’s why we have markets. Markets are constantly trying to weigh the pros and cons and trying to assess what the true value is. That’s why prices fluctuate because no one can put a precise value on it. A valuation model can, as I say, have that problem of false precision where the price becomes a anchor that you become wedded to. What’s a more realistic vision is a range of values that revolve around different scenarios. That’s what you can do by, as you said, in the newsletter clicking past the screenshot on the URL to go directly to the Trefis site and adjust your assumptions.
Zack: Can you give me a snapshot of who the typical user is, the typical subscriber of your newsletter and maybe extend it, who is the typical user of Trefis? I think Trefis is a great tool. I just, from the individual investors I know the ability to… You’re essentially modeling up a company by making certain growth rate assumptions in different divisions and different products. Is that too advanced or is that more advanced than what most investors are capable of doing?
James: I don’t know. First of all, my newsletter is too new to have a typical subscriber. I think my typical subscriber is my family members at this point.
Zack: Are they hitting you for a free subscription, too?
James: Well, yeah.
Zack: By the way, what is the subscription price?
James: It’s 249, $249 annually
James: Through Forbes or through Trefis.
James: That’s a monthly issue with the model portfolio, with the key drivers, with the interactivity, and the thesis for the month.
Zack: Cool. Sorry I cut you off.
James: No problem. Well, you were asking the typical user of Trefis. It’s a discussion I’ve had with Manish on several occasions. Who is the typical user of Trefis, and we found that there are finance professionals using it, casual investors and even investors who use technical analysis which you wouldn’t think Trefis would be the place for them because it is a fundamentally oriented site.
The idea of a DCF analysis I think is complicated for a lot of people, especially if they haven’t taken corporate finance and they haven’t had a traditional background in finance. On the other hand, one of the things that Trefis does is it democratizes the access to this by making it an intuitive dragging and dropping process. Whereas a discounted cash flow analysis which a lot of famous value investors from Buffett on down use, it used to be a process of a hundred page spreadsheet on Excel, and that’s what backs these models on the Trefis site. They are backed by Excel but what Trefis is doing is using this intuitive drag and drop technology that we’re all familiar with, with other things and applying it to the model.
Even the casual user, one you really has no background in this stuff, can jump into the Apple model, click on the drives business which is the iPad and make some assumptions of where they think iPad growth will head. They can do that intuitively by dragging and dropping and see it result in a change in the intrinsic value per share. That ability, that usability, and that user-friendly approach, I think, is something that opens this up to people who ordinarily wouldn’t really spend time trying to alter the assumptions of the traditional spreadsheet.
Zack: That’s a great answer. You’re using it, as you described earlier in this conversation. You have your own tools, I guess, for call it idea discovery, and then you’re going to Trefis and drilling down on the modeling. Can you use Trefis for idea discovery, stock discovery because they’re really two separate parts of the investment process?
James: Yeah. You can. First of all, they publish on their home page the link to a list of all their companies, and you can sort the list by over-
valuation and under-valuation. Assuming you’re looking for a long, you can look at the most undervalued securities and for those who short stocks, you can look at the most over-valued. Right there is a sorting feature that opens up a whole range of possibilities. I’m often checking the extreme ends of that list to look for opportunities.
You can also look at the pieces they write on, various sectors, and on various investment topics to get some ideas and potential investments. But I think you’d be wrong to use Trefis as the be all and end all of any analysis because it’s just one tool like many others. I’m a big believer in triangulating to try to find an intersection of looking at a stock from many different points of views to find the best opportunities. Everyone has to check their own assumptions and do their own homework and check third party assumptions to make sure that they agree.
I would distinguish that, by the way, from the consensus approach to investment which is looking for affirmation from others, which I think doesn’t work because I believe in contrarian investment. I know you’ve put things on your site about that. It’s just extremely part of the process looking at places that people don’t look. On the other hand, since most people don’t pay that much attention to real value and instead pay attention to the daily blips on the screen, I think you can find a lot of opportunities.
Zack: The Berman Value Folio in my mind is one of the first real examples of a product that has been built upon one of these new tools, as I described before. Do you think this is a trend that might continue, with so many new tools out there? I was just speaking with some people in the industry; it’s like almost like a renaissance going on right now for investors. I call it in my book a bull market in investment content.
Zack: Do you think this is a trend that’s going to happen? Sort of these new tools built upon existing tools just like to help make sense of some of the computing power out there.
James: Yeah. I do. I think it will continue. I mean it is interesting that, for example, in my case I ‘m taking something that people I assume or others have assumed and I think a lot of people felt going the way of the dinosaurs which is just your traditional investment ladder. Which seems, first of all, to not exist in real time, seems dated, and used to be sent out by paper and snail mail.
Zack: Right, and then faxed.
James: Right. You take something like that, that looks so dated but that with these new tools can be made relevant. You wed the two together, and then you have a format where someone feels comfortable. Traditional type of publication but now it’s delivered into your email box, and now it has interactive tools. Now, it’s using all those new tools that are out there which I think you, as you say, it’s a bull market in those tools. I think that’s completely accurate. I also think that as in any boom market there’s pros and cons to having such an explosion of information and tools at people’s disposal. I think the problem these days is too much information.
James: In many ways. Screening out noise and trying to determine which information is material and truly important. Tools will evolve over time to do that as well I’m sure. Tradestreaming in some ways is a tool, I suppose, that helps filter those things for people.
Zack: I appreciate that. I’m trying, at least.
James: It’s interesting, I think, as you have a proliferation of more and more of this stuff it solves one problem for the investor and creates another problem.
James: That’s the nature of innovation, and that’s the nature of all innovation in any industry.
Zack: With the demise of the professional, demise may be too strong of a word. but with the changing landscape of the professional adviser. What’s happened is as people got more and more tools to do their own research, they have to assume more responsibility in the research process and the investment process. As you said, that’s a double-edged sword.
What I think you’re addressing is well with the letter and with Trefis is that although these tools exist out there that people can use and whatever, I’ve seen a lot of investor behaviors sort of clustering around, well, I could do it on my own but I still want to trust somebody who knows more than me, someone who is spending more time at it. You are providing a portfolio in your newsletter. It’s not just ideas, right? You are saying here’s the portfolio that fits my investment strategy.
James: Yes. There is a portfolio that I’m invested in. I own many of those same stocks and fund I manage. There’s a portfolio, and when there’s changes to the portfolio those are mentioned and the reasons for those changes. When there’s a new purchase, that’s reflected. Yes. It’s a model portfolio that someone could follow if they like or take pieces of. I’ve had people email me and say, “Well, I agree with these holdings, I don’t agree with those. Of course, that’s what makes markets.”
Zack: A lot of our listeners are people who actually manage their own newsletters or some type of investment advisory service. Everyone is faced at some time with the same issue, am I sort of an idea driven newsletter or am I actually a portfolio manager? There are pros and cons to each, and I actually deal with that in the Ebook that I’ve written. Why did you decide to take the portfolio approach?
What is does is it puts your tucus to the fire, right, like if you don’t perform, you don’t perform? A lot of people don’t necessary like that transparency on the performance front.
James: Well. It does. It definitely puts you on the fire, as you say, but I’m used to that. I’ve had many, many good years; I’ve had many, many bad years. I believe in full transparency of performance results. I suppose, running a portfolio and then having a newsletter gives you the best and the worst of both worlds. I’m comfortable with the fact that as a value investor I know that there are going to be good and bad times.
That’s really the way investment works. One of the interesting things about investing, unlike other disciplines, is if you can just be right more than you’re wrong given the fact that all investors do make tremendous amounts of mistakes, I’ve made many, you can be successful because the reality is that a margin of our performance over a long period of time is really the result of often 51 or 52% correct investments to 48, 49% wrong.
Zack: James, one of the things you mentioned was that you do use Morning Star in sort of the beginning stages of your investment research. I ask all participants on the podcast if… Are there other sources that you come back to that you find yourself hitting time and again, that you find particularly useful, either online or offline sources?
James: Well, I also just use primary sources, such as company filings. I find that’s very important and I think people ignore that at their peril.
Zack: Which type of filings, like regulatory filings, like periodic filings, like 10Ks?
James: Yeah. Like 10Qs, 10Ks, and material filings. I’m a big believer in balance sheet, free cash flow analysis. If you believe in that, there’s really no way around that. I also like to look at any other service that does a discounted cash flow analysis. S&P does that as well. I look at S&P reports and companies.
One thing I do avoid is traditional Wall Street self-side research because… It’s not for the reasons a lot of people talk about these days which is potential conflicts of interest. It’s really for the short-term orientation of that research which I think creates opportunities. In fact, I’ll often use it as a contrarian indicator. If there’s a self-side analyst who capitulates on the stock that will get me interested on the stock. I think most of the Wall Street self-side brokerage research is pretty short-
term oriented, pretty earnings based, not cash based. As a result, it’s something that I avoid.
Zack: I guess one last question I have. Like you said, you’re in your fourth iteration of the newsletter. There’s no typical that we’re talking about here. In your portfolios, your real money portfolios that you manage, what is your average holding period? What’s your target?
James: Well, you know Buffett’s expression on that is an ideal holding period is forever.
James: Since none of us has forever, we have to stick to some reality. I do have a very low turnover, anywhere from 5 to 15% a year. That really implies that the many stocks are being held for three, five, seven years. My holding period is pretty long. That doesn’t mean that it’s buy and hold at all costs. There are always new opportunities emerging, and there are always opportunities that have run their course.
Then, there is always the mistake that has to be exited quickly. Turnover has to occur. No one has forever, but I think to treat stocks as businesses is the best approach. If you have a successful business, it’s trading at a discount to its intrinsic value. There’s really no reason to sell. It’s only when it becomes grossly over valued or the underlying fundamentals of that business completely change that there’s a need to get out.
Zack: Awesome. James Berman, the publisher of the Berman Value Folio and the President and Founder of JBGlobal.com. Thanks so much for being on Tradestreaming.
James: Thanks a lot. It was a pleasure.