Book Review
AL FRANK'S NEW PRUDENT SPECULATOR
Investment Philosophy: Managing Investments Like A Business
by Joseph Dancy
LSGI Advisors, Inc.
July 28, 2004
Al
Frank's New Prudent Speculator
The Master of Value Investing Shows You How To Pick Winning Stocks,
Revised Edition
by Al Frank
300 pages, McGraw-Hill Trade; 1st edition (September 1, 1995)
List: $24.95; $17.46 at Amazon.com
A
print shop owner who never bought a share of stock until he was 38. No
Wall Street background, finance or securities training. Never made more
than $25,000 per year until he was 50. Raised in a lower middle class
family with college degrees in Vocational Rehabilitation Counseling and
American Studies.
This seems to be an unlikely background for the publisher of one of the ten best investment newsletters for the last ten years according to the Hulbert Digest. Or of a person that publishes what financial columnist James Glassman of the Washington Post states "may be the best of all investment newsletters."
Al Frank � �The Prudent Speculator�
It seems like an incredible story on its face. But if you read his book you fully understand why this man has done so well in the market. His secret? He manages his portfolio as a business, buying grossly undervalued companies and holding for the long term. Nothing complex about his strategy.
In an investment world dominated by institutions and short term traders, Al Frank stands apart as a longer term value-based growth investor. His book �The New Prudent Speculator� sets out his investment philosophy, and explains how he has outperformed the major market indexes over the longer term.
Value Based Selection Criteria
Frank attributes part of his success at investment management from owing a business - a print shop. In operating his business he came to recognize several things. First, a well run business can be incredibly profitable for the owners, much moreso than many people realize.
As a business owner it is also clear that it is very difficult, if not impossible, to project earnings and revenues accurately. Thus, management or analyst claims as to future performance are always suspect. An owner also comes to an understanding of what an enterprise might be worth, or its valuation, based on experience.
Using this background, and valuation based criteria such as price-to-book, price-to-earnings, price-to-revenue, price-to-cash flow ratios, return on equity, market capitalization, and other financial valuation measures, Frank identifies companies that are undervalued and holds until they are fully valued. A very simple strategy.
Intuitively, and from studies by Graham and Dodd and the like, Frank notes that such valuation measures have worked well as stock selection tools. He also notes that James O'Shaughnessy "What Works on Wall Street" - a study of historical market data that confirms what many in the business already knew intuitively - that valuation measures such as low price/earnings, price/book, or price/revenue ratios can be used to select a portfolio that has an increased chance of outperforming the market.
Disciplined Approach: Financial Background Not Required
Successful investors have several personality traits: Common sense, patience, a well thought out investment strategy, and a belief in their system according to Frank. In the end, if you buy undervalued companies and patiently hold, Frank claims that the value will eventually be recognized by the market - "value will out."
Frank notes that good investors are relatively rare. Only 15% of investors even match the performance of the major averages. Most strikingly, he notes that to be a successful investor you don't have to be an economist, broker, or have a financial background - in fact common sense may be the most valuable asset of all.
Discipline is also required. Frank notes that a company recommended by the Prudent Speculator often will decline. Only two, three, or more years after the initial decision to purchase will the company stock post a gain as the value is recognized. Some companies never recover to the initial purchase price - 30% of all stocks they recommend never sell above that level before they are sold - but the 70% of companies that are winners more than offset the laggards.
When asked if it was easier making money investing, or as an employee or small business owner, Frank is clear. Over time, investing in undervalued companies is "an incredibly easy" way to make substantial returns. He notes that if one has a large amount of guilt it could be bad, since if you have a coherent strategy "one doesn't have to do much work to make money in the market."
Buying undervalued companies is not as easy as Frank makes it sound. A company is usually undervalued for a reason, whether it involves missed earnings, management problems, or possibly the industry is in a cyclical slump. An investor must be disciplined to adopt this type of strategy - especially in the face of day trading popular Internet stocks and the like.
The Shareholder as a Partner
One thing that Frank makes clear: he does not buy stocks. He buys an interest in companies. While he may have a fraction of one percent interest, non-the-less he considers himself an owner, or partner, with management.
One critical element all successful value based investors must have is faith in their selection methods. "I have come to realize that belief may be the most important characteristic for success in long term, consistent, successful speculation," Frank notes.
Al Frank's New Prudent Speculator is one of the best investment books ever published on the philosophy and specifics regarding long term, value-based, growth investing. Well written and easy to follow, Frank provides proof that one need not be a financial professional to do well in the market.
© 2004 Joseph Dancy
Bio
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Contact Information
Joseph Dancy, Adjunct Professor
Oil & Gas Law,
SMU School of Law
Advisor,
LSGI Market Letter
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