You don’t have to convince a value investor that the market is irrational, or that staying above the fray and make rational, reasoned investments is the key to long-term returns. But that usually means spending the time to understand a business deeply before you invest, identifying its moat, knowing its strengths and weaknesses, and establishing your own valuation before looking at market prices.
Athena Investment Services CEO C. Thomas Howard takes exactly the opposite approach, preferring to nothing almost nothing about the stocks that he owns, earning his Pure Valuation fund 25% annualized returns over the last twelve years. In place of Graham-style fundamental analysis, he sticks to five basic criteria meant to take advantage of behavioral anomalies.
Thomas Howard ruthlessly driving out emotion
Thomas Howard says that he intentionally doesn’t know the names of the stocks in his portfolio, reading them off to his broker when he rebalances at the end of the month and then forgetting them, because he doesn’t even want to see one of the names in a news piece and be swayed for or against the company. His philosophy is that once you have decided on an investment methodology, any extraneous information will only hurt you. If you’re convinced that some other piece of data needs to be included, either include it formally in the process or absolutely keep it out.
“As ruthlessly as I can, I drive everything out of the decision process that is emotionally driven and has nothing to do with my investment process,” says Howard in an interview with Nathan Jaye in the CFA Institute Magazine. “It means we don’t pay attention to anything—literally.”
Howard likes high sales, dividends, and as much debt as possible
First, Howard has a minimum sales threshold to narrow down the universe of stocks he looks at. After that he screens stocks by dividend payments, analyst ratings, debt, and price-to-sales. He says that he likes price-to-sales because it’s a difficult ratio for companies to manage, but the other three all relate to different actors putting their money where their mouth is. Dividend payments are a sign that the company expects to have cash flow well into the future, analyst ratings (inflated though they may be) are a second vote of confidence, and high levels of debt show that someone believes the company will be able to make enough money to pay it all back.
“I want companies with as much debt as possible. If I find one with a negative net worth, I’m thrilled,” he says.
The last factor may seem unpalatable, but for Thomas Howard any company that satisfies all five criteria has satisfied multiple groups with very different interests, and is probably a good stock to own. Not that he could tell you who they are.