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Value Investing: Tools and Techniques for Intelligent Investment by James Montier

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Chapter 31. Cyclicals, Value Traps, Margins of Safety and Earnings Power[31]

  • My screens are throwing up stocks that are perhaps what we might call 'illusory value' – that is stocks which appear cheap simply because they have cyclically high earnings that are about to crater. To some extent I don't worry overly about such situations. The very essence of the risk management practice embodied within the margin of safety concept provides us with a cushion against the worst effects of earnings disappointment.

  • For instance, on average over 1985–2007, those value stocks that have delivered the worst earnings growth have still generated a return around the level of the average stock. Their low price effectively provided some protection against poor outcomes. In contrast, the glamour stocks that deliver the worst earnings growth end up showing an average return of just 2% ...

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