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1. Understand our value investment philosophy. The Prudent Speculator follows an approach to investing that focuses on broadly diversified investments in undervalued stocks for their long-term appreciation potential. Does that mean we build portfolios of 20 stocks…30…? More like 50 and up. We like stocks. And we like a lot of ‘em. We don’t rely nearly as much on “how many” as we do “in which,” but we tend to invest in more names than most. This expansive diversification, we find, potentially serves us well in two ways: we can further minimize the risk of individual stock ownership, while maximizing the likelihood of finding the truly big winners among the undervalued masses.
As for the “in which” part, readers should know we discriminate among potential investments primarily by their relative valuation metrics and our assessments of stock-specific risk. We buy only those stocks we find undervalued along several lines relative to their own trading history, those of their peers or that of the market in general. The prices at which we’ll buy and sell stocks incorporate a range of fundamental risks (e.g. credit, customer and competitive dynamic) that we believe the companies may face over our normal 3-to-5-year investing time horizon.
2. Purchase stocks. Subscribers have several options:
a. Buy all stocks we currently own in TPS Portfolio or one of our other three Newsletter Portfolios
b. Buy all stocks on the latest Currently Recommended Stocks list (40 stocks)
c. Buy the 10 stocks highlighted in the Portfolio Builder section of the newsletter
d. Buy new recommendations as we purchase them for one of our 4 newsletter portfolios
e. Pick a few stocks from our list of open positions (found on our Target Price listings that are updated twice per month ) to add to an existing portfolio
f. Decide they do not have the time or resources to manage their own portfolio, so they call Kovitz Investment Group at 512-354-7041, the parent company to The Prudent Speculator, and schedule an appointment to review their investment options.
There is no right or wrong way to use the newsletter. Each investor has their own objectives and financial situation, so this is merely a guide for what has worked for others in the past. We cannot give individual-specific investment advice to subscribers, but as a managed account client you would receive personalized service and access to a variety of portfolios designed for varying investment objectives.
3. When to buy and sell? Sales and Purchases alerts are sent via e-mail the same day that stocks are sold and bought. In regard to the latter, subscribers are typically notified via the Portfolio Builder section of the monthly newsletter. You can choose to purchase the day the information is made available, or wait for the Newsletter Purchases e-mail.
4. Understand the 4 portfolios. The newsletter tracks four portfolios. Two are hypothetical: PruFolio, launched in 2001. and Millennium Portfolio, launched in 2000. Two are actual, real-money portfolios: TPS – Al Frank’s original portfolio established in 1977 and the Buckingham Portfolio – John Buckingham’s actual portfolio established in 2003. As our real-money portfolios have had significant cash flows over the years (we believe in putting our money where our mouth is!), we maintain our hypothetical portfolios to illustrate how various investments might have performed with a fixed amount of money, making no deposits or withdrawals. Each portfolio is managed using our core Prudent Speculator investment philosophy. The size and the inception date of all four portfolios varies, which has resulted in differences in stock selections, while the timing and amount of cash flows has also influenced the two real-money accounts. PruFolio and Millennium Portfolio do not use leverage. TPS Portfolio and Buckingham Portfolio are not presently margined, though they have incorporated margin usage in the past.
For your Portfolio Gains/Losses Reports, are proceeds after commissions? Do proceeds include income from dividends?
TPS and Buckingham Portfolio are real-money portfolios and, as such, commissions, interest, dividends and subscription fees are included in the performance calculations. Our hypothetical portfolios also incorporate income and expenses. Of course, a Gain/Loss Report shows only purchase and sale price, and as such does not reflect dividends.
Should I buy stocks held in one of the newsletter portfolios or only buy stocks trading below the published buy limit?
We cannot provide specific investment advice, and we encourage our readers to do their own homework or consult with their financial advisor. We understand that it can be a bit confusing, but subscribers use our publication in different ways. Some want an actual portfolio to follow, others want to build their own portfolios by picking and choosing from our Recommended Stocks list and/or the stocks we hold in one of the newsletter portfolios, and there are those who simply want one or two stocks to buy at a time.
Keep in mind that the performance of Buckingham Portfolio, TPS Portfolio, etc. (and the newsletter itself) is dependent upon the stocks that we own, not on the stocks that appear in a given issue of the publication. Of course, only stocks that we hold in our newsletter portfolios will appear on the Recommended Stocks listings.
We do our best to provide a quality experience to all, but the important thing to remember is that our long-term track record has been achieved by buying and seeking to harvest a broadly diversified portfolio of undervalued stocks. As long as we are willing to hold a stock in a newsletter portfolio, we have to be comfortable with a new reader adding it to his or her portfolio, even if it does not happen to appear on a particular Recommended Stocks listing.
How do I find out about any changes made to the portfolios?
We announce new purchases in the newsletter and/or on our electronic Market Commentaries, while we publish any sales via our electronic Sales Alert notifications. Market Commentaries and Sales Alerts are e-mailed to subscribers and are made available on our Web site, theprudentspeculator.com.
How do you find the stocks that you purchase and recommend for your portfolios?
We actively follow more than 200 companies, constantly updating our analyses as corporate fundamentals, industry trends and other relevant data change. We utilize Bloomberg as our primary data provider, which allows us to regularly screen a 3000-stock universe for new positions that meet our undervalued criteria.
Describe your valuation methodology.
Given our affection for Value-oriented investing, it should come as no surprise that the screens we construct to search for new ideas, as well as the analytics that we run each day to evaluate our existing holdings, center on five classic metrics (Sales to Price, EBITDA to EV, Book Value to Price, Earnings Per Share to Price and Dividend Yield) that historically have proved strong indicators of future investment performance. Note that the first four ratios are inverted (i.e. Price to Sales instead of Sales to Price) from how they are conventionally displayed as well as how they appear in The Prudent Speculator, with the result being that we can compare a high ranking stock on Sales to Price to a high scorer on Dividend Yield. Doesn’t matter either way, but with this methodology, the higher the metric the more undervalued the stock. Now, we do add a little of our own valuation flavoring to the mixture as we think that companies also should be compared to their industry peers in addition to the entire investment universe.
We endeavor to determine a quantitative estimate of the future value of a stock, five years hence—our Target Price. We then determine a buy level that has an acceptable margin of safety given the quantitative and qualitative risk characteristics of the company. All else equal, we are comfortable buying a dividend paying stock at a higher level because the yield will add to the capital appreciation in order to achieve the desired total return.
Please describe your sell discipline.
We part with stocks for a variety of reasons:
1. Meets or exceeds its Target Price.
2. Our research finds a candidate with more attractive risk/reward attributes.
3. The stock’s evolved risk/reward profile fails to justify continued ownership.
4. The stock maintains trading characteristics (e.g. sustained or increasingly weak liquidity) not suitable for continue ownership.
Is the performance of your newsletter in Hulbert Financial Digest due to margin leverage? If so, how much margin do you normally use to achieve performance stated in Hulbert Financial Digest?
The performance of The Prudent Speculator, as calculated by Hulbert Financial Digest and Mark Hulbert through 12/31/2020, is presently based on the average returns of our four newsletter portfolios—TPS, Millennium, PruFolio and Buckingham. At present, none of the four have any leverage. Buckingham Portfolio was initiated in January 2003, PruFolio was started January 2001 and Millennium began January 2000. Prior to then, our performance, according to Hulbert, was based solely on TPS Portfolio. Both Buckingham Portfolio and TPS Portfolio have utilized leverage in the past, but not within the last decade.
How should I combine recommendations in The Prudent Speculator with my other holdings?
We cannot provide specific investment advice, and we encourage our readers to do their own homework or consult with their financial advisor.
Do you rebalance your portfolios? As we are equity investors, we do not rebalance our portfolios into other asset classes. That said, holdings are always under review to ensure we are comfortable with the weighting in our portfolios.
If you had $40,000 would you put $1,000 in each stock correct? That is up to you. Remember, each portfolio holds 80+ stocks, so the 40 names on the Recommended Stocks list is simply a subset that we find particularly attractive. Our performance is based upon being invested in all 80+ stocks in each of the portfolios.
Are all 40 stocks from all 4 portfolios? While not every stock on the recommended list will be in all 4 portfolios, they will reside in at least one. Remember, our newsletter portfolios are constructed with the same methodology. Yes, there will be some differences in the holdings in each, but the same investment philosophy – buying a broadly diversified basket of undervalued stocks – is utilized for each portfolio.
Why do we have the hypo portfolios?
As our real-money portfolios have had significant cash flows over the years, we maintain our hypothetical portfolios to illustrate how various investments might have performed with a fixed amount of money, making no deposits or withdrawals. Each portfolio is managed using our core Prudent Speculator investment philosophy. The size and the inception date of all four portfolios varies, which has resulted in differences in stock selections, while the timing and amount of cash flows has also influenced the two real-money accounts.
What if a stock has reached its target price but I haven’t seen a sales alert?
Our Target Prices are simply a guide and not the gospel, while they are under constant scrutiny and subject to change, so we advise those who want to do as we do to await an official Sales Alert before parting with any of our recommendations.
Nothing presented herein is, or is intended to constitute, specific investment advice or marketing material. Information provided reflects the views of Kovitz Investment Group Partners, LLC as of a particular time. Such views are subject to change at any point and Kovitz shall not be obligated to provide notice of any change. No guarantee of investment performance is being provided and no inference to the contrary should be made. There is a risk of loss from an investment in securities. Past performance is not a guarantee of future performance.
For compliance and regulatory purposes, the staff at The Prudent Speculator can only answer questions of a general nature and are unable to provide specific buy/sell recommendations or specific investment advice on an individual basis. For those interested in obtaining individual management services in accordance with our approach, please contact Kovitz Investment Group Partners, LLC.
Kovitz is a Registered Investment Advisor, editor of The Prudent Speculator newsletter and weekly Market Commentary (TPS: ISSN 0743-0809) and serves as investment advisor to individually managed client accounts and certain mutual funds. Investing involves risk. Registration of an investment adviser does not imply any certain level of skill or training. Form ADV and other disclosure documents are available upon request or at afamcapital.com.
The newsletter tracks four portfolios.
As our real-money portfolios have had significant cash flows over the years, we maintain our hypothetical portfolios to illustrate how various investments might have performed with a fixed amount of money, making no deposits or withdrawals. Each portfolio is managed using our core Prudent Speculator investment philosophy.
The size and the inception date of all four portfolios varies, which has resulted in differences in stock selections, while the timing and amount of cash flows has also influenced the two real-money accounts. PruFolio and Millennium Portfolio do not utilize margin. TPS Portfolio and Buckingham Portfolio do not presently use margin, though they have done so in the past. The use of leverage magnifies gains and losses and increases risk to a portfolio.
Kovitz Investment Group Partners, LLC (”KIG”) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. KIG has been independently verified by The Spaulding Group for the periods January 1, 1997 through December 31, 2020. The verification report(s) is/are available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report. GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
Kovitz Investment Group, LLC underwent an organizational change effective January 1, 2016, and is now Kovitz Investment Group Partners, LLC. The previous manager of the strategy, AFAM Capital, Inc. (AFAM) underwent an organizational change effective October 1, 2018, and is now a division of KIG (AFAM Division). AFAM claimed compliance with GIPS® and had been independently verified for the periods January 1, 1996 through December 31, 2017. The staff of the AFAM Division have provided the same services throughout the entire period, and the persons currently responsible for managing Composite portfolios have been primarily responsible for portfolio management throughout the entire period shown.
The Prudent Speculator Composite was created December 31, 2015, and the inception date for portfolio performance was March 10, 1977. The composite was previously called the Al Frank Prudent Speculator Strategy composite. From Strategy inception through December 31, 2015, the Composite was comprised of one account managed according to the Strategy. Portfolios eligible for this composite must follow the stated investment strategy. The minimum account size for inclusion in this composite is $50,000. Composite policy originally required the temporary removal of any portfolio incurring an aggregate net cash flow of at least 25% of portfolio assets. On July 1, 2016, the cash flow policy was updated to reflect the temporary removal of any portfolio incurring cash inflow or outflow of 25% or more during the month – ”net” and ”aggregate” no longer applicable. The removal of such a portfolio occurs at the beginning of the month in which the significant cash flow occurs, and the portfolio re-enters the composite at the beginning of the month after the cash flow. This policy is reviewed and maintained monthly. The composite includes portfolios that utilize margin.
The firm maintains a complete list and description of composites, which is available upon request.
The U.S. Dollar is the currency used to express performance. The composite may include portfolios charged bundled or wrap fees, which typically consists of a single fee representing the advisor’s fee, investment management fees, trading expenses, and portfolio monitoring. Gross-of-fee returns are shown as supplemental information and incorporate the effects of all realized and unrealized gains and losses, the receipt, though not necessarily the direct reinvestment, of all dividends and income, and trading expenses, where explicitly charged. Net-of-fee returns are calculated using actual fees charged to each portfolio and are presented net of the entire bundled or wrap fee, where applicable. The current management fee schedule is as follows: 1.25% on assets below $1 million, 1.0% per annum for assets from $1 million to $5 million, 0.85% per annum on assets from $5 million to $10 million, 0.75% per annum for assets from $10 million to $20 million, 0.65% per annum for assets from $20 million to $35 million, 0.55% per annum for assets from $35 million to $50 million, and 0.50% per annum for assets over $50 million. Such fees are negotiable. Where applicable, the total bundled or wrap fee charged to each portfolio is dependent on the end client’s financial advisor and wrap sponsor. The composite includes accounts that do not pay trading fees. Investing involves risk, principal loss is possible, and there can be no assurance that investment objectives will be achieved.
Past performance is not indicative of future results.
Policies for valuing portfolios, calculating performance, and preparing GIPS reports are available upon request.
Valuation metrics are the harmonic weighted-average of the ratios of all the holdings in the Composite and Index. The P/E ratio is the ratio of a company’s share price to its per-share earnings. The price-to-book ratio (P/B Ratio) is a ratio of a stock’s market value to its book value. The price-to-sales ratio (P/S Ratio) is a ratio of a stock’s market value to its annual sales. The dividend yield indicates how much a company pays out in dividends each year relative to its share price.
For comparison purposes, the composite is measured against the S&P 500 Index, a broad market sample based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The secondary benchmark is the Russell 3000 Value Index, which measures the performance of the value sector (lower price to-book ratios and lower expected growth rates) of the Russell 3000 Index. The third benchmark is the Russell 3000 Index, which measures the performance of the value sector (lower price-to-book ratios and lower expected growth rates) of the Russell 3000 Index, which measures the performance of the largest 3,000 US companies and represents approximately 98% of the investable US equity market.
It is not possible to invest directly in an index.