23 Questions With Value Investor Ari M. Eden

GuruFocus.com
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- By PJ Pahygiannis

1. How and why did you get started investing? What is your background?

I was exposed to it a bit as a kid with some family members who were pretty big market followers, but I really didn't get into it for myself until finishing college and realizing I better learn to supplement income. After graduation I interned at a discount brokerage and then began learning all I could about the markets.


2. Describe your investing strategy and portfolio organization. What valuation methods do you use? Where do you get your investing ideas?

I get my ideas from everywhere really. I enjoy getting the names of companies and ticker symbols and then doing my due diligence so I rarely brush off a pick or tip from someone right off the bat. That's part of the fun for me. I do have a handful of investment newsletters I've come to trust over the years, and I do pay attention to the business channels and publications/Web sites as well. That said, it always comes down to a personal decision on whether to pull the trigger on something or not and there are always a number of red flags that quickly eliminate a solid majority of recommendations. I look for companies with excellent fundamentals and then use technical analysis for the entry and exit points or to trade around a core position. My favorite strategies are income based. Most of my portfolio is made up of solid dividend payers which have stood the test of time in easy-to-understand industries. For the rest, I'll play around with a few growth stocks, but even those tend to be somewhat conservative in nature, like Apple (AAPL), Facebook (FB), etc. I also am fond of income-based option strategies, especially credit spreads and iron condors.

3. What drew you to that specific strategy? If you only had three valuation metrics, what would they be?

I was drawn to these strategies because years of trial and error have led me to what works best for me, and I've also gotten similar feedback from other traders and investors. My favorite investing metrics are probably cash flow, book value and earnings yield. Basic fundamentals, really, but I also look for companies that have built a consensus as having the strongest fundamental grades overall. After that, the trickier part is, of course, the timing and technical factors.

4. Which books or other investors changed the way you think, inspired you or mentored you? What is the most important lesson learned from them? Which investors do you follow today?

I've always been a big admirer of Bill Ackman (Trades, Portfolio) and remain one, despite his recent struggles. Still have confidence in many of his investing theses and projections. I piggybacked on his trade of General Growth Properties (GGP) a few years back and that probably remains my biggest investing success story, seeing the company emerge from bankruptcy intact and regaining much of it's former glory. Also apply elements of William O'Neil and his CANSLIM strategies. When I was first starting out, I also read a number of Cramer's books and those of other very well-known investors, too. They all offered solid advice, but for me everything always seems to boil down to fundamentals, and when you break down many investing/trading books, I've found you often find the same core principles. For options I'm a fan of Macmillan's classic text as well as the "Option Bible" by Guy Cohen and "The Options Playbook" by Brian Overby.

5. How long will you hold a stock and why? How long does it take to know if you are right or wrong on a stock?

For investments I'll hold long term as long as I still believe in my original investing thesis and the company. I will trade around positions, though, taking profits after strong runups and adding again on the way back down. I will constantly monitor the stock though for new red flags and to see if anything has changed. You have to stay on your toes and not take things for granted. There is no definite period for knowing if you are right or wrong. Every investment or trade is different. Generally, I stick with things for quite awhile when they are working, but at the same time, you have to try not to get too emotionally attached to any particular investment. Things can and do change, even for companies you've held for years. Emotion can't cloud your outlook.

6. How has your investing approach changed over the years?

I think I've become more disciplined over the years and less stubborn. You have to see the reality of the markets for what they are and not the way you want them to be. When I first started out, I was probably more concerned with finding the next multibagger small-cap growth stock than value investing and a steady stream of income. I know am a stronger proponent of the latter view.

7. Name some of the things that you do or believe that other investors do not.

I think diversification is somewhat overrated. It has its place, especially across asset classes, but when it comes to stocks I'd rather be right about a few sectors and industries that I know well than wrong about a bunch, just so I have more bases covered. I've also learned that technical analysis is far from infallible, and it's best to never rely too heavily on any one indicator.

8. What are some of your favorite companies, brands or even CEOs? What do you think are some of the most well-run companies? How do you judge the quality of the management?

My favorite companies include General Growth (huge surprise, right?), Apple, Facebook, Amazon (AMZN), Nike (NKE), Chipotle (CMG), Goldman Sachs (GS), Disney (DIS), Berkshire (BRK-A)(BRK-B) and many others, especially the high-yield ones.

9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?

I usually screen for the day's best and worst performers, earnings, stocks with weekly options, and the top performing sectors and industries. I'm a pretty rabid reader, too, so finding ideas isn't usually a problem. The more difficult part is the implementation of them.

10. Name some of the traits that a company must have for you to invest in, such as dividends. What does a high-quality company look like to you, and what does a bad investment look like? Talk about what the ideal company to invest in would look like, even if it does not exist.

Ideally I'd love for any income investment to yield at least 5%, but in the low-yield environment of the last several years where money in the bank has earned essentially nothing, even those yielding 3% or more have been appealing, especially if I think they have room for further growth and are stable companies in easy to understand industries. Low-quality investment ones are usually those too good to be true. That includes pretty much anything trading OTC and not on one of the major exchanges. You also have to watch debt levels and look at the bottom line as well. Is the company making money? If not, what are its future prospects for realistically doing so? It's pretty simple. I guess the ideal company has all of this covered, plus the potential to do good for the overall society as well.

11. What kind of checklist or homework do you utilize when investing? Do you have a specific approach, structure, process that you use? Or do you have any hard cut rules?

I build a consensus of both the fundamentals and technicals. Then I try to see if it's an industry I can easily understand and see if I can make any projections about future prospects realistically. Strong track record helps, too, of course, if applicable. Take a look at past earnings, dividend payouts, analyst views, etc. Stay up to date on company news through reliable sources and never rely on just single sources or outlets.

12. Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?

I usually leave the management talks to others unless I'm at a specific setting which allows for it on a rare occasion. I will listen to conference calls and look over proxies and view press releases by the companies themselves, in addition to the more traditional news outlets.

13. How do you go about valuing a stock and how do you decide how you are going to value a specific stock? When is cheap not cheap? If you can, give some examples.

Again, it's the fundamental metrics that usually tell the story, but you have to try your best to project several quarters out to see if a cheap company won't become an expensive one in the near future. You also have to realize that cheap assets can always become cheaper, especially when the overall market isn't trending up.

14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?

This is a very difficult market to find value in for me personally because we've had such an amazing run since the March 2009 lows essentially, and I think things have been artificially inflated by the Fed to a large degree. That's not to say we can't go much further yet though. There are complelling bull and bear cases and someone will be right. Generally I'll invest in companies that are in the ballpark of the overall market multiple. Even those are kind of pricey now, but what's the old saying about the market staying irrational? At these levels, I think it's important to be insulated by a solid dividend yield, or a company with great growth prospects at least.

15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?

I do think we are overvalued at these levels, but the question is how much. A pretty significant correction has been on the table for quite awhile now, but it hasn't really come and it may not for awhile further. Anybody who tells you that they know for certain is lying, but again, there are compelling cases for either a continuation of the strong rally or a major selloff. A lot will depend on the interest rate environment as well as Trump's presidency, getting our debt situation under control, and probably as many black swans as you can imagine. I don't think we are so grossly overvalued that a new era of prosperity can't allow us to grow GDP and earnings to the point where current market levels look like a bargain again, but it won't be easy.

16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?

Right now I'm reviewing the options books I've listed earlier and also the Ben Graham classic, "The Intelligent Investor." I've probably collected enough books to last several lifetimes.

17. Any advice to new value investors? What should they know and what habits should they develop before they start?

Most of that relays to being too stubborn once again. You can't try to fit a square peg into a round hole when something isn't working for you. Hope will not turn around a losing investment so if your thesis has changed or been proven wrong, don't cut off your nose to spite your face. Take the hit and move on to something better. There are always new opportunities out there.

18. What are some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?

I'm fond of Zack's, Investors Business Daily, The Street, CNBC, Yahoo! Finance, Bloomberg and VectorVest, just to name a few.

GuruFocus also is a great resource to piggyback several notable investors.

19. Describe some of the biggest mistakes you have made value investing. What are your three worst investments that burned you? What did you learn and how do you avoid those mistakes today?

Early on, before I switched my preference to investing in individual companies, I held ETFs and ETNs. It was harder to get a grasp of the basket of stocks that made up these securities and more difficult to get a grasp of future payouts, dividend cuts, etc. It was also quite frustrating to see these securities trade at discounts or premiums to their net asset values with little logic. Perhaps some others find greater success with them, but they weren't for me. In general, you also have to be aware that dividend cuts can and do happen. Don't take solid yields for granted, even among rock-solid companies with very good track records.

My worst mistakes were trading the mentioned ETFs, especially leveraged ones. Sometimes you have to learn the hard way about the discipline of not overleveraging yourself. Even if you are very confident, don't throw your rules out the window for any single trade. Also leave yourself enough time to see things through. If you are investing or trading shorter-term options, you may not leave yourself enough time for the eventual payoff.

20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?

It's not always easy, but you have to remind yourself that such fluctuations are par for the course and part of the game. I think you also have to strive for some balance and doing some other things or you can drive yourself a little crazy. It's important to step away for awhile and focus on self-improvement, your health, other interests, etc. Also realize this isn't life and death, either. At the end of the day, it's only money. Sure, it's nice, but it's definitely not everything so you have to keep perspective, and you want to stay healthy to have the chance to enjoy the fruits of your efforts.

21. How does one avoid blowups in value investing?

You have to stay disciplined, take profits, stay on top of things, trim and add to positions when applicable, hold enough cash to jump at the right opportunities, not overleverage yourself, not paint yourself into too tight a window, etc. Some good luck always helps too.

22. If you are willing to share, what companies do you currently own and why? How have the last five to 10 years been for you investingwise compared to the indexes?

Right now, I am invested in many of the names mentioned earlier as well as several securities yielding 5% or better. I've had my ups and downs for sure, but overall I've outperformed the major indices by a pretty comfortable margin. I'm not too proud to admit that there may have been some luck involved in this, too, but doing your due diligence certainly helps and puts the odds in your favor.

23. Here's a fun one - Which stock would Warren Buffett (Trades, Portfolio) or Benjamin Graham buy today if he were you?

Well, we don't have to guess, at least for Warren. We can take a peak at his holdings from time to time. Graham, as his mentor, would likely have the same, or very similar, holdings. They are the two all-time greats in the game of value investing for sure.

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This article first appeared on GuruFocus.


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