With the market down 500 pts. I swung at one pitch today. KBR.
Might as well do a short post on KBR an engineering, construction, and services company supporting energy, petrochemicals, government services, and civil infrastructure sectors worldwide. For those who do not know, KBR is a spinoff from Halliburton (HAL). KBR reminds me of Joel Greenblatt's "other" book where he states that one place to look for bargains is in spin-offs. I wont talk about "the story" in this post (do your own research), but I will talk about the quant side. 

Price= $17.84
EPS= 1.65
P/E= 10.81

Typical contrarian stock right? Nope. Cash on balance sheet is equal to $9.16 so in reality the P/E is more like 5.

Who would of thunk? The worlds biggest insurer is facing even more scrutiny and possible bankruptcy if the rating agencies lowers its credit rating. I once thought AIG was a bargain at $60 as management re-affirmed stock holders its subprime was manageable and the company should post EPS of $6. I believe Valueline once had it earning $9/share in the years 2011-2013. The numbers might be fullish now but Valueline had a reason to post those numbers as management re-affirmed guidance (I believe they mentioned EPS growth of 5% and revenue growth of 7%). Anyway, as I watched the stock fall I bought a small portion of AIG shares (2% of portfolio) at roughly $30. I bought some for my personal portfolio and some for an investment club. As time went on, it was clear manat had mislead its stockholders. I took a step back and decided to swallow the loss and move on.

Contrarian Investing
AIG is a classic example of contrarian investing and some of the pitfalls. The stock might look cheap on a normalised earnings basis, but in reality its a trap. Thus, I have implemented contrarian investing with magic formula investing. The result being, the stock is considered cheap on a normalised earnings basis but the magic portion (high returns on invested capital) help minimize the odds that the stock is a trap.


Notes* I will double check @ what price I sold out

Will be doiing some selling in the coming days. With my school schedule worked out and taking less classes I will be able to research companies more in depth. Prior to this, I was running an automated portfolio (Low p/E approach) with little stock analysis. I depending a lot on what I already knew on the company (i.e. We use some of IR compressors and pumps at work).

My thoughts on Diversification and Concentration

First of all, there is nothing wrong with diversification (ok there is). One can beat the market by diversifying into cheap (low multiple) companies. BUT, you will outperform the market by small to medium margins. A highly successful diversifyer is Walter Schloss.

Concentration

This is where the big fish is fried. Buffett, Burkewitz, Klarman, Peter Lynch. All know to make big gains in the market, one has to concentrate his bets when odds are in their favor. Time to go look for some 1' puts

Where to start?

After reading all of the David Dreman books, I fell in love with what is called "Contrarian Investing". Contrarian Investing is tough as one is always going against what is popular at the time. Be early, and you will catch a falling knife (HD @ $40 anyone?). Eventually the stock might recover but time is the enemy so says Warren Buffett. Also an investor who buys HD @ $20 will enjoy a better return than an investor who bought HD @ $40. So after getting burned with some "contrarian plays"  I developed my own system for investing which I properly call "Contrarian Magic". Which is basically Low P/E stocks mixed with magic formula stocks. I then add a secret ingredient. I wont tell you because then I will have to kill you . The concept is simple but it takes time and patience to follow my system. So to sum up:

Contrarian Investing + Magic Formula Investing + Secret Ingrediant = Outperform The Market