News and Events
Religious Views on Stock Picking, Teachings from Larry Rakers
Jeffrey Cho (MBA '09)
Cayuga Fund Portfolio Managers had the privilege of learning from Larry Rakers about investing and the various valuation methods he uses to pick stocks. Mr. Rakers joined Fidelity in 1993 and since then he has managed a variety of Fidelity Select sector funds. In 2002, Mr. Rakers became the lead Portfolio Manager of the Fidelity Balanced Fund, a $26 billion mutual fund rated five-stars by Morningstar. The Fidelity Balanced Fund has achieved annualized returns of over 12% over the past 5 years and continues to outperform its Russell 3000 benchmark.
Mr. Rakers labels himself a "value dog" and attributes the book Moneyball to his stock selection process. Interestingly, Moneyball is a book about how the Oakland A's used non-traditional statistical metrics to field an optimal and efficient team, without bloated payrolls like the NY Yankees or Boston Red Sox. In this regard, Mr. Rakers can be viewed as a general manager looking to create the most efficient and optimal "team" or portfolio without overpaying.
Ranking the Stocks
Armed with an engineering background, Mr. Rakers created a formalized methodology to screen and rank stocks. Currently, this screener includes over 1800 stocks and Mr. Rakers manually inputs notes for each stock on his list. He also ranks the stocks according to his research analyst's recommendation, the company's relative valuation, and whether a potential catalyst is on the horizon. However, of the various metrics Mr. Rakers tracks, he feels valuation is the most important factor to picking stocks.
Valuation - Keeping it Simple and Effective
Mr. Rakers also shared some of the valuation methods he uses to gauge whether a stock is undervalued or overvalued by the market. Notably, Mr. Rakers mentioned that although these methods are helpful in gauging the attractiveness of a stock, they cannot be used in isolation. The reason why valuation cannot be used in isolation is because these rules are based off of statistical averages and even though the principals of mean reversion are quite strong, it can take years for a stock to correct towards its mean. Here are a few of the methods Mr. Rakers uses to conduct his preliminary analysis on stocks and investing:
Rule of 10 - If the free cash flow yield + long-term growth rate is greater than 10, the stock may be undervalued and attractive.
Rule of 22 - Historically, the trailing P/E ratio + 10 year interest rates equals 22. If the market is trading below 22, it may be undervalued.
Rule of 20 - Historically, the forward P/E ratio + 10 year interest rates equals 20. If the market is trading below 20, it may be undervalued.
In his speech, Mr. Rakers drew a very compelling analogy to valuation. He stated that valuation is similar to religion, there are a lot of different methods available; however, there is no one perfect way to tell which method is correct or is going to work. Truly, words of wisdom from a great portfolio manager.
Click here to access the full video of Mr. Rakers' presentation.
