My recent posts mentioning Peter Cundill remind me of something Cundill has referred to in interviews over the years -- “The Magic Sixes.”
“The Magic Sixes” are something Cundill got from a man named Norman Weinger of Oppenheimer in the 1970s. They are companies trading at less than .6 times book value (or less than 60% of book value), 6 times earnings or less, and with dividend yields of 6% or more. Cundill remembers that there were HUNDREDS of publicly traded companies in the US qualifying back in those days.
How many are there in the US today?
Well, I ran a screen on Barron’s Online last night and found a grand total of THREE companies meeting those three criteria: Impac Mortgage Holdings (IMH), Remec Inc. (REMC) and INEI Corp. (INEY). The last one didn't even appear on either Barron's Online or WSJ.com when I tried to find more company information. Glancing at the first two didn’t exactly leave me drooling, though anything could happen in the future.
“The Magic Sixes” is NOT something you screen for and then only invest in the companies showing up in the results. Even Cundill says that. Instead, it gives you an idea of whether or not a stock market is dirt-cheap. If it is, you’ll have loads and loads of companies making the cut.
And if not, as in the US, that means the market must be something other than dirt-cheap. That means it’s outrageously overvalued, slightly overvalued, fairly valued or slightly undervalued. My guess would be either of the latter two. We’re certainly not outrageously overvalued.
Looking back on the polyester decade, Cundill has often used a basketball analogy, saying it was “layup time” in picking winning stocks then. I’ve also read him say that an investor would go hungry today trying to invest only in companies meeting “The Magic Sixes” criteria. The same is true for anyone trying to invest only in “net nets.”
Will we ever see “layup” time in the US with a 1970s-like cheap market? Who knows? And what wrenching would the economy have to go through to reach those depths?
Now I’m reminded of the saying (by Joe Louis, if memory serves) that goes something like, “everybody wants to go to heaven, but nobody wants to die.”