Contrarian Investment Journal

Cam019 · 28 December 2016

Hi all,

I'm relatively new to this forum but after having a bit of a read through robusta's and KnowThePast's documented investment journeys, I have decided to start one of my very own. I am using a fairly simple systematic deep value investing strategy to find stocks trading at a significant discount to tangible book value. This portfolio will be long positions only with an emphasis on contrarian strategy and a 3-5 year holding period, but I will hold longer if and when it is required. Position sizing in the portfolio will be equal value for each purchase. No leverage. The number of positions in this portfolio will eventually vary from between 10-30.

Businesses need to meet the following criteria to be considered as a buy for the portfolio:

- Minimum $30 million dollar market capitalization
- No to low debt
- Reasonable current ratio
- Trading at least 1/3 below tangible book value per share (TBVPS)

It is also a bonus if the business is:

- Trading at or near a 52 week low. A low over a longer period is even better

Sell strategy:

- When a position has reached its TBVPS
- When TBVPS is less than what I originally paid for the stock
- When the current ratio falls below my chosen threshold
- When the debt/equity ratio rises above my chosen threshold

Each position in this portfolio will be bought solely based on balance sheet valuations. I don't think I have forgotten anything but if I have don't hesitate to ask, throw out a comment or some constructive criticism.

I will be documenting all my trades but due to the simplistic nature of this strategy there won't be too much reasoning behind each purchase, but I will try to give some insight.

Cam019 · 28 December 2016

14/12/2016 - I bought 1191 of MDL @ 0.420

jjbinks · 28 December 2016

one of the things to consider is what the likely TBVPS is going to be now and how you estimate it. If you just look at the last annual report for example you may be making purchases on information which is no longer correct.

luutzu · 28 December 2016

Cam019 said:
Hi all,

I'm relatively new to this forum but after having a bit of a read through robusta's and KnowThePast's documented investment journeys, I have decided to start one of my very own. I am using a fairly simple systematic deep value investing strategy to find stocks trading at a significant discount to tangible book value. This portfolio will be long positions only with an emphasis on contrarian strategy and a 3-5 year holding period, but I will hold longer if and when it is required. Position sizing in the portfolio will be equal value for each purchase. No leverage. The number of positions in this portfolio will eventually vary from between 10-30.

Businesses need to meet the following criteria to be considered as a buy for the portfolio:

- Minimum $30 million dollar market capitalization
- No to low debt
- Reasonable current ratio
- Trading at least 1/3 below tangible book value per share (TBVPS)

It is also a bonus if the business is:

- Trading at or near a 52 week low. A low over a longer period is even better

Sell strategy:

- When a position has reached its TBVPS
- When TBVPS is less than what I originally paid for the stock
- When the current ratio falls below my chosen threshold
- When the debt/equity ratio rises above my chosen threshold

Each position in this portfolio will be bought solely based on balance sheet valuations. I don't think I have forgotten anything but if I have don't hesitate to ask, throw out a comment or some constructive criticism.

I will be documenting all my trades but due to the simplistic nature of this strategy there won't be too much reasoning behind each purchase, but I will try to give some insight.

To me, this kind of value investing is something to get into when you cannot see any quality businesses selling for a reasonable price. And if it's to be done mechanically like how I understand from your description, it can be dangerous and not as profitable to you when it works out well either.

For example, MDL might mathematically match all your value criteria... but finance and business and accounting have a way of fooling readers who read the accounting without knowing where or how the assets and liabilities got there.

For instance, where and what are those net tangible assets MDL recorded on its book value? Is it some reserves they have yet to quantify precisely but are certain there's that much value under it; is it from patents or some IP or mere R&D.

It hasn't earn much profit over the past decade... is there a good reason for that? Are those losses about to turn the other way or will you and other shareholders be forking out more cash to keep it chugging along?

In other words, I think you ought to be able to put context and histories behind the reported figures. THis mean reading the annual reports, the presentations and really know the business and its industry, know its assets and know whether management is just being optimistic with those tangible asset estimates.

Once you understand the business to that detail, it might very well be a true bargain. But 'til then, it'll be risky as fortunes do change and what is "worth" a million today can be written down to nothing in a few years time. Or could be just its fair value when the industry crashes - say the property market.

Given the effort you'd need to put in to comfortably make these kind of value/bargain hunting judgment... might as well pay attention to great businesses that sells for cheap/er prices given its history and potential. An investor makes more money from a great business than a mere bargain bin hunt.

Not saying that bargain hunting is bad... just to do well at it requires a whole lot more effort than they're made out to be. And if you're wrong, or right but wrong in the timing... people and market can scare you out of it quite easily. To not be scared, you have to do a lot of homework and research... if you're going to do that, then might as well focus on quality businesses selling at cheap or reasonable price because even if you're wrong in your estimate of value (and most are), its future might be so brilliant that it'll make you look like a genius despite that error.

Anywhoo... worth looking into Mermaid Marine (MRM); Sirtex (SRX); Anaeco (ANQ).

I have holdings in them, so do your own research and all that.

Cam019 · 29 December 2016

jjbinks said:
one of the things to consider is what the likely TBVPS is going to be now and how you estimate it. If you just look at the last annual report for example you may be making purchases on information which is no longer correct.

This is 100% true jjbinks. But, by purchasing stocks that are trading at such a large discount, it gives me a bit of wiggle room if I make a mistake when calculating a companies current TBVPS.

luutzu said:
To me, this kind of value investing is something to get into when you cannot see any quality businesses selling for a reasonable price. And if it's to be done mechanically like how I understand from your description, it can be dangerous and not as profitable to you when it works out well either.

For example, MDL might mathematically match all your value criteria... but finance and business and accounting have a way of fooling readers who read the accounting without knowing where or how the assets and liabilities got there.

For instance, where and what are those net tangible assets MDL recorded on its book value? Is it some reserves they have yet to quantify precisely but are certain there's that much value under it; is it from patents or some IP or mere R&D.

It hasn't earn much profit over the past decade... is there a good reason for that? Are those losses about to turn the other way or will you and other shareholders be forking out more cash to keep it chugging along?

In other words, I think you ought to be able to put context and histories behind the reported figures. THis mean reading the annual reports, the presentations and really know the business and its industry, know its assets and know whether management is just being optimistic with those tangible asset estimates.

Once you understand the business to that detail, it might very well be a true bargain. But 'til then, it'll be risky as fortunes do change and what is "worth" a million today can be written down to nothing in a few years time. Or could be just its fair value when the industry crashes - say the property market.

Given the effort you'd need to put in to comfortably make these kind of value/bargain hunting judgment... might as well pay attention to great businesses that sells for cheap/er prices given its history and potential. An investor makes more money from a great business than a mere bargain bin hunt.

Not saying that bargain hunting is bad... just to do well at it requires a whole lot more effort than they're made out to be. And if you're wrong, or right but wrong in the timing... people and market can scare you out of it quite easily. To not be scared, you have to do a lot of homework and research... if you're going to do that, then might as well focus on quality businesses selling at cheap or reasonable price because even if you're wrong in your estimate of value (and most are), its future might be so brilliant that it'll make you look like a genius despite that error.

Anywhoo... worth looking into Mermaid Marine (MRM); Sirtex (SRX); Anaeco (ANQ).

I have holdings in them, so do your own research and all that.

I can understand and appreciate where you are coming from regarding buying great businesses at reasonable prices, that is a great investment strategy and has shown to be immensely profitable over time. But I am not Warren Buffet and I do not pretend to have his (or any other successful investors using the same strategy) skills. My investment strategy is more based around Walter Schloss's investment style. A diversified portfolio of stocks that are selling at a significant discount to their TBV, with little to no debt.

luutzu · 29 December 2016

Cam019 said:
....

I can understand and appreciate where you are coming from regarding buying great businesses at reasonable prices, that is a great investment strategy and has shown to be immensely profitable over time. But I am not Warren Buffet and I do not pretend to have his (or any other successful investors using the same strategy) skills. My investment strategy is more based around Walter Schloss's investment style. A diversified portfolio of stocks that are selling at a significant discount to their TBV, with little to no debt.

What make you think Schloss's method isn't as intelligent as Buffett's? If done in a business-like manner, it's more difficult and require a lot more work.

I was trying to say that there really is no way around understanding the business. You might think that simply getting the NTA or any ratio is as straight forward as it sound... it's not.

I mean, sure you can get the historical or the present ones... but you'd need to know if the factors that adds up to the ratio are sound and reliable. You can't just take any ratio and accounting figures on face value - that's why they have notes attached to them.

In other words, you'd have to be able to paint a picture, tell the business story from the figures reported. Then see how comfortable you are with making decisions based on the ratio or calculation that derives from them.

For example. At last Annual Report, Mermaid Marine (MMA Offshore) have NTA of some $1.70 per share. It is selling at about $0.29 a share. That's about 17 cents on a dollar.

Its current ratio reports a negative; its total debt is some $400M.

taken at face value, the market probably think it's going to go broke; or need a big capital raising that'll dilute its shares.

Maybe the market will be proven right, maybe they'll be proven wrong as MRM stands; maybe new development yet unseen may change the entire game for MRM...

Mere checking of ratios won't answer how likely each of those scenarios would be. And so you'd play safe and might forgo a chance to make 5 times your investment... or if you work out the dilution scenario, could easily double... or not.

Anyway, that's my two cents... badly worded but yea... Schloss and Buffett came from the same school... they all try to understand the business they buy into... not try to out-accounting the market and its super-computers.

KnowThePast · 30 December 2016

Hi Cam,

Well done on starting a journal, I personally found it a great help in my investment career. Having people look over your shoulder makes me more thorough, even if the onlookers are only virtual.

I'll be watching with interest.

May I ask why you've chosen this particular strategy? Just curious how you've arrived at it.

For what it's worth, I ran your strategy through a backtest for the past 10 years on AU data.
Setup:
$50k portfolio, 4% per trade.
Brokerage: $30
4% cash rate
Dividends included
Re-evaluate monthly.

Buy criteria:
Market Value > $30m
Debt/Equity < 0.4
Current Ratio > 0.6
Price/NTA < 0.34

Sell Criteria
Price/NTA > 1 OR
Current Ratio < 0.4 OR
Debt/Equity > 0.6

Result:
Total return: 214.30%. Portfolio grew from $50k to $170,529
Hit rate: 54.43%
Average hold duration: 716 days

XAO returned 2.4% for this period, so this has been a good strategy the last 10 years...

See screenshot for more stats as well as equity curve vs XAO.

Cam019 · 30 December 2016

Purchased 1266 of MCE @ 0.395

Habakkuk · 30 December 2016

KnowThePast said:
For what it's worth, I ran your strategy through a backtest for the past 10 years on AU data.

KTP, a question about the back test.

On any given monthly re-evaluation there would be a mismatch in the number of qualifying candidates versus positions for the available capital. To clarify: on January 2, 2007 there would not have been exactly 25 companies qualifying for the buy criteria, there were probably more, or maybe fewer, I don't know.

Did you implement some ranking system to decide which ones enter the portfolio?

Because if there isn't one and the selections are random, the dispersion in outcomes would be enormous and the path-dependence will be the main determinant of returns. Every month may have several branches, resulting in a vast number of paths over 10 years.

And if there is some ranking criteria, it will be the major determinant and not the quality of the fundamental analysis.

What I'm getting at is the fact that you are quoting a single run of Cam's strategy. Unless I've missed it, his selections must contain this discretionary ranking component.

It's in many ways like people who subscribe to Stock Doctor and have to choose from 100-200 Star Stocks. Unless you believe that they're all equal and will produce pretty much the same return ...

Cam019 · 30 December 2016

KnowThePast said:
Hi Cam,

Well done on starting a journal, I personally found it a great help in my investment career. Having people look over your shoulder makes me more thorough, even if the onlookers are only virtual.

I'll be watching with interest.

May I ask why you've chosen this particular strategy? Just curious how you've arrived at it.

Thanks KTP.

I find value investing really interesting. The idea of buying businesses at a significant discount to its intrinsic value just made sense. I started reading about successful value investors strategies from Benjamin Graham, Seth Klarman, Warren Buffett to Tobias Carlisle and one day I came across Walter Schloss. The idea that Walter wasn't interested in buying businesses based on earnings, but rather assets, just seemed so logical to me seeing that earnings forecasts usually have more variability than a companies assets. So, I took his broad strategy, combined it with a bunch of other information I found useful... and here we are!

Habakkuk said:
KTP, a question about the back test.

What I'm getting at is the fact that you are quoting a single run of Cam's strategy. Unless I've missed it, his selections must contain this discretionary ranking component.

You have not missed anything Habakkuk, my stock selections do contain a ranking component.

KnowThePast · 31 December 2016

Habakkuk said:
KTP, a question about the back test.

On any given monthly re-evaluation there would be a mismatch in the number of qualifying candidates versus positions for the available capital. To clarify: on January 2, 2007 there would not have been exactly 25 companies qualifying for the buy criteria, there were probably more, or maybe fewer, I don't know.

Did you implement some ranking system to decide which ones enter the portfolio?

Hi Habakkuk,

That's an excellent point.

This particular strategy did not have many available trades and was under-invested most of the time, so ranking was not strictly necessary. It absolutely is for most strategies.

Re-running it again, now ranking by Price/NTA ascending.

212.09% return, almost the same as before.

Cam019 · 31 December 2016

Monthly update:

Cam019 · 2 January 2017

Portfolio value up 6.16%

XSO +2.96% (Start value 2313.90, Last 2382.40)

Cam019 · 4 January 2017

Bought 971 of MML @ 0.515

luutzu · 4 January 2017

Cam019 said:
Monthly update:

View attachment 69307

Check with your broker to see if they have a minimum parcel requirement. I think Commsec have something like minimum of $500 per trade. So if you buy at $500 and it goes down, do you plan to hold on until it moves above that.

Cam019 · 6 January 2017

luutzu said:
Check with your broker to see if they have a minimum parcel requirement. I think Commsec have something like minimum of $500 per trade. So if you buy at $500 and it goes down, do you plan to hold on until it moves above that.

Yes. If I buy a parcel at $500 and the price goes down, I will continue to hold until it moves back above a $500 parcel size as long as NTAVPS remains above what I bought it for.

Ves · 6 January 2017

luutzu said:
Check with your broker to see if they have a minimum parcel requirement. I think Commsec have something like minimum of $500 per trade. So if you buy at $500 and it goes down, do you plan to hold on until it moves above that.

I don't think Commsec has a minimum consideration if you are selling. The $500 only seems to apply to purchases.

Cam019 · 6 January 2017

Cam019 said:
Portfolio value up 6.16%

XSO +2.96% (Start value 2313.90, Last 2382.40)

There was a miscalculation. Portfolio was not up 6.16% for the month of December. It was up 2.96%, right in line with the XSO index.

luutzu · 8 January 2017

Ves said:
I don't think Commsec has a minimum consideration if you are selling. The $500 only seems to apply to purchases.

Thanks. Just assumed it works both way all these years.

Guess I don't have to wait for those odd-parcels buyback from the company then.

Cam019 · 31 January 2017

Monthly update:

Portfolio value +3.68%

XSO -2.86% (Start value 2391.50, Last 2323.20)

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