Robusta fundamental, leveraged investments

[odds-on]

odds-on,

What you've described in point 2 is essentially what i'm aiming to achieve only with some slight variations. I'll probably vary my position size also based on company quality, so allocate more to high quality highly undervalued companies and less to the low quality and regularly underavlued companies - note low quality does not mean B&B or ABC Learning, low quality means relative to my mechanical filters etc.

I'm also planning on allocating slightly more to smaller companies simply on the basis of higher risk / higher reward that I may be able to capture some additional returns on a 1-2 year basis.w

I also have the same goals as you, securing some form of reasonable dividend while I wait for the fair value to be realised on a 1-2 year basis without chasing multi-baggers etc. Investing on a 1-2 year basis also means i achieve capital gains discount, and i can make sound investing decisions without contributing huge amounts of time to portfolio management and monitoring. I also believe a 1-2 year value investing style is optimal for me as forecasting earnings or economic events beyond 1-2 years is a mugs game and there is plenty of evidence that even majority of 'leading' economists in this country get it wrong on a regular basis, and quite often by a large margin.

While skc's approach is different in some ways and probably more like your weeks/months option odds-on you can see how successful he was simply buying undervalued companies with sound reasoning and a future catalyst which was likely to positively impact the share price.

Kermit,

It will be interesting to see what you come up with. Everytime i run screens it picks up some ugly stocks but those ugly stocks have been paying dividends and increasing revenue for years. This makes me confident next year they will be doing the same and the market gives them a pat on the back and a 10% capital gain.

Cheers

Oddson

 

[robusta]

The shift that affects results is investors changing "strategy" every six months - defensive income, agressive growth, blah blah blah. Pointless. Stick to a plan.

Could not agree more, constantly monitor and refine your strategy but give it a chance to work.

 

[tech/a]

Could not agree more, constantly monitor and refine your strategy but give it a chance to work.

Robusta.
Your effort here has been excellent.
One I have followed.

I have seen a few efforts to trade Fundamentals and technicals profitably
All fun dies have ended in failure
I've seen many suceed in technical analysis.

The difference is that it's quantifiable.---technically.

I'm interested in what you think needs to be refined to improve a" plan?"

I have found that discretionary technical trading has similar results to value investing.
I've not seen discretionary trading traded profitably overtime.
I know you can as I do trade in a discretionary manner and profitable.


Again just making a statement that you need to keep refining your ideas walking forward is to me trading blind.
Surely if your putting your hard earned up to market RISK you'd want to KNOW
The way you trade is going to e long term profitable ---- not a work in progress!

 

[McLovin]

Would have probably liked a larger position size but as I have $5000 sitting in the QBE spp, will probably get 16 shares unless they scale me back more for applying with my SMSF as well.

Looks like you'll be getting 4 shares.

http://asx.com.au/asxpdf/20120404/pdf/425gfg5gvd5vkk.pdf

 

[robusta]

Robusta.
Your effort here has been excellent.
One I have followed.

Cheers but I think you flatter me, there have been too many mistakes for me to get a pass IMO - so far

I have seen a few efforts to trade Fundamentals and technicals profitably
All fun dies have ended in failure
I've seen many suceed in technical analysis.

Sorry can't agree with that, I could name at least five on ASF that I think are successful and a much larger group of value fund managers.

The difference is that it's quantifiable.---technically.

I'm interested in what you think needs to be refined to improve a" plan?"

This is going to sound a bit vague but constant learning and a bit of tinkering around the edges.

For example my first investment in MCE was predicated on the growth from the recent past continuing in a almost straight line - big mistake in a cyclical business, but at another price the volatility may be worth paying for.

QBE is another example, when I bought I liked the prospect of growing margins but on further research decided I did not like the expected returns from the float in the bond market.

I guess the plan stays basically the same but as I learn more about different businesses I am looking to buy better quality and/or at cheaper prices.

I have found that discretionary technical trading has similar results to value investing.
I've not seen discretionary trading traded profitably overtime.
I know you can as I do trade in a discretionary manner and profitable.

Maybe I have had a few too many beers, not sure I get your point, actually to tell the truth I don't know what discretionary technical trading is.

Again just making a statement that you need to keep refining your ideas walking forward is to me trading blind.
Surely if your putting your hard earned up to market RISK you'd want to KNOW
The way you trade is going to e long term profitable ---- not a work in progress!

The difference IMO is this is not a mechanical system, and there are not many clear cut right or wrong entry or exit points, just a lifelong learning experience.

There is no way I will ever KNOW I have made the correct investment when I purchase part of a business but if I get more right than wrong (along with good position sizing) good results should follow.

 

[robusta]

Looks like you'll be getting 4 shares.

http://asx.com.au/asxpdf/20120404/pdf/425gfg5gvd5vkk.pdf

Yep fantastic, and paying interest on $5000 for a few weeks while CPU stuff around and I would have sold my parcel weeks ago probably closer to $14.50

 

[McLovin]

Yep fantastic, and paying interest on $5000 for a few weeks while CPU stuff around and I would have sold my parcel weeks ago probably closer to $14.50

I'm holding onto QBE, they've turned the corner (not that I think they're going to $20 in a hurry).

They have taken their sweet time with this SPP.

 

[robusta]

I'm holding onto QBE, they've turned the corner (not that I think they're going to $20 in a hurry).

They have taken their sweet time with this SPP.

You could be right, the insurance margins look to be on the improve but for me ~$14.00 is a fair price I will still be selling.

Not sure if you look at international shares but have you had a look at Fairfax Financial, listed on the TSX, these guys have improving margins AND a fantastic record of good investment returns.

 

[McLovin]

Not sure if you look at international shares but have you had a look at Fairfax Financial, listed on the TSX, these guys have improving margins AND a fantastic record of good investment returns.

Thanks, I'll check it out.

 

[tech/a]

Cheers but I think you flatter me, there have been too many mistakes for me to get a pass IMO - so far



Sorry can't agree with that, I could name at least five on ASF that I think are successful and a much larger group of value fund managers.

Well I've been here a little while and not found 1
Fund managers I'm not interested in
I'm interested in what is achievable for Joe Average.

This is going to sound a bit vague but constant learning and a bit of tinkering around the edges.

For example my first investment in MCE was predicated on the growth from the recent past continuing in a almost straight line - big mistake in a cyclical business, but at another price the volatility may be worth paying for.

QBE is another example, when I bought I liked the prospect of growing margins but on further research decided I did not like the expected returns from the float in the bond market.

I guess the plan stays basically the same but as I learn more about different businesses I am looking to buy better quality and/or at cheaper prices.

Unfortunately I think your whole life will be filled with tinkering and learning!

Maybe I have had a few too many beers, not sure I get your point, actually to tell the truth I don't know what discretionary technical trading is.

Trading with discretionary decision making based upon chart analysis.
Similar to making discretionary decisions based upon valuation.

The difference IMO is this is not a mechanical system, and there are not many clear right or wrong entry or exit points, just a lifelong learning experience.

I agree but
When do you know you've made a right decision?
When do you know you've made a wrong decision.
When do you know you've been right long enough
When do you know you've been wrong long enough.
When do you know you should have more capital on the trade.

There is no way I will ever KNOW I have made the correct investment when I purchase part of a business but if I get more right than wrong (along with good position sizing) good results should follow.

You won't but you will know when your wrong
What you do and how long you stay wrong will determine your success or failure.

You know you don't have to be right that often
In fact you can be wrong 90% of the time and still be profitable.
You just have to know what to do when your wrong and what to do when your wrong!
First step is to know your right and or wrong within your model.
If you don't know either then you can't tinker with your outcome!

Think about it!
It's NOT ABOUT BEING RIGHT!

If it was---- your valuation would match everyone else's and you'd all ride the trade to " fair value" and everyone would be in Barbados.

 

[robusta]

Well I've been here a little while and not found 1
Fund managers I'm not interested in
I'm interested in what is achievable for Joe Average.

Just my opinion but I think there are a few value investors on ASF with market beating returns and without being arrogant I plan to join them in the future.

Unfortunately I think your whole life will be filled with tinkering and learning!

I sincerely hope so - I love tinkering and learning.

When do you know you've made a right decision?
When do you know you've made a wrong decision.
When do you know you've been right long enough
When do you know you've been wrong long enough.
When do you know you should have more capital on the trade.

Same way you know, the numbers will tell me, however a lot slower.

Sorry Tech/a I will have to get back to you on your last points tomorrow, I have another big week on at work.

 

[craft]

Mechanical systems have the advantage of being able to objectively quantify expectancy (so long as they havn't been optimized to historical data). A disciplined approach in following the rules that give rise to the positive expectancy means the law of large numbers will see you achieve that expectancy given enough repetitions.

A large problem with most of the academic papers on mechanical fundamental valuations is that to realise the positive return expectation found you must take ALL the stocks in the reference group (ie lowest decile or whatever) and you must repeat over successive years to engage the law of large numbers. If you don’t then you are no longer following the rules that found the positive expectation. Very few have the capital or the stomach to buy the entire bottom 10% of the market on any given metric. It seems logical to cull out the dogs that have no competitive advantage or balance sheets ready to explode – but there is no study that objectively says this works.

I don’t employ any of the mechanical fundamental approaches from the academic papers but I have taken plenty on board from them about what sort of parameters can give rise to a positive return. But my approach is subjective because I can’t quantify it by back testing a set of rules.

I am however convinced by all my research, logic and experience that I have a positive probability of excess return.

I subjectively select stocks based on my understanding of business fundamentals – no rules as such but a holistic understanding focussed on competitive advantage and balance sheet economics – blah – blah – blah. (Subjectivity based on experience.) I’ve been able to gain experience because I’ve been able to stay in the game.

The reason I stay in the game is because I adhere to the golden rules of what makes any investing or trading profitable which is simple mathematical expectation. Number of wins x win amount must outweigh no of losses x loss amount.

I diversify between 12 – 18 companies so that any one mistake doesn’t take me out of the game.

I buy only companies that I regard as high quality with sustainable competitive advantages to protect their earning capacity (doesn’t mean they won’t be cyclical though)

I buy only when the price is less then I determine the future real cash flows to be which means if necessary I can ignore the market forever after my purchase and still make my required return. (as long as my analysis is right)

As I ignore market prices I don’t get whipsawed due to market fluctuations.

If the assumptions I have done my valuations on turn out to be wrong - I get out immediately to minimise my downside.

Ignoring price means that theoretically I can lose 100% of my investment. However buying at a discount to valuation, actively watching business performance and acting when it doesn’t meet expectations means I limit my down side to much less.

Buying quality companies with competitive advantages and holding them over the long term means the potential for multi baggers and huge dividend returns on initial outlay. This controlling the down side and being exposed to the best upside my judgement can find results in winners being much larger then losses.

I certainly get some wrong but experienced FA iand the absence of market price whipsawing also produces a high win %. Put the two together and you’ve got the highest expectancy that I know how to produce.

The downside – The positive probability that produces the FA edge is subjective so I’m going to get hurt if I lose it, before I know I have lost it. I watch my equity curves closely for an indication.

Buying with a margin of safety offers some limited protection against a starting draw down – however positions that have moved closer to fair value are subject to whatever drawdown the market may wish to throw at you. Only having 12-18 selectively picked stocks means your equity curve won’t mimic the index though it’s not going to be that different because you are not going to cash for protection. When everything goes to the dogs and correlates then a 50% mark to market drawdown could easily occur whilst this approach is still working. My equity channel width is around 50%. Don’t underestimate this point. Losing half of 100k may not change your life if you’re young. Losing half of 10 Million still leaves you pretty well off. Losing half of 1 Million that you need to live off for the rest of your life is a disaster which will Inevitably see you give up.

Subjective fundamental investing produces for me the highest expectancy that I can find – but it is not the easiest approach because the foundation of the positive return is subjective and the equity curve is not what you would call smooth. I know no way of smoothing the mark to market equity curve without negating my FA edge.

I love analysing businesses and I love the freedom of the passive income that the dividends provide, I think what I have described is my best path to wealth creation, however I at times have run a systematic TA momentum approach on some of my funds to smooth my equity curve or utilise funds when I can’t find anything to buy at the right price.

Hmmm this post has got rather long – not sure I should even hit the submit button as I have dribbled on so much – hopefully somebody will find something useful if they have read this far.

Sorry Robusta for posting this on your thread but it is in response to the discussion of the last few days on this thread.

 

[burglar]

...

Sorry Robusta for posting this on your thread but it is in response to the discussion of the last few days on this thread.

Rule #6: Never say "You're Sorry." It's a sign of weakness.[11]

 

[McLovin]

Great post, again, craft.

I don't think I've come away from one of your posts without something to think about.

 

[kermit345]

craft, your first 2-3 paragraphs are almost identical to the research I have infront of me at the moment. Essentially there is a value and small cap return premium available in the market but to receive it you have to weight entirely to these two areas of the market across a number of stocks which would be very capital intensive and require many hours per week to administer.

For those interest the following are the returns quoted by the research for given periods based on value or small cap weightings.

Australian Stocks - 1980-2010
Australian Value Index - 20.40% annual return
S&P 500 Index - 14.43% annual return
Australian Growth Index - 10.71% annual return

US Large Cap - 1927-2010
US Large Value - 14.03%
S&P 500 Index - 11.88%
US Large Growth - 11.35%

US Small Cap - 1927-2010
US Small Value - 19.17%
US Small Growth - 13.95%

Emerging Markets 1989-2010
Emerging Value - 25.01%
Emerging market Index - 19.46%
Emerging Growth - 17.05%

Now obviously this depends on their metrics of 'value' and 'small' which are not on the slide. Essentially Large-Small is based on market cap and Value-Growth is based on Book to Market according to whats written in the other slides. PM me if your interested in the article that supports the above.

I'm basically mixing and matching a lot of what people have talked about on here and tweaking as I go along much like robusta.

I'm taking a semi-mechanical approach although I think my metrics may be a little too strict. From these stocks I rate them based on value and start researching, if there is something I come across that I think warrants an investments based on quality, value and potential for that value to increase then i'll make an investment. My position size is then based on the quality, the value and the size of the company.

That is essentially the extremely basic version of what i'm planning to work through. Still nutting a few things out but once i've got it all nailed down i'll probably start posting my portfolio much like robusta has. Boy has this thread gone off on some tangent's but I think everyone will agree the discussion has been very insightful.

 

[tech/a]

craft, your first 2-3 paragraphs are almost identical to the research I have infront of me at the moment. Essentially there is a value and small cap return premium available in the market but to receive it you have to weight entirely to these two areas of the market across a number of stocks which would be very capital intensive and require many hours per week to administer.

For those interest the following are the returns quoted by the research for given periods based on value or small cap weightings.

Australian Stocks - 1980-2010
Australian Value Index - 20.40% annual return
S&P 500 Index - 14.43% annual return
Australian Growth Index - 10.71% annual return

US Large Cap - 1927-2010
US Large Value - 14.03%
S&P 500 Index - 11.88%
US Large Growth - 11.35%

US Small Cap - 1927-2010
US Small Value - 19.17%
US Small Growth - 13.95%

Emerging Markets 1989-2010
Emerging Value - 25.01%
Emerging market Index - 19.46%
Emerging Growth - 17.05%

Now obviously this depends on their metrics of 'value' and 'small' which are not on the slide. Essentially Large-Small is based on market cap and Value-Growth is based on Book to Market according to whats written in the other slides. PM me if your interested in the article that supports the above.

I'm basically mixing and matching a lot of what people have talked about on here and tweaking as I go along much like robusta.

I'm taking a semi-mechanical approach although I think my metrics may be a little too strict. From these stocks I rate them based on value and start researching, if there is something I come across that I think warrants an investments based on quality, value and potential for that value to increase then i'll make an investment. My position size is then based on the quality, the value and the size of the company.

That is essentially the extremely basic version of what i'm planning to work through. Still nutting a few things out but once i've got it all nailed down i'll probably start posting my portfolio much like robusta has. Boy has this thread gone off on some tangent's but I think everyone will agree the discussion has been very insightful.

So a reasonable argument to trade indexes.
But I can't see how it helps " value investors "
They have to find " value " within the index.

So pretty well all here are still nutting out their plan
No one has portfolio returning a long term profit.

Don't get me wrong many technical traders are in the same boat.
If you take a look at the individual threads on stocks many many
Punters are convinced they have recognized value and nothing shakes
Their commitment. Even a fall of 80% of it's value doesn't deter them.

Does supply and demand enter into your considerations?
How do you limit risk?
How do you handle opportunity cost?
Why if a stock is " value " and drops 50 % isn't it seen as amazing value
And holders buy more?
Why don't new buyers see the light and buy like mad?
Why in most cases do they keep falling?

I've seen a few attempts of showing the strategy of averaging down to be a valid and
Powerful method of maximizing profits.
They have only proven the exact opposite.

Sure the odd one will recover but decimation of capital over the long term is
The most common result.
Any papers around on that?

 

[craft]

No one has portfolio returning a long term profit.

I know factually that this is not correct.

In the absence of me bearing my sole on a public forum - please read the THE SUPERINVESTORS OF GRAHAM-AND-DODDSVILLE link that I posted below.

http://www.tilsonfunds.com/superinvestors.html

Not only is the argument robust – It was made in 1984 and the names mentioned have continued to have public success.

Continuing to claim that FA has no success will just alienate people that know that is not true from your other messages.

 

[odds-on]

Tech A,

I would recommend getting the following book out of the library if you have not done so already:-

http://www.amazon.com/Buffett-The-Making-American-Capitalist/dp/0385484917

The key point that I took from the book is that whatever business he is involved in, be it common stock purchases or private business purchases or reinsurance. He only ever does business when the odds are firmly in his favour. A critical skill to make money and something I suspect some investors do not actually get.

Read this:-

http://www.tweedy.com/resources/library_docs/papers/WhatHasWorkedInInvesting.pdf

You only need to read the first 6 pages! But it gives an FA investor a start of where to go fishing to start getting nice odds.

If a stock of a business is displaying some of the value characteristics outlined in the pdf and the business model is sound (limited failure modes) then it is probably a fair investment. From what I have seen on various forums, blogs and my own experience is that most FA investors are not patient enough to wait for the value characteristics to be bargain and overestimate their ability to assess the business model. The expected value of the investment ends up too low, when the difference in quantified confidence in a business model needs to go from 90% to 95% to make the expected value calculation positive the average FA investor is doomed. I use a screener with bargain value characteristics to stop me looking at companies that are not bargains and I am extremely critical of my own ability to assess business models, hopefully this will put the odds in my favour.

Whatever approach an investor uses it is all about the odds. Thinking like a poker player is key

Cheers

Oddson.

 

[kermit345]

Essentially tech/a the figures I posted means that even if your picking the middle of the pack or possibly even the worst of the 'value' stocks your still going to beat the middle of the pack or worst of regular or particularly growth stocks. (From memory the standard deviations were all pretty similar).

In terms of anyone here having long-term profit, I have no idea but i'm sure there are some making a decent profit so far. However as I said the guy giving the presentation I attended stated that it takes approximately 64 years to perfectly know you have the ability to pick stocks that outperform the market in terms of a value approach.

Does that mean all of us here a beating a dead horse? certainly not, any of us could have a methodology or ability to constantly pick winners that outstrip the market but can we prove it? Probably not until we've done so for at least 10 years, or to be 100% confident - 64 years. This essentially answers your question, can we prove that any of our preferred metrics are better then others or are profitable long-term - Not at the moment. Although i'm sure people have chosen to go down the 'value' investing path for one reason or another and may not need that certainty that you have with TA. I don't think there is a right or wrong way to go about it, although as you've stated TA can have a positive expectency while FA struggles to prove it does until walking forward for some time. However I (and i'm sure others) actually enjoy the FA way of doing things and find it makes more sense to me.

In terms of the questions you posed:
Supply/Demand would have to be considered as you don't want to buy something you cannot sell when it reaches your preferred price or when it falls to a level where you want to remove it from your portfolio. Illiquidity is something nobody wants to deal with.

Limitting risk - have a substantial margin of safety to your target price and I think its important to have your target price as a conservative range of prices as there is no magic number a company can be worth. You buy when you have a margin to the lowest point of this range to minimise the risk that a) your analysis is incorrect or b) your expected earnings doesn't eventuate/disapoints.

Opportunity cost will depend on the individuals analysis, if i'm in a company that i percieve as medium quality and medium value and there is an opportunity to enter something medium quality but high value then I should enter the high value opportunity, otherwise the basis for investing in value companies to start with is flawed.

It depends in which context you saying a stock 'drops 50%'. If it's in a day then you'd think there would be some form of an announcements to produce such a drop which is essentially out of your control and you'd have to re-do your analysis. If it is a gradual decline then essentially either your margin of safety was not adequate enough or your analysis was way off. I haven't been around long enough to know the answer to the following question but some may - how often has a stock deemed as a 'value' investment dropped 50% when already purchasing with a margin of safety for no apparent reason or change to the fundamentals but just a gradual decline? I'd think it would be rare but cannot substantiate.

In terms of why do they not keep falling, that depends on the individuals strategy as not all value investing is simply buying an unloved stock that has dropped from highs. It may be buying a stock with great earnings upside which is already in an uptrend but simply hasn't realise its value yet. But I think for the instance of 'why do they not keep falling' a small amount of chart looking should be used to see if some simple support levels can be recognised and used for entry levels.

wow this post got long, happy to continue the discussion and robusta if this is annoying you in any way as its your thread simply say so and we can move it elsewhere.

 

[sinner]

Essentially tech/a the figures I posted means that even if your picking the middle of the pack or possibly even the worst of the 'value' stocks your still going to beat the middle of the pack or worst of regular or particularly growth stocks. (From memory the standard deviations were all pretty similar).

Err ...except like I said, growth has been chopping value as a FA metric since the GFC.



Using the common valuation metrics has underperformed the index and growth, undeniably, since the GFC.