Robusta fundamental, leveraged investments

[kermit345]

There in lies the issue Tech/a, in my view it has been shown to some extent that value outperforms growth over the long-term, but this has only been evidenced in the form of index's.

Logic would suggest that if you pick 'the best' of these value stocks then those stocks will be the ones that drive that outperformance of the index. However i haven't personally seen any evidence that suggests this is the case or what metrics, ratio's etc determine exactly what is 'the best'.

Would be interesting to see the performance of portfolios constructed of 12-18 stocks based on different mechanical filters such as the following:

Portfolio 1: Only stocks with D/E less than 40%, ROE above 10%, market cap must be above $100 mill and must trade at least a 25% discount to sector or avg peer P/E's
Portfolio 2: Only stocks with D/E less than 40%, ROE above 10% and invest in the stocks with the highest Book to Market values
Portfolio 3: D/E less than 40%, EPS and Cashflow/share both positive and within +/- 15% of each other, invest in the top ranking EPS growth shares

Obviously these are all entry criteria and you've had to put exit criteria etc etc around it, but would be interesting to see what achieves the greatest results. As i've said, the research I've seen stated that they found Book to Market to represent value the best (higher it is, better the value).

Your right though tech/a, theres reasonable evidence regarding value index's, not so much in terms of individuals portfolios. Not sure this proves it doesn't work though, just that there is a lack of research (as far as i'm aware of).

 

[kermit345]

Mainly it shows how the scientific literature does this. The opposite of most Benjamin Graham techniques really. I decide on a simple/robust valuation metric (e.g. P/B) and then buy the cheapest quintile or decile of stocks. Now I have my portfolio and it is 'valued' as the cheapest N stocks in the universe measured by XYZ metric.



tech I am not sure you grasp entirely?

The "index" you refer to is just another trading system pulled from the scientific literature: buy the N largest stocks by market cap, weighted by market cap, rebalance yearly.

The indices I am referring to are the same, trading systems pulled from the scientific literature: buy the N stocks with the highest/lowest metric in a given market cap range universe and rebalance yearly. These indexes are the answer to your question about



They "value" index is simply the equity curve of a "value" system...

nice post, although that metric is still pulling in at least a few hundred stocks. I guess tech/a is referring to a small individuals portfolio? I'm assuming a similar result would be achieved in the long term however there would be greater volatility and tracking error in the individuals portfolio.

 

[sinner]

nice post, although that metric is still pulling in at least a few hundred stocks. I guess tech/a is referring to a small individuals portfolio? I'm assuming a similar result would be achieved in the long term however there would be greater volatility and tracking error in the individuals portfolio.

I just used 'that metric' as one which is an example of something simple/robust. Anyone can value using whatever metric they like.

McLovin, I completely agree they aren't mutually exclusive. There are papers out there for double/triple/quadruple sort strategies which are some combo of/like momentum => growth => value => liquidity. At least in the past, combining FA metrics has been shown to decrease volatility and in some cases increase returns significantly.

 

[tech/a]

Mainly it shows how the scientific literature does this. The opposite of most Benjamin Graham techniques really. I decide on a simple/robust valuation metric (e.g. P/B) and then buy the cheapest quintile or decile of stocks. Now I have my portfolio and it is 'valued' as the cheapest N stocks in the universe measured by XYZ metric.



tech I am not sure you grasp entirely?

The "index" you refer to is just another trading system pulled from the scientific literature: buy the N largest stocks by market cap, weighted by market cap, re balance yearly.

The induces I am referring to are the same, trading systems pulled from the scientific literature: buy the N stocks with the highest/lowest metric in a given market cap range universe and re balance yearly. These indexes are the answer to your question about



They "value" index is simply the equity curve of a "value" system...

Yes Now you have explained it I do understand it.

NOW ILL GET TO MY POINT

I believe that the larger majority of Investor/Trader method is now archaic certainly in the retail sector.
All of those using the metrics they are studying and tinkering with now will be seen as Dinasours. Plodding around in the dark.

Take 10 mins and watch this video

http://www.mtpredictor.us/2099/correction-came-but-how-deep/

 

[sinner]

All of those using the metrics they are studying and tinkering with now will be seen as Dinasours. Plodding around in the dark.

Take 10 mins and watch this video

I disagree. Most of the 'advanced' quant stuff I see these days is still using

simple/robust

without caring how archaic it is. I am really surprised to hear this coming from you actually. Are you telling me the fresh research coming out in 2010-2012 period which uses nothing but standard deviations of returns and a 10SMA to generate un-correlated 10-20% P.A. is 'plodding around in the dark'?

The video you post is old news to anyone who has been reading zerohedge since 2009. Nor are HFT any sort of god. They have a competitive informational advantage, their edge isn't in the use of a spline instead of a moving average.

Sorry for the hijack robusta.

 

[kermit345]

Yup, when I said 'that metric' I just meant it in the general sense of whatever the individual is using. There are that many different forms of 'value investing' its a bit overwhelming.

Tech/a - Just watched that video, makes you wonder where markets will be in 5, 4 or even 2 years time based on algorithmic trading. Makes it even worse to know these algorithms are built to make multiple 'incorrect' trades to trick other algorithms and flood the market with data.

To my knowledge the Aussie market doesn't have as higher percentage in algorithm trading but it is heading in the same direction. Will regulators need to step in? In my view I think this still means value investing has it merits, but as algorithmic trading continues to involve maybe it will make the value realisation timeframes even longer then they already are?

 

[craft]

Yes Now you have explained it I do understand it.

NOW ILL GET TO MY POINT

I believe that the larger majority of Investor/Trader method is now archaic certainly in the retail sector.
All of those using the metrics they are studying and tinkering with now will be seen as Dinasours. Plodding around in the dark.

Take 10 mins and watch this video

http://www.mtpredictor.us/2099/correction-came-but-how-deep/

That video might be relevant to people who trade based on price. (maybe not)

But how does it have any relevance to somebody who buys a business based on that business generating the return?

If you had Algo’s squabbling over the price of your business and making millions of trades trying to get the better of each other – would it actually make any difference to you as the owner, the one who gets the excess cash flows?

 

[kermit345]

Further to this does it mean a company whose value is for instance approx $10.00, has EPS of $1.00 and pays DPS of $0.60, may have a share price of lets say $9.00. The algo's continue to trade millions of times at the $9.00 mark as they take over the market but Joe Blog's buys some at $9.00 as well. As the algo's keep squabbling at $9.00 but EPS rises to $2.00 and DPS rises to $1.20 Joe Blogs can enjoy an effective yield of 13% while algo's squabble over the $9.00 price still.

Hard to imagine this scenario playing out, businesses will still make profits at a growing rate and return some of this to shareholders, the maket manipulation from algo's just may make it more difficult for some investors to have conviction in their investment decisions as the price action may cause them to second guess themselves?

 

[tech/a]

That video might be relevant to people who trade based on price. (maybe not)

But how does it have any relevance to somebody who buys a business based on that business generating the return?

If you had Algo’s squabbling over the price of your business and making millions of trades trying to get the better of each other – would it actually make any difference to you as the owner, the one who gets the excess cash flows?

Well my view is you dont need a bot trading in microseconds.

But what you do need is to step out of the box and make use of the technology available to us.
Sure youll get value but your'e in the position---with some knowledge to be in the market right at the begining and out right at the end through the peaks and troughs
100s of times in a trend.

Maximising profit and minimising loss---with minimal opportunity cost and eventually minimal work on your part. Gone will be the massive drawdowns---Profits which would have your head spin thought impossible only 10 yrs ago.

Those who recognise this opportunity early enough will be leaders in a field where tweeking will be an art form!

Anyway I plant this as food for thought ---- remember man would never travel faster than the speed of sound!

 

[robusta]

Just a quick bit of housekeeping, I post the progress of my portfolio on this thread but in no way do I think I own it or have a right to moderate it. So if anyone has anything interesting to say I am more than happy for it to be posted here.

There was however some excellent analysis on Cochlear a few pages back and I would like Joe's opinion if this should be pasted on the COH thread as a reference for investors who may miss it here.

 

[tech/a]

Sorry Robusta
I'll go back to watching with interest

 

[Joe Blow]

I would like Joe's opinion if this should be pasted on the COH thread as a reference for investors who may miss it here.

I think that's a very good idea. The more analysis in stock threads the better.

 

[robusta]

Sorry Robusta
I'll go back to watching with interest

Not at all you have generated some great discussion. I would like to take a few days to digest a few of the recent posts but in no way want to deter anyone from this discussion.

To tell the truth I do not have anything intelligent to add at the moment.

 

[tech/a]

That video might be relevant to people who trade based on price. (maybe not)

But how does it have any relevance to somebody who buys a business based on that business generating the return?

If you had Algo’s squabbling over the price of your business and making millions of trades trying to get the better of each other – would it actually make any difference to you as the owner, the one who gets the excess cash flows?

Well YES it does.
In fact I think youll find the landscape of the market as we know it will be altered for good.

Having a chat to my resident quant he makes some valid points.
(1) human behaviour may be taken out of the equation--Fear and Greed.
(2) price will no longer act in ways which human behaviour can be read.
(3) Fundamantal analysis will no longer determine price.
(4) Supply and demand will be governed by the algo's trading the instrument.
(5) Those algos will have algos "learning" their algos to profit from them.
(6) Goverments and larger business will be and are using them.
(7) The punter will just be bled---the algo knows if it/they made the bid or ask and will either buy or sell to take advantage of the "New Money"---effectively pocketting it. remember they are big enough to control price. As such they will control the price of a company---if its bot traded.

Brave New World
Fanasy?

 

[robusta]

Efficient market theory on steroids I hope this gains some followers as I believe it will create more opportunity for me.

 

[McLovin]

Efficient market theory on steroids I hope this gains some followers as I believe it will create more opportunity for me.

Exactly. But some arguments aren't worth having.

 

[motorway]

Well YES it does.
In fact I think youll find the landscape of the market as we know it will be altered for good.

Having a chat to my resident quant he makes some valid points.
(1) human behaviour may be taken out of the equation--Fear and Greed.
(2) price will no longer act in ways which human behaviour can be read.
(3) Fundamantal analysis will no longer determine price.
(4) Supply and demand will be governed by the algo's trading the instrument.
(5) Those algos will have algos "learning" their algos to profit from them.
(6) Goverments and larger business will be and are using them.
(7) The punter will just be bled---the algo knows if it/they made the bid or ask and will either buy or sell to take advantage of the "New Money"---effectively pocketting it. remember they are big enough to control price. As such they will control the price of a company---if its bot traded.

Brave New World
Fanasy?

As long as buying and selling has to be done , very little that matters will change.

Patterns in demand and supply!

Every position taken has a dual effect.

A buy has to be sold !

And a Sell has to some point will buy.

cause and effect will always create imbalance and opportunity.

What causes rational and irrational ?

The amount of money chasing opportunity. The amount of money entering or leaving. Being created or destroyed. This will always be changing. There will always be following of perceived opportunity , this creates other opportunities.

There is Trend and Counter Trend ( IE there are different reactions and actions )

Hence there will always be Tops and Bottoms and turning Points and of different degrees.

Everyone also needs someone to buy and sell from.
natural selection ( always a key concept ) will favor an increase not a decrease in market niches and of the number of profitable time horizons.

Fundamental Analysis will have more not less opportunity as will everyone else. ( that is two sided as well ).

The coastline of prices will just get much more fractal not less.

Motorway

 

[tech/a]

As long as buying and selling has to be done , very little that matters will change.

Patterns in demand and supply!

Every position taken has a dual effect.

A buy has to be sold !

And a Sell has to some point will buy.

cause and effect will always create imbalance and opportunity.

What causes rational and irrational ?

The amount of money chasing opportunity. The amount of money entering or leaving. Being created or destroyed. This will always be changing. There will always be following of perceived opportunity , this creates other opportunities.

There is Trend and Counter Trend ( IE there are different reactions and actions )

Hence there will always be Tops and Bottoms and turning Points and of different degrees.

Everyone also needs someone to buy and sell from.
natural selection ( always a key concept ) will favor an increase not a decrease in market niches and of the number of profitable time horizons.

Fundamental Analysis will have more not less opportunity as will everyone else. ( that is two sided as well ).

The coastline of prices will just get much more fractal not less.

Motorway

I agree when dealing with a humans.
but when dealing with a mathamatical formula which reacts to supply and demand without emotion.
I have my doubts.
Frankly I dont think anyone knows just yet what it will mean to retail clients.
But take out the human element and you have much much less to work with.

And its not a theory already wide spread in US and Euro Markets.
And getting bigger.

 

[sinner]

Having a chat to my resident quant he makes some valid points.

Why don't you just call your son, your son?

Brave New World
Fanasy?

Because all the algorithmic trading that's gone on so far has been so spectacularly successful that all the institutions love it! Oh wait, nope, they ****ing hate getting subpennied and execute in dark pools now. Hilarious stuff tech, fear and greed removed, were you not trading on May 10 2010?

It's our money, earned through productivity invested through superannuation and funds that these guys think they will be able to 'scalp' forever. Short sighted fools is all they are. I mean, why don't we all just stop producing and start scalping shares, everyone will be rich, right? Oh wait again, nope, turns out the real world still matters more than a bunch of 1s and 0s.

Savings and Investment come through societal Productivity. As if market participants are gonna let HFT steal their productivity day after day after day, they will just abandon the markets and invest their saved surplus productivity out of reach. Dark execution is the case in point.

 

[tech/a]

Why don't you just call your son, your son?



Because all the algorithmic trading that's gone on so far has been so spectacularly successful that all the institutions love it! Oh wait, nope, they ****ing hate getting subpennied and execute in dark pools now. Hilarious stuff tech, fear and greed removed, were you not trading on May 10 2010?

It's our money, earned through productivity invested through superannuation and funds that these guys think they will be able to 'scalp' forever. Short sighted fools is all they are. I mean, why don't we all just stop producing and start scalping shares, everyone will be rich, right? Oh wait again, nope, turns out the real world still matters more than a bunch of 1s and 0s.

Frankly I dont know the outcome.
But what I do know is that if masses of money can be made then youll find a following.
It has a following and its getting bigger.
to the point where questions are being asked as how to control it.
What are the effects on markets going to be.
What should be done if anything.

Its newish.
Its evolving.
Its here to stay.
Computers were only a fad they could never be afforded by the common man.
My phone has more power than the first which took up a whole building.

Will it stop me trading.
Like you no.
But it will have me mindful of whats out there and if I can't quantify my edge and monitor it---I wont be doing it!

Thats MY WHOLE POINT.
Lost on most.