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Archive for the ‘Strategy’ Category

I’ve just finished the rough draft of a new book about concentrated value investing and the investors who practice it. One of the side-effects of extreme concentration is idiosyncratic portfolio performance–concentrated portfolios behave differently from the market. This makes sense. To beat the market one must hold stocks in a different composition to the market, which in turn means performance that’s different, both to the upside and the downside. The investors interviewed in the book all have very long track records (more than 25 years) of massive outperformance, but all have endured regular and extended periods of underperformance. Such is the toll of concentrated investing.

The performance of the market–let’s say the S&P 500–is the market capitalization-weighted average performance of the largest 500 stocks in the US. In most years the performance of the aggregate doesn’t tell you a great deal about the performance of the underlying stocks. The extent to which the performance of the best stocks in the market outperform the worst stocks is known as dispersion.

Patrick O’Shaughnessy has a great new site called The Investor’s Field Guide where he shares the results of backtests and other research he conducts. In Is Being Different Better? Dispersion and Active Management he takes a look at dispersion. In the chart below he compares the average excess returns for the best and worst performing 10 percent of stocks in three different market capitalization ranges–large, small and micro–over the last 50 years.

dispersion-of-returns-by-cap-space

These are excess total returns measured against an equal-weighted benchmark, which means, for example, the +58 percent result for the Best Performing 10% (Large) means that those stocks beat the market by 58 percent in any given year. As the chart makes clear, the smaller the stocks in the universe, the greater the magnitude of outperformance (or underperformance). Micro cap stocks offer the best opportunity for skilled stocks pickers (and the greatest opportunity to trip over). That’s dispersion.

O’Shaughnessy notes:

Since our goal is earning the highest returns possible above the market, it stands to reason that we should prefer parts of the market which offer the greatest chance of earning huge returns. … [T]hese results highlight an opportunity in micro- and small-cap investing. This is especially true for smaller, individual investors who don’t have to worry about market impact when trading. Large institutions simply can’t run meaningfully large micro-cap portfolios, and so many small stocks go unnoticed.

Check his new site The Investor’s Field Guide or read more Is Being Different Better? Dispersion and Active Management.

You can get a free list of the best deep value stocks in the largest 1000 names on The Acquirer’s Multiple.

Buy my new book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Here’s your book for the fall if you’re on global Wall Street. Tobias Carlisle has hit a home run deep over left field. It’s an incredibly smart, dense, 213 pages on how to not lose money in the market. It’s your Autumn smart read. –Tom Keene, Bloomberg’s Editor-At-Large, Bloomberg Surveillance, September 9, 2014.

Click here if you’d like to read more on Deep Value, or connect with me on Twitter, LinkedIn or Facebook. Check out the best deep value stocks in the largest 1000 names for free on The Acquirer’s Multiple.

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Josh Payne and the folks at Quantopian ran some tests on the performance of the acquirer’s multiple and Joel Greenblatt’s Magic Formula.

I have argued in Deep Value and Quantitative Value that the acquirer’s multiple (enterprise value / operating earnings) tends to outperform the better known Magic Formula although it is only one-half of the Magic Formula, which also includes return on invested capital. Josh and Quantopian wanted to test that idea in the Quantopian backtester.

They tested a few variations of operating earnings, including EBIT, EBITDA, and EBITDA – Cap Ex. The results were recorded in their notebook, which you can view on the site by clicking here and finding the red “View Notebook” button to the bottom right of the first screen. Here are some of the backtest results:

Quantopian Backtest

After optimizing the results, Josh and Quantopian conclude:

Taking a look at the Cumulative Returns, Sharpe Ratios, Max Drawdown, Calmar Ratios, Annual Returns, and Annual Volatility we see that the Acquirer’s Multiple beats the Magic Formula in almost every category except drawdown and annual volatility. However, given the Sharpe ratio and Calmar ratio, it seems that the volatility and drawdown is for good measure.

..

In short, Magic Formula has slightly better performance with defensive metrics like volatility and drawdawn, but the superior returns that the Acquirer’s Multiple provides proves to be worth it, as encapsulated in metrics like Sharpe Ratio and Calmar Ratio.

Simpler, it seems, really is better in this case.

Quantopian has a really cool feature: You can grab the source code for the acquirer’s multiple backtest and run variations of it using Quantopian’s backtest data, or test your own ideas. Check it out here.

You can also check out the top acquirer’s multiple stocks in the largest 1000 names for free on the acquirer’s multiple site.

Buy Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Here’s your book for the fall if you’re on global Wall Street. Tobias Carlisle has hit a home run deep over left field. It’s an incredibly smart, dense, 213 pages on how to not lose money in the market. It’s your Autumn smart read. –Tom Keene, Bloomberg’s Editor-At-Large, Bloomberg Surveillance, September 9, 2014.

Click here if you’d like to read more on Deep Value, or connect with me on Twitter, LinkedIn or Facebook.

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[Sponsored Post]

The London Value Investor conference is the largest gathering of Value Investors in Europe and is Moderated by Richard Oldfield and David Shapiro. It will take place on Wednesday 20th May at the Queen Elizabeth II Conference Centre in Westminster, London. The conference will feature well known investors such as Charles Brandes, Dato’ CHEAH Cheng Hye, Jonathan Ruffer and Neil Woodford.

At the 2015 Conference, the following speakers will provide valuable insights in to their methods and approaches as well as giving specific investment ideas. The full line-up:

  • Neil Woodford, Woodford Investment Management
  • Charles Brandes, Brandes Investment Partners
  • Jonathan Ruffer, Ruffer LLP and Auckland Castle Trust
  • Dato’ CHEAH Cheng Hye, Value Partners Group
  • Hassan Elmasry, Independent Franchise Partners
  • Nathaniel Dalton, Affiliated Managers Group
  • Tim Hartch, Brown Brothers Harriman
  • Johan Du Preez, Eastspring Investments
  • Bernd Ondruch, Astellon Capital Partners
  • David Shapiro, Towers Watson (Moderator)
  • Richard Oldfield, Oldfield Partners (Moderator)

A key feature of the conference is the 10-15 minutes dedicated to audience Q&A which is led by Richard Oldfield of Oldfield Partners and David Shapiro from Towers Watson.

This will also be a unique networking opportunity as this conference is the largest gathering of value investors in Europe, we expect there will be 400 paying delegates present this year.

Click here to learn more.

 

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The Investors Podcast

I had a lot of fun recording an interview with Stig Brodersen and Preston Pysh of The Investors Podcast on one of my favorite subjects, deep value investing. Click this link or the caricature of my head to be taken to The Investors Podcast:

The Investors Podcast Caricature

 

Buy Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Here’s your book for the fall if you’re on global Wall Street. Tobias Carlisle has hit a home run deep over left field. It’s an incredibly smart, dense, 213 pages on how to not lose money in the market. It’s your Autumn smart read. –Tom Keene, Bloomberg’s Editor-At-Large, Bloomberg Surveillance, September 9, 2014.

Click here if you’d like to read more on Deep Value, or connect with me on Twitter, LinkedIn or Facebook.

Read Full Post »

[Sponsored Post]

The London Value Investor conference is the largest gathering of Value Investors in Europe and is Moderated by Richard Oldfield and David Shapiro. It will take place on Wednesday 20th May at the Queen Elizabeth II Conference Centre in Westminster, London. The conference will feature well known investors such as Charles Brandes, Dato’ CHEAH Cheng Hye, Jonathan Ruffer and Neil Woodford.

Discounted tickets are available through Greenbackd–see below for more information.

At the 2015 Conference, the following speakers will provide valuable insights in to their methods and approaches as well as giving specific investment ideas. The full line-up:

  • Neil Woodford, Woodford Investment Management
  • Charles Brandes, Brandes Investment Partners
  • Jonathan Ruffer, Ruffer LLP and Auckland Castle Trust
  • Dato’ CHEAH Cheng Hye, Value Partners Group
  • Hassan Elmasry, Independent Franchise Partners
  • Nathaniel Dalton, Affiliated Managers Group
  • Tim Hartch, Brown Brothers Harriman
  • Johan Du Preez, Eastspring Investments
  • Bernd Ondruch, Astellon Capital Partners
  • David Shapiro, Towers Watson (Moderator)
  • Richard Oldfield, Oldfield Partners (Moderator)

A key feature of the conference is the 10-15 minutes dedicated to audience Q&A which is led by Richard Oldfield of Oldfield Partners and David Shapiro from Towers Watson.

For a short time you can get a£120 discount by using “GREENBACKD-20MAY” when booking (expires 14th March 2015). Click here to use the discount code.

This will also be a unique networking opportunity as this conference is the largest gathering of value investors in Europe, we expect there will be 400 paying delegates present this year.

Click here to learn more.

 

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Click here to watch a recording of last night’s seminar on “Portfolio Construction, Concentration and Diversification for Value Investors.”

Click here to take advantage of the offer–the first month with Singular Diligence for just $10before midnight tonight.

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Just a quick reminder that my webinar“Portfolio Construction, Concentration, and Diversification for Value Investors” starts in 30 minutes.

Seats are filling up fast so you’ll want to join the webinar room now to secure your spot.

Click here to register now.

Already register for today’s webinar? You should have received a custom link via email when you registered.

Can’t find the link? Click the registration link above to get a new one.

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