Archive for the ‘Greenbackd’ Category

Greenbackd Report

I’ve received sufficient inquiries about the subscription-only service aimed at identifying stocks similar to those in the old Wall Street’s Endangered Species reports to proceed with it. Thank you for your support.

If you would like to receive a free trial copy of the report when it is produced in exchange for providing feedback on its utility (or lack thereof), you can still send an email to greenbackd [at] gmail [dot] com.


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I’m considering launching a subscription-only service aimed at identifying stocks similar to those in the old Wall Street’s Endangered Species reports. Like the old Wall Street’s Endangered Species reports, I’ll be seeking undervalued industrial companies where a catalyst in the form a buy-out, strategic acquisition, liquidation or activist campaign might emerge to close the gap between price and value. The main point of difference between the old Piper Jaffray reports and the Greenbackd version will be that I will also include traditional Greenbackd-type stocks (net nets, sub-liquidation values etc) to the extent that those type of opportunities are available. The cost will be between $500 and $1,000 per annum for 48 weekly emails with a list of around 30 to 50 stocks and some limited commentary.

If you would like to receive a free trial copy of the report if and when it is produced in exchange for providing feedback on its utility (or lack thereof), would you please send an email to greenbackd [at] gmail [dot] com. If there is sufficient interest in the report I’ll go ahead and produce the trial copy.

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Speculating about the level of the market is a pastime for fools and knaves, as I have amply demonstrated in the past (or, as Edgar Allen Poe would have it, “I have great faith in fools — self-confidence my friends will call it.”). In April last year I ran a post, Three ghosts of bear markets past, on’s series of charts showing how the current bear market compared to three other bear markets: the Dow Crash of 1929 (1929-1932), the Oil Crisis (1973-1974) and the Tech Wreck (2000-2002). At that time the market was up 24.4% from its low, and I said,

Anyone who thinks that the bounce means that the current bear market is over would do well to study the behavior of bear markets past (quite aside from simply looking at the plethora of data about the economy in general, the cyclical nature of long-run corporate earnings and price-earnings multiples over the same cycle). They might find it a sobering experience.

Now the market is up almost 60% from its low, which just goes to show what little I know:

While none of us are actually investing with regard to the level of the market – we’re all analyzing individual securities – I still find it interesting to see how the present aggregate experience compares to the experience in other epochs in investing. One other chart by worth seeing is the “Three Mega-Bears” chart, which treats the recent decline as part of the decline from the “Tech Wreck” on the basis that the peak pre-August 2007 did not exceed the peak pre-Tech Wreck after adjusting for inflation:

It’s interesting for me because it compares the Dow Crash of 1929 (from which Graham forged his “Net Net” strategy) to the present experience in the US and Japan (both of which offer the most Net-Net opportunities globally). Where are we going from here? Que sais-je? The one thing I do know is that 10 more years of a down or sideways market is, unfortunately, a real possibility.

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President’s Day

Have a good break. See you tomorrow.

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As I foreshadowed yesterday, there are several related themes that I wish to explore on Greenbackd. These three ideas are as follows:

  1. Quantitative value investing
  2. Pure contrarian investing
  3. Problems with the received wisdom on value investment

Set out below is a brief overview of each.

A quantitative approach to value investment

I believe that James Montier’s 2006 research report Painting By Numbers: An Ode To Quant presents a compelling argument for a quantitative approach to value investing. Simple statistical or quantitative models have worked well in the context of value investing, and I think there is ample evidence that this is the case. (Note that simple is the operative word: I’m not advocating anything beyond basic arithmetic or the most elementary algebra.) Graham was said to know little about the businesses of the net current asset value stocks he bought. It seems that any further analysis beyond determining the net current asset value was unnecessary for him (although he does discuss in Security Analysis other considerations for the discerning security analyst). Perhaps that should be good enough for us.

As Oppenheimer’s Ben Graham’s Net Current Asset Values: A Performance Update paper demonstrates, a purely mechanical application of Graham’s net current asset value criterion generated a mean return between 1970 and 1983  of “29.4% per year versus 11.5% per year for the NYSE-AMEX Index.” Oppenheimer puts that return in context thus, “[one] million dollars invested in the net current asset portfolio on December 31, 1970 would have increased to $25,497,300 by December 31, 1983.” That’s a stunning return. It would have put you in elite company if you had been running a fund blindly following Oppenheimer’s methodology from the date of publication of the paper. Other papers examining the returns over different periods and in different markets written after Oppenheimer’s paper have found similar results (one of the papers is by Montier and I will be discussing it in some detail in the near future). The main criticism laid at the feet of the net net method is that it can only accommodate a small amount of capital. It is an individual investor or micro fund strategy. Simple strategies able to accommodate more capital are described in Lakonishok, Shleifer, and Vishny’s Contrarian Investment, Extrapolation and Risk. In that paper, the authors found substantial outperformance through the use of only one or two value-based variables, whether they be price-to-book, price-to earnings, price-to-cash flow or price-to-sales.

I believe these papers (and others I have discussed in the past) provide compelling evidence for quantitative value investing, but let me flip it around. Why not invest solely on the basis of some simple value-based variables? Because you think you can compound your portfolio faster by cherry-picking the better stocks on the screen? This despite what Montier says in Painting By Numbers about quant models representing “a ceiling in performance (from which we detract) rather than a floor (to which we can add)”? Bonne chance to you if that is the case, but you are one of the lucky few. The preponderance of data suggest that most investors will do better following a simple model.

Pure contrarian investing

By “pure” contrarian investing, I mean contrarian investing that is not value investing disguised as contrarian investing. LSV frame their Contrarian Investment, Extrapolation and Risk findings in the context of “contrarianism,” arguing that value strategies produce superior returns because most investors don’t fully appreciate the phenomenon of mean reversion, which leads them to extrapolate past performance too far into the future. LSV argues that investors can profit from the market’s (incorrect) assessment that stocks that have performed well in the past will perform well in the future and stocks that have performed poorly in the past will continue to perform poorly. If that is in fact the case, then contrarian strategies that don’t rely on value should also work. Can I simply buy some list of securities at a periodic low (52 weeks or whatever) and sell some list of securities at a periodic high (again, say 52 weeks) and expect to generate “good” (i.e. better than just hugging the index) returns? If not, it’s not contrarianism, but value that is the operative factor.

It is in this context that I want to explore Nassim Nicholas Taleb’s “naive empiricist.” If contrarianism appears to work as a stand alone strategy, how do I know that I’m not mining the data? I also want to consider whether the various papers written about value investment discussed on Greenbackd and the experiences of Buffett, Schloss, Klarman et al “prove” that value works. Taleb would say they don’t.  How, then, do I proceed if I don’t know whether the phenomenon we’re observing is real or a trick? We try to build a portfolio able to withstand stresses, or changes in circumstance. How do we do that? The answer is some combination of employing Graham’s margin of safety, diversifying, avoiding debt and holding an attitude like Montaigne’s “Que sais-je?”‘ (“What do I know?”). It’s hardly radical stuff, but, what I believe is interesting, is how well such a sceptical and un-confident approach marries with quantitative investing.

Problems with the received wisdom on value investment

Within the value investment community there are some topics that are verboten. It seems that some thoughts were proscribed some time ago, and we are now no longer even allowed to consider them. I don’t want delve into them now, other than to say that I believe they deserve some further consideration. Some principles are timeless, others are prisoners of the moment, and it is often impossible to distinguish between the two. How can we proceed if we don’t subject all received wisdom to further consideration to determine which rules are sound, and which we can safely ignore? I don’t believe we can. I’ll therefore be subjecting those topics to analysis in any attempt to find those worth following. If I’m going to make an embarrassing mistake, I’m betting it’s under this heading.

There are several other related topics that I wish to consider, but they are tangential to the foregoing three.

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Welcome back to Greenbackd for 2010. I hope the holidays were as good to you as they were to me.

The break has afforded me the opportunity to gain some perspective on the direction of Greenbackd. Away from the regular posting schedule I found the time to write some Jerry McGuire The Things We Think and Do Not Say treatises, quickly consigning most of them to trash so that they couldn’t come back to haunt me at a later, more lucid and, perhaps, sober moment (I did say the holiday was good to me). Some (heavily edited) remnants of those rambling essays will filter through onto this site over the coming weeks. I’m charged up about several topics that I want to explore in some depth, which is a change from the net net ennui that was starting to creep in before the break.

The beauty of the Graham net net as a subject for investment is its simplicity. Conversely, that same characteristic makes it a poor subject for extended contemplation and writing. There is a limit to which the universe of Graham net nets, even those entwined in activist or special situations, can be subject to analysis before the returns to additional analysis diminish asymptotically to approaching zero. Note that in this context I don’t mean investment returns, but returns to the psyche, good feelings, the avoidance of boredom…in other words, the really important stuff. The investment returns in that area are good, but we all already know that to be the case. What am I contributing if I keep digging up undervalued net nets? Not much. Graham invented it. Oppenheimer proved it. Jon Heller writes about it better than anyone else. The rest of us are just regurgitating their work.

Really, this is old news. Greenbackd passed the point some time ago at which it was possible to hold off the tedium of net nets and evolved organically to embrace several related topics. I still love the activist dogfight for control or influence and I think a well-written 13D makes for excellent copy. I also still love finding blatantly misplaced securities, each one a little slash at the heart of the EMH. Greenbackd will continue to study individual securities and follow interesting activist situations, however, it will not be the sole focus of the site. For me, there are more interesting problems to tackle. My concern has been whether Greenbackd can contain the new topics or whether I’ll just annoy old Greenbackd readers with the new direction. My favorite blogger wrestled with same issue several years ago, and so I’m using her experience as a guide.

I think the smartest thinker and most lucid writer in the financial and political (in the broadest sense of the word) sphere is Marla Singer at Zero Hedge and occasionally Finem Respice (formerly Equity Private at Going Private). Marla, then writing as Equity Private, started out with a narrowly focussed blog about the “sardonic memoirs of a private equity professional,” but gradually expanded to cover only tangentially related topics like the role of government, economics, philosophy, literature, art, duelling, card sharping and cargo cults (the implications of which won’t be lost on most readers). For me, it was a thrilling departure, but Marla must have felt that Equity Private was too limited, and created Finem Respice before moving on to Zero Hedge. I was only too happy to follow, but I would have been equally happy for Equity Private to keep posting as Equity Private. (As an aside, I recommend following Marla at Zero Hedge. Her ability to tease out the hidden story from some granular detail in legislation or data is simply breathtaking and unmatched in the mainstream media.)

I’ll persist with Greenbackd because I like this boat, but it will be embarking for new shores. Pure net net investors are well served by other sites, so it’s probable that some readers will depart. This site will always be dedicated to deep value, but I want to find some uncharted territory. The voyage might not yield any new land, but I think it will be more fun than continuing to orienteer on Graham’s old maps. I have an inkling there is something interesting out there at the intersection of Montier, Montaigne, Taleb and Graham. Tomorrow, I’ll start to sketch out the new world. It also coincides with a personal change for me. Working in someone else’s fund has been enjoyable, but I feel it’s time to graduate to principal. I’m presently considering entering into an established partnership or starting my own fund. Whichever direction I go will likely have some influence on Greenbackd.

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I find it interesting to see which posts on Greenbackd attract the most attention and I thought you might too. To that end, here are the 10 most popular Greenbackd posts of 2009:

  1. The best unknown activist investment of 2009
  2. Seth Klarman on Liquidation Value
  3. Tweedy Browne updates What Has Worked In Investing
  4. Marty Whitman’s adjustments to Graham’s net net formula
  5. Walter Schloss, superinvestor
  6. Sub-liquidation value ten baggers
  7. VXGN gifted to OXGN; VXGN directors abandon shareholders, senses
  8. Valuing long-term and fixed assets
  9. Where in the world is Chapman Capital?
  10. Counterintuition

Why was The best unknown activist investment of 2009 the most popular post of 2009, attracting 5 times the traffic of the Seth Klarman on Liquidation Value post, which is number 2 on the list? Who knows? It seems you guys like stories about idiosyncratic investors who trade in odd securities found off the beaten track.

Here are four near misses:

  1. The end of value investing?
  2. Buffett on gold
  3. Marty Whitman discusses Graham’s net-net formula
  4. John Paulson and The Greatest Trade Ever

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