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TranceAddict Investors Club @ Marketocracy (pg. 133)
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| Joss Weatherby |
| All i know is that ima make bank on monday ;p |
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| jerZ07002 |
| quote: | Originally posted by Krypton
Sorry guys, but fundamentals are the foundation of my strategy, and they are more reliable than ever in this recession.
"In the short-run, the market is a voting machine but in the long run, the market is a weighing machine." - Ben Graham |
When a company has book assets that are significantly overvalued (e.g., goodwill acquired in a merger in which the company significantly overpaid relative to current fair value of the assets), however, the company has yet to take a writedown on the value of those assets, how does your fundamental analysis account for that factor? This is a significant problem with companies that made acquisitions prior to the market collapse. In particular, companies like Citi and publicly traded PE firms are facing this issue.
Does your analysis account for any qualitative factors (e.g., significant R&D expenditures in potential high growth areas - in particular, companies like GE and UTX that spend tons in efficient energy production)?
Does your analysis take into account macroeconomic factors such as overextended credit throughout the entire market? Past performance encompasses the overextention of credit, but is not capable of predicting the contraction of credit. |
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| Capitalizt |
| Also don't forget that earnings of 2006-2008 are no indication of what earnings will be this year or next. The economy has collapsed so badly that trailing p/e ratios are pretty much worthless when determining value. Many companies that had a sub 10 p/e six months ago will have a of p/e 100+ this year..or actually be taking losses. Too much uncertainty for me. |
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| Krypton |
| quote: | Originally posted by jerZ07002
When a company has book assets that are significantly overvalued (e.g., goodwill acquired in a merger in which the company significantly overpaid relative to current fair value of the assets), however, the company has yet to take a writedown on the value of those assets, how does your fundamental analysis account for that factor? This is a significant problem with companies that made acquisitions prior to the market collapse. In particular, companies like Citi and publicly traded PE firms are facing this issue. |
My model uses 40+ calculations to rate the fundamentals of a company. If you notice, my model has Citigroup as a possible bankruptcy. Additionally, Citigroup has a negative PE, since their EPS is negative. So PE is useless with Citigroup.
| quote: | | Does your analysis account for any qualitative factors (e.g., significant R&D expenditures in potential high growth areas - in particular, companies like GE and UTX that spend tons in efficient energy production)? |
My model is purely quantitative. The qualitative analysis is made after quantitative analysis indicates the most likely market outperformers.
| quote: | | Does your analysis take into account macroeconomic factors such as overextended credit throughout the entire market? Past performance encompasses the overextention of credit, but is not capable of predicting the contraction of credit. |
My model is a microeconomic algorithm. Macroeconomics is a whole other ball game. For that, I use logarithms, and yield ratios to determine the value of the market. As of now, the market is under priced. So I know it is a logical time to add some equity positions. |
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| Shakka |
| quote: | Originally posted by Krypton
Sorry guys, but fundamentals are the foundation of my strategy, and they are more reliable than ever in this recession.
"In the short-run, the market is a voting machine but in the long run, the market is a weighing machine." - Ben Graham |
....which is why Warren Buffet, prized student of Graham saw his stock decline over 40% last year while his net earnings dropped over 90%...Fundamentals are fine but the market is completely disconnected from reality a lot of the time lately. Not to mention that the bull market of 2002-2006 has largely been exposed as a farce based on imaginary earnings and asset values. Fundamentals only get you so far, but they won't take you to the promised land on their own. The days of buy-and-hold investing are through. The successful investors of tomorrow will be those that know how to deftly maneuver through the choppy waters of this secular bear market in order to have a treasure chest to play around with when the next real bull market finally finds legs. |
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| Krypton |
| quote: | Originally posted by Capitalizt
Also don't forget that earnings of 2006-2008 are no indication of what earnings will be this year or next. The economy has collapsed so badly that trailing p/e ratios are pretty much worthless when determining value. Many companies that had a sub 10 p/e six months ago will have a of p/e 100+ this year..or actually be taking losses. Too much uncertainty for me. |
PE is just one metric out of dozens which I use to analyze a company. |
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| Krypton |
| quote: | Originally posted by Shakka
....which is why Warren Buffet, prized student of Graham saw his stock decline over 40% last year while his net earnings dropped over 90%...Fundamentals are fine but the market is completely disconnected from reality a lot of the time lately. Not to mention that the bull market of 2002-2006 has largely been exposed as a farce based on imaginary earnings and asset values. Fundamentals only get you so far, but they won't take you to the promised land on their own. The days of buy-and-hold investing are through. The successful investors of tomorrow will be those that know how to deftly maneuver through the choppy waters of this secular bear market in order to have a treasure chest to play around with when the next real bull market finally finds legs. |
No, the days of buy-n-hold are nowhere near over. We Graham disciples profit from exactly the same mechanism with which you announce the death of buy-n-hold. We profit from the market's irrationality. The short term decline we'v suffered is insignificant. In fact, the current decline is our chance to buy at once in a lifetime prices as the market is not just irrational, but paranoid schizophrenic. You guy's outlook is far too short to understand my approach to fundamentals. Of course they'r dead and irrelevant to you. I bet you guys stay in a position for more than 1 year a time. I'm betting you guys stay in a position usually for less than 1 month. Especially you Shakka. Aren't you a day trader?
Buy-n-hold is a central tenet of my strategy but I don't stick to it religiously. I allocate my portfolio according to macroeconomic indicators and also fundamentals indicators. If I view the market as under valued according to dividend yields versus 10Y T-bills and logarithmic estimations, my portfolio allocation will be 75% equities, 25% bonds/precious metals. If I view the market as over valued, I switch to 75% bonds/precious metals, and 25% equities. When the market is at a fair value, I go to 50/50 between equities and bonds/precious metals. Right now, I'm still 75% precious metals, and 25% equities, but I am in the process of increasing my equities exposure.
With my strategy, patience is a virtue. 50% decline in my position? So what. Buffet says if you can handle that, you shouldn't be in the market. The fact that I know a high quality company when I see it and know how to value it lets me sleep like a baby at night, even with a 50% unrealized loss. I wait years for the market to realize the company's intrinsic value. That is the key. Patience. Short term traders, like I am assuming you guys are, do not adhere to this philosophy so I wouldn't expect you to advocate for it like I am.
Think of it like this. Quantum mechanics versus general relativity. Both describe the universe beautifully but are incompatible with each other. My philosophy is general reletivity and you short term guys are quantum mechanics. We'r probably both right. |
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| Shakka |
| quote: | Originally posted by Krypton
I'm betting you guys stay in a position usually for less than 1 month. Especially you Shakka. Aren't you a day trader? |
Absolutely not! I'm in positions anywhere from days to years--it just depends on a lot of other factors besides pure fundamentals. A day trader is someone who closes out all open positions in a day and carries no open positions home overnight. Daytrading has little to no discipline and is a mug's game as far as I'm concerned. I work for a hedge fund. I go long and short with a little option and fixed income exposure. I trade for maximum profit for my shareholders and partners. The difference between you saying that "The short term decline we'v suffered is insignificant." (which by the was is reckless as a 50% loss is not insignificant as easily demonstrated by the millions who have lost their life savings--just look at the buy-and-hold graveyard today: Bill Miller, Martin Feldstein, etc. They have been decimated.), and what I do is that I manage for risk first and then return.
Compared to the S&P 500, my fund has the following risk characteristics:
My Fund S&P 500
Correlation Coefficient 1.76% 100%
Beta -0.06 1.00
Standard Deviation 0.51 1.12
Sharpe Ratio 0.80 0.28
Semi-Variance (downside volatility) 0.13 0.61
Furthermore, since active management of my fund began in 1992 through 10/31/2008, we have generated average annual returns of 10.5% vs. the S&P's up 7.46% (A metric that has only improved in my favor since then).
In other words, over the long haul, my fund has significantly outperformed the S&P 500 with significantly less risk. You can buy and hold that all the way to the bank.
Don't get me wrong, I'm not saying that buy-and-hold can't ultimately work, but I am of the belief that it certainly doesn't work like it used to--partly because the market is so much bigger, active, transparent and more complex than it has ever been before. Back in the 60's when Warren Buffet was looking through Valueline at companies that nobody even knew existed looking for that "margin of safety" it was a lot easier to find lesser known companies trading well below book value. That is simply not the case today due to so many reasons. So while you may be right and ultimately get a stock that goes up 50% a few years, it's simply disingenuous to imply that this strategy works the same today as it did 50 years ago.
| quote: | | With my strategy, patience is a virtue. |
That is fine if you're OK with that, but as I've mentioned before, at the institutional level, patience is generally NOT a virtue. Patience in the face of mounting losses simply compounds the problem of asset outflows. People do not pay you to lose their money.
| quote: | | 50% decline in my position? So what. Buffet says if you can handle that, you shouldn't be in the market. |
See above. That's great if you can sleep well at night with that kind of thinking. If you bought into Berkshire in 1997 and held on to it, as of this day you have not made a single penny in profit. How's that for patience being virtuous?
| quote: | | The fact that I know a high quality company when I see it and know how to value it lets me sleep like a baby at night, even with a 50% unrealized loss. I wait years for the market to realize the company's intrinsic value. That is the key. Patience. Short term traders, like I am assuming you guys are, do not adhere to this philosophy so I wouldn't expect you to advocate for it like I am. |
It's not hard to find a high-quality company. I used to think buy-and-hold was the way to go because, hey, the market always goes up over the long-term right (like housing?)? Just look at Japan--the Nikkei is trading near 26 year lows!!! If you started putting into a 401K in Japan when you were 30 and are now pushing 60 and ready to retire, you'd have a retirement account worth a shadow of what you put into it!
Do I think buy-and-hold is completely wrong? Not totally, but I do believe that if you're not actively managing risk you're doing yourself a disservice and keeping yourself exposed to potentially huge and unnecessary downside risk. Remember, the first rule of investing is not to lose money.
| quote: | | Think of it like this. Quantum mechanics versus general relativity. Both describe the universe beautifully but are incompatible with each other. My philosophy is general reletivity and you short term guys are quantum mechanics. We'r probably both right. |
Relative performance is for the birds. We were down 4.6% last year and it felt like but our investors think the world of us for it. |
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| jerZ07002 |
| quote: | Originally posted by Shakka
I work for a hedge fund. |
For some reason I thought you worked for a mutual fund. |
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| Krypton |
| Shakka, I buy cheap, sell when the companies stock is overpriced, so don't think I'm pure buy-n-hold. But buy n hold is necessary for my positions to reach their intrinsic values given that that intrinsic value does not decline. I explained my asset allocation between equities and bonds which is also the strategy set forth in Graham's The Intelligent Investor. |
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| Capitalizt |
| quote: | | Originally posted by Krypton I'm still 75% precious metals, and 25% equities |
That's probably a good ratio to stick with for the next 1-2 years..possibly even with a higher PM ratio. GLD and SLV will be big winners in the coming devaluation, and they have no political or economic risks like the mining stocks. You are placing a pure bet against paper money..against government stupidity.
Shakka, I hope you load up in your fund..especially on SLV. I think we are going to have one final credit-based boom globally..the last great hurrah of monetarism/keynesianism. Competitive currency devaluation should lead to global "prosperity" (artificial or not) for at least a few years. Silver is an industrial metal and should benefit greatly from the coming reflation purely on a supply/demand basis. China is gobbling it up like mad in their efforts to modernize, and the fact that it also serves as a traditional precious metal/inflation hedge (poor man's gold) makes it twice as appealing as gold in my opinion. Your clients will thank you one day. ;) |
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| Krypton |
| quote: | Originally posted by Capitalizt
That's probably a good ratio to stick with for the next 1-2 years..possibly even with a higher PM ratio. GLD and SLV will be big winners in the coming devaluation, and they have no political or economic risks like the mining stocks. You are placing a pure bet against paper money..against government stupidity. |
I'm not selling my precious metals but I'm not adding any more. I am building my equity exposure with the cash I have on hand. What is stupid is if the government allowed the economy to systemically collapse. Is everything they'v done perfect? No. But no other institution is in the position to prevent massive bank runs and lessen the macro effects of massive debtor delinquencies. |
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