yitech
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Posts posted by yitech
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I do not claim to be able to get those returns, I do think that if I try hard enough I will come close over time. people think, well few are able to get those returns, so therefore it is difficult! Doesn't mean it isn't, but I don't think it is nearly as hard as most think.
This also becomes self reinforcing. Better not expect it, or really try it even. It is an evolutionary instinct, few are able to do it = probably very hard. So better not put a lot of energy into attaining it. Good example of thinking fast and slow where thinking fast is a mistake imo. I have seen this also so many times outside of investing. It is just mindblowing. Very few people seem to have to 'i can clone what this guy is doing' attitude.
Think about it, everything you learned in the past seemed at some point hard and difficult. But once you started breaking it down piece by piece it became easier to understand. The first time in school you had algebra, solving y=2x/x+3 seemed like chinese. But once you break it all down in easy pieces after a while more complex math concepts start to become easy to understand as soon as it all clicks. The moment you get it, it stops being difficult or mysterious and it seems very easy. I like to divide the world into easy things I do understand and I do not understand yet. Time, motivation and energy being the only barrier.
I studied a bunch of people who outperformed by a very wide margin and try to see what buffett did in the early days. I think the way to go is find the most mispriced stocks (not necesairily the best companies or business models!), this is almost always small and micro caps. There are more of them, and they get less attention. And CATALYSTS. They are very important I think. And also concentrate. And finally, be willing to say next a lot. Be very picky.
For example, an idea with 70% upside to fair value (where massive outperformance will stop becoming likely) will not put the odds in your favor to get a 30 40 or 50% annual return if there is no clear catalyst. If your ideas take on average 3 years to pay off (which a lot of case studies show), then to get 40% you need to find idea's that have on average 170% upside total. Probably more because some will not work out. Or a high probability of less upside being made very obvious to the market in a fundamental way. Preferably some growth that can add to longer term upside if you have to wait. But probably more because some will not work out.
BUT if you say , well I don't expect more then 20%, you will probably stop looking once you get a portfolio of slightly mispriced stocks. And usually those very large returns require you to constantly turn over more rocks.
Bias will kick in and you will not dig very deep for new an better idea's. And you often need to look more closely then just look at an income and cash flow statement. Because the best idea's are often hidden.
Paying up for a great business will not get you those returns imo. That is good if you don't want to put in a lot of work down the line (because you have other things to do or dont care for the process) or if you have a lot of money to manage. But with a small account to maximize returns you usually want to pick the idea's with an ok moat that are priced like they are trash. Or trash that is about to be liquidated or sold that is priced too low. over time you will make whatever Return on invested capital is if you pay up, and that is usually not 30-40%.
And catalysts. I get the idea that catalysts are like a forbidden word for buffett followers and grahamites. It somehow implies short term thinking and trading. But that is not true, it simply means having the odds in your favor by not having to wait for potentially 5-10 years and sitting in value traps.
I noticed several ways where you can usually find the stocks with the most low risk upside.
-Operating leverage kicking in with a business model that doesn't seem very high risk (GNCMA is an example of this I think), or faces large industry tail winds.
-Doesn't screen well on PE ratio or book value
-A lot of new capacity coming online with lot of demand for the service or product. Especially for some small companies with high ROA. Enterprise is the perfect example of this. New patent protected capacity coming online.
-Mispriced cyclicals. Schuff at 9$? Usually short term thinking at work here. They start moving up usually a year or so before the cycle kicks up.
-Changing strategy to make business more lean, spin offs or activist investors, or simply cutting fat (have to be somewhat sure this will happen).
-Non cash charges like depreciation for some reason much lower then actual capex in the long run.
-hidden assets that are being monetized (steinway piano's with that valueact guy that had a very good track record?) and Keck seng?
-negative publicity where suddenly almost nothing good is reflected anymore in the price due to law suits or regulation threats. Altisource and Ocwen perfect examples of this. If you dig down on these stocks, you see that it is all pretty much bullshit. Usually best to stay away, but sometimes it is so obvious that the price overshot downwards if you look closely.
-Threat of replacement of a better alternative. Outerwall a good example. A lot of panic, price crashes to a point where valuation makes zero sense and no possible good thing is being priced in. This is not even a full blown cigar butt. Yet it is priced like one that will go away only a few years from now.
-Growth and usually a combo of ROIC being mispriced due to too much short term thinking.
-Markets with a lot of trash (canada) or fraud. A lot of low PE stocks in hong kong market because a lot of them don't pay out the cash they earn. So sometimes good stocks with low PE ratios are hidden between those.
Almost all these type of mispricings usually have a catalyst that is very likely to occur somewhat soon. This will make the stock a lot cheaper due to buybacks, dividends or visibility on the usual screeners. Or if emotion goes away the market stops the black and white thinking. Fear is usually only a temporary emotion. And it goes away once the market sees the business isn't going anywhere.
Obviously because these things are usually hidden and there are like 50k stocks out there and they usually don't screen that well they are very hard to find. That is also why returns on these things can be so high. But I think I found a decent way that still seems very overlooked by the market.
A study on VIC idea's showed that the high rated idea's did something like 22% a year between 2000 and 2009. There are about 2-3 idea's posted there every day? Links if you are interested:
http://www.retailinvestor.org/pdf/HedgeFund.pdf
http://mpra.ub.uni-muenchen.de/12620/1/MPRA_paper_12620.pdf
That is at least several 100 idea's a year. Another 50-100 idea's a year from this website? add in blogs and hedgefunds to follow and you have almost 500 idea's where the ground work is already done which saves a lot of time (can sift through trash faster). You only need about 5-6 new ones each year, given that you hold them more then 1 year on average if you want a 10-15 stock portfolio. I think key is to focus on high upside idea's and keep saying next if they don't seem very mispriced. And catalysts.
BTW a good example of the above points is AIQ I think
seemingly crappy business -check
doesn't show up on easy screeners -check
looking at it on the surface a year or so ago wouldn't say it is a good investment -check
Capex going forward lower then actual depreciation -check
Business being cleaned up and made leaner -check
catalyst - check
Hitting all the marks, but it looked like crap. But if you followed Howard mark's oak tree (or packer) and dug into it you would have made a huge return of several 100% with relatively little risk (or not as big as perceived by the market). I personally didn't but I like to study these cases in hindsight. And you had Oak tree on your side as investor as a safety net against their debt load.
Just look at oak tree's portfolio, most of it looks like trash at first glance.
You only need to find a few a year, and in a market of 50k stocks, there are always idea's like this somewhere. So I don't think that starting in a bear market is that important. Again only relevant if you manage a billion dollars or so.
great post! +1
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I had been in 60% or more in cash since early 2012 (reminds me of stones and glass houses...), though my stock exposure is around 80-110% due to LEAPS. So I am very much on the fence.
Vinod
This sounds like pretty much full equity exposure (or 80-110%) with 40% OTM put protection or protective puts strategy... Not sure this means you are on the fence here... Cash is not really cash in regular speak when you have a portfolio of cash and derivatives (I assume you meant LEAP calls here). It more resembles synthetic equity position, but with 40% OTM put protection.
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What Would You Do if You Were Prem Watsa? by Cove Street Capital
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There may also be movements toward MSR-backed debt like Ocwen did to properly hedge the prepayment risks. They were able to sell those at higher multiples overall than they bought.
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But you can use that winter time to put together your furniture...
+1 :D
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It is only cheaper if you ignore the two-way option spreads and commissions you are implicitly paying when you establish the synthetic position using calls and puts.
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In terms of the comparison I think over the LT you can expect an additional premium of 4 to 5% per year. I don't think earnings yields are 2% (50 P/E) or you would be right. The 10-yr bond is at 2.7% and the SPY P/E is at 15.3 or earning yield of 6.5% so an implied ERP of 3.8% for all stocks. So the ERP cost of holding bonds is 3.8% per year and 6.5% per year for holding cash.
I think of these investors as opportunistic investors and will only be "invested" when the can find bargains (large in size in the case of Buffet and Klarman) with a margin of safety. They not being invested only means they cannot find large in size bargains not that stocks are poor choice versus bonds or cash. To make that decision you need to understand the opportunity cost of holding cash and bonds versus stocks.
Packer
Packer
I agree. I believe Buffett mentioned that he would be always fully invested if he has only $1M or $10M since he can always find opportunities. It's due to higher opportunity cost of holding cash for smaller asset base versus where he is now. If one cannot find enough opportunities to deploy cash (i.e. tens of billion dollar funds like Baupost), it makes more sense to return the "extra" cash to the investors rather to ask them to pay negative carry (management fees) on the cash. In my opinion, 70%+ cash is a bit outrageous. It's okay to be risk-averse, but having 70%+ cash for 2 or 3 years makes me wonder whether the fund manager worries too much about the-end-of-the-world scenario.
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Why The Dow In 2014 Isn't 1929 In Charts
http://education.investors.com/investors-corner/689822-1929-crash-not-in-the-offing-in-2014.htm
What the graph would look like if you lengthen the time and normalize the scale. It sounds smart when the doomsayers like Marc Faber are constantly predicting 40% corrections every 3 months, but no one seems to care about their prediction track records. I guess CNBC prefers entertainments that help ratings.
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I agree that I like Fairfax and the way they think, however, these hedges have become a disaster. When I first asked about these a few years ago and the AM they said these were temporary and not a normal part of their investing program but in fact since 2009 they have been. They have destroyed a good part of the returns they have generated by removing the high appreciating alpha from their portfolio. If they are too levered to hold as much equity as they want then get rid of the debt and preferred shares and delever, What you have this year is a good underwriting year that no one expects to be repeated and it has saved their bacon. Could you imagine a bad underwriting year and the investment losses combined, which is what we may get next year.
Having your strategy based on your investment alpha too is very risky because over time beta has added so much to equity returns that removing it increases risk and reduces returns. This has been an expensive and painful investment period. My take from the history of money managers that have either tried to hedge or gone to a large % cash have all lost to the market (call is the triumph of beta over alpha). I hope the folks at Fairfax being students of history can/will learn from this as they have done with other aspects of their investment approach. If they are worried about a large decline why don't they sell the hedges and buy 20% OTM puts instead? This will provide them protection and if they are wrong the upside they have earned.
Packer
Well said. When you remove the beta, you may have effectively removed a large portion of the return, which otherwise would compound, so the mathematics can work against you. Over the long haul, it can destroy a lot value. Putting on a complete hedge is effectively market timing, especially when it's over more than a couple years and ignores the fact businesses generally compound their value.
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This is where Kelly's forumla comes into play.
Let's say you are playing head of tail. Head you win 3x the bet, tail you lose your bet. You have 10$ seed money. How much should you play? If you bet all the time all your money you will end up one day or another with a total loss. If you bet 1% of your net worth you will be compounding very slowly. Kelly's formula tells you the sweet spot where you can't lose everything but where you'll compound your money the fastest.
BeerBaron
You can be very limited if you only invest in common stock (not using options). 100% investment in a single common stock can lead to the total loss you mention.
Instead, using options, you can get at-the-money calls which represent a 100% notional upside position. But then you pay for those calls by writing puts on 99 other companies.
You now have a portfolio of 100% concentrated upside in one name, but only 1% downside exposure in each of 100 different names.
These Kelly formula discussions never deal with these real world strategies. It's all Ivory Tower stuff that leads to unrealistic fears about concentrated positioning.
I think this strategy looks quite appealing, but during market corrections, correlations among the 100 stocks tend to become close to 1, so the downside may not be truly diversified.
The point of diversification isn't to prevent the portfolio from declining in market corrections, it's to prevent you from single-company risk.
So you don't wind up being 100% concentrated in JPM when the next London Whale comes along on a scale of 20x the size of the last one.
Yeah. That makes sense. I guess you can diversify away the sort of Black swan fraud risk that brought down Barings Bank. Maybe simpler to just write put on S&P index. More diversified than 100 names.
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This is where Kelly's forumla comes into play.
Let's say you are playing head of tail. Head you win 3x the bet, tail you lose your bet. You have 10$ seed money. How much should you play? If you bet all the time all your money you will end up one day or another with a total loss. If you bet 1% of your net worth you will be compounding very slowly. Kelly's formula tells you the sweet spot where you can't lose everything but where you'll compound your money the fastest.
BeerBaron
You can be very limited if you only invest in common stock (not using options). 100% investment in a single common stock can lead to the total loss you mention.
Instead, using options, you can get at-the-money calls which represent a 100% notional upside position. But then you pay for those calls by writing puts on 99 other companies.
You now have a portfolio of 100% concentrated upside in one name, but only 1% downside exposure in each of 100 different names.
These Kelly formula discussions never deal with these real world strategies. It's all Ivory Tower stuff that leads to unrealistic fears about concentrated positioning.
I think this strategy looks quite appealing, but during market corrections, correlations among the 100 stocks tend to become close to 1, so the downside may not be truly diversified.
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Computer engineering then financial engineering in MS.
Worked in risk management, derivative valuation and securitization for 6 years.
Now just investing my own smallish capital.
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How do those of you who use IB measure your returns? Do you use one of the reports? Do you use money weighted or time weighted?
IB has portfolio analysis report for monthly, daily, quarterly..etc. I believe it's default to chain-linked time-weighted as the standard where it splits the periods during which you have withdrawal/deposits and multiply these time-weighted returns. It's the recommended CFA practice.
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Just sold some XIV today. Up ~50% in the two months that I have held it. Yes I am bragging about my luck. ;D
Will reload when the VIX goes above 20 again.
Short VXX and/or Long XIV (for a small portion of the portfolio though) has been a consistent winner the past few years. I don't think it is entirely luck, the construction of these products has something to do with it. As long as you can stomach the volatility of these volatility products, I think the shape of the VIX curve kind of guarantees some of this return. I hope they don't pull these products from the market soon....
I am short VXX/UVXY as well. The near-term of the VIX curve in contango virtually guarantees the decay. I like to spice it up with levered UVXY to let the compounding effect of volatility due to leverage to work in my favor.
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69% so far this year. combination of concentration, leverage(option and margin) and luck.
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Well done, Packer! That's a fantastic track record.
Looking forward to learning more from you!
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yitech,
can you please tell me where I can find a recording of Li Lu pitching korea preferreds?
thanks!
Check out the link fareastwarriors posted.
He also mentioned briefly on the Korean preferreds in his San Francisco State University talk in April:
Part1:
Part2:
Part3:
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I did some digging after watching Li Lu's video pitching Korean preferred stocks.
You can purchase London-based GDRs for Hyundai and Samsung preferred shares via Interactive Brokers.
The conversion ratios are 2:1. You can divide the closing price in Korea by 2 and convert it from Korean Won to USD.
HYUD (HYUD.IL under Yahoo Finance) is the shares for Hyundai Preferred class 1 share (005385.KS). 4X P/E currently.
SMSD (SMSD.IL under Yahoo Finance) is the shares for Samsung Preferred share (005935.KS). 5X P/E currently.
Both were trading at larger discount to commons (005380.KS for Hyundai common and 005930.KS for Samsung common) around May/June, but the discount has been narrowing since.
They are under the exchange symbol LSEIOB1 for IB accounts.
I used to own SMSD, but now own only HYUD. I purchased HYUD at around 3.2 P/E.
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Two Brazilian Brothers to Pay Nearly $5 Million in Insider Trading Case
Greed is good? yeah?
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If by economic rights, you meant equal share of earnings per share, I believe it's 'yes'. However, preferred share holders cannot vote. The ability to vote is not much of a big deal though since the founder family have most of the voting rights anyways. Preferred shares are equity, but most companies mask it as debt by calculating EPS only for the commons below the line. Earnings for preferred are treated as preferred interest expenses above the line. So, there is some confusion whether it's debt or equity.
I know they do calculate EPS for preferred shares for Samsung, but not Hyundai in the annual reports. Moving to IFRS from Korean GAAP may help a bit as well. In addition, preferred shares are much less liquid than common and treated as more inferior by trader-minded Koreans. Also, companies rarely buy back stocks to enhance shareholder values. Unless, corporate governance and sensible accounting guidelines strengthen, the large discount may persist indefinitely.
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I did some studies on the Korean preference stock after listening to Li Lu's lecture.
You can buy Samsung Preference shares (GDR:SMSD.IL or 005935.KS) at less than 5X PE or Hyundai Motors Preference shares (GDR:HYUD.IL or 005385.KS) at less than 3X PE.
Like Li Lu said, they are franchises/compounders with large margin of safety, provided that the discount narrows (to a more reasonable 15-20%) sometime in the future of course.
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Yes. Definitely... like what Nate Silver mentioned in the book the Signal and the Noise, computers can do weather forecast relatively well within 2 or 3 days. It's a coin-toss around 7 days due to the Chaos theory. An example of the theory is that a butterfly flapping its wing in Brazil can cause a tornado in Texas that sort of thing. Various airflows can interact with each other in unpredictable ways.
It's a great book, by the way!
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Keep in mind that probability is just a % estimate of the specified event occurring, at a future point in time, +/- an allowance for uncertainty. P(ground breaking event, t=1): 85%, +/- 5% means there is an estimated 80-90% chance of the 'ground breaking event' occurring within 1 year. High enough to warrant a potential investment in the ground breaking event actually occurring.
The longer the time period the more uncertain the estimate, & the less powerful the prediction. P(ground breaking event, t=7): 85%, +/- 35% means there is an estimated 50-120% chance of the 'ground breaking event' occurring within 7 years. Essentially a coin toss. Low enough to warrant changing the strategy to shorting, or selling calls on, the company to capture the misplaced enthusiasm.
Probability is also a 'relative' measure, that assumes all else 'constant'. i.e the company business plan will remain as profitable as it currently is throughout the whole 7 years, there will be no interim financing to support development, etc. All unrealistic.
Most folks restrict their use of probability to short horizons, & the limitations are recognized intuitively.
Actuaries & underwriters excluded.
Not to quibble... But what does it mean 120% probabilistically speaking in real life sense? :)
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I just started importing in options--is there a way to format the cell so that it is in $ format? Every time I reformat, it just ignores and shows as a number. The OC in me is upset!
Simply add a "+0" in the end. It will convert string of numbers to decimal format.
Berkowitz Responds to Einhorn
in General Discussion
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St. Joe Company Settles With S.E.C. on Overvaluing Land Holdings
http://www.nytimes.com/2015/10/28/business/dealbook/st-joe-company-settles-with-sec-on-overvaluing-land-holdings.html