DoddDisciple

Has anyone used both platforms and can compare? I was originally thinking Fidelity for international trades since I have heard IB is notoriously unhelpful, but if I am not doing frequent trading, maybe any pains in IB are worth it for the lower costs. For example, you mentioned above that the Forex (which I guess you would have to go through to turn your USD into whatever currency you then want to buy stock in, right?) is less than 1% in IB, but Fido is pretty much 1% for less than $100k. I also noticed the $50 foreign OTC fee. Can you negotiate with Fido or anything like that? Thanks!

Shoot, I wrote all that and forget another question for Nate, though anyone else is welcome to chime in. From your blog, it looks like you have an employer-sponsored 401k through Fidelity. Since you've said they restrict you to funds, that means you either have a list of overpriced Fidelity funds or the BrokerageLink option that allows you to invest only in funds, not individual stocks. I almost feel like doing a 40/60 split between domestic and international in the plan, but the funds (196 of them) have atrocious value representation, and even worse international small offerings. FISMX I believe has the lowest average market cap for international funds at $1.4B, but it is heavily weighted to growth. For domestic, FCPVX has a little more value weighting and is at $1.6B average market cap. The fees on each of these is around 1%, which feels like highway robbery since I know ETFs that would get me the same exposure I am trying to get with these funds, but better and at lower cost. I've tried to get BrokerageLink to be added (funds only or full), but I don't think it will ever happen. I'd appreciate if you or anyone else has advice, especially on what funds go well in combination with a deep value/net-net strategy.

Wow, I have to thank everyone who's posted so far! I've tried to respond to everyone below. Re: ubuy2wron This is my thought as well, and part of the reason why I want to figure out a gameplan I can stick with before undertaking it. I'm looking at each 20 names or so being its own portfolio, and letting positions work out, for better or worse, naturally and for what's left, closing them out after the 3 years. Conceivably, I could end up with having 100+ stocks as a complete portfolio, and there may be some overlap in each basket purchase as well. Re: Packer16 At least when it comes to net-nets, studies have shown underperformance when value weighting versus equal weighting. Nate/Oddball had a link to a European student's thesis who discussed this. In Oppenheimer's older net-net paper, he noticed some odd things like how the firms with negative earnings as a group earned better returns than those with positive earnings. For a strategy like this, I'm not looking for outperformance relative to deep value investors who actively hunt for deals at all times, but I am looking to beat the general market (S&P 500) and more small size/value focused indices in the long-term. On the comment of ownership, I understand that my money can get stuck so-to-speak with suboptimal firms. However, would looking at f-score (and possibly z-score) as quality factors along with aggregate insider ownership help diminish the problems I would personally experience, along with utilizing a basket approach? If I were trying to actively force a liquidation, I can understand the complication, but as a portion of a larger hands-off portfolio, and with selling after 3 years versus holding onto the stocks for a decade or so, should I worry about this? Re: NormR It's funny that you mention the quantity of net-nets at the moment. One thing I was thinking long-term, though it may involve too much tinkering with a mechanical strategy, is looking at the number of net-nets as an indicator of current market under/overvaluation, and how that should influence, say, the portion of new money that should be directed to funds like Merger (MERFX) and the Arbitrage Funds, along with other special situation and workout stocks/funds. This is inspired by Graham who suggested a general 50/50 split between bonds/supercash and stocks and that the max to push any one area was 75%-80%. Sonkin had a similar structure with his Hummingbird fund, though Tarsier was just raw deep value. The lack of net-nets could be one indicator that domestic markets are overvalued. Greebackd has been doing a series of different studies that all show we are due for a correction. Part of me says to just develop my plan and start now if I am going to follow a mechanical strategy. Would you mind telling where you'd recommend running the screen? I don't have a problem with a subscription service, but would like as much of what I need in one place: (1) global net-net screen in majority of publicly traded markets - probably can't find anything to screen for a lot of unlisted/OTC stocks aside from by hand or with something like Nate's unlistedstocks.net (2) f-score, z-score maybe, insider ownership (3) maybe net-net, NCAV, NNWC values - again will still verify numbers are accurate and not the result of a data misread I've seen GuruFocus, Value-investing.eu, StockScreen123, Screener.co, and the Graham Investor screener as possible options so far. I worry about data quality on some, like Graham Investor, of course. I think the benefit, at least with the backtests Geoff did, is that he used StockScreen123, which uses Compustat and is supposed to be a database that keeps records for liquidations and bankruptcies, as well firms leaving for the OTC index, reducing survivorship biases. You can find a stock like Solitron in CompuStat since it was once in NASDAQ, but for something that has always been OTC, it's not included. Re: no_free_lunch (1) Sector diversification could make sense. However, if you look at other mechanical strategies, like Greenblatt's Magic Formula, there are concentrations in certain sectors at times, which may be a component of the strategy's performance. For-profit education showed up on a lot MF screens lately: perhaps a storm of negativity over a sector sinks all ships, and while some may never come back up, if bought in a basket, the winners should make up for the losers. Also, I'm looking at net-nets with quality filters provided by F-score and insider ownership. Using the example of financial stocks, if I could buy a basket of them as net-nets and they had a quality F-score, a no-nothing approach should lead to reasonable results. (2) I agree that knowledge of a formula as well as access to more ways of screening/backtesting can cause outperformance that was there to disappear. Oddly enough, I feel more comfortable with a net-net strategy vs something like the MF or the numerous other strategies out there in that it is an area where it is unlikely for institutional and other sophisticated investors to enter in a large enough degree to dissipate returns. The existence and outperformance of net-nets has long been known in the investment community, but it remains one of the simplest methods of basket investment and even with the most no-nothing strategies, such as Oppenheimer's buy all the net-nets available each year, it has shown potential returns of up to 30% p.a. There was talk of John Simons' Renaissance Technologies making some investments in net-nets, which was odd for a quant hedge fund. Maybe that's a sign of experienced traders finding a way to profit from the price discrepancies of smaller stocks and future returns in the area may be impaired. I don't know how valid the papers in the net-net area are, but Tobias from Greenbackd contributed to a recent net-net research paper where they ran a net-net strategy through a multifactor model, and outperformance from net-nets could not be fully explained by current factors, like size, value, momentum, etc. Re: craigatk Really good on-the-ground information here! I know that at lot of value bloggers have notice Renaissance Tech engaging in net-net investing as of late. I don't know what this means for the strategy in the future. Japan seems to be a hot area now for people looking to apply basket net-net or extreme low p/b strategies. I have seen several value bloggers who have initiated basket purchases in the area, and research as shown that of global net-nets, at times more than 50% have been located in Japan. Jim Grant had a Japanese net-net fund that was unable to unlock value and was shuttered, but I don't know if that presents a similar warning for individual investors. Expansion to a global level is ideal, but it doesn't look like small-guy screeners have caught up yet. I've read that Nate from Oddball goes through foreign markets by hand, which I am not against, I just want to ensure I am covering the largest pool once I enter those markets. Would you think that the basic idea, which is ranking net-nets by insider ownership and F-score, would still make sense in global markets? Would a stronger form of net-net calculation, like the 1.00-0.75-0.50 method or 66% method, be recommended? Re: blainehodder Not selling at NCAV seemed cornerstone to the success of the basket method, so I would want to deviate as little as possible from that. I almost think the 2-3 year component could be a stronger driver of returns since it is a time frame that runs so contrary to other strategies as well as uncertainty tolerances. I know Geoff recommend up to 5 years, but absent at least some research in the area, I don't know if it is wise to hold onto something that long. 2-3 I can see due to the 50% of net-nets remaining net-nets the next year statistic, so only around 10% of the stocks wouldn't have had a movement by then. Do you have recommendation on holding period or a way, aside from by hand, of looking at longer than 1 year holding periods? An annual check wouldn't hurt, but what would I do at that stage? I would check to ensure the stocks had passed as a net-net and had the correct valuation along with F-scoring before initiating the basket purchase. If the NCAV spread had increased, maybe it would still be included in a basket purchase (and analysis would be covered when performing that purchase). If it's above NCAV, I of course wouldn't want to fool with it. One thing I considered was a floor for loss on any one stock, but even for large cap stocks the price can swing as much as 50% over the course of one year. Where do I set the floor? 70%? 80%? Or does doing the quality screen at the start make this step unnecessary since I could just chalk a company bankruptcy up as just one of those things that happens with a mechanical strategy. Re: vinod1 I was really excited for "Quantitative Value" and actually pre-ordered it which is super weird for me. However, after reading it, I was a little let down at the information relative to what is found in the earlier posts of Tobias' Greenbackd blog. Nate went into some of the book's complications for small investors at Oddball, such as how the authors elected to focus moreso on large cap stocks. Realistically, they presented several ways of computing value and reducing risk which in aggregate are too involved for a purely one-man, mechanical strategy. Near the start of the book they touched on one of Graham's strategies he presented late in his life (it was the one from his Medical Economics interview). For effort involved, the strategy performed just as well in the long-run as the model they developed over the course of the book. Of course it looked more risky since they were looking at a smaller pool of stocks, so there were times when Graham's strategy would have involved being fully invested in one stock. I'll poke around Fool's Mechanical Investing board some more. I did see some sample net-net performance portfolios on there, and the one year returns were sometimes mind-boggling for a quant strategy, like 200%. Of course, I think that was for 2009. Maybe I'll make a post on there. Re: oddballstocks Hi, Nate. I love your blog! You are probably one of the most prolific investment writers within a one hour radius and definitely the most generous with your ideas (weird thing to say, I know, but I'm within an hour of you and you're competing against several R1 institutions in that radius). I actually wondered a little about "What would Nate think?" when writing this post and after seeing your thoughts on "Quantitative Value." I had many of the same problems you did with the book. I know you cover a lot more area than just net-nets, but for a pure know-nothing strategy, basket net-nets are one of the few areas where this could really work since there is a clear buying indicator. The selling is a little unclear, but the value spread is made at the buying, and selling is less important. George Risk seems pretty popular. As far as I know, it along with Ark are the only 2 domestic stocks Geoff owns. I recall a post of yours about how you should seriously consider selling at NCAV on some stocks since they can be pretty ugly and if you can get your value out of them quickly, that's all for the better. I'm sure you still think about it on a case-by-case basis. It's interesting that you are buying stocks around the world and are going very old school about it, going straight through the list of names on that country's exchange. You don't even subscribe to any screeners, do you? You just use FT.com, maybe Bloomberg's site if you have a name, and a lot of by hand research. I'm not a programmer, but do work with some on online projects, so I understand what you're talking about and appreciate the parser offer. I'll definitely investigate those investment communities. One interesting thing is that Geoff started the net-net newsletter on GuruFocus, but then it looks like you took it over. He had a hold for one year and then sell strategy, even though he said he would prefer a multiyear holding period. Now, you've adopted buy/sell/hold recommendations. Geoff had one article about how to put $1M to work in net-nets, which essentially meant buying the same stocks the newsletter recommended. I honestly don't know which strategy will do better long-term. Re: hielko Couldn't the same problem regarding enrichment happen in any company? I would think that prioritizing the net-nets and seeking those with high insider ownership would do a good job of aligning interests, even if the interest of management is to buy out the rest of the firm and take it private, possibly at a suboptimal price relative to estimates of value. I agree that a value-based, instead of time-based, selling approach works better with a mechanical strategy. All I would want to know going in is that, in aggregate, most of the stocks are being purchased below a very pessimistic liquidation value at a point in time. Of course, some firms can continue to burn through cash, but in total, the goal of the businesses should be to generate shareholder wealth now and in the future. Investing in net-nets in a mechanical way is almost a leap of faith, in that we see the value now has a margin of safety, but we are unsure what will happen to unlock that value. We can try to analyze what will happen, but the market always has ways of surprising us, both good and bad. Could this mean low risk, high uncertainty in the long run?

Thanks, West, I honestly don't know if I should just delete this post and make a shorter one - maybe that would prompt more results in the long-run. What I am really looking for is an investment style that fits my personality. Net-nets appeal to me since from Graham on up, people have had success with the method and it looks like it is an area institutional investors are aware of, but can't necessarily enter and invest to a level that returns are removed or diminished (versus, say, Dogs of the Dow). Net-nets' success is predicated on mean reversion and buying below conservative estimates of real-world value. Even on the question of total loss, I remember Greenbackd or Montier looked at net-nets versus the total market, and I believe 3% of the total market blew up, while 6% of net-nets did, which could definitely be insulated by buying in baskets and buying the "higher quality" ones. I have done some research on Greenblatt's magic formula as well. Some people said that his use of EV/EBITDA was the main driver of returns, and the ROC measure actually reduced returns while averaging out the volatility somewhat. Overall, I don't doubt that it works, but I like the 3 year holding period with net-nets that Geoff proposes (and I don't think you could do that with magic formula stocks necessarily) since I would have a harder time following a strategy if I have to rebalance my entire portfolio once a year versus rebalancing a lot of mini portfolios as their 3 years are up. I am planning to keep transaction costs at 1% of assets per basket purchase and then sit on my hands until the 3 years is up. Any estimated returns from net-net portfolios I have seen act as a ceiling on expected returns, not a floor, and I believe extended meddling from me would do nothing but detract from that. I really enjoy all those blogs you mentioned :) It just seems that, the more I look into it, a purely statistical strategy similar to what Graham suggested late in his life is most beneficial for those willing to deviate outside of the norm when it comes to investing, but still remaining somewhat reticent when it comes to day-to-day action.

This is probably odd for a first post, but I am trying to elicit feedback and hopefully this is a good place for it. I know this may end up being a case of "too long, didn't read," but if not, I really appreciate any comments and thank everyone who posts in advance :) I am seriously considering quantitative, mechanical basket net-net investing as a long-term strategy. I have a general idea of how to accomplish this, and perhaps I am overthinking things trying to find more information since a lot of papers, posts, and what have you make it look like just a systematic accumulation of net-nets can lead to at least decent results. In particular, there is one article by Geoff Gannon that presents a decision framework that is compelling: www.gurufocus.com/news/121824/how-to-pick-netnets. ValuePrax also has a summary of the "net-net magic formula" that Geoff develops in the article: http://valueprax.wordpress.com/2012/05/16/notes-how-to-pick-net-nets-two-philosophies-from-geoff-gannon-and-gurpreet-nurang-geoffgannon-net-nets/. In brief, net-nets are extreme P/B stocks, so it is clear that we already have the cheapness factor taken care of. However, Geoff presents a quality screen of F-score and insider ownership being used for ranking which appears to lead to outperformance. He presents some portfolio return information using StockScreen123 from March 31st 2001 - February 7th 2011. In a portfolio of 12 US net-nets, sold and replenished annually, 20% per annum is generated. Comparing net-nets less than $25M market cap and greater than $25M market cap, the former generates 21% p.a. and the latter 11% p.a., showing a size bias. From experience, he thought that one particular group, that with the highest insider ownership and below $25M market cap, would generate excellent returns. I think I'd have to describe the calculated 32% p.a. for this group as beyond excellent. For another metric, F-score, the return was 25% p.a., though I am not sure if this is among all net-nets, or with just those below $25M market cap. At this point, I honestly have not seen anything better than the above when it comes to a systematic investing in net-net stocks. StockScreen123 uses Compustat which is an excellent sampling of NYSE, NYSE-AMEX, NASDAQ, and some OTC stocks that would be able to capture most, if not all, non-OTC US net-nets. Picking stocks where the owners have an incentive to unlock value, where the price is below liquidation value, and where there can potentially be a quality filter via the F-score seems like a foolproof way to generate returns. I don't know if anyone has ever done this (probably not, since it isn't all that much fun for those actually interested in security analysis), but I'd like to pose some questions to see in what ways this can be optimized further and how I can further solidfy my gameplan: (1) Sizing - I use Fidelity right now for investing, so I would want to initiate positions so as to keep the round trip commission at 1% or less, so $1,590 with $7.95 per buy/sell. Geoff uses a portfolio of 12 in his screens, but I could see doing baskets of 15 or 20 (for a nice 4% of assets per stock), so at least $23,850 to $31,800 per basket purchase. I could see myself doing several basket purchases a year for the foreseeable future and I have several decades as a compounding runway. (2) Ranking - Combined score for insider ownership (0.0 - 9.0, example 5.0 = 50% ownership) and Piotroski F-score (0.0 - 9.0), rank high to low and buy top X in equal weighting. (3) Pricing - Here's an area where I am a little unsure. I believe Geoff's just looking at stocks where current assets exceed total liabilities, versus Graham's (1.0 x cash) + (0.75 x accounts receivable) + (0.5 x inventory) + (sometimes 0.1 x fixed assets) and also his 66% of the spread between current asset and total liabilities. (4) Selling - Geoff recommends holding for 3 years. This seems to be an area where almost everyone else believes to sell close to NCAV, which could make sense if you were initially selective of the stocks purchased. However, the more I think about it, a 3 year holding makes sense for a variety of reasons. For one, I have read that of all net-net, about 50% are still net-nets one year later, meaning that the typical 1 year holding period could shuffle what is already purchased to replenish the basket. By 3 years, perhaps only 12.5% of the stocks will be net-nets, and the rest will have had some activity, even if that is having gone to zero. Also, the 3 year period allows for semi-market neutral activities, like going private, buyouts, etc. to occur and unlock the value prematurely. (5) Buying - Here, I will use limit orders on the net-net, NCAV, or NNWC figure calculated. I could possibly even try to earn on the bid-ask spread by pricing 0.005% less or more than my calculated value or the last trade price, whichever is less, since there is no rush to accumulate shares if there is a 3 year holding period. Beyond the above, I have wondered about several other aspects: (1) Timing - Are there any "January" effects in net-nets and, even if there is, does it matter with a 3 year holding period? I recall there appeared to be one in one of the papers Greenbackd contributed to, where there were large sell-downs before the end of December and the prices remained depressed through some of January due to tax loss harvesting. Even then, I almost feel a random initiation of a basket of limit orders as enough assets are accumulated to keep the buy/sell at 1% of less makes the most sense. (2) International - Could the same model be applied internationally, possibly even eventually having a global net-net portfolio, where the highest f-score and insider ownership stocks regardless of location are sought? Montier found that a basic net-net strategy worked in all markets, though of course in differing degrees. Would the same methodology Geoff proposes work? He talks about avoiding Chinese reverse merger net-nets (which the F-score should catch these as well as any other similar offerings in the future), but I am not sure if foreign net-nets are to be avoided in general. (3) Data - I know StockScreen123/Portfolio123 is one option, but that is covering only US stocks. Screener.co is supposed to have 40k global covered stocks. Value-investing.eu already has F-score calculations and is supposed to cover 22k US and International stocks. Beyond this, would anyone have anything else to recommend aside from massively expensive Bloomberg, CapIQ, and other packages? I don't have a problem checking and performing the calculations by hand (I actually planned on doing that to ensure there weren't any false net-nets), but my main goal is to get as complete data as I can. If this is between multiple packages, that's fine too. It's probably too much to ask to find a single place that does the F-score and insider holdings calculations for all global stocks. (4) Compliment - What would be the best complement to a pure net-net portfolio? Perhaps funds that invest in mergers and arbitrage (or possibly following something like Fat Pitch Financials)? Or, if the money invested doesn't need to be accessed and is locked up for 3 years, is going full-on net-net acceptable? What about in plans (like 401k, 403b) where investment options are limited? Would investing in small cap value domestic and international funds (which are really nothing like net-nets when the average market cap of holdings is $1B) be a poor complement and should something else should be sought? (5) Alternatives - I know the research in this area is extremely slim, but is there anything better than Geoff's idea? The underlying logic of a net-net portfolio seem sound, and even mechanical strategies where rebalancing is increased dramatically still perform decently, as shown by Jae Jun's OSV NNWC screen and backtest (18.28% p.a.). Is there are way to expand market coverage (aside from Nate's unlistedstocks.net) and is that even necessary? We are already in the CSRP 10 category in terms of market capitalization here. I know this has been probably one of the longer opening posts on here, so thanks to anyway who stuck with me on it :D Really looking forward to your all's thoughts!