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frommi

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    Frauds and Bear Markets

    in General Discussion

    Posted

    I don`t know if this is a fraud but HCSG is manipulating net income by a lot. They are not able to collect receivables and at some point have to write them off. Their clients are mainly SNF and other healthcare facility operators. But the market is ignoring this fact and values the company on net income and past growth (which is unreasonable to be repeated and probably only fictious, because the growth comes from near-bankrupt clients.) I except it to fall hard in the next bear market, its maybe worth 20-30% of the current marketcap.

    Aggressive rebalancing

    in General Discussion

    Posted

    Yes, let's limit or historical data-set to the largest equity bull market ever, end it right before that 50+% correction for general stocks the following year, and use that data to determine what a reasonable drawdown for a strategy that invests in over-levered companies that are losing money to determine what a reasonable drawdown is...

     

    ::)

     

    If you expand the data set to actually include periods of stress (outside the moderate bear market in 2000 that hardly impacted value stocks as a whole), you get drawdowns of 80-90% on a handful of occasions. That's at the portfolio level.

     

    The strategy still performs over the long-term though because it consistently produces signficantly higher returns than the market. Say portfolio goes down 80% versus the S&P at 50% in a bad equity bear market. The first year the portfolio rebounds by 70% while the S&P rebounds by 30%. After that, you get 17% per year in low P/B strategy and 7% in S&P. In year 16 you're tied and by year 20 you're 100% ahead of the S&P for the 20 year period (outperformance of ~3.5% per year).

     

    Making an extra 10% per year covers a multitude of sins if you stick with it.

     

    Based on what i have seen in the past 3 years of international netnet investing is that drawdowns/volatility are smaller than the overall market. Especially if you have a lot of dividend paying japanese stocks with low betas in the portfolio. And hopefully not every netnet is losing money. I also have netnets with P/E`s of 3-10 in the portfolio. Its just that those are not available in the US.

    Aggressive rebalancing

    in General Discussion

    Posted

    Can anyone share a list (or parts of a list) of what this portfolio would currently hold? I ran a similar screen on CapitalIQ (https://drive.google.com/open?id=0B1tb4Z-iuO9Bd3NDYWxmT3JOYWc). I've looked through a good number of the results and haven't found any that really jump out at me as good investments. That has the bias of my opinion, so the key to making the strategy work may be to eliminate that  ;). Some are Chinese companies, some are retailers with deteriorating results, some are homebuilders/land owners, some don't have English financials (which leaves you betting on the CapIQ/Bloomberg analyst inputting the numbers correctly).  Trans World Entertainment is one I've watched for a while... they have a large shareholder, a lot of inventory and a huge amount of NOLs. If they just slowly liquidated stores as sales declined and reinvested that into something low risk but cash producing it would be a great investment. Instead they overpaid for an Amazon seller that loses money.

     

    My personal experience has been that investing primarily on the basis of low price/book / net-net has generated my worst results. Again, that's a limited sample set which incorporates my selection bias. I'm skeptical of a company that can't earn decent ROIC in today's economy, unless it's O/G (or something else that is cyclically down).

     

    I ran the screen frommi described above against the Portfolio123 data today and it is only returning 2 current symbols.

     

    GIGM GigaMedia LTD MktCap ~33m and NCAV ~57m

    MSN Emerson Radio Corp MktCap ~35m and NCAV ~52m

     

    Yes, there is no way around international markets if you want to build a diversified netnet portfolio at the moment. The most stocks in my portfolio are currently from Japan, Singapur, Hongkong and Poland.

    Aggressive rebalancing

    in General Discussion

    Posted

    Frommi,

     

    Curious as to how you were able to get such promising results.  I also have a portfolio123 and just tried a similar simulation using your rules and the results were abysmal (negative annual returns)

     

    This is my attempt to mimic your rules above:

     

    Buy Rules:

    ($NCAV2/MktCap) > 1.4

    Price > 0.1

    Vol10DAvg > 0.1

    MktCap < 150

    (SharesFDQ / SharesFDPY) < 1.2

    ($NCAV2/$NCAV2PQ) < 1.25

    ($NCAV2/$NCAV2PQY) < 1.25

     

    Sell Rules:

    $NCAV2 < MktCap

     

    Definitions:

    $NCAV2 = AstCurQ - LiabCurQ - PfdEquityQ

     

    Universe:

    All Stocks USA

    Exclude GICS (352010 - Biotech, 40 - Financials, 10102020 - O&G Exploration)

     

    Exact rules:

    https://drive.google.com/open?id=0BzQbS-AUNeo9UHpjZm1aaks3a00

     

    exclude china and sharecount 5% allowed difference instead of 20% may be the drivers.

    Aggressive rebalancing

    in General Discussion

    Posted

    Frommi in the Google Drive links you posted it shows that the rebalance frequency is weekly, is that correct and did you notice weekly performed better over the same period than monthly/yearly?

     

    Since it is a portfolio simulation, that is the frequency the engine uses to evaluate if it has to execute a buy or sell-rule. Stocks are only bought or sold if the rules are met. Yearly or monthly rebalancing is worse, because the simulation can`t take advantage of price drops/surges in between that timespan. I checked the transaction log after the simulation and it was the way i expected this to work.

    Aggressive rebalancing

    in General Discussion

    Posted

    I looked at my account statements and you are right, trading japanese stocks was pretty cheap, but trading otc stocks with very low prices and buying australian stocks was expensive for me. (around 0.5% per trade, so i took that as a reference.) And when you don`t cross the ask its sometimes hard to build meaningful positions, thats the reason i think that 0.5% slippage in a backtest is reasonable. I missed the point of not rebalancing the whole portfolio so you are probably right that it doesn`t lower the returns so much.

     

    But a part of whats going on with monthly rebalancing might be that you are capturing the bid-ask spreads when the closing prices bounce between them.

     

    @stahlehyp you can start a portfolio123.com trial to get lists of netnets.

    Aggressive rebalancing

    in General Discussion

    Posted

    Does the bloomberg backtest use realistic transaction costs and slippage? With netnets slippage can be the deciding factor if more or less rebalancing is better. Also the tax consequences of monthly rebalancing can ruin your backtest. 1% per month easily eats the excess return of a monthly rebalance. (And maybe you can do this with a tiny amount of money, but i don`t think you will be able to monthly rebalance a netnet portfolio with more than 500k in it.)

     

    The best i was able to get in a backtest with portfolio123 was a CAGR of 51%, but the drawdown was 68%. It was an equal weight simulation of the 10 netnets with the highest discount to tangible book. With 20 stocks it looked more "useable", since it was still a CAGR of 44% with market like drawdowns. I used 0.5% as commission and 0.5% as slippage which is still very optimistic for a netnet-system in my view. That system used a rule to sell at NCAV, so no fixed holding period. (either NCAV deterioated very fast or the stocks go up to NCAV, i don`t think there was a stock longer than 3 years in the portfolio.)

    My hypothesis on why it is hard to beat the index...

    in General Discussion

    Posted

    It is mostly hard to beat the index because the majority of index gains come from very few stocks. Most stocks lose money.  If you are actively selecting stocks it is likely you will miss those winners.

     

    If you closet index you will likely select the winners but have high fees.

     

    Therefore it makes sense that few outperform the index. It is not the case that 50% of people should outperform and 50% should underperform with random concentrated stock selection given the distribution of stock gains is waited heavily to a small subsection of the index. In that scenario most should underperform with some really massive winning fund managers.

     

    The momo effect of indexing also ensures you cut losses on nearly all stocks that go to zero and are invested in all stocks that compound value by default.

     

    I just read that in the past 5 years only 13 of 500 stocks in the S&P500 outperformed the index. My conclusion is that you either have to go hunting outside the index (microcaps etc.) or you have to increase your turnover to outperform. Going the microcap route is the easiest route to outperform with small AUM and at the same time the hardest thing for people to do because it is viewed as risky by most investors.

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