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NomadicRiley

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    What I Learned About Investing From Darwin - Pulak Prasad

    in Books

    Posted

    Thoroughly enjoyed this book.  Thank you @cash_incinerator for the recommendation.

     

    My only quibble is his fund appears to be structured like VC / PE where the LPs make commitments and the fund then calls them as needed.  This reduces the penalty of "waiting" for these valuation shocks as they have not called the money yet.  I wish he'd included a chapter/section on how this strategy impacts overall returns for individual investors who have often have money coming in monthly and the cost of waiting 5+ years between valuation shocks can be quite high as the overall index has likely advanced substantially.  This was especially true in the 2012->2020 window when interest rates on cash were so low.

     

    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

     

     

    Aggressive rebalancing

    in General Discussion

    Posted

    Here are the results of my tests:

     

    10 stocks:

    https://drive.google.com/open?id=0BzQbS-AUNeo9OUt2NEZHcHpaM1U

     

    20 stocks:

    https://drive.google.com/open?id=0BzQbS-AUNeo9ZDRPaGJQeXJISWs

     

    buy rules:

    ncav/mktcap > 1.4

    price > 0.1

    avg. volume10day > 0.1

    mktcap < 150 million

    stable sharecount

    ncav burnrate < 25% YoY and QoQ

    no biotech,financials,o&g stocks.

     

    ranked by tangible book

     

    sell rule:

    ncav < mktcap

     

    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)

     

     

    Your highest conviction idea for 2014 + why

    in General Discussion

    Posted

    Thanks a lot for the explanation.  Really great insight.  I will keep it in mind.  Sorry I am a little uninformed, but isn't the Volcker rule going to force the big banks out of this business?

     

    My understanding under the current interpretation of the Volcker rule is that pure market making is still allowed.  I have not heard anyone in the industry mention or imply that the banks will be under any pressure to spin off their market making arms like they were forced to do with their prop and hedge fund arms.

    Your highest conviction idea for 2014 + why

    in General Discussion

    Posted

    A fund manager that I know who is currently managing double digit million AUM had mentioned that interactive brokers is far better than all the other market makers out there.  I trade through IB as well.  It does appear that the infrastructure does allow you to do all sorts of trades even with a smallish amount of capital.  He firmly believes that IB has a long runway.  Thoughts?

     

    Yes, IBKR is miles beyond any of their brokerage competitors.  They also have more than enough internal flow to support their Timber Hill market maker.  They are players in the external flow market making area, but not nearly as dependent on it as the Knights and ATDs of the world.

    Your highest conviction idea for 2014 + why

    in General Discussion

    Posted

    Thanks for the feedback.  So you don't think that the technological infrastructure, know-how, and regulatory system will keep others from taking market share from Knight?  It seems like others would see the trading glitch as a good reason to stay away as it is an easy business to shoot yourself in the foot in.  Since there are some people in the industry here, are GETCO and Knight going to offer a better product than the other market makers?  Why are competitors trading at over 3x TBV while KCG is just a little over 1x TBV?

     

    The lack of moat for market makers is partially because it is a secondary business for most of their competitors which provides benefits for their primary business and is not forced to stand alone. 

     

    In the case of the large investment banks (Citi, Morgan Stanley, Goldman, BAC, etc.), there are multiple benefits:

     

    1.  For firms that they have a prime broker relationship with (hedge funds, buy side, prop, etc) they will often stipulate that as part of their prime brokerage agreement the firm is obligated to send their firm through the investment banks infrastructure / market maker and if they chose to route to a different firm they will have to pay additional fees. 

     

    2.  All of these firms have a substantial amount of "captive" order flow that originates from their retail broker and wealth management arms.  Their market maker division gets exclusive rights to this.

     

    3.  They view it as a service they are expected to offer as part of an overall relationship with large customers.  Not having this capability could be viewed as a negative when pitching large potential clients.

     

    The second set of firms that often end up with market making firms are HFT/Prop firms (Wolverine, Two Sigma, Getco before Knight merger).  In this case, these firms are already active on the major exchanges running their own HFT algos and trading their own accounts.  At some point, they realize that by virtue of being a successful HFT they have created the vast majority of the infrastructure required to be a market maker for client flow and since the majority of the infrastructure can be shared any additional revenue they generate from attracting client order flow will offset the increasingly large costs of maintaining an up to date infrastructure.  Furthermore, the idea of having some diversification from prop trading which is heavily dependent on volatility and volumes is extremely attractive.  The interesting thing is that most firms don't move in this direction until their HFT profits have peaked because retail market making is far, far less profitable than successful prop trading.

     

    The final problem these firms face is that all of their clients have relationships and connections with multiple of their competitors so in the case where a firm does get into trouble, their clients completely abandon them w/in hours.  This is what happened with Knight during their blowup.  In the couple days between the event and the announcement of the new investor buy-in, the majority of their clients had ceased to send _any_ orders to them.  Why would they take even a modicum of risk when they can receive the exact same product at multiple other firms who did not have that same level of risk?

    Your highest conviction idea for 2014 + why

    in General Discussion

    Posted

    I would be less worried about another trading glitch and more worried about the erosion of the market making business model over the last decade. A lot of it is driven by HFT hedge funds (a superior business model). Some is also driven by more efficient brokers. How low will their ROE go? If they can only earn 5% ROE going forward, it's not worth book value.

     

    I also work in the industry and agree with constructive.  The market maker space is incredibly competitive and provides no sustainable moats.  There are often price wars when new entrants enter the market which drives down returns for all participants.

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