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Mohammed Al Alwan

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Posts posted by Mohammed Al Alwan

    position sizing

    in General Discussion

    Posted

    I read this book written by two NY Times reporters years back called "Blind Man's Bluff" about the Cold War that involved true stories about submarine espionage.  One of the stories involves the USS submarine Scorpion that disappears in 1968 to the bottom of the Atlantic with all hands lost.  This sets off a frantic search by the US Navy to find its lost sub.  All they knew was its last reported position, the path it was on (it was heading back to base at Newport News, VA after a tour of duty in the North Atlantic) and only vague other bits of information.  The area to be searched was a large part of the North Atlantic near the US coast.  It was kind of hopeless that the sub would ever be located.

     

    https://en.wikipedia.org/wiki/USS_Scorpion_(SSN-589)

     

    So the Naval Officer in charge of the search operation (a kind of Hunt for Red October Jack Ryan type of guy, I guess) comes up with a novel plan.  He doesn't just reach out to experts like other submarine commanders.  He assembles a wide range of folks - some with submarine knowledge, mathematicians, salvage ops men - basically a diverse set of knowledgeable people but not all experts in subs.  He briefs them with all the information and data that the Navy has related to the USS Scorpion's last voyage.  He then asks them to go off on their own, sift through the data and independently offer their best opinion on why the submarine ran into trouble, its speed and its steepness of descent so as to locate where it might have touched bottom.  He makes it interesting by offering a reward and prizes to the winner who comes closest to the actual location if/when the sub is located.

     

    The individuals' guesses were assembled on a map and using some fancy math (Bayes Theorem) -- a composite guess of the "crowd" was isolated based on the collective estimate of the group as to where the sub might be located.  The location was not a spot any individual member came up with or picked.  But a search was started focusing on the spot identified by this collective method and five months later the sub was located within 220 yards from where the group's estimate said it would be.

     

    Ok - why tell this story.  Because collective wisdom is what the stock market operates on.  It is why it is generally an efficient market.  The various participants individually all have guesses about the fair value of a stock.  These guesses are made up of lots of random guesses + a tiny bit of signal information in each guess.  As these guesses are aggregated, the random parts cancel each other out and what remains is mostly pure signal.

     

    I long ago gave up on using the Kelly Criterion.  That is because according to the Kelly Criterion the size of the bet is determined by the formula:  Edge/Odds = size of bet.  But here's the thing - according to the formula if your Edge = zero, then the size of bet is "Don't Bet!". 

     

    If most of us are truly honest with ourselves, do we really have an edge in picking an individual stock vs the market.  Do we think our guess as to where the "missing sub" is located is going to be more accurate and correct than the collective wisdom of a diverse group of actors with money on the line?  Are we really just punters when we think we are experts?

     

    The good news is that unlike most gambling games (which are negative sum), the stock market is a positive sum game.  All we need is to go with the market via diversification in a group of 10-15 high quality businesses and we will do fine.  So my recommendation is to put away the Kelly position sizing stuff because if you think you have an edge then you are making big bets that you alone can locate a "missing sub" better than the market can.

     

    wabuffo

     

    p.s. the USS Scorpion story is also featured in James Surowiecki's "Wisdom of Crowds" book.

     

    the problem is  for the wisdom of the crowed to operate in stock market you need diversity and independence which usually breakdown at market extreems.

    position sizing

    in General Discussion

    Posted

    Agree with all of the points mentioned above.There was a reading in CFA level three that really changed the way I approach my personal portfolio  as well.The reading was about asset allocation for human and financial capital .The idea is that early in your life most of your net worth is in human capital which are cash flows distant in the future and your financial capital is little.

     

    So, if you consider your financial capital allocation only ,you might be underinvested and not concentrated as you may think. It touched on the correlation between human capital and financial capital. for-example ,you work in wall street and most of you pay is variable and equity like, by concentrating say on financial stocks you are actually more concentrated than you think because at worst you may lose your job (human capital) and your financial capital (stocks go down ).i think now it's being revised under risk management for individual portfolios worth a read .

    minority interest and valuation

    in General Discussion

    Posted

    Thank you Packer16

     

    actually I am looking at multiple MI for a petrochemical company SABIC AB Equity (Bloomberg Code).unfortunately the accounting standard don't use market to market for MI but use book value.

     

    my concern on MI is only if you do look at Multiple alon,however,if your doing some DCF type of analysis then its not an issue as you can subtract it from EV to arrive at equity value.

    minority interest and valuation

    in General Discussion

    Posted

    Thank you Hielko

    actually if you calculate EV you can either include or exclude MI, if you opted to include or exclude you  need to make sure  both Numerator and denominator are apple to apple . My question was what is the best way to tackle it and it seems that the best way is to exclude MI from the calculation in both Numerator and Denominator.

    minority interest and valuation

    in General Discussion

    Posted

    I have a question on the impact of Minority interest (MI) on valuation.

     

    When comparing a company with MI and this MI is big as pct of EV vs a company with no MI based on multiple say EV/EBIT or EV/EBITDA what would you do. A friend suggested that you strip out MI from both Numerator and denominator and compare them apple to apple. I disagreed and my argument was that I already subtract MI when I calculate the EV a the end to arrive at the fair equity value .So,what is the point of this adjustment!!

     

    second point, is the MI is an accounting figure and not based on market value. what would you do for companies with MI would you strip it out as suggested by our friend or is there a better alternatives as this use of accounting value would make company look cheaper.

     

     

    Audio books and podcasts

    in General Discussion

    Posted

    the following is a list of podcast that I listen to and find useful.

     

    The knowledge project by Farnamstreet

    the Big trade Series

    Masters in business

    Wealth Track podcast

    Value investing podcast by MOI

    CFA institute Audio Podcast

    CFA institute take 15 Series

    Optimize with Brain Johnson

    MTA association podcast

    Freaknomics Radio

     

     

    Valuation - McKinsey

    in Books

    Posted

    McKinsey book is an excellent reference on the topic but a better book in my view which I think is underrated is Greenwald book which provides the best valuation framework I have come across.However,with regard to valuing franchise or growth companies greenwald second book which is competition dymetified is better than first book .The author is supposed to finish an updated version of his first book value investing where he update his work on franchise investing but for a reason or another is not yet out.

    CFA later in life? Anyone do it and how did it work out for you?

    in General Discussion

    Posted

    I just came across an interview with CFA institute president and he mentioned that he got his CFA when he was 40 and after 20 years in the industry .so,I don't think you are starting late.

     

    my take on the CFA program

    I just sat for level 3 on Saturday and I am professional money manager with 11 years experience. I do mainly equities in frontier markets. I find the CFA program very useful if you work in portfolio management or equity research .will the CFA make you great money manager or analyst I don't think so.based on CFA research published in their website they could not find correlation between successful equity analyst or portfolio manager and the CFA program.However,many successful value investor holds the CFA designation like Mario gabali,bill miller,David Herro,Steven Romick, bill gross,Robert L. Rodriguez, John Neff,John C. Bogle etc. These are just few names that came to my mind.

     

    if you study the history of the CFA program its founded by the father of value investing ben graham as way to show that you are serious and committed about investment profession industry .in earlier years the CFA program level 2 was based on security analysis book. The program is evolving since then.

     

    the price you pay is high in terms of commitment and social life and most of the value of the charter is that if you are outside the industry and want to break in.if you are already in the industry the benefits of the charter would be in terms of knowledge which as some one mentioned above that you can acquire. Also, the CFA charter is appreciated more in emerging markets vs. developed markets.

     

    in conclusion I think its wise to pursue the charter because its a documentation of your knowledge and commitment towards becoming a better investor vs.. if you choose to study on your you need to proof it.

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