How long do you wait to achieve expected return?

[randomep]

for me, not losing money is hard enough.

 

Well, someone who has your problem and is rational can use any strategy in the Bogleheads forum and get much better returns, don't you think?

 

Come on now - keep it civil

 

Sorry I truely am

[yitech]

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