How long do you wait to achieve expected return?

[randomep]

woah, you can predict a priori who is better than you? Assuming an investor knows himself, his floor is the market (by buying an index fund). So I presume he invests because he thinks he can beat the market. And so you know someone who can beat the market by more than you by managing your money? Can you give me a name of someone who will invest your money and beat the market? The only person I can think of who will take my money and beat me is Prasad. I believe various bloggers can beat me but they won't take my money......

 

This is all before fees, if this is a close call then of course fees would sway the balance in our favour.

 

My assumption is that all of use in this forum are all above average investors who have found a niche by buying what we know or smallcaps or whatever, so we can beat the experts.

 

And what do you mean risk adjusted?

 

thanks

 

OK. Just for the hell of it ...

 

Pretty sure that a priori, WEB, Munger, etc. are better than we are - even after fees. Theoretically we should just give them our money, & they should accept it, making us both wealthier. Pretty much everyone on this board should all be holding Berkshire Hathaway - but we don't because we're never going to get to be that good unless we practice, & the opportunity cost is our annual tuition fee.

 

But we're greedy - & hold a hedge fund with a 3 & 50 fee structure  ;D

No way this fund can get away with the 50% fee unless they are taking far more risk than their 2% & 30% fee counterpart - & either winning by luck or manipulation. The SML tells us that for more risk, we need a higher return - excluding the jail possibility.

 

So ... after a great year, our fund charged us 3% + 30%, leaving us with a 27% return. In the same year, our alternate (WEB) made 22% & the market was up 15%. If I want an additional 10% for the additional risk our fund is taking, the fund had to return 32% (WEBs 22% + the 10% risk premium) to us. The bums only made us 27% - so we fire them.

 

.. we also say a very big thank you that they didn't blow up while we foolishly held them!

 

SD

 

 

Woah, Woah again!  We all know WEB, he says he can do 50% on 1 mil (which is our little guy's range), you can knock that down a bit to 30%, 40% whatever.

 

Brk as I last heard lagged the S&P 500 for the last 5 years. WEB if he managed my portfolio like his partnership in the 50's would NOT have lagged the S&P 500. Therefore, conclusion........... Berkshire Hathaway does not equal WEB a money manager.

 

If I invested in BrkB (actually I still own some but only because of tax reasons) I am getting the world's most brilliant investor to basically manage a large cap fund like vehicle. Pit WEB running a large cap fund against Prasad investing in mircocaps, you would bet Prasad right? I mean that's the rationale of people on this board investing with Prasad instead of (or more than ) Brk.

 

I also got a thought, if Brk grew at 25% it would be $2 Trillion in 10yrs, and more than 10% of US GDP, wow!

 

[Andy Dufresne]

I am really enjoying this thread ... however, IMHO the title of this thread and the pursuant discussion are somewhat misleading because the "expected return" depends on why the position was initiated ...

 

For me the basic answer is "it depends (on my thesis going into the position)" - is this an event driven position? activist driven? cyclical? hated sector? compounding machine? There are lots of options but I think it is conducive to try to go in with a clear IV or timeline (if relevant) and re-asses candidly if the timeline does not work or events change - e.g. I got out of Oi twice based on external news - first that they would be merging with Portugal Telecom and a few months later because PT likely lied to Oi about debt ... neither of these were on my radar when I went long ...

 

I will however begin another thread with respect to the psychology (and difficulties) of holding a position :)

[yadayada]

I don't think 50% a year on small capital is rocket science. A lot of people actually  limit themselve. If you say you are happy with 20% IRR, you stop looking after you find a bunch of idea's fitting that bill. And thus you won't find the best ones.

 

Since buffett picks simple business models, all the skill lies in actually finding them. If I present you a dirt cheap stock and explain why, you probably go, well yeah I guess Ill buy some! When I read 'you can be a stock market genius' I was thinking, well yeah if i had this idea, and I knew what greenblatt knew at the time after reading it all, I guess I would invest too! The trick is actually finding them. And putting in the work. And not settle for anything less then stellar before you find them.

 

That doesn't happen though if you insist you will never be buffett and are happy with 20% or 10%. I like that quote from a ultra runner (like a super marathon) when asked how he did it, he said 'well no one ever told me I couldn't do it' .

[scorpioncapital]

My eyes are popping out at all these references to 20,30,40,50% returns. Am I the only one not getting these?

[Hielko]

My eyes are popping out at all these references to 20,30,40,50% returns. Am I the only one not getting these?

That's what you get if you started investing after 2008...

[yadayada]

well with that attitude you will never get those returns!  ::)

[merkhet]

My eyes are popping out at all these references to 20,30,40,50% returns. Am I the only one not getting these?

That's what you get if you started investing after 2008...

 

Nope, you're not the only one.

 

I'm moderately amused with the influx of (predominately new) people on the forum that think 40% and 50% returns are somehow easy to achieve and/or the norm for investors. This seems to dovetail coincidentally with the amount of people looking to start funds because they're sure that they can continue (begin?) to outperform.

[randomep]

My eyes are popping out at all these references to 20,30,40,50% returns. Am I the only one not getting these?

That's what you get if you started investing after 2008...

 

Ya and past is no indication of future performance......

 

I was quoting Buffett on 50% who was saying his expectation is 50%, and I have dialed it down to 20% expectation for myself. And with the caveat that I have a net worth in real estate, cash and stock. The first two are hedges for my stock portion. I am saying 20% in the stock portion.  It is misleading, similar to some other tread about Hussaman doing great on his stock picks. Ya he picked those stocks with wild abandon because he had the protection of his hedges, yet overall his results were lousy.

 

Like another poster said, it isn't that hard if you do it a particular way that the master (WEB, Graham) have taught.....

 

 

[enoch01]

My eyes are popping out at all these references to 20,30,40,50% returns. Am I the only one not getting these?

That's what you get if you started investing after 2008...

 

Nope, you're not the only one.

 

I'm moderately amused with the influx of (predominately new) people on the forum that think 40% and 50% returns are somehow easy to achieve and/or the norm for investors. This seems to dovetail coincidentally with the amount of people looking to start funds because they're sure that they can continue (begin?) to outperform.

 

+1

[alertmeipp]

for me, not losing money is hard enough.

[Guest]

random and yada, no offense intended, but how long have you guys been investing?

[merkhet]

random and yada, no offense intended, but how long have you guys been investing?

 

And perhaps how have your returns been? Since 20% (random) or 50% (yada) returns seem not to be rocket science. :P

[randomep]

random and yada, no offense intended, but how long have you guys been investing?

 

And perhaps how have your returns been? Since 20% (random) or 50% (yada) returns seem not to be rocket science. :P

 

Ok if you want to know more about me you can get some ideas of my portfolio:

 

http://bovinebear.blogspot.com/2013/09/my-2nd-annual-schedule-of-investments.html

 

I honestly don't know exactly what it is and I wouldn't publish it anyway. But you can see from my holdings and I do own all of them still what kind of returns I am getting. But yaya we are in a raging bull market.

 

You can also see my age on my blog. I have been investing for 16+ yrs. I have seen a lot. For example, if you read my other entries (I am flattering myself probably) I have mentioned STZ (bought 9yrs ago missed a 7 bagger). PM/Altria (bought 14 yrs ago). CVX (bought 10yrs ago). Cisco bought 15yrs ago at 50. I have done stupid things through the worst 10yr stretch since 1930s. But I am a new person now haha, wishful thinking.

 

Believe me I am not a braggard, I just want to call a spade a spade. I am not saying my net worth will go up by 20%, I just expect the stock portion of my portfolio to go up by 20%. It is what I think it doesn't fact.

 

You know, I have seen two crashes, I have a mentality like a concentration camp survivor: what can they do to me???

[oddballstocks]

random and yada, no offense intended, but how long have you guys been investing?

 

And perhaps how have your returns been? Since 20% (random) or 50% (yada) returns seem not to be rocket science. :P

 

Ok if you want to know more about me you can get some ideas of my portfolio:

 

http://bovinebear.blogspot.com/2013/09/my-2nd-annual-schedule-of-investments.html

 

I honestly don't know exactly what it is and I wouldn't publish it anyway. But you can see from my holdings and I do own all of them still what kind of returns I am getting. But yaya we are in a raging bull market.

 

You can also see my age on my blog. I have been investing for 16+ yrs. I have seen a lot. For example, if you read my other entries (I am flattering myself probably) I have mentioned STZ (bought 9yrs ago missed a 7 bagger). PM/Altria (bought 14 yrs ago). CVX (bought 10yrs ago). Cisco bought 15yrs ago at 50. I have done stupid things through the worst 10yr stretch since 1930s. But I am a new person now haha, wishful thinking.

 

Believe me I am not a braggard, I just want to call a spade a spade. I am not saying my net worth will go up by 20%, I just expect the stock portion of my portfolio to go up by 20%. It is what I think it doesn't fact.

 

You know, I have seen two crashes, I have a mentality like a concentration camp survivor: what can they do to me???

 

Wow..someone else who holds Installux!  I was tempted to sell them once they crossed book value, but decided I'd rather hold.  The company is nice, I like their owner, his letters are a nice read.

[topofeaturellc]

My eyes are popping out at all these references to 20,30,40,50% returns. Am I the only one not getting these?

That's what you get if you started investing after 2008...

 

Nope, you're not the only one.

 

I'm moderately amused with the influx of (predominately new) people on the forum that think 40% and 50% returns are somehow easy to achieve and/or the norm for investors. This seems to dovetail coincidentally with the amount of people looking to start funds because they're sure that they can continue (begin?) to outperform.

 

Well to begin with its a little silly to assume that because someone is new they are new to investing.

 

But also its not correct that someone who is looking for something trading at half of intrinsic value is expecting to earn some insane return. Don't forget a double over five years is "only" a 15% return - and inevitably you'll have things you are wrong about.

 

But for me there are a few reasons why I want to be buying things at huge discounts

1) Margin of Safety - the cheaper something is to what I think its worth the more I can be wrong without incurring a permanent impairment. The confidence interval surrounding IV is probably bigger than I think.

2) Time - the bigger the discount the longer I can wait for it to narrow

3) Need my winners to be big enough to subsidize my losers.

 

For me, personally I hope to earn a premium over a dumb value strategy. A little bit from liquidity risk, a little bit more from stock selection. If I can't beat that I should just be buying a value factor ETF or something.

[SharperDingaan]

Where to begin .... !

 

A priori. No idea what our, or others, results will be 1 yr out. Yesterdays great result also doesn't mean that todays result will be great (I could just have been lucky). But I can say that the successful guy with 40 yrs+ of results (40 yr compound return > market rate) very likely knows his business very well. All athletes believe they are better than every other athlete at the start of the race, but every race has only one winner (assume no draws).

 

Which race. Every sprinter is faster than a marathoner over a short distance, but most can't run even a quarter marathon before collapsing exhausted. Yes, I may know this market very well & have been through a few cycles - but the marathoner has been through many more, dealt with repeated secular change, & come out successfully. Either there were billions of monkeys clattering on typewriters when this marathoner started (Taleb), or this marathoner is a pretty special monkey!

 

Baggage. Small & private doesn't have the burden of fiduciary restriction (investment policy), size, marketing, & regulatory burden; its easy to get in/out, no explaining yourself to shareholders, & no need for a 2.5B+ profit, per quarter, to demonstrate to the world that you still have it. Many folks on this board routinely outperform WEB (.. ericopoly!), but were we WEB's size ? - probably not. Compare sprinters to sprinters, not marathoners.

 

Rubber measurement. Take 50% of your capital off the table today, & double your remaining investment in 1 year; your opportunity cost is 50%. Do it again the following year, & the opportunity cost is now 75% - you're a terrible investor! Apparently, consecutive returns of 100%/yr is terrible performance?

 

SD

 

 

 

 

 

 

[Guest longinvestor]

My eyes are popping out at all these references to 20,30,40,50% returns. Am I the only one not getting these?

Lol. Forget about Omaha, Toronto etc. Who wants to listen to the old farts, just sit on your butt and read message board investors.

[yadayada]

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.

[Tim Eriksen]

 

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.

 

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.

 

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.

 

 

Micro Caps, Catalysts and Concentrated Portfolio.  That is what I came to understand as the best approach for me to get high returns over time.  I view catalysts like retailing.  I would rather have higher turnover (due to near term catalysts) and 20 to 50% gains, than lower turnover (waiting a long time for a bigger % gain).  Ignoring taxes for the moment, each turnover increases my capital.  100 becomes 130 which becomes 169, etc. 

 

The funny thing is Buffett made significant sums on arbitrage.  Arbitrage is nothing more than an idea with a known near term catalyst.  Thus his partnership portfolio had known near catalysts (i.e. arbs), likely medium term catalysts (even if he had to be it - Sanborn Map, Dempster Mill, Berkshire, and I would argue AmEx), and some unknown long term catalysts, which required a deeper discount.  He was able to take come situations that were in the third category and move them into the middle category.   

[SharperDingaan]

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.

 

+1

 

SD

[merkhet]

Who said that people on this forum don't like catalysts? I've never once seen that.

 

I was merely bristling at the 50% returns not being rocket science comment. Take it from someone who has compounded at pretty damn close to that amount over the last few years. It's damn difficult.

 

Remember the old Munger quote. "Investing isn't supposed to be easy. Anyone who finds it easy is stupid."

[learner]

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.

+1

[Kraven]

 

You know, I have seen two crashes, I have a mentality like a concentration camp survivor: what can they do to me???

 

Good analogy.  I understand that people in Auschwitz were known to say that being there was just like having their investments drop in value.

[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?

[investor-man]

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