What is the Big-Big Picture?

[Guest HarryLong]

Apologies, here is the correct link, with a description of what Reese feeds into the computer:

 

http://www.validea.com/stocks/gurubios.asp?guru=benjamingraham

[Guest HarryLong]

I was wrong, he used to put the precise formula he used in there, but I think one can't see it freely anymore. Suffice to say, he feeds Graham's rules through a computer screener. Bmi, it's a little faster than having MBA students go through Moodys manuals by hand.  ;D

[Guest HarryLong]

And Bmi, as for your enterprising non-definition, that was the word he used for his systematic net-net strategy.

[Guest HarryLong]

So, going back to the question--does anyone disagree with my conclusion?:

 

------------------------

Conclusion: we should search for securities that are wholly ignored--not securities which are widely followed and we believe to be mispriced. In other words, while one could make money from large caps which are surrounded by controversy, the easier money will be made in micro and nano-caps which are not even followed and are wholly ignored. This is why it is dismaying that the board keeps working over the same old, tired, well worked over situations, rather than discovering something new.

 

I am happy to be proven wrong here. What I am doing is taking you through my thought process so you can decide for yourself. Even if any given large cap situation ends up being profitable, overall, the odds in the large cap space are probably stacked against us, and if they are not right now, will increasingly be over time.

[bmichaud]

What is your point? Bindly following one of those models and rebalancing monthly is not how we want to invest on this board. You're completely ignoring what I am saying - WE LIKE THE CHALLENGE OF RESEARCHING AND BUYING INDIVIDUAL STOCKS BASED ON OUR OWN ABILITY TO VALUE A COMPANY.

 

Our system is buying individual securities in a concentrated fashion based on our own judgment and analysis. If you want to engage in a fruitful discussion, let's debate how to improve on that.

 

If you want to start a discussion about using an uninvolved, model-based, monthly auto rebalancing strategy and how to improve upon that, then start a new board.

 

Semantics. You know exactly what I am talking about. You're espousing using a computer-driven model that takes all human thinking out of the equation. This is an "enterprising" value investment board where investors :) discuss individual ideas found through narrowing down the investment universe via a "system" of looking for out of favor, unloved, undervalued companies based on particular "ratios". As enterprising investors, we crave the challenge of finding 50-cent dollar bills and battling Mr. Market - it is this challenge that keeps us all in the game, NOT finding a strategy that allows us to take all emotion out of the equation, sit back, and let a computer do the work for us.

 

 

 

 

 

I am perfectly fine with system - you just don't like the value investing system, you like a QUANT strategy as I said. You put the word "system" in my mouth.

 

Regarding the church - you are coming into a Baptist church trying to preach Buddhism, and NOT trying to improve on Ben Graham's system. I love trying to improve on the value investment system - ie I believe a value investor can rationally buy gold shares with a margin of safety in order to protect capital against the current macro backdrop. Your accusations regarding my knowledge and respect of the value investment system are assuming.

 

 

Kraven, Bmichaud, and Dorsia-- systems are nothing to laugh at:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

The human emotional responses from each of you are a great example of why objective systems have an advantage over sometimes illogical humans.

 

Let's break down Bmichaud's arguments one by one in a non-emotional way.

 

I. Benjamin Graham himself espoused a systematic, quantitative value strategy--two actually--one for conservative investors and one for enterprising investors. Looks like we've dispensed with your argument that you can't espouse a systematic strategy on a value investing board without being subject to scorn.

 

II. Your second argument is even more emotionally driven. In your view, this is a "church" with certain faith-based tenets, therefore, you can't be reasonably be asked to improve, because that would be an affront to your "faith"? OK, notwithstanding point I. which totally eviscerates any claim you can make that systems are not part of the "faith" or the "church" if you will (are you one of those backwoods preachers who doesn't read the holy books called "Security Analysis" or "The Intelligent Investor"?), you are essentially saying that it is unfair of me to ask you to behave logically because you are a "believer" not a thinking person.

 

III. You believe that I can't see the "light" when you yourself ignore that Benjamin Graham himself espoused systems. I guess you would throw him out of your "church" as self appointed bishop on this board.

 

Oh Enlightened One, please elevate me to your elevated plane of reasoning where you tell others that they should leave the congregation while you ignore Benjamin Graham's teachings yourself!  ;D

 

Seriously, though, value investing is not a cult, or a religion, it's a method, constantly evolving through discoveries which come from within and outside the community to improve risk/return profiles.

 

Bmichaud, your view of value investing is very naive, because it ignores Buffett's innovations and those of Charlie Munger, which moved value investing away from a more asset-based focus to one where earnings, earnings stability, growth, free cash flow and moats were examined.

 

I am almost disturbed that you have such a primitive view of the history of value investing--a field which you claim to respect. In your view, there have never been systematic approaches, and moreover, no innovation. Your view does not square with the facts. If you disagree, I would be happy to send you some books which might help you learn about the history of a field which you claim so vehemently to respect.

 

Graham's systems were quantitative systems. They used ratios. Period the end.

 

I am going to try to help you engage in fact-based reasoning:

 

http://www.validea.com/registration/newusersignupj.asp

[Guest]

Harry,

 

I appreciate you not being dishonest about any performance things. While I'm disappointed you have ignored me on several occasions, I still think you're a pretty good guy. :)

[Guest HarryLong]

What is your point? Bindly following one of those models and rebalancing monthly is not how we want to invest on this board. You're completely ignoring what I am saying - WE LIKE THE CHALLENGE OF RESEARCHING AND BUYING INDIVIDUAL STOCKS BASED ON OUR OWN ABILITY TO VALUE A COMPANY.

 

Our system is buying individual securities in a concentrated fashion based on our own judgment and analysis. If you want to engage in a fruitful discussion, let's debate how to improve on that.

 

If you want to start a discussion about using an uninvolved, model-based, monthly auto rebalancing strategy and how to improve upon that, then start a new board.

 

Semantics. You know exactly what I am talking about. You're espousing using a computer-driven model that takes all human thinking out of the equation. This is an "enterprising" value investment board where investors :) discuss individual ideas found through narrowing down the investment universe via a "system" of looking for out of favor, unloved, undervalued companies based on particular "ratios". As enterprising investors, we crave the challenge of finding 50-cent dollar bills and battling Mr. Market - it is this challenge that keeps us all in the game, NOT finding a strategy that allows us to take all emotion out of the equation, sit back, and let a computer do the work for us.

 

 

 

 

 

I am perfectly fine with system - you just don't like the value investing system, you like a QUANT strategy as I said. You put the word "system" in my mouth.

 

Regarding the church - you are coming into a Baptist church trying to preach Buddhism, and NOT trying to improve on Ben Graham's system. I love trying to improve on the value investment system - ie I believe a value investor can rationally buy gold shares with a margin of safety in order to protect capital against the current macro backdrop. Your accusations regarding my knowledge and respect of the value investment system are assuming.

 

 

Kraven, Bmichaud, and Dorsia-- systems are nothing to laugh at:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

The human emotional responses from each of you are a great example of why objective systems have an advantage over sometimes illogical humans.

 

Let's break down Bmichaud's arguments one by one in a non-emotional way.

 

I. Benjamin Graham himself espoused a systematic, quantitative value strategy--two actually--one for conservative investors and one for enterprising investors. Looks like we've dispensed with your argument that you can't espouse a systematic strategy on a value investing board without being subject to scorn.

 

II. Your second argument is even more emotionally driven. In your view, this is a "church" with certain faith-based tenets, therefore, you can't be reasonably be asked to improve, because that would be an affront to your "faith"? OK, notwithstanding point I. which totally eviscerates any claim you can make that systems are not part of the "faith" or the "church" if you will (are you one of those backwoods preachers who doesn't read the holy books called "Security Analysis" or "The Intelligent Investor"?), you are essentially saying that it is unfair of me to ask you to behave logically because you are a "believer" not a thinking person.

 

III. You believe that I can't see the "light" when you yourself ignore that Benjamin Graham himself espoused systems. I guess you would throw him out of your "church" as self appointed bishop on this board.

 

Oh Enlightened One, please elevate me to your elevated plane of reasoning where you tell others that they should leave the congregation while you ignore Benjamin Graham's teachings yourself!  ;D

 

Seriously, though, value investing is not a cult, or a religion, it's a method, constantly evolving through discoveries which come from within and outside the community to improve risk/return profiles.

 

Bmichaud, your view of value investing is very naive, because it ignores Buffett's innovations and those of Charlie Munger, which moved value investing away from a more asset-based focus to one where earnings, earnings stability, growth, free cash flow and moats were examined.

 

I am almost disturbed that you have such a primitive view of the history of value investing--a field which you claim to respect. In your view, there have never been systematic approaches, and moreover, no innovation. Your view does not square with the facts. If you disagree, I would be happy to send you some books which might help you learn about the history of a field which you claim so vehemently to respect.

 

Graham's systems were quantitative systems. They used ratios. Period the end.

 

I am going to try to help you engage in fact-based reasoning:

 

http://www.validea.com/registration/newusersignupj.asp

 

I know you don't like to read, but I have made some very specific suggestions for the discretionary value investor:

 

I. There is a probability that discretionary value investors could be right about seemingly mispriced large-caps--or they could be eviscerated the way many were with HPQ.

 

II. It is naive for discretionary investors competing against bots to assume that the bots do not use value based methods. Many do, which narrows mispricings and the margins of safety in many securities.

 

III. Many of the bots are only let loose on certain universes of securities meeting certain size/liquidity thresholds.

 

IV. This means, rationally, that discretionary value investors, if I am correct that bots are often only let loose on securities meeting certain size/liquidity thresholds, should be focusing most of their time on nano-caps and micro-caps where the level of bot competition is minimal.

[bmichaud]

No it's not just that - come on dude, stop treating us like morons.

 

Page 156 of Zweig's Intelligent Investor: Operations in Common Stocks

 

The activities specially characteristic of the enterprising investor in the common stock field may be classified under four heads:

 

1. Buying in low markets and selling in high markets

2. Buying carefully chosen "growth stocks"

3. Buying bargain issues of various types

4. Buying into "special situations"

 

 

And Bmi, as for your enterprising non-definition, that was the word he used for his systematic net-net strategy.

[rranjan]

Harry - It's true that you can find more mispriced securities in less liquid situation but from time to time you can find some in large caps as well. Also the notion that after you buy something , it should not get cheaper is pretty useless. Only way to see effectiveness of any process is to check the overall results after a minimum of 3-5 years  period and also on longer terms. It is also important that people can duplicate the system otherwise it will be the case of some one getting lucky.

 

Last few years we have seen some large caps being mis-priced time to time and they might have even become cheaper after you purchased them but what matters is return expectations in 3-5 years without taking very high risk. Yaah, it will be always nicer to buy at lowest point but that will be mostly luck and not possible to do consistently. But it's always possible to buy at big discount which can provide pretty good returns over the 3-5 years even if you might look like an idiot for next few months or even a year.

 

I am not saying anything new here but if you can get good performance over long term without any computer based system then absense of computer based system does not really matter. On the other hand, computer based system should be based on logic and also have to do well over long term to be taken seriously. It's not enough to make case for them selectively.

 

Logically, I find buying at big discount easy and simply to execute. I can do it consistently and expect decent retuns without taking high risk. I don't find any rationality in computer based system so it does not click with me. Some computer based model might even take some aspect of valuation but I prefer to make my own judgement looking at several factors. It does not mean that some people might not find computer based model useful but everyone has to pick their spot.

 

If you go to some gold bug sites , you are likely to see a group thinking. Most people, who already think in certain way, are participant there. Same way, in Value invetment board you will find group think time to time. Now calling groupthink wrong or right is wrong way to go. Right way would be to point out negatives in the idea which you term as group thinking. Also keep the short term price movement seperate because that has absolutely nothing to to do with idea being good or bad. 

 

Main thing is if group thinking is based on any logic? It just happens to the case where more people arrive to same conclusion while thinking independently. Stuation can be termed as group thinking but there is nothing illogical about it. Only for the sake of having a different opinion is also wrong if it is not backed by any logic. We are not right or wrong because majority agrees or disagrees with our view point. We will be wrong or right only if our logic was wrong or right.

 

If you put top 100 computer scientists in a room then majority of them might think independently and come to similar conclusion. Conclusion migth be termed as group thinking but that does not make it right or wrong.

 

I do accept that it's easier to find mispricing in less liquid stocks but I don't accept that we should ignore large caps.Buy whatever seems good risk/reward sitaution. Who cares wher you find them. Also , If you want to make any case for specific computer based modelling then bring the logic built in computer based model up for discussion otherwise it's impossible to comment on their merits.

[Guest HarryLong]

Harry - It's true that you can find more mispriced securities in less liquid situation but from time to time you can find some in large caps as well. Also the notion that after you buy something , it should not get cheaper is pretty useless. Only way to see effectiveness of any process is to see overall results after a minimum of 3-5 years  period and also on longer terms.

 

Last few years we have seen some large caps being mis-priced time to time and they might have even become cheaper after you purchased them but what matters is return expectations in 3-5 years without taking very high risk. Yaah, it will be always nicer to buy at lowest point but that will be mostly luck and not possible to do consistently. But it's always possible to buy at big discount which can provide pretty good returns over the 3-5 years even if you might look like an idiot for next few months or even a year.

 

I am not saying anything new here but if you can get good performance over long term without any computer based system then absense of computer based system does not really matter. On the other hand, computer based system should be based on logic and also have to do well over long term to be taken seriously. It's not enough to make case for them selectively.

 

Logically, I find buying at big discount easy and simply to execute. I can do it consistently and expect decent retuns without taking high risk. I don't find any rationality in computer based system so it does not click with me. Some computer based model might even take some aspect of valuation but I prefer to make my own judgement looking at several factors. It does not mean that some people might not find computer based model useful but everyone has to pick their spot.

 

If you go to some gold bug sites , you are likely to see a group thinking. Most people, who already think in certain way, are participant there. Same way, in Value invetment board you will find group think time to time. Now calling groupthink wrong or right is pretty useless.

 

Main thing is if group thinking is based on any logic? It just happens to the case where more people arrive to same conclusion while thinking independently. Stuation can be termed as group thinking but there is nothing illogical about it. Only for the sake of having a different opinion is also wrong if it is not backed by any logic. We are not right or wrong because majority agrees or disagrees with our view point. We will be wrong or right only if our logic was wrong or right.

 

If you put top 100 computer scientists in a room then majority of them might think independently and come to similar conclusion. Conclusion migth be termed as group thinking but that does not make it right or wrong.

 

I do accept that it's easier to find mispricing in less liquid stocks but I don't accept that we should ignore large caps.Buy whatever seems good risk/reward sitaution. Who cares wher you find them. Also , If you want to make any case for specific computer based modelling then bring the logic built in computer based model up for discussion otherwise it's impossible to comment on their merits.

 

rranjan, I always appreciate your points. I want to affirm, as I always do, that certain humans can do well without systems. But let's go back to the Kaizen standard of continuous improvement. If we wish for continuous improvement, we must necessarily recognize the information-processing limitations of humans.

 

Therefore, we must embrace systems if we wish to push past humans' very real limitations. I am not saying that my audience is everyone who is comfortable with the status quo. My audience is people who strive for continuous improvement, no matter how skilled they are to begin with.

[rranjan]

No doubt that humans will always have limitation with how much information they can process. I do use them for identifying some oppurtunities but I prefer making the final call myself.

 

Personally for me, I can use any computer based model if I conviced with the inbuilt logic to screen some new oppurtunities but I will not feel comfortable with model making the call on my behalf. Thats just me and it does not mean others can't use for making final call.

[NormR]

I tend to favour quant stuff however 2 points

 

1) Database errors:  All of the stock databases that I've come across contains errors.  Some value screens can be pretty good ways to find the errors.  Some human intervention / cross checking is required.   

 

2) Humans own the capital:  Quants can't get rid of the behavioral stuff because, at the end of the day, people provide the capital and are prone to pull it at very bad times.  The quants themselves are prone to give up a inopportune times.

 

As a result, pure quant approaches can't be followed in practice.  But they can be handy tools.

[ERICOPOLY]

In a few years we can see how the MSFT bet goes.

 

Harry's system is shorting it.

 

Will the computer be "eviscerated"?

 

I was short, I covered. How did you like the "short" thread?

 

I didn't pay much attention to it.  I pay attention to long ideas, and normally ignore the short ones.

 

However why were you shorting a large cap given your thinking around outsmarting the herd of people who follow large caps?

 

Even if any given large cap situation ends up being profitable, overall, the odds in the large cap space are probably stacked against us, and if they are not right now, will increasingly be over time.

 

 

 

[Guest HarryLong]

In a few years we can see how the MSFT bet goes.

 

Harry's system is shorting it.

 

Will the computer be "eviscerated"?

 

I was short, I covered. How did you like the "short" thread?

 

I didn't pay much attention to it.  I pay attention to long ideas, and normally ignore the short ones.

 

However why were you shorting a large cap given your thinking around outsmarting the herd of people who follow large caps?

 

Even if any given large cap situation ends up being profitable, overall, the odds in the large cap space are probably stacked against us, and if they are not right now, will increasingly be over time.

 

As you know, I am not a discretionary investor, so I'm not at an inherent disadvantage in the large cap space.

[enoch01]

 

...I have made some very specific suggestions for the discretionary value investor:

 

I. There is a probability that discretionary value investors could be right about seemingly mispriced large-caps--or they could be eviscerated the way many were with HPQ.

 

II. It is naive for discretionary investors competing against bots to assume that the bots do not use value based methods. Many do, which narrows mispricings and the margins of safety in many securities.

 

III. Many of the bots are only let loose on certain universes of securities meeting certain size/liquidity thresholds.

 

IV. This means, rationally, that discretionary value investors, if I am correct that bots are often only let loose on securities meeting certain size/liquidity thresholds, should be focusing most of their time on nano-caps and micro-caps where the level of bot competition is minimal.

 

Proposition I is superfluous to your argument.  In fact, Proposition I is consistent with your conclusion and its contrary.  You don't even mention what the probability is.

 

Part of me is eager to see you prevail in getting people to ignore undervalued large caps, Harry.  That way I'll be able to buy more of them.  I just wanted to point out the irrelevance of Proposition I to your argument.

[bmichaud]

Can you please address the discrepancy between Graham's definition of enterprising and yours?

 

Also, please provide your performance numbers. It's extremely bad form to tout a particular strategy then not have the cahounes to back it up with cold hard data. And not data spat out by a model - your actual performance.

 

 

No it's not just that - come on dude, stop treating us like morons.

 

Page 156 of Zweig's Intelligent Investor: Operations in Common Stocks

 

The activities specially characteristic of the enterprising investor in the common stock field may be classified under four heads:

 

1. Buying in low markets and selling in high markets

2. Buying carefully chosen "growth stocks"

3. Buying bargain issues of various types

4. Buying into "special situations"

 

 

And Bmi, as for your enterprising non-definition, that was the word he used for his systematic net-net strategy.

[Guest HarryLong]

I've actually exposed you to aggregate data from hundreds of systematic funds. If you don't want to accept the evidence for systematic methods, I can't force you to engage in evidence based thinking which challenges your previously conceived notions. It looks like you have a hard case of confirmation bias. Any disconfirming piece of evidence to your original thesis is ignored. I'm so sorry that this is an emotional issue for you Bmi:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

[bmichaud]

I'm actually exposed you to aggregate data from hundreds of systematic funds:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

You didn't answer my enterprising investor question and you didn't provide your own performance....

[Guest HarryLong]

I'm actually exposed you to aggregate data from hundreds of systematic funds:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

You didn't answer my enterprising investor question and you didn't provide your own performance....

 

I'm very pleased then that you seem to accept my cold hard data from hundreds of funds. I am happy to point you to sections of Graham's books precisely defining his systems if you would like to continue off-line. Most others here have read his works.

[Guest]

I'm actually exposed you to aggregate data from hundreds of systematic funds:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

You didn't answer my enterprising investor question and you didn't provide your own performance....

 

I'm very pleased then that you seem to accept my cold hard data from hundreds of funds. I am happy to point you to sections of Graham's books precisely defining his systems if you would like to continue off-line. Most others here have read his works.

 

I know, for one reason or another, you won't provide your performance. That's your choice.

 

With that being said, if you look at the funds in aggregate, didn't they under perform the S&P500 through the end of last year?

 

 

[Guest HarryLong]

 

 

http://therealreturns.blogspot.com/2007/04/connecting-bottoms-of-s-500.html

[bmichaud]

I provided a "cold hard" definition of enterprising investor, yet you can't reconcile your definition that an enterprising investor is defined as a systematic net-net approach. I don't get it.

 

And PLEASE explain how your "cold hard" data for other funds has anything to do with your own performance? Resolving something offline so that nobody else on the board can see your actual performance will do nothing.

 

 

I'm actually exposed you to aggregate data from hundreds of systematic funds:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

You didn't answer my enterprising investor question and you didn't provide your own performance....

 

I'm very pleased then that you seem to accept my cold hard data from hundreds of funds. I am happy to point you to sections of Graham's books precisely defining his systems if you would like to continue off-line. Most others here have read his works.

[Guest]

 

 

http://therealreturns.blogspot.com/2007/04/connecting-bottoms-of-s-500.html

 

Right. That is over 4 years old.

 

http://www.moneychimp.com/features/market_cagr.htm

 

According to that the compound return is 9.61%

[JSArbitrage]

One point and one question:

 

1) If that Barclay's data only lists funds that voluntarily disclose their results, then it's pretty clear that there is huge danger of selective reporting (i.e., only successful funds will openly announce their results.)  I find it hard to believe that systemic funds, in aggregate, were up 18% in 2008.  Sorry, just not believable for me. 

 

2) What do we mean by "systems?"  How much computer involvement constitutes a system? For example, from what I have seen with Graham and Schloss, they pretty much did a sort of "quant" work before computers existed (i.e., if a stock passed their strict ratio criteria, they invested regardless of the qualitative factors. They felt that a very diversified portfolio of stocks that passed these criteria didn't require qualitative analysis.)  Personally, I think they simply stumbled on something that academics are now starting to admit: small cap low P/B stocks outperform the market as a whole.  They just didn't know it at the time.  So, what constitutes a system?

 

 

[Guest HarryLong]

This better?

 

http://historicalreturns-sp500.blogspot.com/