2015 Q3 Value Performance Update And How I Value Markets

By | October 9, 2015

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Summary Proof that you shouldn’t follow “smart money”, as it’s herd mentality. A list of my 2015 Q3 value strategy performances. A look at how I value the market to know whether it’s expensive. The final quarter. The home stretch. If you took advantage of the small market correction, great job, because the market has “recovered” about 6% already. The last thing you should do is take advice from what you hear on TV or the radio, because that’s where the peak of herd mentality exists. The talking heads don’t provide any deep insight or outside views, as it’s their job to provide simple outer-layer analysis that any average Joe can understand. You actually come out smarter if you ignore everything they say. Here’s a look at what I mean. This is the performance of the top 20 stocks held by hedge funds, according to novus.com . (click to enlarge) How does this look in a chart? (click to enlarge) Not impressive. Especially when people running these funds are supposed to be Ivy League top 0.1% brains. It’s quite easy to avoid these “top 20” names. Ignore news and headlines. Ignore popular stocks. Ignore complicated stocks you don’t understand. Investing doesn’t have to be complicated. Most of the investments above have complicated stories. If you’re looking for a simple business and investment thesis to understand, don’t look at hedge fund holdings. This is GREAT news for people like us. After all, the advantage that small investors and fund managers have is that we don’t have to play by their rules. It’s perfectly within the rules to resist the steady drumbeat of calls to activity. So, how does it look on the value side? Value Investment Strategy Performances 2015 Q3 YTD Even though on I’m on the value side, it’s not easy. It’s not supposed to be easy. Anyone who finds it easy is stupid. – Charlie Munger At the end of each quarter, I take some time to see what’s working and what isn’t working with a list of predefined value stock screens I follow. Here’s how it looks at the end of Q3. These are YTD performances. A lot can happen in one quarter, as you can see in the following image. The tables are organized so that the best-performing screen is at the top of each quarter. (click to enlarge) Don’t Blindly Follow High-Performance Screeners Last quarter, I mentioned how you should ignore the NCAV (Net Current Asset Value) and NNWC (Net Net Working Capital) performances this year. On paper, the results are mind-blowing, given the conditions this year, but in reality, it’s not so great and shows how difficult net net investing can be in a bull market. What do I mean? NCAV and NNWC produced only 8 and 12 stocks in the results respectively. They both include VLTC, which has done this. The problem is that at the beginning of the year, you wouldn’t have been able to purchase enough of it in your real-world portfolio due to low liquidity. It’s only after a spike that volume increases as traders and momentum seekers join the party. Plus, holding only 8 or 12 net nets in a bull market is not a strategy I want to employ. The 2015 NNWC stocks look like this: Thanks to one stock, the NNWC stock performance is up 30%. You may say that it’s the outcome that’s important, but I call this one more luck than skill. Why Bother Tracking Net Nets Or Underperforming Screeners? So why do I bother tracking this or other underperforming screens? The easy answer is to say that that one year doesn’t signal long-term performance, and then show you this table of results. (click to enlarge) (Source: Old School Value Stock Screener Performances ) But the better answer is that it’s a very simple and effective way for me to track how expensive the market is. I don’t refer to market P/E or Market-to-GDP, as it only looks at the entire market. I’m only interested in finding pockets in the market that provide value – mainly on the value investing side – and this is how I try to track and find those pockets of opportunity. Here are some more observations. When Mr. Market falls, it doesn’t care who you are. In fact, Mr. Market will take quality, growth and value all down with him. Risk management should be at the top of your list day in and day out. Boring value stocks fall less hard, but also don’t rise as quickly. Net Nets Are Awesome Indicators Let me revisit another reason why I like net nets. Using the number of net nets available as an indicator is a great way to expand Graham’s “net net” concept into a market valuation idea. In 2013, I made the claim that Ben Graham was a closet market timer, and drew up the following chart and table. Even without a table or chart like this, it’s obvious when the market is cheap. But it’s also most scary, which is why you need a table or chart like this where the facts smack you in the face. I haven’t updated this table in a while, but 2014 and 2015 are similar to the 2011 levels. Summing Up Investing is hard. “It’s not supposed to be easy. Anyone who finds it easy is stupid.” – Charlie Munger Ignore herd mentality. Ignore what the top funds are holding. Don’t play by the same rules as the big boys. Make use of your advantage, like buying smaller stocks, illiquid stocks, out-of-favor stuff. Net nets are awesome indicators. Recommended Reading Scalper1 News

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