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8:02 pm
February 6, 2012
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somrh
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jalleninvest said:
What difference does it make? As value investors we don't care about the meanderings of the market, whether trend following, random walk, waves, or biorhythms, except when they get extreme, in the sense that it provides an opportunity, as Buffett so eloquently put it, "profit from folly not participate in it." It is just one way in which Mr. Market gets in his "moods."
Trying to time the market is a tricky business, fraught with difficulties, and probably counterproductive especially when it takes attention and time away from looking for and analyzing good businesses at bargain prices. To each his own, of course.
The only difference it would make is if it would allow you to predict (statistically) whether or not prices might get cheaper. Like I said, I'm still largely skeptical of it but many of the techniques used don't require that much time to look at so I'm not sure that it would take too much time away. It would just depend on whether or not it adds predictive value to add value by reducing your buy-in price.
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6:49 pm
February 5, 2012
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jalleninvest
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Post edited 10:50 am – February 5, 2012 by jalleninvest
somrh said:
There is even some evidence for technical analysis (I've only reviewed some of the summary research). IIRC, the evidence is stronger in forex markets than it is the stock market. And there are plenty of open methological questions and criticisms of these studies. I'm not even convinced you should entirely ignore the "technicals" because, minimally, many institutions use them and, thus, they have an effect on market direction.
There's an interesting model developed by Grimaldi and Grauwe which predicts that "charting" becomes more dominant in bubbles. Their model is for forex markets but I would suspect aspects of it would apply to stock markets as well.
Bubbling and Crashing Exchange Rates
Granted, I suspect much of TA is superstition but I still suspect it has an effect on markets.
What difference does it make? As value investors we don't care about the meanderings of the market, whether trend following, random walk, waves, or biorhythms, except when they get extreme, in the sense that it provides an opportunity, as Buffett so eloquently put it, "profit from folly not participate in it." It is just one way in which Mr. Market gets in his "moods."
Trying to time the market is a tricky business, fraught with difficulties, and probably counterproductive especially when it takes attention and time away from looking for and analyzing good businesses at bargain prices. To each his own, of course.
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9:33 pm
May 7, 2011
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valueinvestortoday
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Post edited 2:35 pm – May 7, 2011 by valueinvestortoday
Yes, TA obviously has an effect on markets, however, I have found no evidence that supports that effect to any degree greater than the daily fluctuations of Mr. Market. I don't believe TA has an effect on the underlying business; which is ultimately all I care about.
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6:07 am
May 5, 2011
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somrh
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I've read them all years ago and own copies of most of his writings. To
define this work as more "mature" would be to assume that there was some
point in which he lacked maturity. I have not found that argument to
hold water as he was an economic genius at a very young age.
I don't think I made that argument at all. I put "mature" in quotations. I was referencing the fact that these are comments he made at the end of his life after years of substantial research. His research indicated using these techniques could provide returns greater than the Dow indicated by his research. Subsequent research, to date, has also indicated that.
I have a copy of that interview as well and I believe it is often
misunderstood because markets have changed. The markets and how
corporations conduct business today is much different than the way
business was conducted in the 1970's when this comment was made. An
example of why I believe thorough analysis is more successful today than
it was in 1970 is that since 1970, the increase of interest in the
Efficient Market Theory has been widely promoted in the large majority
of colleges around the world. To such a degree that the majority of
investors today are of a technical background who lack the interest in
reading SEC filings and have more interest in looking at pretty blinking
lights on their computer screens. This wasn't the case in 1970. In
those days and long before, fundamental investing was very popolar.
There had become such a large amount of instituational investors that
utilized fundamental analysis in 1970 that Graham's comments made
perfect sense. Today, they don't because in the technology era we live
in today where video games are so popular, today's investor would rather
look at pretty flashing lights on their computer screen than do the
boring and tedious work of reading a 175 page 10-K.
I think these are fair comments.
Security Analysis, I believe, would and has provided for a successful
formula to investing – today – more than it ever has in the past. I see
as much relevance in formula investing as I do technical investing.
That may be the case moreso with the advent of the internet and plenty of tools and resources for folks to employ the methods. But historically there is substanial evidence that mechanical investing has beaten the market (even when you do the "appropriate" adjustment for beta). Whether or not that will continue is for the future to decide.
There is even some evidence for technical analysis (I've only reviewed some of the summary research). IIRC, the evidence is stronger in forex markets than it is the stock market. And there are plenty of open methological questions and criticisms of these studies. I'm not even convinced you should entirely ignore the "technicals" because, minimally, many institutions use them and, thus, they have an effect on market direction.
There's an interesting model developed by Grimaldi and Grauwe which predicts that "charting" becomes more dominant in bubbles. Their model is for forex markets but I would suspect aspects of it would apply to stock markets as well.
Bubbling and Crashing Exchange Rates
Granted, I suspect much of TA is superstition but I still suspect it has an effect on markets.
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1:01 pm
May 3, 2011
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valueinvestortoday
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Post edited 6:11 am – May 3, 2011 by valueinvestortoday
"First and foremost, I have no problem arguing with Ben Graham (metaphorically obviously) or anyone. So I'm not sure what you're point is there. I actually found myself less critical of the rest of the book but there wasn't much interest in this thread so I moved on to other things."
I've moved on as well.
"As for my actual comments, you'll have to look at some of Graham's more "mature" thoughts on investing; there were a number of articles that he was responsible for in the 70's that are of interest. In particular, take a look at A Conversation with Benjamin Graham."
I've read them all years ago and own copies of most of his writings. To define this work as more "mature" would be to assume that there was some point in which he lacked maturity. I have not found that argument to hold water as he was an economic genius at a very young age.
"In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities…"
I have a copy of that interview as well and I believe it is often misunderstood because markets have changed. The markets and how corporations conduct business today is much different than the way business was conducted in the 1970's when this comment was made. An example of why I believe thorough analysis is more successful today than it was in 1970 is that since 1970, the increase of interest in the Efficient Market Theory has been widely promoted in the large majority of colleges around the world. To such a degree that the majority of investors today are of a technical background who lack the interest in reading SEC filings and have more interest in looking at pretty blinking lights on their computer screens. This wasn't the case in 1970. In those days and long before, fundamental investing was very popolar. There had become such a large amount of instituational investors that utilized fundamental analysis in 1970 that Graham's comments made perfect sense. Today, they don't because in the technology era we live in today where video games are so popular, today's investor would rather look at pretty flashing lights on their computer screen than do the boring and tedious work of reading a 175 page 10-K.
Security Analysis, I believe, would and has provided for a successful formula to investing – today – more than it ever has in the past. I see as much relevance in formula investing as I do technical investing.
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10:00 am
April 25, 2011
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somrh
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valueinvestortoday said:
A big misconception is that Graham used "reported" financial data to derive his metrics. He did not. Seth's original comment is true concerning reported P/E, for example. Graham always adjusted the earnings of a business to account for one time and special purpose accounting events. There's no greater practitioner of value investing and supporter of Ben Graham than Warren Buffett and according to Warren, Seth Klarman is the best value investor out there today. Bruce Greenwald made mention of this fact recently. So, to argue with Seth is the same as arguing with Ben Graham himself because the man who learned from one and taught the other says they are one in the same.
First and foremost, I have no problem arguing with Ben Graham (metaphorically obviously) or anyone. So I'm not sure what you're point is there. I actually found myself less critical of the rest of the book but there wasn't much interest in this thread so I moved on to other things.
As for my actual comments, you'll have to look at some of Graham's more "mature" thoughts on investing; there were a number of articles that he was responsible for in the 70's that are of interest. In particular, take a look at A Conversation with Benjamin Graham.
If you don't have access to the article, I can quote portions of it if you'd like. Here are a couple of examples. In regard to whether careful study is required for stock picking:
In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a good deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the " efficient market" school
When asked more on specifics he describes two methods. The first is finding securities that are less than NCAV (suggesting that he loosened up on the 2/3 requirement. I would imagine this probably improved the quality of the issues he found.) The second method I'll quote:
It consists of buying groups of stocks at less than their current or intrinsic value as indicated by one or more simple criteria.
The criterion I prefer is seven times the reported earnings for the past 12 months. You can use others such as a current
dividend return above seven per cent or book value more than 120 percent of price, etc.
So basically we're looking at the Graham/Rea criteria or some slight modification of them.
Two other interesting reads from his later life:
The Future of Common Stocks
The Future of Financial Analysis
There are some comments here on index funds which is something that Klarman talks about a lot. I believe Graham had sympathy for the idea but they weren't common at the time and he probably couldn't have anticipated how that all got fleshed out. He probably would agree with Klarman's comments given the current situation.
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6:12 am
April 25, 2011
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valueinvestortoday
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Post edited 11:12 pm – April 24, 2011 by valueinvestortoday
As we all know Graham used many ratios for stock selction and many studies have been performed. Some had to have existed when this book was written. In some of Graham's last comments (an interview in the 70's), he explicitly said that he uses formulas for stock selection and claims that those selling below NCAV earned around 20% and those by other metrics (low P/E, low P/B, high dividend, etc) earned him about 15%. In Fama and French (1992) even the EMH guys acknowledge P/E and P/B generate highe returns (they argue that they are riskier assets).
A big misconception is that Graham used "reported" financial data to derive his metrics. He did not. Seth's original comment is true concerning reported P/E, for example. Graham always adjusted the earnings of a business to account for one time and special purpose accounting events. There's no greater practitioner of value investing and supporter of Ben Graham than Warren Buffett and according to Warren, Seth Klarman is the best value investor out there today. Bruce Greenwald made mention of this fact recently. So, to argue with Seth is the same as arguing with Ben Graham himself because the man who learned from one and taught the other says they are one in the same.
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6:26 am
April 24, 2011
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DeepValueInvestor
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Book Review
Seth A. Klarman’s very limited print of “Margin of Safety” is in such short supply that used copies sell for between $825 and $1300 (as per latest check on Amazon).
Klarman explains the value investing philosophy, the logic of the value investing strategy, and why value investing succeeds over the long term. Klarman holds, and has indeed demonstrated by his outstanding investment performance, that the market is not always efficient. This means that, in the short run, market inefficiencies present the value investor with opportunities to purchase stocks at substantial discounts to their intrinsic value (i.e. buying stocks with a margin of safety). Klarman asserts that purchasing stocks with a significant margin of safety also serves to reduce portfolio risk. The value investing strategy calls on the value investor to hold the stocks purchased at a discount until the market bids up the price as the value or worth is recognized by the market. Klarman also describes that consideration should be given to selling existing stocks if better opportunities become available. Cash should also be held as necessary to take advantage of opportunities and/or in the event that there is a lack of current investment opportunities.
“Margin of Safety” is organized into three sections:
Where Most Investors Stumble
A Value-Investment Philosophy
The Value-Investment Process
Section 1 examines…
continue reading… http://deepvalueinvestor.com/m…..ok-review/
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7:26 am
March 9, 2011
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somrh
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Disclaimer, I have a tendency to be critical and negative. I frequently engage in dialectical thinking and prefer dialectical discussions. As such, I may argue for things just for the sake thereof. So most of my comments will be negative. It's just my personal preference (and I think it goes well with "intelligent investing" so I have no intentions of changing it.)
Chapter 1 comments (all pages are book pages, not pdf pages):
Investment versus Speculation
This is probably worthy of its own thread. There are portions of Graham where he seems to think there is something like "rational speculation". So I think Klarman is using a different idea (the merits of which can be discussed of course… we need not be dogmatic followers of Graham for sure.) The impression I get from Klarman is that he has two distinct archetypes in mind that are mutually exclusive but not exhaustive by any stretch. I think there is some grey area in the middle. His characterization of a speculator:
Speculators, by contrast, buy and sell securities based on whether they believe those securities will next rise or fall in price. Their judgment regarding future price movements is based, not on fundamentals, but on prediction of the behavior of others. They regard securities as pieces of paper to be swapped back and forth and are generally ignorant of or indifferent to investment fundamentals. (pg 4).
Where would something like option purchases fit here? They aren't necessarily "ignorant" or "indifferent" to fundamentals but they also depend upon price movements in some given period of time.
Investments and Cashflows
On page 8, he points out that investments are the sorts of things that generate cash flows of some sort (which I'm OK with) In footnote 4, he also acknowledges that things like gold can be investments since they are perceived as a store of value (see page 18). His reasoning is that gold's value has held roughly the same (an ounce of gold is exchangeable for a fine suit). But gold prices are actually quite volatile.
My own take is that I can compare relative values of things but I don't have any sense of "absolute value". So I can, for example, compare two bonds. I can compare stocks to bonds (if you use a discounted anything model, this is the same formula for valuation). I can compare anything that generates cash flow to bonds. I can compare currencies to other currencies (based upon what they can currently buy me. So if an IPOD costs $200 in the US and 100 Euros in Germany, that tells me, roughly, how these currencies should be exchanged. But I have no idea what an ounce of gold is worth.
So I question his position here. I don't know whether or not gold can be an investment but assertions and think his reasoning needs some filling here. I would like to see something argued. (I wonder if Einhorn has said anything. I know gold is one of his largest positions.)
Bond Yield and Stock Prices
These investors fail to consider that bond market yields are public information, well known to stock investors who incorporate the current level of interest rates into share prices. When bond yields are low, share prices are likely to be high. (page 16).
This is an interesting assertion that I think needs more research. Graham had commented that he conjectured there would be a relationship between interest rates and stock prices but claimed the evidence for that relationship was weak. I don't know if he published any studies or if any other studies have been done. I have seen (visually) that the charts of the inverse of the S&P 500 looks similar to junk bond spreads (and I can't find the link so maybe my memory is bad.) Beyond that I'd like to see some actual studies done on this because "rationally" I would expect this to be the case but I don't think markets are necessarily "rational".
The other interesting thing is that an inverted yield curve may imply stocks will decrease in price. An inverted yield curve indicates that interest rates may be falling soon which means stock prices should appreciate if Klarman is right. Yet, stock returns are actually negative post inverted yield curve (and this one I have a link for.)
Looking at the Yield Curve: Time to Reconsider Stock Market Exposure?
Investment Formula
Other formulas incorporate investment fundamentals such as price-to-earnings (P/E) ratios, price-to-book-value ratios, sales or profits growth rates, dividend yields and the prevailing level of interest rates. Despite the enormous effort that has been put into devising such formulas, none has been proven to work. (page 17).
As we all know Graham used many ratios for stock selction and many studies have been performed. Some had to have existed when this book was written. In some of Graham's last comments (an interview in the 70's), he explicitly said that he uses formulas for stock selection and claims that those selling below NCAV earned around 20% and those by other metrics (low P/E, low P/B, high dividend, etc) earned him about 15%. In Fama and French (1992) even the EMH guys acknowledge P/E and P/B generate highe returns (they argue that they are riskier assets).
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6:18 am
March 9, 2011
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somrh
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I'm finally getting around to reading this book. If you haven't read it, you can find it in pdf form here:
http://www.my10000dollars.com/MS.pdf
I'll be posting some remarks and comments as I read it.
On that note, would there be any interest in a sort of "investing book club"? I assume many of you are active readers and it might be a better reading experience to discuss books with others who are reading it.
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