2015 Q3 Value Performance Update and How I Value Markets


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Jae Jun

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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 so 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 hedgefunds according to novus.com

2015 Q3 Top 20 Hedgefund Stocks

2015 Q3 Top 20 Hedgefund Stocks | Credit: novus.com

How does this look in a chart?

Horrible Performance of Hedge Fund Top Picks

Horrible Performance of Hedge Fund Top Picks

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.

  1. Ignore news and headlines
  2. Ignore popular stocks
  3. 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.

2015 Q3 YTD TR Value Performances

2015 Q3 YTD Value Performances Total Return

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.

2015 Value Performances

2015 Value Performances

Don’t Blindly Follow High Performance Screeners

Last quarter, I mentioned how you should ignore the NCAV and NNWC 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.

VLTC-stock-chart

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.

2015-NNWC-stocks-1

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 lucky than skill.

Why Bother Tracking Net Nets and Bad Performing Screeners?

So why do I bother tracking this or other underperforming screens?

The easy answer is that one year doesn’t signal long term performance and then show you this table of results.

value-stock-screen-performance

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 PE 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 opportunities.

Here are some more observations.

  • When Mr Market falls, it doesn’t care who you are. It will take Quality, Growth and Value all down with him.
  • Risk management should be at the top of your list day in 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.

By using the number of net nets available as an indicator, it’s a great way of expanding 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.

Chart of Cheap Years

Chart of Cheap Years

number-of-net-nets-performance-2000

Total Net Nets 1999 – Sept 2013 | Recession Year Highlighted Pink

Even without a table or chart like this, it’s obvious when the market is cheap.

But it’s also the most scariest, which is why you need a table or chart like this where the facts smack you in the face.

I haven’t update this table in a while, but 2014 and 2015 are similar to 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 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.

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