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Old 03-20-2012, 06:59 PM   #201
hanster
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Re: Value Investing and Longer Term Investing

i think everyone here should be reminded that value stocks without a catalyst are value traps
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Old 03-20-2012, 07:32 PM   #202
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Re: Value Investing and Longer Term Investing

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i think everyone here should be reminded that value stocks without a catalyst are value traps
That's not true. Value stocks without a catalyst THAT WILL DESTROY THE EXISTING SHAREHOLDER VALUE, while you wait for the market to "recognize" said value, are value traps.

A stock being sufficiently undervalued is catalyst enough as long as the business isn't dying. Just need patience.
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Old 03-21-2012, 10:08 PM   #203
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Re: Value Investing and Longer Term Investing

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Originally Posted by DOOM@ALL_CAPS View Post
Read greenblatts "little books"
hey guys. I just finished Greenblatt's Magic Formula book and though it was pretty good. One question, why does Greenblatt only hold stocks for 1 year periods in his formula? Doesnt it seems better to hold a bit longer like 3 years when buying depressed companies - to give them a bit longer to comeback into favor or realize value?

Thx
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Old 03-22-2012, 10:48 AM   #204
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Re: Value Investing and Longer Term Investing

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Originally Posted by VictorChandler View Post
hey guys. I just finished Greenblatt's Magic Formula book and though it was pretty good. One question, why does Greenblatt only hold stocks for 1 year periods in his formula? Doesnt it seems better to hold a bit longer like 3 years when buying depressed companies - to give them a bit longer to comeback into favor or realize value?

Thx
I believe he has the 1 year holding period because that was the time period he used for his historical study. The point of the MF is that it's systematic and should not be tweaked. If you were to stretch out the holding period to 3 years, then you would need a considerably better returns to match the single year return compounded by years 2 and 3 to properly compare holding a cheap stock for 3 years. Another reason to avoid a longer holding period is to avoid value traps or at least move on and more profitably deploy capital.
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Old 03-22-2012, 11:23 AM   #205
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I believe he has the 1 year holding period because that was the time period he used for his historical study. The point of the MF is that it's systematic and should not be tweaked. If you were to stretch out the holding period to 3 years, then you would need a considerably better returns to match the single year return compounded by years 2 and 3 to properly compare holding a cheap stock for 3 years. Another reason to avoid a longer holding period is to avoid value traps or at least move on and more profitably deploy capital.
I thought part of the point was a tax issue (sell losers before one year and winners after one year) and to constantly be reallocating to the cheapest stocks. I could be misremembering though.
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Old 03-22-2012, 02:56 PM   #206
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Re: Value Investing and Longer Term Investing

I would agree with Doom here. Initially I was thinking "sell the losers, keep the winners," but I think the point is to keep cycling into the cheapest stocks. If I remember correctly he says that it should only take 2-3 years for them to come back?

I just bought the book on the recommendation here. In fact, I ordered a few books, they shipped, decided to google the book, and found a PDF file of the book online. Read it that night, and I'm now rereading it since the book arrived yesterday.

I don't have the extra money to open up a large investing account so I am starting off in a simulator to see what happens.

What I did was took the top 30 companies at >100, put them into Excel, and then went through and found the numbers for each company. Then I took the top 5 in each category and reranked them and took the top 3 from that and bought them in my simulator. Over time I am going to buy 2-3 each month until I get up to about 24-30 stocks.

I just started yesterday so it's still too early to tell. The concept seems pretty straightforward and for the first time in a long time it was like a lightbulb went off and everything started to make sense to me. We'll see what happens.
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Old 03-22-2012, 04:26 PM   #207
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Re: Value Investing and Longer Term Investing

MKC is compelling to me. Shareholder friendly management. Stable growing #s. Easy to understand business that won't be blindsided by some new technology that makes seasonings obsolete. Just wish it was cheaper.

Seems like the type of company buffet would buy.
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Old 03-22-2012, 05:35 PM   #208
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Re: Value Investing and Longer Term Investing

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I would agree with Doom here. Initially I was thinking "sell the losers, keep the winners," but I think the point is to keep cycling into the cheapest stocks. If I remember correctly he says that it should only take 2-3 years for them to come back?

I just bought the book on the recommendation here. In fact, I ordered a few books, they shipped, decided to google the book, and found a PDF file of the book online. Read it that night, and I'm now rereading it since the book arrived yesterday.

I don't have the extra money to open up a large investing account so I am starting off in a simulator to see what happens.

What I did was took the top 30 companies at >100, put them into Excel, and then went through and found the numbers for each company. Then I took the top 5 in each category and reranked them and took the top 3 from that and bought them in my simulator. Over time I am going to buy 2-3 each month until I get up to about 24-30 stocks.

I just started yesterday so it's still too early to tell. The concept seems pretty straightforward and for the first time in a long time it was like a lightbulb went off and everything started to make sense to me. We'll see what happens.
I just referenced my copy of the book and in the "Step by Step Instructions" section, Greenblatt recommends a one year holding period because that's what his firm used when doing the analysis. He then goes on to making an adjustment to the holding period +/- day depending on whether the stock is a winner/loser and the tax status of the account.

In the appendix he also wrote that he didn't have many consecutive three year periods of data. I'm not sure why he didn't use rolling three year periods to substitute this, but whatever.
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Old 03-22-2012, 06:07 PM   #209
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Re: Value Investing and Longer Term Investing

so did Greenblatt use 1 year because it was an 'easy' way to run his simulations or because he believes that exactly 1 year* is pretty close to the optimal time frame for this (meeting the other criteria of the MF)

So far it seems to me he just picked 1 year kinda out of thin air, but I doubt im correct in thinking this. hopefully someone can show why 1 year might be (close to) optimal here?


*+/- a few days for tax reasons
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Old 03-22-2012, 08:00 PM   #210
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Re: Value Investing and Longer Term Investing

I'd guess that the 1 year holding period is kinda random. Would be nice if someone could backtest the strategy for every holding period between 1 and 1000 days, if the strategy would work you'd expect some sort of curve of outperformance (possibly around the 1 year period).
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Old 03-22-2012, 09:06 PM   #211
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I don't think holding period should be too strict. If one of the stocks rockets up close to its valuation quickly you can sell it, if it hasn't moved in a year but its still amongst the most undervalued securities on your radar, keep holding it.
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Old 03-22-2012, 10:46 PM   #212
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Re: Value Investing and Longer Term Investing

My only thought is that selling the losers before the 1 year mark is best for the tax reasons.

But another thing I'm not understanding is that in Chapter 10 he mentions that it could take 2-3 years for the market to realize the value of the company, but yet he has the reader selling yearly.
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Old 03-22-2012, 10:55 PM   #213
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Re: Value Investing and Longer Term Investing

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But another thing I'm not understanding is that in Chapter 10 he mentions that it could take 2-3 years for the market to realize the value of the company, but yet he has the reader selling yearly.
yes exactly, it is a bit confusing. It seems he just gives in and picks the 1 year time frame because it is easiest for the general reader to stick to, rather then trying to explain what Xaston said above - which is vvvv hard to do correctly over the long term; at least as I understand it.
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Old 03-22-2012, 11:07 PM   #214
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Yea the point of the magic formula is to just make it all very mechanical and foolproof.

I just think if you're coming to 2+2 and talking about it then you see value in figuring out why the magic formula ends up with good results, and what things you can do to improve on the framework.
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Old 04-01-2012, 10:33 AM   #215
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Re: Value Investing and Longer Term Investing

Visteon seems compelling based on a back of the envelope calculation. It's post reorg company that sells auto parts like consoles and air conditioners. They own 70% of a Korean company that is worth 1.4b alone. Mgmt's projected EBITDA is ~680 and the market cap plus debt is about 3.2b. (All these numbers were by memory, sorry if theyre wrong).
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Old 04-02-2012, 02:02 PM   #216
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Re: Value Investing and Longer Term Investing

I have a question about the Greenblatt strategy that we talked about recently.

Late march I opened a sim account and have been holding some stocks since then. The portfolio has been doing pretty well, pretty much outperforming the S&P.

I got my friend into doing it too and might have a 2nd friend interested in trying it out. I'm testing it out to see how the strategy does, he's testing it out to learn about the stock market.

He has a stable job, but not a lot of money because of bills and what not so his savings really isn't investment worthy.

We were talking about a bankroll that he could start with down the road, maybe a year or two from now and he was thinking maybe $5,000 might be possible.

The strategy says 20-30 stocks so that leaves him about $400 per stock, at the most.

My question is, is it still feasible if he just started with $5,000 and bought 5-6 stocks and started out? Then over time he builds it up? So let's say $6k for 6 stocks. $1000 in each, holds for a year or until he has enough to buy another, then over time he starts building up his portfolio (hopefully as the strategy works and he has profits)? So it might take him 2-4 years to actually build up a portfolio of 20 stocks.
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Old 04-02-2012, 02:33 PM   #217
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Re: Value Investing and Longer Term Investing

I haven't read it but in his new book he talks about value weighting indexing. That seems like a better idea for him
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Old 04-02-2012, 03:46 PM   #218
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Re: Value Investing and Longer Term Investing

Are you aware of any low-fee investable value weighted indices? As far as I know there are no ETFs of that sort so far.
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Old 04-02-2012, 03:55 PM   #219
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Re: Value Investing and Longer Term Investing

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Are you aware of any low-fee investable value weighted indices? As far as I know there are no ETFs of that sort so far.
I actually forgot about him mentioning them. He talks about them in his book, "The Big Secret for the Small Investor." I don't know if I would recommend the book though.

I went back through and skimmed the last few sections and I don't think he mentioned any value weighted funds.

Anyways, he lists some Value Index ETFs (NOT value weighted):
I = iShares
V = Vanguard

IWD
IWN
IWS
IJS
VTV
VOE
VBR
EFV (international)

I personally prefer the individual value stock route that he mentions in his book because I have control over only selecting the companies with the highest earnings yield and ROA - based off his stock screener.
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Old 04-02-2012, 05:21 PM   #220
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Re: Value Investing and Longer Term Investing

Yea, those aren't value-weighted.

Gotham runs a hedged strategy that is similar, but that is not available to retail investors.

Fwiw, here's a recent article by Greenblatt on "Adding your two cents"- comparing "self-managed" vs algorithmic construction of the formula investing:
http://news.morningstar.com/articles...ED.HTML&_BPA=N
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Old 04-02-2012, 05:49 PM   #221
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Re: Value Investing and Longer Term Investing

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Fwiw, here's a recent article by Greenblatt on "Adding your two cents"- comparing "self-managed" vs algorithmic construction of the formula investing:
http://news.morningstar.com/articles...ED.HTML&_BPA=N
Anyway you could PM me or quote the 2nd page? I don't have an account and don't want to sign up for one.
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Old 04-02-2012, 05:58 PM   #222
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Re: Value Investing and Longer Term Investing

Quoted for all

Quote:
How’d that happen? Well, here’s what appears to have happened:

(You might consider this a helpful list of things NOT to do!)

1. Self-managed investors avoided buying many of the biggest winners.

How? Well, the market prices certain businesses cheaply for reasons that are usually very well-known. Whether you read the newspaper or follow the news in some other way, you’ll usually know what’s “wrong” with most stocks that appear at the top of the magic formula list. That’s part of the reason they’re available cheap in the first place! Most likely, the near future for a company might not look quite as bright as the recent past or there’s a great deal of uncertainty about the company for one reason or another. Buying stocks that appear cheap relative to trailing measures of cash flow or other measures (even if they’re still “good” businesses that earn high returns on capital), usually means you’re buying companies that are out of favor. These types of companies are systematically avoided by both individuals and institutional investors. Most people and especially professional managers want to make money now. A company that may face short-term issues isn’t where most investors look for near term profits. Many self-managed investors just eliminate companies from the list that they just know from reading the newspaper face a near term problem or some uncertainty. But many of these companies turn out to be the biggest future winners.

2. Many self-managed investors changed their game plan after the strategy underperformed for a period of time.

Many self-managed investors got discouraged after the magic formula strategy underperformed the market for a period of time and simply sold stocks without replacing them, held more cash, and/or stopped updating the strategy on a periodic basis. It’s hard to stick with a strategy that’s not working for a little while. The best performing mutual fund for the decade of the 2000’s actually earned over 18% per year over a decade where the popular market averages were essentially flat. However, because of the capital movements of investors who bailed out during periods after the fund had underperformed for a while, the average investor (weighted by dollars invested) actually turned that 18% annual gain into an 11% LOSS per year during the same 10 year period.[2]

3. Many self-managed investors changed their game plan after the market and their self-managed portfolio declined (regardless of whether the self-managed strategy was outperforming or underperforming a declining market).

This is a similar story to #2 above. Investors don’t like to lose money. Beating the market by losing less than the market isn’t that comforting. Many self-managed investors sold stocks without replacing them, held more cash, and/or stopped updating the strategy on a periodic basis after the markets and their portfolio declined for a period of time. It didn’t matter whether the strategy was outperforming or underperforming over this same period. Investors in that best performing mutual fund of the decade that I mentioned above likely withdrew money after the fund declined regardless of whether it was outperforming a declining market during that same period.

4. Many self-managed investors bought more AFTER good periods of performance.

You get the idea. Most investors sell right AFTER bad performance and buy right AFTER good performance. This is a great way to lower long-term investment returns.

So, is there any good news from this analysis of “self-managed” vs. “professionally managed” accounts? (Other than, of course, learning what mistakes NOT to make—which is pretty darn important!) Well, I can share two observations that are, at the very least, fun to think about:

First, most clients ended up asking Formula Investing to “just do it for me” and selected “professionally managed” accounts with over 90% of clients choosing this option. Perhaps most individual investors actually know what’s best after all!

Second, the best performing “self-managed” account didn’t actually do anything. What I mean is that after the initial account was opened, the client bought stocks from the list and never touched them again for the entire two-year period. That strategy of doing NOTHING outperformed all other “self-managed” accounts. I don’t know if that’s good news, but I like the message it appears to send—simply, when it comes to long-term investing, doing “less” is often “more”. Well, good work if you can get it, anyway.

[1] The study reviewed the period May 1, 2009 to April 30, 2011. Past performance is not indicative of future results.

[2] Source: Morningstar study quoted in The Wall Street Journal, December 31, 2009, “Best Stock Fund of the Decade.”
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Old 04-02-2012, 06:40 PM   #223
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Re: Value Investing and Longer Term Investing

Thanks!

From what I'm understanding is that the article is saying the reason why some people did worse was because they weren't following the strategy. They were changing it up to suit their own fear of losing money or trying to double up after it already went up.
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Old 04-03-2012, 07:42 AM   #224
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Re: Value Investing and Longer Term Investing

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Are you aware of any low-fee investable value weighted indices? As far as I know there are no ETFs of that sort so far.
Is your term "value weighted indices" synonymous with fundamentally-weighted indices? If so, what about PRF or PRFZ?
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Old 04-03-2012, 11:03 AM   #225
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Re: Value Investing and Longer Term Investing

TY anklebreaker.
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