tag:blogger.com,1999:blog-3579950804586077792024-03-12T18:42:28.029-07:00The bookbookfund blogThis blog sets out the progress of my investments.Unknownnoreply@blogger.comBlogger30125tag:blogger.com,1999:blog-357995080458607779.post-77095173320754729292012-09-29T14:41:00.000-07:002012-09-29T14:41:37.273-07:00the blog is deadLong live the blog.<br />
<br />
I've moved to wordpress because blogger software is terrible in comparison. At the same time I changed the name. Check out the <a href="http://fowci.wordpress.com/">new blog</a> (well-conceived investments) here:<br />
<a href="http://fowci.wordpress.com/">http://fowci.wordpress.com</a><br />
<br />
I'm going to try to post more, and often with shorter posts, there. I'm also going to concentrate on a lot of New Zealand stocks, as that's where I actually do most of my research.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-88288189373871436442012-09-28T15:37:00.000-07:002012-09-28T15:37:02.374-07:00Kiwifruit updateSeeka filed a few documents over the past few weeks since I wrote about the company.<br />
<br />
The director selling his shares got rid of <a href="https://www.nzx.com/files/attachments/163897.pdf">another 27,000</a>.<br />
<br />
The company released a <a href="https://www.nzx.com/files/attachments/163964.pdf">"stakeholder" presentation</a> essentially trying to explain why shareholders had done so badly over the past few years.<br />
<br />
Worth reading if you thought about buying Seeka or Satara. I still wouldn't.<br />
<br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-79847538480981900352012-09-17T02:25:00.001-07:002012-09-17T02:29:22.595-07:00Bargain fishingOver the past week or so I’ve been looking at closed-end
funds, prompted by <a href="http://brooklyninvestor.blogspot.co.nz/2012/09/special-opportunities-fund-spe.html">this</a> cool post by Brooklyn Investor.<br />
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A closed-end fund is a fund run by a portfolio manager that
trades on a market. Fund holders own
shares in the fund, but the fund doesn’t allow redemptions nor new issuances of
those shares. In contrast, an open-ended
fund allows holders to give their shares to the manager of the fund, who pays
them out the “net asset value” (NAV) of their shares. The NAV is simply the current market price of
the underlying assets that the fund holds. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The share price of a closed-end fund can trade at a discount or a
premium to the NAV of the underlying securities. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The very existence of a discount or premium calls into
question the efficient market hypothesis.
If the efficient market hypothesis is true, then buying a basket of
closed-end funds will provide a market return (minus fees). Because no stock is known ex ante to
outperform, buying a basket of closed-end funds simply gives you a diversified
market portfolio. If this were true
though, there shouldn’t be such a high discount on some of these funds. In New Zealand, the <a href="https://www.nzx.com/markets/NZSX/securities/mln"><i>Marlin Global</i> fund</a> trades at a (as of the end of last week)
17.6% discount.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Now, to tell you a secret, I really do want the efficient
market hypothesis to be false. If it is,
all this blogging, reading, and investing might have a chance of succeeding and
I won’t have been wasting all this time.
If you read Brooklyn Investor’s post on Phillip Goldstein, you’ll see
one person who seems to be earning above market returns by investing in
closed-end funds at a discount to their NAV.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Reviewing the finance literature of closed-end funds, there
are effectively seven reasons why the discount might be rational. If the discount is a rational feature, the
market might be efficient and the discount might not a source of subsequent
outperformance.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The seven potential reasons are:</div>
<ul>
<li><span style="text-indent: -18pt;">Built-in potential gain tax.</span></li>
<li><span style="text-indent: -18pt;">Distribution policies</span></li>
<li><span style="text-indent: -18pt;">Investments in restricted stock</span></li>
<li><span style="text-indent: -18pt;">Holding of foreign stock</span></li>
<li><span style="text-indent: -18pt;">Past performance</span></li>
<li><span style="text-indent: -18pt;">Portfolio turnover</span></li>
<li><span style="text-indent: -18pt;">Management fees</span></li>
</ul>
I’m going to through each one of these as it applies to the <i>Marlin Global </i>fund to see if any of them
(individually or in combination) can explain the 17.6% discount. If they can’t, my conclusion is that it might
make sense to buy some shares in the Marlin Global closed-end fund. As you’ll see if you read till the end, there
seems to me a good catalyst for the closing of the discrepancy between the NAV
and the market price for Marlin Global.<br />
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Built-in potential gain tax</b><o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
This doesn’t apply.
For a New Zealander investor (like me) the fund is subject to the
Portfolio Investment Entity (PIE) regime.
This taxes the fund by deeming five percent of the net assets to be
income (on which tax is then charged).
As long as investors hold more than $50 000 of foreign assets (bit more
complicated than this) in their personal portfolios, there is no tax advantage
from holding assets directly as opposed through the fund. There is no capital gains tax in New Zealand,
so the explanations in the USA about investors no longer having an “option” to
bring forward capital losses and delay capital gains cannot apply.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Distribution policies</b><o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
I’ll come back to this at the end, but Marlin Global has a
particularly attractive distribution policy that should reduce its
discount. Basically, Marlin Global pays
out, quarterly, 2% of the net asset value of the fund. Annually that’s 8%. The pay-out ratio is almost 10% when you look
at the current market price as compared with the NAV and the distribution
policy. One thing to keep in mind is
that this is not a true “yield” because you’re not getting paid the income from
the fund (or the dividends from the companies it owns). You’re being paid 8% of the net asset value
of the fund yearly. You’re getting
capital amounts back, not income amounts.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
To me, that’s a good news story as it should minimise the
difference between the NAV and the share price. If the manager cannot grow NAV
by 8% a year, reduces the assets under management. In turn, this could force the fund to close
and redeem at NAV as assets shrink. Of
course, if the manager can grow NAV at over 8% per year, the discount should
shrink on its own as investors start to believe that the manager has some
ability. I conclude that distribution
policies cannot explain the discount.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Investments in restricted stock</b><o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
This is the idea that the NAV might be overstated because
the fund owns “restricted stock” that it cannot sell. From a quick review of Marlin Global’s holdings,
that doesn’t seem to be the case.
However, it does hold positions in some very small companies. If the fund tried to sell those quickly it
would likely not receive the current market price. I conclude that this might explain a very
small discount.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Holding of foreign stock</b><o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
This goes both ways.
Some posit (and this is borne out in plenty of evidence) that the
holding of foreign stock should create a premium, as it is likely to be a much
more cost-effective way to get exposure to foreign stocks than holding the
stocks directly. Inevitably a small
investor will have larger trade and foreign exchange fees than a fund
manager. Marlin Global holds non-New
Zealand or Australian investments. This
is one way to remove the <a href="http://en.wikipedia.org/wiki/Equity_home_bias_puzzle">“home bias”</a> – invest in a foreign closed-end
fund at a discount. I conclude this
doesn’t explain any of the discount.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Past performance</b><o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Everyone knows that past performance doesn’t predict future
results, don’t they? This explanation
for the discount assumes that past performance <b>does </b>predict future results, and therefore poor past performance
requires a discount. This raises the inherent contradiction in looking at closed-end funds. If we assume the market is efficient, then
past performance doesn’t predict future results, and <b>there should be no discount</b>.
But we do see a discount. But if
we assume the market is inefficient, then past performance does predict future
results, <b>and there should be a discount.
</b>But is the discount evidence of market efficiency? How can it be when one of the inputs
explaining the discount is that the market is inefficient? This is tough stuff. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
I’ve come to my conclusion that the market is inefficient on
the basis of evidence that there do seem to be a category of investors and
stocks that do outperform. In short,
value investors and “value stocks” do seem to persistently outperform. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Let’s take the situation where past performance does predict
future results. How is the past
performance of the Marlin Global fund?<o:p></o:p></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbCXktM-AYDkzK0Jd5eL-bAXblNGW5bnRmSFQEFnj57Wd0jiGVd-jeOFJ8ruFvoITgfYIWCdQpsWXEKbW6mE6QpYOUhXarwreCHdeGVHiRR5FzZkk0XBsSwBImowPu-25fmVd40Fo22XA/s1600/marlin.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbCXktM-AYDkzK0Jd5eL-bAXblNGW5bnRmSFQEFnj57Wd0jiGVd-jeOFJ8ruFvoITgfYIWCdQpsWXEKbW6mE6QpYOUhXarwreCHdeGVHiRR5FzZkk0XBsSwBImowPu-25fmVd40Fo22XA/s1600/marlin.JPG" /></a></div>
<div class="MsoNormal">
<br /></div>
It seems to be outperforming (in a very minor way) the MSCI
Global Small Cap Gross Index (ie, it’s a smaller negative). The fund manager is Fisher Funds. Fisher Funds seems to have outperformed
generally over quite a large time frame.
That’s from a quick scan of their website though. These sorts of funds are notoriously
difficult to compare, and any attempt to do so is riddled with survivorship
bias so it’s hard to put much weight on this.<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
Let’s be conservative and say that the manager has no edge,
and is throwing darts at a dart board and simply buying a less than optimally
diversified random group of stocks that should, over time, approximate the
market return. In this case, the past performance
cannot explain the discount.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Portfolio turnover</b><o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
This is the idea that the expected portfolio turnover will
be suboptimal (in most cases, too high) and fees will eat up the NAV. The first bullet point of Marlin’s
“investment philosophy” is:<o:p></o:p><br />
<br /></div>
<div class="MsoNormal">
<span style="font-family: Symbol; text-indent: -18pt;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;">
</span></span><span style="text-indent: -18pt;">The Company seeks to buy and hold shares in companies
for the medium to long term.</span></div>
<div class="MsoNormal">
<span style="text-indent: -18pt;"><br /></span></div>
<div class="MsoListParagraph" style="mso-list: l0 level1 lfo2; text-indent: -18.0pt;">
<o:p></o:p></div>
<div class="MsoNormal">
There’s no evidence that the manager is buying and selling
too often, and the manager’s philosophy is the antithesis of that. So portfolio turnover can’t explain the
discount.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Management fees</b><o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
This is the hardest one to analyse. The discount is justified if the net present
value of the fees expected over the life of the fund equal the discount. The Marlin Global Fund has a bit of a weird
fee structure. Basically, the management
fee is 1.25%, but reduced by 0.1 percentage points for every one percentage
point of underperformance against a benchmark, to a minimum of 0.75%. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
There is also a performance fee.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The performance fee is the 15% of the lesser of:</div>
<div class="MsoNormal">
</div>
<ol>
<li>The "excess return" of the fund.</li>
<li><span style="text-indent: -18pt;">The difference between the NAV at the end of the
year, and the highest NAV during the previous year.</span></li>
</ol>
The “excess return” is any amount over the NZX 90-Day Bank
Bill Index plus five percentage points. <br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
That’s a pretty odd comparator. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
One the one hand, it’s an absolute comparator, which has the advantage
of only charging fees in years where shareholders get a positive return. On the other hand, the manager gets a
performance fee for a rising stock market.
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
I’m sceptical the general increase in stock prices over the
last century will continue at the same rate.
Because of this, I’m more comfortable with an absolute fee – the manager
will have to work for it.<o:p></o:p></div>
<div class="MsoNormal">
15% is high though. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Keep in mind that the fee is the lesser of the two items above. This effectively means there’s a “high-water mark”
that the NAV must reach before a fee can be charged. For the year ended 30 June 2012, the NAV
high-water mark was $0.97. The current
NAV is $0.8281. That’s a fair way to go
before a fee is charged (+17% increase in NAV).
If the discount was rational, it would be the net present value of the
expected value of fees. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
That’s the sort
of maths that I can’t do. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
One way to test whether it is rational is to look at the
discount over time and see if it increases as the NAV increases (and approaches
the high-water mark), and decreases as the NAV decreases (and falls away from
the high-water mark. As the NAV
increases, the expected value of the fees go up, and the discount should
widen. However, the opposite occurs.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsnc5joe1rExQQiB0Nd72sN_oYvjHZdJa-c9DTowQABhyphenhypheneL4Jjd4vLFrsYMd1HODv4kKMvjitMPxXcytf61SgdddG861nK1scDkIWvdxlDPRnIRToNa9ChvzpRIMfmAWw0_61Lk9ZhRL8/s1600/marlin.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="432" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsnc5joe1rExQQiB0Nd72sN_oYvjHZdJa-c9DTowQABhyphenhypheneL4Jjd4vLFrsYMd1HODv4kKMvjitMPxXcytf61SgdddG861nK1scDkIWvdxlDPRnIRToNa9ChvzpRIMfmAWw0_61Lk9ZhRL8/s640/marlin.JPG" width="640" /></a></div>
<div class="MsoNormal">
<o:p> </o:p> </div>
<div class="MsoNormal">
The graph shows that the discount was widest at market lows
(March 2009), in direct contradiction to any rational expected value of fees
calculation. The purpose of the graph is
to show how the discount has reduced since the “distribution” policy. The “distribution”
is really a return of capital. I think
it naturally keeps the discount within a band.
The other thing you’ll note from the graph is how volatile the discount
is. And that brings me to my
conclusion. After reviewing all these
reasons, I see some support for a discount, but I can’t believe that the
discount that regularly occurs is a product of rational pricing. Therefore I expect to purchase shares at a
substantial discount the next time I see it. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
As I mentioned a few times above, the distribution of 8% of the NAV is a form of a catalyst. If the manager can't keep capital growth up with the distributions, funds under management start to dwindle, the NAV drops, and there's more and more pressure to wind the fund up (and less incentive to keep it going, given that fees are a function of the funds under management). </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The other option is that the manager stops the distribution policy and the discount widens. While this is possible, the manager has also instituted a small stock buy back. Given this, there seems evidence that the manager is likely to try other tactics to lower the discount, and there's investor pressure to do so.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
I won’t purchase at anything smaller than a 20% discount. That may take some time, but I'm not in a hurry.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-357995080458607779.post-58860730738980947422012-09-11T01:06:00.002-07:002012-09-11T01:07:29.943-07:00High-frequency kiwifruit trading<i>The title of this post is a reference to how quickly I bought then sold this stock. I bought yesterday and sold today. </i><br />
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
<b>Seeka<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Seeka is a New Zealand company concentrating on whole of
production kiwifruit industry in New Zealand.
I first became interested in the stock when the stock price hit $1.00 and the book value was $3.99. The stock is currently selling at an EV/EBITDA ratio of 1.42.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
I purchased some stock at $0.92 but then quickly sold at
$0.85 when I realised that my order filled part of a director’s sale
order that made me think about this a second time. Looking on past filings, I see
that this director is the second largest insider holder and has been selling
stock since a biological pest was discovered in New Zealand that could (and has
already begun to) destroy the kiwifruit industry. The price is now $0.81, and given the book
value, I’m investigating at what price I would re purchase this company.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>What does Seeka do?<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal" style="margin-bottom: 0.0001pt;">
Seeka is basically a vertically-integrated kiwifruit producer. It leases orchards and grows kiwifruit (and manages orchards for others), harvests the fruit, processes it, and packs it ready for sale.<o:p></o:p></div>
<div class="MsoNormal" style="margin-bottom: 0.0001pt;">
<br /></div>
<div class="MsoNormal">
Seeka’s half-year report is sobering reading. The conclusion of the Chairman’s address says
it all:</div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal" style="margin: 0cm 0cm 0.0001pt 1cm;">
<br /></div>
<div class="MsoNormal" style="margin: 0cm 0cm 0.0001pt 1cm;">
This remains a
testing time for the industry and Seeka. The pressure of the Psa-V outbreak
alongside a challenging harvest and grower uncertainty has again demonstrated
how Seeka’s dedicated leadership, dedicated people and its strategy, position
the company well to deliver the best outcome to growers and shareholders in the
current environment.<o:p></o:p></div>
<div class="MsoNormal" style="margin: 0cm 0cm 0.0001pt 1cm;">
<br /></div>
<div class="MsoNormal" style="margin-bottom: 0.0001pt;">
Below is a snap of their balance sheet as at 30 June 2012. I draw your attention to three items. The first is the bottom line. Net assets come in at $59 million. That is as compared with a market cap (today)
of $11.7 million. Net assets are
currently 5 times market cap. The second
item is one item in current assets – trade and other receivables. It’s a massive $28 million. <b>Its
receivables are higher than its market cap</b>.
The other large asset (non-current) on its balance sheet is property,
plant and equipment, at $69 million.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOwOBRHW6ygvI2TIBQSexeWCla7-tRI99AjUDl4-ppWxkbHdh3UDPhAcSt7ulhw7rdz9WTq_u-aFI5FGU25XJGDGO3TLvaK1TkdDJHEW3LgOwZYrCkY1pUodm67dHa8ViUDVkiMZTyLEk/s1600/Capture.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOwOBRHW6ygvI2TIBQSexeWCla7-tRI99AjUDl4-ppWxkbHdh3UDPhAcSt7ulhw7rdz9WTq_u-aFI5FGU25XJGDGO3TLvaK1TkdDJHEW3LgOwZYrCkY1pUodm67dHa8ViUDVkiMZTyLEk/s640/Capture.JPG" width="550" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Check the arows, they point to matters I find of interest</td></tr>
</tbody></table>
<div class="MsoNormal">
Note 9 (on Trade and other receivables) states:</div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="margin-left: 1.0cm;">
Note 9. Related party transactions<o:p></o:p></div>
<div class="MsoNormal" style="margin-left: 1.0cm;">
<br /></div>
<div class="MsoNormal" style="margin-left: 1.0cm;">
<i>Seeka Growers Limited<o:p></o:p></i></div>
<div class="MsoNormal" style="margin-left: 1.0cm;">
<i><br /></i></div>
<div class="MsoNormal" style="margin-left: 1cm;">
In the normal
course of business the Group undertakes transactions with Seeka Growers
Limited, a related party which administers all post harvest operations and
revenues from the sale of kiwifruit on behalf of growers with whom it holds a contract.
In the current period the Group received $50,318,169 (2011: $51,195,190) for
the provision of post harvest and orchard management services to Seeka Growers
Limited. At balance date, a significant portion of receivables are due from
Seeka Growers Limited. These receivables are funded by future fruit payments
from Zespri Group Limited to Seeka Growers Limited.<o:p></o:p></div>
<div class="MsoNormal" style="margin-left: 1cm;">
<br /></div>
<div class="MsoNormal">
I find this a pretty odd
note. Basically, Seeka gets money from Seeka Growers Limited (a
related party). Seeka does all the post
harvest work for Seeka Growers Limited, who have not yet paid for the work. That all makes sense I guess. It’s the last sentence that’s a bit
weird. “These receivables are funded by
future fruit payments from Zespri Group Limited to Seeka Growers Limited”. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
So basically, Seeka Growers Limited can’t pay
Seeka until Zespri pays Seeka Growers. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Zespri is a legislated
co-operative of kiwifruit growers. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Basically, the way I read that note is that Seeka gets paid if Seeka Growers get paid. Seeka Growers get paid if it can sell fruit to Zespri in the future. But what if
the Kiwifruit industry is finished? Zespri might not be able to pay Seeka
Growers, and Seeka Growers might not be able to pay Seeka.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Psa<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Zespri’s annual report (year
ended 31 March 2012 - available on their website) states that 30% of New
Zealand kiwifruit orchards have some Psa (Pseudomonas syringae pv. actinidiae)
infection.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
This <a href="http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10831638">news article</a> from September 4 states that nearly 50 per cent of kiwifruit crops in New
Zealand are on an infected orchard. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A 13 August market update from Seeka contained the following ominous line:<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="margin-left: 1cm;">
Seeka continues
to caution the market that the outbreak which is now in its second year has the
potential to seriously impact on future earnings for the Company. <o:p></o:p></div>
<div class="MsoNormal" style="margin-left: 1cm;">
<br /></div>
<div class="MsoNormal">
The question is, let’s say future
earnings for Seeka collapse, what happens to the company? Clearly if the Kiwifruit industry in New
Zealand halves (not out of the question now that Psa is here – many orchardists
may switch to another crop that doesn’t get hit by Psa), the assets that Seeka
have won’t be worth anywhere near book value.
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Seeka has specialised factories
for processing and packing kiwifruit.
Now of course those assets will have some value to another fruit
company, or another kiwifruit factory out of New Zealand. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
But I imagine that shipping a
factory from New Zealand to somewhere else that grows kiwifruit reduces the
book value and sale price of that factory substantially. Seeka says that its land and building assets
were revalued at 31 December 2011 taking into account the Psa discovery. When $69 million of assets is in “property,
plant and equipment”, any further reduction to take into account the wider
spread of Psa seriously erodes the $59 million net asset base.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A further aspect I haven't touched on (and won't in any detail) is that assuming that the kiwifruit industry isn't destroyed, merely decimated (in the original sense of the term - ie, cut by 10%), the excess capacity for processing and packing kiwifruit will drive the revenues from these activities down so that Seeka's margins (if they exist) will be suppressed indefinitely as the industry consolidates.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Seeka’s annual report for the
year ended 31 December 2001 records revalued land (after initial Psa discovery)
at $2.8 million. It records buildings at
$37 million, and plant and equipment at $31 million. If land was worth $37 million vs a building
of $2.8 million, then buying now might be a good move – the land is likely to
be far less affected by changes in what can be grown on it, than a building or
plant equipment can by what can be processed through it. The land is fertile and can grow stuff; the
buildings/plant are all geared for a particular crop.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
But don’t rely on my opinion:
director Stuart Burns has reduced his position in the company since 30 November
2011 to 150,000 shares from 300,000.
Finding that makes me happy to have exited the position (but kicking
myself for ever initiating it).<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
I started this exercise asking at
what price would I buy this company.
After undertaking this exercise, I can say that I won’t touch this
company at any price. There may be value
here, but to see that you’d have to have stepped foot inside a kiwifruit
processing factory and have an idea of how much you’d be able to get for the
stuff in a liquidation. Maybe a Psa resistant
strain of kiwifruit will be found tomorrow – but I know as much about kiwifruit
disease epidemiology as I do about kiwifruit factories so have no advantage
there. <o:p></o:p></div>
<div class="MsoNormal" style="margin-left: 1cm;">
<br /></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-40181042945298901422012-07-17T00:02:00.002-07:002012-07-17T00:06:12.077-07:00Internal Rate of ReturnIn response to my <a href="http://bookbookfund.blogspot.co.nz/2012/07/performance-in-2nd-quarter-2012.html">latest performance post</a>, reader Hugh asks two questions:<br />
<br />
1) What is "internal rate of return" and how is it calculated?<br />
<br />
2) Why is it hard to compare your internal rate of return to that of the S&P500?<br />
<br />
<i>What is "internal rate of return" and how is it calculated?</i>
<br />
<br />
The <i>internal rate of return </i>of a stream of cashflows (which is all an investment is in terms of its performance) is the annualized effective compound return rate. A natural question is - well what's that? The easiest way to think about it is to compare it to an interest rate on a bank deposit. A bank term deposit of $10 000 may have an interest rate of 6% (let's assume after tax) for a term of 5 years. As long as interest is paid yearly, the internal rate of return for the bank deposit is 6%, because the annualized effective compound return rate is what the bank tells you it is - 6%.<br />
<br />
That's easy to work out. But how do you compare that to:<br />
<br />
<ul>
<li>buying $5 000 IBM shares on January 1 2011, </li>
<li>buying $3 000 Microsoft shares on July 20 2011,</li>
<li>receiving a $28 dividend from your Microsoft shares on November 20 2011,</li>
<li>selling half of your IBM shares for $3 000 (they went up in value) on December 15 2011,</li>
<li>buying $8 000 of Oracle shares on February 10 2012,</li>
<li>after all that, finding yourself with $16093 worth of shares today (17 July 2012).</li>
</ul>
<div>
The answer is excel. You simply make a list of dates and a list of cashflows that looks like this:</div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbJURehC1qN8vlbznV2n0BJnq7YjGubhXyIU8YkRCZ-orVBA8UaGwARN5hZaQFTzrDpCqYRjiifxmPJyd0n01se0dCTv5W_MLNxfY8nRfHQbXq0LB2SSmqrllVT3q7rue5J0XkSfUsHws/s1600/irr.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbJURehC1qN8vlbznV2n0BJnq7YjGubhXyIU8YkRCZ-orVBA8UaGwARN5hZaQFTzrDpCqYRjiifxmPJyd0n01se0dCTv5W_MLNxfY8nRfHQbXq0LB2SSmqrllVT3q7rue5J0XkSfUsHws/s1600/irr.JPG" /></a></div>
<div>
<br /></div>
<div>
You'll see that those cashflows are events based on the bullet points above. The internal rate of return formula in excel is simply "=xirr(values, dates)". And you get 24% in my example.</div>
<div>
<br /></div>
<div>
<i>Why is it hard to compare your internal rate of return to that of the S&P500?</i>
</div>
<div>
<i><br /></i></div>
<div>
The fund has data on all dividends, all purchases and sales of shares since inception. We use that to get July 14's 7.52% internal rate of return. But how do we compare that to an investment in the S&P500? Do we assume that on the first day we purchased shares, the alternative was to purchase the S&P500? But what if a month after the first purchase, we purchased some different shares? If the S&P500 has gone up since then, our performance looks terrible if we backdate the comparator to having purchased the S&P500 at the earlier date (of first purchase). Vice versa if the S&P500 has gone down.<br />
<br />
The problem is knowing what to compare when you are slowly adding positions to your portfolio (as we are). The only sound way to do it is to, at every purchase and sale, assume that you had purchased or sold the S&P500 at equal value to the actual purchase or sale. So if the fund bought $50 000 of IBM on 20 January 2012, we assume that the alternative was to buy $50 000 of the S&P500. If the fund sold $10 000 of MSFT, we assume that the alternative was to sell $10 000 worth of the S&P500. This method removes any influence of "market timing" in the comparison. This seems fair, since the whole premise of the fund is that market timing (for us) is impossible, and all we can try to do is buy stocks cheaply whenever we see them.<br />
<br />
Having set that all out, if I get hold of historical prices for the S&P500, I think I might actually be able to compare performance directly with a bit of tinkering in excel. I might try to do that sometime this week.<br />
<br />
<br /></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-82613503040604976842012-07-13T17:20:00.001-07:002012-07-13T17:30:32.796-07:00Performance in 2nd Quarter 2012Ignoring currency changes but accounting for trading expenses, the fund returned -3.09% in the 3 months to 30 June 2012. Over this same time period, the S&P500 returned -4.01%. <br />
<br />
So the fund moderately outperformed the index.<br />
<br />
For the half year ended 30 June 2012, the fund returned 5.52% Over this same time period, the S&P500 returned 6.66%, so the fund is still underperforming the index by a moderate amount.<br />
<br />
The current internal rate of return of the fund (the best measure, but the hardest to compare to the S&P500) as of today (July 14) is 7.52%.<br />
<br />
The best performers in the portfolio for the quarter were: <br />
<ul>
<li>Origin Financial (ORGN) (+35.51% including dividend) </li>
<li>Tree.com (TREE) (+16.10%), </li>
<li>Asta Funding (ASFI) (+15.45%), </li>
</ul>
The worst performers for the quarter were:<br />
<ul>
<li>LCA-Vision (LCAV) (-42.95%), </li>
<li>Aperam (APEMY) (-40.49%) </li>
<li>Dell Computers (DELL) (-29.15%)</li>
</ul>
<div>
<ul>
</ul>
<div class="MsoNormal" style="line-height: 18px;">
<ul style="list-style-image: initial; list-style-position: initial; margin: 0.5em 0px; padding: 0px 2.5em;">
</ul>
</div>
<ul style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px; list-style-image: initial; list-style-position: initial; margin: 0.5em 0px; padding: 0px 2.5em;">
</ul>
</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-73488933051736454862012-07-02T23:05:00.002-07:002012-07-02T23:05:53.399-07:00DiversificationMark Weldon is the former CEO of NZX, the New Zealand stock exchange (which itself, is listed on the NZX as <a href="https://www.nzx.com/markets/NZSX/securities/nzx">“NZX”</a>.<br /><br />In today’s stuff, there’s an article about his big sell down of his NZX shares which he accumulated while CEO of NZX. He's bought a vineyard.<br /><br /><a href="http://www.stuff.co.nz/business/industries/7209938/NZX-sell-down-pragmatic-Weldon">The article</a> makes him seem to be pretty confused, but I expect he’s skirting around the truth to be polite. He says:<br /><br />''It is just not at all sensible to have all your money invested in one stock alone. If you work at a place, it is a different story, but once you have left an organisation to have all your eggs in one basket is just not a strategy anyone would advise''<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://www.odt.co.nz/files/story/2011/10/mark_weldon__4e96c071ae.JPG" style="margin-left: auto; margin-right: auto;"><img border="0" height="320" src="http://www.odt.co.nz/files/story/2011/10/mark_weldon__4e96c071ae.JPG" width="287" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: small; text-align: -webkit-auto;">The face of an undiversified man</span>
</td></tr>
</tbody></table>
<br />
In fact, if you work at a place, it’s an even worse strategy to have all your eggs in one basket. <br /><br />One way to see this is to think of your assets as two things - your human capital (your skills, connections, current employment) and your financial capital (money, shares, house, etc). When you are heavily invested with both your human and financial capital in the same basket, you are incredibly undiversified. That's what Weldon was when he was at NZX.<br /><br />The easiest intuition to think about is those Enron employees who had invested their pensions in Enron shares. When Enron was found out to be the fraud that it was, those employees lost their jobs and their savings. Had they diversified away from Enron with their financial capital, they would have been much better off, and exposed to much less risk. So there’s a reason to think that the story is not different when you work at a place. In fact it’s a scarier story.<br /><br />From a shareholder’s perspective, often we’d like the CEO to own a lot of stock of the company – to some extent it aligns the CEO’s interests with ours (both parties want the price to go up, and hopefully the CEO can actually do something about it). But from the CEO’s perspective it’s very risky. Sometimes the risk can pay off, and it certainly makes sense if, as the CEO, you believe you can have a meaningful impact on the business, and that impact will increase the share price more than the increase in other stocks who presumably have CEOs who are as confident as you in their own abilities. <br /><br />In other words, if as a CEO you can answer the question “am I an above average CEO?” in the affirmative, then maybe it’s worth trading off some diversification for this outsized performance. Of course, almost every CEO, by their nature, will think that they are above average, so it’s probably not a bad strategy to just ignore your subjective belief, assume that you are overconfident in your belief of your above averageness, and do not invest any financial capital investment in the firm you are CEO of (and if you did the numbers, depending on the amounts of your physical and financial capital it might even make sense to go short the shares (but then you’d probably lose your job so....)).<br /><br />In Weldon’s case, the share price of the NZX performed very well over his tenure, so there’s (at least) weak empirical evidence that he is an above average CEO. And you’ve got to expect that the board who appoints you as CEO know how many shares you own and like the fact that you’ve doubled down on the company – you are incentivised.<br /><br />So why is Weldon selling? The real answer must surely be a combination of two reasons:<br />· He needs the money for his vineyard, and<br />· He has no ability to influence the share price by now, and suspects that the new CEO will not be as good as him (or at least the information asymmetry of him knowing his own abilities intimately but not knowing the new CEO’s abilities as intimately brings enough risk into the situation that he should sell down).<br /><br />The first reason is almost certainly dominant, but the second reason is more fun to think about.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-87917419971279813362012-06-21T00:05:00.000-07:002012-06-21T00:05:04.706-07:00Too busy to blogI've been too busy with work and other stuff to blog well lately. Don't worry though - I'll have next quarter results out in a few weeks after I've updated my spreadsheets.<br />
<br />
I'm going to read <a href="http://www.amazon.com/Hidden-Champions-Twenty-First-Century-Strategies/dp/0387981462">this book</a> soon - it's been suggested by many people.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-57328917536725938142012-05-12T21:20:00.003-07:002012-05-12T21:20:58.150-07:00Value investing evidence roundupThe past week or so, <a href="http://greenbackd.com/">Greenbackd</a> has been collecting evidence for the outperformance of value investing, use of the magic formula, and the use of other ratios to outperform the market. It's great stuff.<br />
<br />
I had planned to write a post this weekend with links to all, but I just checked google reader and another excellent blog, <a href="http://alphavulture.com/">Alpha Vulture</a>, already did that in <a href="http://alphavulture.com/2012/05/12/some-good-posts-at-greenbackd/">this post</a>.<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://raptorexperience.files.wordpress.com/2012/03/suli-flying-with-sally.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="240" src="http://raptorexperience.files.wordpress.com/2012/03/suli-flying-with-sally.jpg" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Here's the blogger known as Alpha Vulture, with his master - an unlikely looking older woman. Alpha Vulture is about to scan the pink sheets for prey, and report back on his blog. I may then select the tastiest morsels to invest in.</td></tr>
</tbody></table>
So now I don't have to find all the links and try to put them into html, just click on the link above.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-83347715727508874122012-05-09T00:53:00.001-07:002012-05-09T00:53:24.968-07:00Venture capital returnsThe hilariously named and always good to read Felix Salmon has a great post on <i><a href="http://blogs.reuters.com/felix-salmon/2012/05/07/how-venture-capital-is-broken/">How venture capital is broken</a></i>. <br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://static7.businessinsider.com/~~/f?id=4ab15970e158eb18617141f7" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="240" src="http://static7.businessinsider.com/~~/f?id=4ab15970e158eb18617141f7" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Here's a picture of Felix's face.<br /></td></tr>
</tbody></table>
This is one of those times where I could summarise his post, but it's really good anyway and already summarises a larger report. Basically, he's got data for venture capital returns (which there was very limited data on before) showing that there aren't insanely high returns to limited partners (ie, investors). In fact, the marginal investor is earning a negative return, and probably has been since about 1995. <div>
<br /></div>
<div>
I like this because I once sat in a meeting with a senior government official who glibly told the 8 or so attendees that "what happens is off shore private equity [of which venture capital is a subset] borrows overseas at 4%, and invests here earning 25%, and leverages up even more to make three digit returns". I didn't even know what to say and so said nothing. (I could have said <a href="http://en.wikipedia.org/wiki/Uncovered_interest_parity#Uncovered_interest_rate_parity">this</a>, or <a href="http://en.wikipedia.org/wiki/Efficient_markets_hypothesis">this</a>, but no one else seemed shocked so I just blinked as loudly as possible).</div>
<div>
<br /></div>
<div>
I like confirmation of the fact that he was almost certainly wrong, and had probably been to too many meetings with people like <a href="http://www.youtube.com/watch?v=2Ux3vncNNLg">this</a>.</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-84403023653534798862012-05-07T13:10:00.004-07:002012-05-07T13:10:48.472-07:00Pure magic, or just an illusion?<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://thealphanetworkeralliance.com/wp-content/uploads/2010/04/magic_formula.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="213" src="http://thealphanetworkeralliance.com/wp-content/uploads/2010/04/magic_formula.jpg" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Doesn't look like 30.8% to me</td></tr>
</tbody></table>
Greenbackd has an <a href="http://greenbackd.com/2012/05/07/how-to-beat-the-little-book-that-beats-the-market-an-analysis-of-the-magic-formula/">excellent round up</a> of recent evidence on the outperformance of Joel Greenblatt's so called "magic formula".<br />
<br />
I won't repeat his post - just go and read it. But basically, it outperforms, but nowhere near the 30.8% cumulative annual growth rate that Greenblatt reported in his book. Wes Gray has elsewhere noted that Greenblatt has dropped that number from his speeches. Gray suspects that Greenblatt made an error in his backtesting.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-20905757682828885982012-05-06T23:06:00.002-07:002012-05-07T02:55:44.533-07:00Regression to the mean, or why second albums suckI'm currently reading Daniel Kahneman's <i><a href="http://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374275637">Thinking, fast and slow</a>. </i>It's excellent. It's taking me a while to get through, because the book is long and has lots of great insights that take a while to digest.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://paw.princeton.edu/_internal/cimg!0/3s9021c0ihsm9fkd7ugwvilq22xacfz" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="213" src="http://paw.princeton.edu/_internal/cimg!0/3s9021c0ihsm9fkd7ugwvilq22xacfz" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">He looks like he's thinking at a medium pace here.</td></tr>
</tbody></table>
<br />
One such insight is the oft-quoted but less understood "regression to the mean". Kahneman gives the clearest explanation I've ever read. Put simply, he says that many outcomes are a result of a combination of what we might call "skill" and "luck". (If you don't like the word "luck", just substitute "randomness").<br />
<br />
Because many outcomes are the result of skill + luck, when there is a particularly good outcome (say an investment manager's portfolio return in a year), it is likely that the next year will be less impressive. <br />
<br />
For argument's sake, let's be generous to investment managers and say that their portfolio return for a single year is a result of 30% skill and 70% luck. If they are a skilled manager, who gets lucky, they will have a very high return that year. Let's say they were in the<b> top 10% of luckiness</b> that year. The next year, they are still highly skilled (their skill transports over time), but the 70% luck outcome resets every year (of course, it resets every nanosecond, but for our purposes we can think of it resetting each year as that is our measurement period).<br />
<br />
When the random number generator called life rolls the investment manager's portfolio dice, the probability that they <b>repeat their good luck or receives better luck is 10%</b>. The probability that their luck "reverts to the mean" is whatever's left - 90%.<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://shooptc.com/wp-content/uploads/2011/12/rolling_dice.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="320" src="http://shooptc.com/wp-content/uploads/2011/12/rolling_dice.jpg" width="240" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">God rolling the dice of life, and determining your investment results. </td></tr>
</tbody></table>
<br />
That's why it's interesting for the purposes of investments (and of course it applies to individual stock picks, yearly results, and all sorts of decisions that need to be made).<br />
<br />
But it occurred to me there's another area where it goes a long way to explain (and to my mind probably completely explains) a commonly debated and observed pattern - bands' second albums are almost always worse than their first.<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://userserve-ak.last.fm/serve/_/39190821/The+Strokes+Strokes+Classic.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="320" src="http://userserve-ak.last.fm/serve/_/39190821/The+Strokes+Strokes+Classic.jpg" width="305" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">The Strokes - it wasn't because Julian got a long term girlfriend, it was a statistical artifact called regression to the mean!</td></tr>
</tbody></table>
So the first thing you have to realise is that the only reason you have heard of a band's first album is because it was excellent, right? There are a lot of bands making first albums in the world, and you hear a miniscule fraction of a tenth of a hundredth of one percent of those albums. For that to happen, the band has to be skilled, but of course there are lots of skilled bands. On top of that, the band has to get lucky - not a bit lucky, but massively lucky. For whatever reason, be it coincidence of time and space, the music they make has to resonate with the public, and probably with you, for you to think the band is good and to worry about the band's second album. Right time, right place, whatever - the band got a bit lucky.<br />
<br />
So we know that luck played a large part in determining the outcome of their first album (this does not undermine the skill/taste/coolness of the band, it just notes that there is an aspect of luck to their success). When luck is reset for their second album, the chances of them repeating their outstanding skill + luck combo are tiny! Of course it's going to be a worse album! The only reason you heard of them in the first place was their crazy luck to make it out of the swamp of average debut albums.<br />
<br />
So next time someone at a party starts talking about <a href="http://en.wikipedia.org/wiki/Franz_Ferdinand_(band)">bands</a> <a href="http://en.wikipedia.org/wiki/Arctic_monkeys">with</a> <a href="http://en.wikipedia.org/wiki/The_Datsuns">disappointing</a> <a href="http://en.wikipedia.org/wiki/The_Darkness_(band)">second</a> <a href="http://en.wikipedia.org/wiki/The_Strokes">albums</a>, impress them by talking about regression to the mean. If that doesn't impress them, really wow them by bringing up this blog post on your iphone or android device!<br />
<br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-58934297152341530672012-04-10T12:39:00.001-07:002012-04-10T12:39:30.076-07:00Performance in 1st Quarter 2012<div class="MsoNormal"><span style="font-family: inherit;">Ignoring currency changes but accounting for trading expenses, the fund returned 10.83% in the 3 months to 31 March 2012. Over this same time period, the S&P500 returned 12.55%. <o:p></o:p></span></div><div class="MsoNormal"><span style="font-family: inherit;"><br />
</span></div><div class="MsoNormal"><span style="font-family: inherit;">It’s not surprising that in a bull market (9<sup>th</sup> best 1<sup>st</sup> Quarter in S&P500 history) the fund underperformed, but it does mean that simply buying an index fund and forgetting about it outperformed all the carefully selected stocks in the portfolio.<o:p></o:p></span></div><div class="MsoNormal"><span style="font-family: inherit;"><br />
</span></div><div class="MsoNormal"><span style="font-family: inherit;">The <b>best</b> performers in the portfolio were:<o:p></o:p></span></div><div class="MsoNormal"></div><ul><li><span style="font-family: inherit;">Aperam (APEMY) (+29.56%),</span></li>
<li><span style="font-family: inherit;">Teekay Corporation (TK) (+24.87%),</span></li>
<li><span style="font-family: inherit;">NAPCO Security Technologies (NSSC) (+22.05%),</span></li>
<li><span style="font-family: inherit;">Microsoft (MSFT) (+21.29%),</span></li>
<li><span style="font-family: inherit;">Dolby Laboratories (DLB) (+21.04%).</span></li>
</ul><span style="font-family: inherit;"><o:p></o:p></span><br />
<div class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></div><div class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></div><div class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></div><div class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></div><div class="MsoNormal"><span style="font-family: inherit;">The<b> worst</b> performers were:</span></div><div class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></div><div class="MsoNormal"></div><ul><li><span style="font-family: inherit;">Multiband Corporation (MBND) (-8.48%),</span></li>
<li><span style="font-family: inherit;">Clearwater Paper (CLW) (-2.96%),</span></li>
<li><span style="font-family: inherit;">Gyrodyne (GYRO) (-1.90%)</span></li>
</ul><o:p></o:p><br />
<div class="MsoNormal"><o:p></o:p></div><div class="MsoNormal"><o:p></o:p></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-38317110753788254072012-03-24T15:27:00.001-07:002012-03-24T18:02:38.638-07:00Man vs MachineEmpiritrage has some research on stock picking results of Man (Value Investors Club picks) vs Machine (so-called "magic formula" picks). It's pretty even - Man outperforms but does so with some additional risk. Check out the research <a href="http://empiritrage.com/wp-content/uploads/2012/03/man_vs_machine.2012.03.24.pdf">here</a>.<br />
<br />
I know I've been terrible and haven't posted in over a month. I'm sorting out my portfolio for the end of this quarter. I'll post absolute and relative results in early April.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-20981356348374296682012-02-26T00:33:00.001-08:002012-02-26T00:36:24.017-08:00Passing on SandstormOver at <a href="http://www.aboveaverageodds.com/">Above Average Odds Investing</a>, Ryan O'Connor has a <a href="http://www.aboveaverageodds.com/2012/02/24/investment-analysis-sandstorm-metals-energy-cve-snd-sees-candies-at-a-sanborn-maps-price/#comment-27159">very good write up </a>of <a href="http://www.sandstormmetalsandenergy.com/s/Home.asp">Sandstorm Metals and Energy</a>. <br />
<br />
I read the w<span style="font-family: inherit;">rite-up (which also appears on Value Investors Club, as <i>Above Average Odds Investing </i>is a member) and my interest was piqued. My mouth even watered. But the more I read about the company the less enthusiastic I </span>got. Put simply, Ryan sets out the case for an incredibly cheap company with the potential to be an absolute giant. You pay nothing for its potential, and get the current cashflows very cheap. I can't do it justice, so you should just read his post.<br />
<br />
But here's what I found when I started looking that bothered me:<br />
<br />
<br />
<div class="MsoNormal"></div><ul><li>I can’t give myself a plausible but overstated or wrong reason why it’s cheap.</li>
<li>The CEO Nolan Watson’s Wikipedia page is incredibly promotional. The editor is “Denvyboy”, who seems to only write about sandstorm and Nolan. Denvyboy is probably Denver Harris, the investor relations manager for Sandstorm. I’d prefer if they spent more time on the company than on investors.</li>
<li>In his y<a href="http://www.youtube.com/watch?v=lfpR8KrUkH8&feature=player_embedded">outube video about due diligence</a>, Sandstorm Executive Vice President, David Awram uses the phrase “going forward” five times in less than three minutes.</li>
<li>The only <a href="http://www.sandstormmetalsandenergy.com/s/AnalystCoverage.asp">analyst coverage</a> is from two organisations: National Bank Financial and Cormark Securities. When you look at their management, one Executive VP is a former VP at National Bank Financial, and another Director is currently Vice Chairman of Cormark Securities. Seems like they’re only giving analyst coverage to the stock because of the firms’ relationship with management. </li>
<li>If Nolan Watson is such a boy genius (with all his contacts from being CFO of a billion dollar company) he should easily be able to find investors. Furthermore, current investors would trust him and wouldn't be selling shares at the current price. This is effectively just a restatement of the first bullet point: there's no plausible reason why this stock is undervalued.</li>
<li>Note that Watson's main trumpeted achievement in his time at Silver Wheaton is raising a billion dollars in debt and equity. That's a skill, but it's a promotional skill (an important but dangerous one).</li>
<li>In the Donner deal announced July 13, 2011, Sandstorm provided $25m senior finance to Donner, and in return got the right (and obligation) to purchase 17.5% of the copper and precious metals from the Bracemac-McLeod mine, for the price of US$0.80 per pound (if the market price of copper is above US$2.75 per pound). If the price is below $2.75 per pound, they can purchase for the lesser of US$0.55 or the prevailing spot price. That seems like a great deal, but I know nothing about loan financing or mining. I do know a tiny bit about buying stocks (that's not understatement, I truly mean I know a tiny amount as compared with loan finance and mining, where I know nothing). And Sandstorm also purchased 6,200,000 Donner common shares for CDN$0.35, for a cost of $2,250,000. Donner shares last traded at 0.25, for a loss of 28% since purchase. That's a bad trade so far.</li>
<li>There are absurd amounts of warrants and options. There are 155 562 490 warrants outstanding, with an exercise price of US$0.70 and expiry date of December 23, 2012. That puts a bit of a cap on the stock this year, and the whole concept of having 150 million warrants outstanding when you only have 300 million shares seems a bit crazy – what’ll they do next year? Any massive increase in the stock price has a pretty heavy ceiling, and no doubt they’ll just issue more warrants if the current ones are exercised.</li>
<li>I feel like I can’t pinpoint a specific risk that exists. But it just might be that the business is unsustainable. Perhaps the unique business model/financing structure allows plenty of room to creatively report assets/income. I think the market may be pricing this in and that’s why the share price languishes.</li>
</ul><div>So I'm not going to be buying any. To be honest, it could be a huge mistake. The bull case from Above Average Odds Investing is compelling, but it just doesn't fit right with me. I'll be following progress.</div><div class="MsoNormal"><o:p></o:p></div><div class="MsoListParagraphCxSpFirst"><br />
</div><div class="MsoListParagraphCxSpLast"><br />
</div>Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-357995080458607779.post-4185519962765308332012-02-25T16:13:00.000-08:002012-02-25T16:13:17.742-08:00Notes on Buffett's letter to shareholdersGeoff Gannon has put together some excellent <a href="http://www.gurufocus.com/news/164027/notes-on-warren-buffetts-2011-letter-to-shareholders">notes</a> on Buffett's letter to shareholders - released yesterday. I was going to make some notes, but Gannon does it better than I could.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-14179552056368243552012-02-09T16:49:00.000-08:002012-02-09T18:58:42.532-08:00Warren Buffett on stocks, bonds, and gold<a href="http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/">This column</a> is adapted from his upcoming letter to shareholders.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-43928744327667631082012-01-27T12:09:00.000-08:002012-01-27T12:09:39.921-08:00Getting free learningAswath Damodaran is putting his whole Valuation, and Corporate Finance classes online this semester. If you are interested in either, you can take them for free. You get no official credit from NYU, but you do get to learn stuff from a really smart guy for free.<br />
<br />
<a href="http://aswathdamodaran.blogspot.com/2012/01/university-business-model-is-failure.html">Here</a> is a link to his instructions and why he's doing it.<br />
<br />
Check out his wikipedia page <a href="http://en.wikipedia.org/wiki/Aswath_Damodaran">here</a> - he's a smart guy.<br />
<br />
I'll be taking both courses. <br />
<br />
I haven't blogged in almost two weeks. I've been pretty busy. I'll try to think of something to blog about soon. I've almost finished re-reading <i><a href="http://www.amazon.com/Intelligent-Investor-Definitive-Investing-Practical/dp/0060555661">The Intelligent Investor</a>. </i>I'm getting much more out of it the second time around - maybe I'll do a post on that.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-9187840084815898912012-01-17T00:06:00.000-08:002012-01-17T10:37:17.607-08:00Measuring Whitney Tilson's alpha<div class="MsoNormal"><a href="http://en.wikipedia.org/wiki/Whitney_Tilson">Whitney Tilson</a> is a value investor. He co-manages T2 Partners with Glenn H. Tongue. He was one of the authors of <i><a href="http://www.poorcharliesalmanack.com/">Poor Charlie’s Almanack</a></i>, generally the best book on Berkshire Hathaway Vice Chairman and multi-billionaire Charlie Munger.<o:p></o:p></div><div class="MsoNormal"><br />
</div><div class="MsoNormal">Tilson’s funds lost 24.9% of their value in 2011. Despite that, they have returned an annualised 6.0% since inception in January 1999. This is better than the S&P 500 which has returned 2.0% p.a since January 1999. The total return is 114.2% (T2 Partners) vs 29.2% (S&P 500).<o:p></o:p></div><div class="MsoNormal"><br />
</div><div class="MsoNormal">Given that substantial outperformance, you might think that it was obvious that Whitney Tilson can generate “alpha”. <a href="http://en.wikipedia.org/wiki/Alpha_(investment)">Alpha</a> is a financial term for the risk-adjusted return of an active manager. Basically, if a manager generates alpha, the manager can achieve the same return as the market with lower risk, or higher returns than the market without a corresponding increase in risk.<o:p></o:p></div><div class="MsoNormal"><br />
</div><div class="MsoNormal">I personally think it is very likely that Whitney Tilson can outperform the market. His letters to investors seem well thought out and he usually has very good justifications for his stock positions. This, coupled with his performance, suggest to me, a prima facie case for outperformance. So I decided to test whether a regression shows that Whitney Tilson can generate alpha, or whether he is simply exposing his funds to more risk and achieving a corresponding return.<o:p></o:p></div><div class="MsoNormal"><br />
</div><div class="MsoNormal">First, I found and inputted his monthly returns from his later letter from January 1999 to December 2011 into a spreadsheet. I matched that to the market return minus the risk free rate for all those dates. I then performed a regression to calculate the 3-factor (Fama-French) and 1-factor (capital asset pricing model) alpha.<o:p></o:p></div><div class="MsoNormal"><br />
</div><div class="MsoNormal">I find the story of the 3-factor Fama-French story interesting. Fama notes in a recent paper that one reason that “value” (as measured by low price-to-book ratios) might outperform growth is that people get some non-financial utility from owning growth stocks. This makes sense to me. Some people must like being able to say they own an “up-and-coming” stock rather than an old skeleton they’re just trying to squeeze the last bit of value from. Think of the film (or book) <i><a href="http://www.youtube.com/watch?v=AiAHlZVgXjk">Moneyball</a></i>. It must be exciting to pick young up and comers in your ball team rather than David Justice, a 37 year old who is clearly past his prime. Despite that, there is more value (as measured by price for performance) in picking David Justice over young glamour players (or at least there was until the Oakland Athletics popularised the strategy). <o:p></o:p></div><div class="MsoNormal"><br />
</div><div class="MsoNormal">Anyway, the 3-factor Fama-French measurement came about because people started to notice that there was a persistent outperformance by “value” stocks (low price to book) and small capitalisation stocks. One theory was that these stocks were inherently more risky. But by all conventional measures of risk, they’re not more risky. The next theory is that it’s “unmeasured risk”. Effectively the argument is that because they outperform, they must be more risky. This seems like a triumph of theory over evidence. It presupposes that the market is perfectly efficient, then explains evidence of its inefficiency (the outperformance of value and small cap stocks) by referring back to the theory and insisting it must be true. In the face of the question – where is the excess risk? The response is that it can’t be measured yet. <o:p></o:p></div><div class="MsoNormal"><br />
</div><div class="MsoNormal">If the risk can’t be measured, I find it implausible (although not impossible) that market participants are factoring in this unmeasured risk to cause the pricing discrepancy and outperformance. I find Fama’s proposition of non-financial utility in growth and big cap stocks more convincing.<o:p></o:p></div><div class="MsoNormal"><br />
</div><div class="MsoNormal">Now, whether there is more alpha in value and small cap stocks or whether there is more risk is largely irrelevant for our purposes of measuring manager performance. The key is that you can cheaply access this higher return (be it alpha or risk) through an index fund devoted to value stocks (as measured by low price to book ratios) or small cap stocks (or even both). Given that ability, you shouldn’t pay a manager high fees to just get you that.<o:p></o:p></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><b>So what does the regression show?<o:p></o:p></b></div><div class="MsoNormal"><b><br />
</b></div><div class="MsoNormal">The regression shows that using the 1-factor capital asset pricing model, Whitney Tilson generates<b> 0.305% of alpha </b>per month. That’s significant, but unfortunately we don’t have enough data points to make it <b>statistically</b> significant. The null hypothesis is that Tilson has no alpha. It’s been too long since I did any statistics, but from what I gather, the p-value suggests that if we assume the null hypothesis, there is a 33% chance of obtaining his results just by luck. The t-stat is 0.977.<o:p></o:p></div><div class="MsoNormal"><br />
</div><div class="MsoNormal">Using the 3-factor Fama-French data (ie, controlling for the value effect and the small cap effect), Whitney Tilson generates<b> 0.216% of alpha</b> per month. That’s not bad either, but the p-value is 0.496 – ie, assuming that Tilson has no alpha, there’s a 49.6% chance of obtaining his results just by luck (assuming my interpretation of a p-value is correct). The t-stat is 0.683.<o:p></o:p></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><b>Alpha-male?<o:p></o:p></b></div><div class="MsoNormal"><b><br />
</b></div><div class="MsoNormal">Unfortunately, 154 months just isn’t enough to give us statistically significant results. My own personal null hypothesis is that Tilson can generate alpha, but we won’t know for many many years. By that time, we’re very unlikely to be able to invest money in his fund. He’ll either be shown to have no alpha and have closed down, or be some alpha generating machine with too much money clogging up his alpha machine and anchoring his performance.<o:p></o:p></div><div class="MsoNormal"><br />
UPDATE: I realised I rudely forgot to thank <a href="http://turnkeyanalyst.com/">Turnkey Analyst</a> for the lesson in how to run this regression. He runs through the method and includes a video <a href="http://turnkeyanalyst.com/2012/01/how-to-calculate-alpha-with-free-resources-from-the-web/?utm_source=Turnkey+Analyst+List&utm_medium=email&utm_campaign=d622d955a9-RSS_EMAIL_CAMPAIGN">here</a>.</div><div class="MsoNormal"><br />
</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-11983588518694070832012-01-13T14:47:00.000-08:002012-01-13T14:49:15.249-08:00Warren Buffet sent me a secret message<div class="MsoNormal"><span style="font-family: inherit;">Back in May Warren Buffet did a video <a href="http://www.reuters.com/video/2011/05/01/buffett-says-us-not-a-credit-risk?videoId=205771014&videoChannel=5">interview</a><o:p></o:p></span></div><blockquote class="tr_bq"><span style="font-family: inherit;">Reuters: You’re always looking for value. What about Microsoft? I know you say you don’t do tech. But given that it has a forward P/E right now that’s below 10, it seems like a value play.</span></blockquote><blockquote class="tr_bq"><span style="font-family: inherit;">Buffett: Yeah. I agree with you. I regard myself as precluded from either personally or having Berkshire buy Microsoft because if something good happened the following week people would think Bill had told me. So I just see no way that we can ever buy Microsoft and be sure that we won’t look like we had some kind of inside information or something. So it’s off limits. It did look pretty cheap.</span></blockquote><div class="MsoNormal"><span style="font-family: inherit;">I was going to write up all the fundamental quantitative stuff that makes me like MSFT. But then TurnkeyAnalyst did an amazing job so I'll just send you <a href="http://turnkeyanalyst.com/2012/01/turnkey-research-note-microsoft-corporation-nmsmsft/?utm_source=Turnkey+Analyst+List&utm_medium=email&utm_campaign=d622d955a9-RSS_EMAIL_CAMPAIGN">there</a>.<o:p></o:p></span></div><div class="MsoNormal"><span style="font-family: inherit;"><br />
</span></div><div class="MsoNormal"><span style="font-family: inherit;">The conclusion is:<o:p></o:p></span></div><blockquote class="tr_bq"><span style="font-family: inherit;">So overall what are the quantitative data telling us about an investment in MSFT? Perhaps its most distinguishing feature is that MSFT is a cash cow, earning high current and normalized returns on capital and assets based on the wide defensive business moat that its Windows operating system provides. While in the longer run, MSFT may face significant competitive pressures, it is unlikely to be dislodged from its strong defensible position in a dramatic way any time soon. There are no obvious red flags from any of our short screens, and the company is hugely profitable and stable, so there is a low risk of financial distress. The stock looks cheap here, and its strong magic score suggests that you are not overpaying for this very high quality business. If you are looking for a safe bet in a high quality company in the technology space, MSFT would appear to fit the bill.</span></blockquote><div class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></div><div class="MsoNormal"><span style="font-family: inherit;">We bought MSFT for the fund in early November 2011. It has appreciated 9% since then and paid a dividend of 0.8% of our cost. We bought after reading Warren Buffet's comment and taking a look at the return on invested capital and earnings yield.</span></div><div class="MsoNormal"><o:p></o:p></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-51544644146846231402012-01-04T20:31:00.000-08:002012-01-06T13:08:50.340-08:00Seth Klarman and contrarianismI just read through a collection of Seth Klarman’s <a href="http://www.scribd.com/doc/14576127/Baupost-Fund-Letters">letters to shareholders</a> in his fund – the Baupost Group. Klarman is a value investor and wrote the out of print “Margin of Safety”, now selling for over $1000 on Amazon. The Baupost Group has achieved an average annual return of 19% since 1983 for its three partnership funds. The particular letters I read were for a smaller fund that he set up in 1990.<br />
<br />
One thing that struck me reading through his letters is his contrarian streak. I think it’s incredibly hard to confidently go against the grain when everyone around you seems like they’re printing money. That’s why Klarman’s letters are so refreshing. <br />
<br />
In the letters between 1995 to 2000, he calls the internet bubble several times. You can feel the frustration in his letters as his funds lag various indices by substantial amounts. At one stage (April 1999) $50 000 invested in the particular partnership at its inception (December 1990) would have turned into $139 277. That’s not bad, but $50 000 in the S&P 500 passive index would have returned $250 971! That sort of persistent and dramatic underperformance has got to feel pretty bad. <br />
<br />
Klarman makes passing mention of the internet fad in his 1995, 1996, and 1997 letters, but rips into it in 1998:<br />
<br />
<i>The U.S. stock market has been propelled by investors falling all over themselves to buy large-capitalization growth stocks like <b>Microsoft</b>, <b>Coca Cola</b>, and even <b>General Electric</b>. At least they are, more or less, good companies. Occasionally, periods of unbelievable excess occur, where near-worthless enterprises are propelled into the stratosphere. Such a period is now upon us. <br />
<br />
It is bad enough that the shares of small growth companies announcing stock splits surge skyward as if something value enhancing has actually taken place. Now, suddenly, the siren song of the internet has become even more irresistible for hordes of growth investors.</i><br />
<br />
<i>Consider the case of <b>K-Tel International</b>, the company best known for selling music CDs and tapes on late night television. After hovering in a narrow trading range around $7 a share(for its 4.1 million outstanding shares) since January, the announcement that K-Tel plans to sell its music on the internet caused its shares to skyrocket from $7 to $45 in just one week and to $80 a week later with daily volume exceeding 100% of the freely tradeable shares outstanding. "You put 'dotcom' behind it and they'll buy it", said one analyst commenting on the behavior of internet-obsessed investors. In a similar vein, <b>Market Guide</b>, a provider of financial data, rallied from 3 to 29½ in three trading days after announcing a partnership with <b>America Online</b>. At 29½, the company had a market capitalization of almost $150 million yet it boasts current annual revenue of only $5 million. Watch out below!</i><br />
<br />
And in 1999:<br />
<br />
<i>The $200 billion market capitalization of <b>America Online</b> recently exceeded that of <b>IBM</b>. <b>Charles Schwab</b> was recently valued 50% more highly than <b>Merrill Lynch</b>. <b>Priceline</b>, the Internet company that sells airline tickets, was valued more highly than the three largest airlines, combined! <b>eToys</b> came public and immediately jumped to a valuation well above that of the well established <b>Toys "R" Us</b>. The prevailing casino atmosphere must certainly put a damper on trips to Las Vegas or Atlantic City, where there are more losers than winners. In Internet-land, there have been no real losers as of yet; the illusion of a positive-sum casino is an attractive lure for the gambler. Recent exuberance notwithstanding, at today's valuations it is clear that Wall Street is certain to continue issuing shares of new Internet companies until the supply of shares overwhelms the resources of the buyers.</i><br />
<br />
It’s obvious now and in hindsight that he was absolutely, 100% right. He ended up making up all his lagged performance (and then some) in 2000 and later. But at the time it must have been maddening.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-73022232608078333812012-01-02T16:15:00.000-08:002012-01-02T16:15:27.342-08:00End of year updateThe total portfolio increased in value by 0.4% for the two months ended 31 December 2011. The market itself increased 1.5% over this time. So the fund is tracking below market. The internal rate of return of the fund (the compound growth rate, annualised) is 2.9% for the two months to date. <br />
<br />
There are 18 stocks in the portfolio. We like each and every one of them, but we feel like 18 is towards the upper limit of how diversified we want to be. Given the limited amount of capital, having fewer stocks and making fewer trades is preferred because then we can keep trading fees as a percentage of funds to a minimum.<br />
<br />
We expect to rebalance the portfolio in March. There are 13 businesses we own that we intend to hold for at least a year (and at least 4 we intend to hold for perhaps five years). This allows some room to introduce a few new stocks, but cull a few of the more marginal picks.<br />
<br />
I only intend to update the portfolio performance quarterly from here on in. I think monthly forces us into a short term thinking (as does quarterly, but I've got to find something to do). <br />
<br />
Over the break I read Warren Buffet's letters to shareholders on my kindle. I'll post some excerpts in the coming weeks. He's hilarious.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-31368553955971672442011-12-23T13:51:00.000-08:002011-12-23T13:51:37.467-08:00Geoff Gannon's <a href="http://www.gurufocus.com/news/156612/when-is-a-bad-business-a-good-netnet">latest post</a> is on net-nets, the importance of return on equity, and potential catalysts for net-nets.<br />
<br />
A net-net is a stock selling for less than the value of its current assets – cash, receivables, inventory, and prepaid expenses — minus all liabilities. Basically, it’s a stock selling for less than its liquidation value.<br />
<br />
In Ben Graham's day (during the depression) he could by net-nets that were selling for less than 2/3rds of their net current assets. <br />
<br />
Warren Buffet once found a stock with $20 of cash that was selling for $3.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-357995080458607779.post-25155572589977925522011-12-19T00:43:00.000-08:002011-12-19T10:40:53.175-08:00The magic formula in New ZealandThe bookbookfund doesn't invest in New Zealand equities, but I do on my personal account. Ever since I read Joel Greenblatt's <i>The Little Book That Beats The Market</i> I've been interested as to how his "magic formula" would work in New Zealand. <br />
<br />
Briefly, the magic formula is:<br />
<br />
<b>Establish a minimum market capitalization (usually greater than $50 million).<br />
<br />
Exclude utility and financial stocks.<br />
<br />
Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages).<br />
<br />
Invest in 20–30 highest ranked companies, accumulating 2–3 positions per month over a 12-month period.<br />
<br />
Re-balance portfolio once per year, selling losers one week before the year-mark and winners one week after the year mark.<br />
<br />
Continue over a long-term (3–5+ year) period.</b><br />
<br />
I got hold of New Zealand stock market data <a href="http://people.stern.nyu.edu/adamodar/New_Home_Page/data.html">here</a>.<br />
<br />
With that data, I ranked all the stocks by earnings yield and by return on invested capital, aggregating their rankings and then ranking the aggregate (to get the best "combo"). Then I created portfolios of ten stocks a piece (if you buy 30 you may as well buy the whole NZ market), starting January 2004 (where I have data back to), to the present day. I only rebalanced every year, in January.<br />
<br />
I used <a href="http://www.sharesight.co.nz">sharesight</a> to input the portfolios, as that site then gives me all the dividends so I can count those too as well as any capital gain. <br />
<br />
There was corrupted data from the Stern University NZ data for 2007 so I was not able to rebalance on January of that year (I had to keep my 2006 portfolio for two years instead of one). There were a few other issues when inputting data where I had to use a second choice, but I still got plenty of big winners and big losers.<br />
<br />
Overall, from 1 January 2004 to the present day, the "magic formula in NZ" strategy returned a 8.93% cumulative annual growth rate. My first fake portfolio had $150 000 worth of shares at the start of 2004, and with annual rebalancing (except for 2007) it has a current value of $296 508. Not bad, but not particularly astounding.<br />
<br />
But I checked the return of the smartFONZ index fund over that period. Unfortunately, this exchange traded index fund didn't start until part way through 2004. To account for this, I took the value of the magic formula portfolio at Jan 2005 ($181 486) and pretended that instead of persisting with the magic formula strategy, I simply purchased the index fund and waited. That strategy returned 0.6% cumulative annual growth rate (including dividends), and that's including the $31 486 advantage from using the magic formula in its first year! Compared to that terrible growth, the magic formula looks pretty magical.<br />
<br />
This was a very rough experiment: none of the data or methods I used were particularly sound. I found the best free excel ready data I could, and used sharesight - a pretty powerful portfolio tracker. <br />
<br />
If I make further investments in the NZ sharemarket, I'll definitely be looking at where potential companies rank in the "magic formula".Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-357995080458607779.post-8489019058077401542011-12-17T17:47:00.000-08:002011-12-17T17:48:24.917-08:00Follow me on twitterBookbookfund has a twitter account: https://twitter.com/#!/Bookbookfund<br /><br />I'm still working on a post with actual content.Unknownnoreply@blogger.com0