A Reader’s Suggestion for DEEP VALUE COURSE by CSInvesting

I have recently received many suggestions to improve this course. There are almost 600 people in our group with many different backgrounds and experiences. There may be advanced students who wish to discuss current case studies (Why is DLX, Deluxe, not a value trap like Radio Shack?) or potential investments or subjects into greater depth. This course planned to follow Deep Value (book) while digging deeper into the footnotes without preconceived notions. If, for example, we read about Buffett’s transition from net/nets to franchises, we will look at franchises but not focus on them. The point is to give students background to understand the distinctions. However, this may be too basic for many of you.

My goal is to make this a learning community. One idea would be to set up another blog (volunteers?) to discuss various ideas if there is enough interest. I won’t give out anybody’s email without their permission, but if a group of students wanted to dig deeper into various subjects, I am happy to provide a link to this new group or discussion area. I will wait until I hear your feedback.

For example, a reader/student went into vast effort to provide feedback and suggestions. Dr. K (my nickname for this reader) might be an excellent leader to develop a new discussion blog? Below are Dr. K’s emails and links. I will post your suggestions.


John; This is Dr. K following up from our phone conversation. So far I am very frustrated with the deep value course and in the following series of emails I will explain why.

Why I hate mechanical investing and problems with back-testing

  • First of all Seth Klarman in his book (Intro xvi, p.13, p.16-18, p.151, p.162) discusses the folly of searching for the holy grail “mechanical” formula for investing success. BG in The Intelligent Investor p.38-46 and p.194-195 also says mechanical formula investing is self-defeating. It contradictory that we are reading about mechanical formula (Toby Carlisle’s books). Mechanical formula (Toby Carlisle and Joel Greenblatt’s 2nd book) come off as lazy, naïve, and immature to me.
  • Seth also is not a fan of Wide Moats (see p.32-34, p.93) but I guess that’s OK but it’s very confusing how we are jumping around from one investment ideology to another!! Seth also does not think much of EBITA (see p.71-78) while you seem to mention it on the front of your blog home page in a link at the top.
  • Now go to http://falkenblog.blogspot.com and read as many past articles as you can. You should also get his first book: “Finding Alpha.” There is no need to read the rest of his books. In that book especially key in on p.115-116 “Geometric vs. Arithmetic Averaging”, p.116-117 “Survivorship Bias”, Ch. 6 p. 113-125 “Is the Equity Risk Premium Zero?” especially read p.121-123 “Transaction Costs” , p.47 “the Size Effect” and p.48 “Delisting bias.” These are just some of the many reasons why mechanical back testing is a dead-end path to investing success.
  • And/or you can go to http://www.efalken.com and watch the Finding Alpha videos. This should take 8 hours but it’s good if you are short on time or you can do both. I also have many of the papers he has written or mentioned. I can send them to you upon request.
  • Next go to www.davidhbailey.com.Click on the Mathematical Investor blog and read all of the articles. Now see that attached papers he wrote along with Campbell Harvey.
  • Go to www.numeraire.com and read all of the links at the top. In the search site map section click on the article about why screening is not valuation.
  • Now go to www.numeraire.com/download.htm . Read every article in the Research Related Letter section. These are short but notice whom he is critical of. Now read all of the articles in the Research Notes section. Especially read “What is Circular Reasoning” which will explain why most stock screens and mechanical formulas (Toby Carlisle, Joel Greenblatt) are garbage! Make sure you click on or go to all of the links in this article. Notice the lists of various forms of logical errors. Notice the cross correlation with behavioral finance! These logical error list need to be studied in greater detail!! Also especially read “What is Economic Simultaneity?”, “A History of the Size Effect” and notice that on p.4-5 he lists some of the variables that are and are not circular!!, “Evolution of Stock Picking”, “Visual Detection of Circular Reasoning” (it’s vital you understand this) and finally “Fatal Summary.” (it’s vital you understand this also) Read all of the articles in Research Presentations and in Research papers (especially “Circling the Square” and notice on p.8 he gives the return formula and it’s vital you understand this).

You should a somewhat better idea of why mechanical investing is not scientific. You should not trust academic research as well as a lot of p-side research! I am not impressed with Toby Carlisle and Joel Greenblatt’s second book. I have a good feeling that many people in this course and google group are more advanced then you are aware of and feel the same way. I can tell you that I have been reading many academic papers over the years and would attach them when I tried to apply for a research job and never got any positive feedback from attaching them!! In addition Alpha Titans such as Seth Klarman, Peter Lynch, Warren Buffett, Ben Graham were not fan of this type of investing approach.

Let me know when you have read this stuff. I think you need to read and understand them otherwise you are not fully grasping how difficult value investing really is!! Keep in mind I don’t fully understand everything in this material but I know enough to not be impressed by mechanical investing research garbage studies!!

Most Factor Models that Explain Returns are False _ 1

Anamolies Don’t Do as Well after Publication

A Skeptical Appraisel of Asset-Pricing Tests _ 3

Backtest Overfitting

Significance Testing Issues for Empirical Finance 5

The Probability of Backtest Overfitting 6

Factor models to sensative to the time period tested 7

Email #2 about Net Nets.

You mentioned www.oldschoolvalue.comon your site in the resource section. I like this site for the free screens and the blog articles which do a good job of teaching quality investment theory. I am not too fond of his software program and he raised the price and his spreadsheets do not include critical off-balance sheet accounting adjustments (I will explain the New Constructs platform in a later email). Jae Jun thinks his spreadsheet program is better than it really is. (in my opinion).

Go to the -VeEV, NNWC and NCAV screens. Some of the stocks duplicate themselves. Now go to Ben Graham Net Net Stocks and a 7 Step Checklist to Make Money with Net Nets . Notice on p.7 Jae says 99% of Net Nets are useless and on p.9 he does not like Chinese ADRs. I think he also does no include financial companies, REITs, CEFs, Shells etc.

Now go to

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