On Disclosing Investment Process, Ideas: Redux

Would I disclose proprietary ideas of mine? I’ve done it before. Why would I do it? Because it would take a lot to make the ideas usable. Remember my commentary from when I was a bond manager: I was far more open with my brokers than most managers, but I never gave them the critical bits.

So a reader asked me:

Any chance you could expand on what quantitative metrics you are using to compare potential investments? Could you also name a few of the 77 13fs you track? Thanks

I will go above and beyond here. You will get the names of all 78 — here they are:

Abrams
Akre
Altai
Ancient Art
Appaloosa
Atlantic
Bares
Baupost
Blue Ridge
Brave Warrior
Bridgewater
BRK
Capital Growth
Centaur
Centerbridge
Chieftain
Chou
Coatue
Dodge & Cox
Dreman
Eagle Capital
Eagle Value
Edinburgh
Fairfax
Farallon
Fiduciary
Force
FPA
Gates
Glenview
Goldentree
Greenhaven
Greenlight
H Partners
Hawkshaw
Hayman
Hodges
Hound
Hovde
Icahn
Intl Value
Invesco
Jana
JAT
Jensen
Joho
Lane Five
Leucadia
Lone Pine
M3F
Markel
Matrix
Maverick
MHR
Montag
MSD
Pabrai
Parnassus
Passport
Pennant
Perry
Pershing Square
Pickens
Price
Sageview
Scout
Soros
Southeastern
SQ Advisors
Third Point
Tiger Global
Tweedy Browne
ValueAct
Viking Global
Weitz
West Coast
Wintergreen
Yacktman
What I won’t tell you is what I do with their data, because it is different from what most do. But you can play with it.

Then you asked about factors. Here are my factors:

Price change over the last year
Price change over the last three years
Insider buying
Price-to-earnings, both current and forward
Price-to-book
Price-to-sales
Price-to-free cash flow
Price-to-sales
Dividend yield
Neglect (Market cap / Trading volume)
Net Operating Assets
Stock price volatility over the last three years
Asset growth over the last three years
Sales growth over the last three years
Quality (gross margins / assets)
Now that I have “bared all,” I haven’t really bared all, because there is a lot that goes into the preparation and analysis of the data that can’t be grasped from what I have revealed here. To go into that would take more time than I can spend. That’s one reason why as a corporate bond manager, I would share more data with my brokers than most would do, because I knew that the last 20% that I reserved was the real gold. That I would not share.

Beyond that, there are my industry rotation models, which I share 4-6x per year, and then my qualitative reasoning, which makes me reject a lot of ideas that pass my quantitative screens.

That’s what I do. It’s not perfect, and my qualitative reasoning has its faults as well. I encourage you to develop your own theories of value, as Ken Fisher encouraged me to do back in early 2000. Develop your edge, with knowledge that you have that few others do. I’ll give you an example.

I understand most areas in insurance. I don’t get everything right, but it does give me an edge, because insurance accounting and competition is a “black box” to most investors. Insurance has been one of the best performing industries over time, but many avoid it because of its complexity and stodginess.

Behind the hard to understand earnings volatility, there is sometimes a generally profitable franchise that will make decent money in the long run. But few get that, and that is an “edge” of mine. Develop your own edge.

That’s all for now. Invest wisely, and be wary, because the market for risk assets is high, and what if the Fed stops supporting it? Make sure your portfolio has a margin of safety.

By David Merkel, CFA of Aleph Blog



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.