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:
Dodge & Cox
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
Price-to-earnings, both current and forward
Price-to-free cash flow
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