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On Investment 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.






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Industry Rotation, Insurance, Portfolio Management, Quantitative Methods, Stocks, Value Investing | RSS 2.0 |

3 Responses to On Investment Ideas, Redux

  1. Greg says:

    @DM wrote: ” Insurance has been one of the best performing industries over time, but many avoid it because…”

    Do you think the insurance company meme, while historically profitable, has now been over-exposed by yourself, AIG, Berkshire, etc?

    Seems like the barriers to entry throughout the financial industry have collapsed (dis-intermediation by whatever name), and the trade looks pretty crowded. Every industrial concern has a financial arm as widely reported.

    I have noticed a lot of de-mutualization of insurance companies, a lot of M&A / consolidation activity, and obviously asset management (new competitors) has grown all over the place. The financial sector (as a percent of the S&P) is back near all time highs.

    Is the insurance meme now a crowded trade?

  2. forgetalpha says:

    As the user who asked for some more transparency with you initial investment ideas post, all I can say is thank you. Not very often one can get a response that quickly, in this kind of detail. Above and beyond the call of duty. Just another example of why your blog is in a league of its own. Thanks again.

  3. hodedofome says:

    Even if you shared the stocks you owned, it wouldn’t help much. Without knowing the size of your positions, your exit strategy and your entries, someone would have to be an idiot to blindly follow your investments.

    Not only that, but without having the conviction that you do, even knowing your process in detail isn’t going to help much. Strategies are easy, it’s sticking to them when it’s not going well that’s the hard part.

    It wouldn’t matter if you printed your rules in the newspaper, most people couldn’t follow them. They’d buy in after it’s had a good run, and then give up on the ‘system’ after it’s had a bad run. That’s the opposite of what they should do, but without transforming their minds and being in control of their emotions, they can’t do anything but respond inappropriately to their fears.

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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