Aggressive rebalancing

[rukawa]

The drawdowns for this type of strategy are as high as 90% in a given year. That is why few people have a stomach for this - you can't justify why you hold them and the volatility/drawdowns are insane when a bad year hits. This is exactly why the opportunity exists as well. As simple as it is to implement, it's not easy to do so.

 

I'm not sure where you are getting drawdowns that large. I'm assuming your talking about drawdowns at the portfolio level. Generally my observation is that the only way you can get drawdowns like 90% is by using a fairly small number of stocks. Tobias Carlisle's study has a table of 3 year returns from 1983 to 2007 (see Exhibit III)

http://www.valuewalk.com/wp-content/uploads/2014/07/benjamin-grahams-net-nets-seventy-five-years-old-and-outperforming-full-tables1.pdf

 

Basically net-nets beat the market every single year except for the 3 year period starting in 1988 where your terminal wealth is $9279 (from $10000 initial) vs the markets $14496. There is one big drawdown and that is in the 3-year period starting in 2007 where your $10000 initial investment drops to $3470...however in this scenario the market does slightly worse.

 

 

I ran the screen frommi described above against the Portfolio123 data today and it is only returning 2 current symbols.

 

GIGM GigaMedia LTD MktCap ~33m and NCAV ~57m

MSN Emerson Radio Corp MktCap ~35m and NCAV ~52m

 

There are a tonne of Japanese ones. Canada and Australia are the other countries that dominate. For instance this stock trades at less than half NCAV. Also in the US you are missing RGS Energy and everyone perennial favorite STRI.

 

Yes, there is no way around international markets if you want to build a diversified netnet portfolio at the moment. The most stocks in my portfolio are currently from Japan, Singapur, Hongkong and Poland.

 

Thanks!!! I didn't even know I could buy Poland. I just now looked on IB and found out you could due to your message.

[frommi]

Thanks!!! I didn't even know I could buy Poland. I just now looked on IB and found out you could due to your message.

 

Which one where you able to buy? I bought polish stocks with degiro. :)

[TwoCitiesCapital]

The drawdowns for this type of strategy are as high as 90% in a given year. That is why few people have a stomach for this - you can't justify why you hold them and the volatility/drawdowns are insane when a bad year hits. This is exactly why the opportunity exists as well. As simple as it is to implement, it's not easy to do so.

 

I'm not sure where you are getting drawdowns that large. I'm assuming your talking about drawdowns at the portfolio level. Generally my observation is that the only way you can get drawdowns like 90% is by using a fairly small number of stocks. Tobias Carlisle's study has a table of 3 year returns from 1983 to 2007 (see Exhibit III)

http://www.valuewalk.com/wp-content/uploads/2014/07/benjamin-grahams-net-nets-seventy-five-years-old-and-outperforming-full-tables1.pdf

 

Basically net-nets beat the market every single year except for the 3 year period starting in 1988 where your terminal wealth is $9279 (from $10000 initial) vs the markets $14496. There is one big drawdown and that is in the 3-year period starting in 2007 where your $10000 initial investment drops to $3470...however in this scenario the market does slightly worse.

 

Yes, let's limit or historical data-set to the largest equity bull market ever, end it right before that 50+% correction for general stocks the following year, and use that data to determine what a reasonable drawdown for a strategy that invests in over-levered companies that are losing money to determine what a reasonable drawdown is...

 

::)

 

If you expand the data set to actually include periods of stress (outside the moderate bear market in 2000 that hardly impacted value stocks as a whole), you get drawdowns of 80-90% on a handful of occasions. That's at the portfolio level.

 

The strategy still performs over the long-term though because it consistently produces signficantly higher returns than the market. Say portfolio goes down 80% versus the S&P at 50% in a bad equity bear market. The first year the portfolio rebounds by 70% while the S&P rebounds by 30%. After that, you get 17% per year in low P/B strategy and 7% in S&P. In year 16 you're tied and by year 20 you're 100% ahead of the S&P for the 20 year period (outperformance of ~3.5% per year).

 

Making an extra 10% per year covers a multitude of sins if you stick with it.

 

 

 

[frommi]

Yes, let's limit or historical data-set to the largest equity bull market ever, end it right before that 50+% correction for general stocks the following year, and use that data to determine what a reasonable drawdown for a strategy that invests in over-levered companies that are losing money to determine what a reasonable drawdown is...

 

::)

 

If you expand the data set to actually include periods of stress (outside the moderate bear market in 2000 that hardly impacted value stocks as a whole), you get drawdowns of 80-90% on a handful of occasions. That's at the portfolio level.

 

The strategy still performs over the long-term though because it consistently produces signficantly higher returns than the market. Say portfolio goes down 80% versus the S&P at 50% in a bad equity bear market. The first year the portfolio rebounds by 70% while the S&P rebounds by 30%. After that, you get 17% per year in low P/B strategy and 7% in S&P. In year 16 you're tied and by year 20 you're 100% ahead of the S&P for the 20 year period (outperformance of ~3.5% per year).

 

Making an extra 10% per year covers a multitude of sins if you stick with it.

 

Based on what i have seen in the past 3 years of international netnet investing is that drawdowns/volatility are smaller than the overall market. Especially if you have a lot of dividend paying japanese stocks with low betas in the portfolio. And hopefully not every netnet is losing money. I also have netnets with P/E`s of 3-10 in the portfolio. Its just that those are not available in the US.

[TwoCitiesCapital]

Yes, let's limit or historical data-set to the largest equity bull market ever, end it right before that 50+% correction for general stocks the following year, and use that data to determine what a reasonable drawdown for a strategy that invests in over-levered companies that are losing money to determine what a reasonable drawdown is...

 

::)

 

If you expand the data set to actually include periods of stress (outside the moderate bear market in 2000 that hardly impacted value stocks as a whole), you get drawdowns of 80-90% on a handful of occasions. That's at the portfolio level.

 

The strategy still performs over the long-term though because it consistently produces signficantly higher returns than the market. Say portfolio goes down 80% versus the S&P at 50% in a bad equity bear market. The first year the portfolio rebounds by 70% while the S&P rebounds by 30%. After that, you get 17% per year in low P/B strategy and 7% in S&P. In year 16 you're tied and by year 20 you're 100% ahead of the S&P for the 20 year period (outperformance of ~3.5% per year).

 

Making an extra 10% per year covers a multitude of sins if you stick with it.

 

Based on what i have seen in the past 3 years of international netnet investing is that drawdowns/volatility are smaller than the overall market. Especially if you have a lot of dividend paying japanese stocks with low betas in the portfolio. And hopefully not every netnet is losing money. I also have netnets with P/E`s of 3-10 in the portfolio. Its just that those are not available in the US.

 

I can absolutely confirm drawdowns can be significantly larger. When I started my passive portfolio back in 2015, 75% of it was international energy companies - some in the U.S., some in Australia, some in Europe, etc. And when oil prices were at $27, the portfolio was down over 40+% while the general market was up.

 

Also, as a subtle difference, there is a difference between net/nets and a low P/B portfolio. The low P/B portfolio, from what I have seen, outperforms all other approaches. So my portfolio of energy companies were typically companies trading at 0.2-0.3x stated book value.

[rukawa]

Yes, let's limit or historical data-set to the largest equity bull market ever, end it right before that 50+% correction for general stocks the following year, and use that data to determine what a reasonable drawdown for a strategy that invests in over-levered companies that are losing money to determine what a reasonable drawdown is...

 

Net-nets generally aren't over-levered. And the table includes the worst drawdown. The last line in the table is 2007. What this means is that they bought the net-net portfolio on Dec 31, 2007 and held it to Dec 31, 2010. So it does include the worst drawdown of the period and doesn't end before it. In that drawdown your initial $10000 investment goes down to $3470 if you invest in the net-net portfolio and goes down to $3251 if you invest in the market.

 

I believe you are applying what you know about low P/B stocks to net-nets. Then your comments about 90% drawdowns and over-levered companies makes sense.

 

[TwoCitiesCapital]

Yes, let's limit or historical data-set to the largest equity bull market ever, end it right before that 50+% correction for general stocks the following year, and use that data to determine what a reasonable drawdown for a strategy that invests in over-levered companies that are losing money to determine what a reasonable drawdown is...

 

Net-nets generally aren't over-levered. And the table includes the worst drawdown. The last line in the table is 2007. What this means is that they bought the net-net portfolio on Dec 31, 2007 and held it to Dec 31, 2010. So it does include the worst drawdown of the period and doesn't end before it. In that drawdown your initial $10000 investment goes down to $3470 if you invest in the net-net portfolio and goes down to $3251 if you invest in the market.

 

I believe you are applying what you know about low P/B stocks to net-nets. Then your comments about 90% drawdowns and over-levered companies makes sense.

 

Yes, my apoligies. I caught the subtle difference in my comment to Frommi, but not prior to that to know we were talking about two different things. All of my comments, including those about 90% drawdowns, were about low P/B strategies as mentioned in my first comment.

 

Can anyone share a list (or parts of a list) of what this portfolio would currently hold? I ran a similar screen on CapitalIQ (https://drive.google.com/open?id=0B1tb4Z-iuO9Bd3NDYWxmT3JOYWc). I've looked through a good number of the results and haven't found any that really jump out at me as good investments. That has the bias of my opinion, so the key to making the strategy work may be to eliminate that  ;). Some are Chinese companies, some are retailers with deteriorating results, some are homebuilders/land owners, some don't have English financials (which leaves you betting on the CapIQ/Bloomberg analyst inputting the numbers correctly).  Trans World Entertainment is one I've watched for a while... they have a large shareholder, a lot of inventory and a huge amount of NOLs. If they just slowly liquidated stores as sales declined and reinvested that into something low risk but cash producing it would be a great investment. Instead they overpaid for an Amazon seller that loses money.

 

My personal experience has been that investing primarily on the basis of low price/book / net-net has generated my worst results. Again, that's a limited sample set which incorporates my selection bias. I'm skeptical of a company that can't earn decent ROIC in today's economy, unless it's O/G (or something else that is cyclically down).

 

The studies have actually shown that it IS the worst of the worst that provide the best returns. Narrowing the focus of low P/B stocks by selecting favorable metrics like positive cash flows, positive earnings, and etc has only ever impaired the long-term results of the strategy. You actually get better returns by focusing only on companies that are LOSING money. You truly have to buy the nonsensical/hated over-levered equity stubs where a handful will surprise and return 50-250% while everything else languishes for 12 months.

 

The drawdowns for this type of strategy are as high as 90% in a given year. That is why few people have a stomach for this - you can't justify why you hold them and the volatility/drawdowns are insane when a bad year hits. This is exactly why the opportunity exists as well. As simple as it is to implement, it's not easy to do so.

[JayGatsby]

MSN Emerson Radio Corp MktCap ~35m and NCAV ~52m

Not to get the thread of course, but this seems like a decent little cigar butt:

-Mkt Cap of $34M is 56% owned by a company out of Hong Kong, leaving $15M in public hands

-Current repurchase plan is for $5M. Runs through December

-Lloyd Miller owns 1.5M and has been pushing for cash distributions for years. In 2015 the company did a $19M special dividend

-Operating business is pretty poor (Import cheap electronics under the Emerson brand and sell to big box retailers), but they've managed the decline well. Sales have declined from $163M in 2012 to $21M in 2016 but EBITDA was basically breakeven in 16 and there's no capex. Inventory and AR have mostly already been converted to cash.

-A licensing contract terminated at the end of 2016 that contributed $3.6M of revenue in 2016 at likely no cost. My guess is the licensor decided the Emerson brand doesn't have much value. Business now is largely selling cheap microwave ovens to Walmart, which, not surprisingly, doesn't have a lot of margin.

-They recently terminated the CFO and replaced him with a board member affiliated with the controlling shareholder. This is a bit of a red flag, but the old CFO made $480k last year while the new guy will make $150k (plus bonus?). He also loses the $50k he received as a director, so net this saves the company ~$300k assuming a 50% bonus.

 

Haven't dug into it too much but it seems fairly low risk for a negative enterprise value business. TBV/share is $1.98 versus $1.27 share price. If they execute the buybacks that gap will widen (although business is likely currently EBITDA negative). Seems like it's getting pretty close to the point where there isn't really anything left from an operating business perspective. Risk seems to be that the controlling shareholder decides to do something other than wind down the business. They haven't made any acquisitions that I can see though. The controlling shareholder was involved in a complicated liquidation of a HK holding company that may be worth reading into more.

[rukawa]

MSN Emerson Radio Corp MktCap ~35m and NCAV ~52m

Not to get the thread of course, but this seems like a decent little cigar butt:

-Mkt Cap of $34M is 56% owned by a company out of Hong Kong, leaving $15M in public hands

-Current repurchase plan is for $5M. Runs through December

-Lloyd Miller owns 1.5M and has been pushing for cash distributions for years. In 2015 the company did a $19M special dividend

-Operating business is pretty poor (Import cheap electronics under the Emerson brand and sell to big box retailers), but they've managed the decline well. Sales have declined from $163M in 2012 to $21M in 2016 but EBITDA was basically breakeven in 16 and there's no capex. Inventory and AR have mostly already been converted to cash.

-A licensing contract terminated at the end of 2016 that contributed $3.6M of revenue in 2016 at likely no cost. My guess is the licensor decided the Emerson brand doesn't have much value. Business now is largely selling cheap microwave ovens to Walmart, which, not surprisingly, doesn't have a lot of margin.

-They recently terminated the CFO and replaced him with a board member affiliated with the controlling shareholder. This is a bit of a red flag, but the old CFO made $480k last year while the new guy will make $150k (plus bonus?). He also loses the $50k he received as a director, so net this saves the company ~$300k assuming a 50% bonus.

 

Haven't dug into it too much but it seems fairly low risk for a negative enterprise value business. TBV/share is $1.98 versus $1.27 share price. If they execute the buybacks that gap will widen (although business is likely currently EBITDA negative). Seems like it's getting pretty close to the point where there isn't really anything left from an operating business perspective. Risk seems to be that the controlling shareholder decides to do something other than wind down the business. They haven't made any acquisitions that I can see though. The controlling shareholder was involved in a complicated liquidation of a HK holding company that may be worth reading into more.

 

I didn't invest because I didn't trust management. I tend to stay away from all Chinese run companies that are listed in other countries. Basically I look at the board of directors and executives and if it sounds too Chinese I stay away. There are exceptions to this where the names are Chinese but they were born and raised in other countries or I have other reasons to not suspect the company. You can't do too much filtering in a net-net strategy but this is one of the few filters I do have.

 

Geoff Gannon did an extended analysis of management for Emerson.

https://www.gurufocus.com/news/172206/a-stock-where-neither-the-business-nor-the-price-matters

 

[JayGatsby]

I didn't invest because I didn't trust management. I tend to stay away from all Chinese run companies that are listed in other countries. Basically I look at the board of directors and executives and if it sounds too Chinese I stay away. There are exceptions to this where the names are Chinese but they were born and raised in other countries or I have other reasons to not suspect the company. You can't do too much filtering in a net-net strategy but this is one of the few filters I do have.

 

Geoff Gannon did an extended analysis of management for Emerson.

https://www.gurufocus.com/news/172206/a-stock-where-neither-the-business-nor-the-price-matters

Good read by him. Shares are down ~50% since then as the business has underperformed. He was right that the brand licencing business was pretty worthless and in decline. I'll have to dig through it a bit more and see if there are related party transactions. I didn't see anything in my quick read to suggest the owner had done anything nefarious over the past 5 years. The question now is whether it's at the tipping point where there is no more operating business and they simply return cash.

 

Schwab placed 25 shares for me today... so $30 of stock and $5 of commissions. Better double from here!

[NomadicRiley]

Screen referenced above had a new symbol this week

 

RELL

 

Note this is not the first time RELL has shown up on the screen, was also on it back in 7/2015 and multiple times in 2016.

 

There is also a thread about it already on this board

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/rell-richardson-electronics/