Value Investing: Philosophy, Process & Objective

[CityFarmer]

Let me share some interim findings of mine.

I have a long-term uncleared doubt, is concentrated fund more riskier than broadly diversified one, thus having a higher return in general? Is the "riskier" is an illusion, or a reality?

I found this report, from Yale University on Mr. Buffett portfolio riskiness, base on Sharpe ratio. For those not familiar with the term, please refer to the wiki below
https://en.wikipedia.org/wiki/Sharpe_ratio

Based on the report, linked below. Mr. Buffett ratio between 1976-2011, was 0.76, vs the market 0.39. It seems Mr. Buffett was having almost double the return, per unit of risk. For comparison, I calculated from Yeoman Cap 18 years of monthly data, the ratio is 0.56, with risk-free rate of 2.5%. Warren Buffett won the game.

http://www.econ.yale.edu/~af227/pdf/Buff...dersen.pdf

But wait a minute, don't value investing prefer volatility? Is it a contradiction here? Yes, short-term volatility is a friend of value investing, not a risk. But over a longer term, I tent to agree with Howard Mark's statement, "prices of fundamentally risky securities fluctuate more than those of safer ones (over longer term)". The definition of risk here, is "possibility of permanently loss of capital"

I adjusted the calculation, based on yearly performance, rather than monthly,with similar risk-free rate. The adjusted ratio, based on data from Mr. Buffett shareholder letter, from 1965-2014

BH: 1.2
S&P 500 : 0.5

For comparison, I calculated Yeoman Cap's 18 years data, the ratios were

YC: 0.4
Asia x-Japan : 0.2

One observation, Mr. Buffett's SD was lower than S&P 500, while almost double in return. In Yeoman Cap, its SD was higher than Asia ex-Japan, while double in return.

An interim conclusion of mine. Concentrated approach yield better result, if not similar, per unit of "real" risk. I am practicing it, and hope I am right, many years later.

All comments are welcomed.

(sharing interim finding of my own "researches")

[HSquare.Cap]

Let me share some interim findings of mine.

I have a long-term uncleared doubt, is concentrated fund more riskier than broadly diversified one, thus having a higher return in general? Is the "riskier" is an illusion, or a reality?

I found this report, from Yale University on Mr. Buffett portfolio riskiness, base on Sharpe ratio. For those not familiar with the term, please refer to the wiki below
https://en.wikipedia.org/wiki/Sharpe_ratio

Based on the report, linked below. Mr. Buffett ratio between 1976-2011, was 0.76, vs the market 0.39. It seems Mr. Buffett was having almost double the return, per unit of risk. For comparison, I calculated from Yeoman Cap 18 years of monthly data, the ratio is 0.56, with risk-free rate of 2.5%. Warren Buffett won the game.

http://www.econ.yale.edu/~af227/pdf/Buff...dersen.pdf

But wait a minute, don't value investing prefer volatility? Is it a contradiction here? Yes, short-term volatility is a friend of value investing, not a risk. But over a longer term, I tent to agree with Howard Mark's statement, "prices of fundamentally risky securities fluctuate more than those of safer ones (over longer term)". The definition of risk here, is "possibility of permanently loss of capital"

I adjusted the calculation, based on yearly performance, rather than monthly,with similar risk-free rate. The adjusted ratio, based on data from Mr. Buffett shareholder letter, from 1965-2014

BH: 1.2
S&P 500 : 0.5

For comparison, I calculated Yeoman Cap's 18 years data, the ratios were

YC: 0.4
Asia x-Japan : 0.2

One observation, Mr. Buffett's SD was lower than S&P 500, while almost double in return. In Yeoman Cap, its SD was higher than Asia ex-Japan, while double in return.

An interim conclusion of mine. Concentrated approach yield better result, if not similar, per unit of "real" risk. I am practicing it, and hope I am right, many years later.

All comments are welcomed.

(sharing interim finding of my own "researches")

Hi CF. thanks for sharing. I guess we all faced similar dilemma at one point or another.

As for me, I assign weightage on the basis of margin of safety. Generally, higher weightage for higher MOS.

2 Key considerations:

- How confident are we in our valuation?
- What if we are wrong?

These considerations flow down to MOS, and risk management anchors on MOS. With this consideration, my portfolio can swing between concentrated and diversified.


As for your interim research. I generally like you thought process.
We could probably get a conclusive finding if Warren Buffett or Yeoman have 2 portfolios. One concentrated and one diversified. While both are value oriented, they used distinct processes. This can complicate comparisons.

[CityFarmer]

Hi CF. thanks for sharing. I guess we all faced similar dilemma at one point or another.

As for me, I assign weightage on the basis of margin of safety. Generally, higher weightage for higher MOS.

2 Key considerations:

- How confident are we in our valuation?
- What if we are wrong?

These considerations flow down to MOS, and risk management anchors on MOS. With this consideration, my portfolio can swing between concentrated and diversified.


As for your interim research. I generally like you thought process.
We could probably get a conclusive finding if Warren Buffett or Yeoman have 2 portfolios. One concentrated and one diversified. While both are value oriented, they used distinct processes. This can complicate comparisons.

I used two tools to control risk. One is MOS, based on similar process as yours. The other is a reasonable diversification.

IMO, to conclude in an academic report, I need a "fool-proof" 100% result, but for a useful finding in life, I might only need probably 80% proven result. I found my "interim" conclusion is good enough to follow for my investment, and may be minor tunings along the way.

[Nebula]

Let me share some interim findings of mine.

I have a long-term uncleared doubt, is concentrated fund more riskier than broadly diversified one, thus having a higher return in general? Is the "riskier" is an illusion, or a reality?

I found this report, from Yale University on Mr. Buffett portfolio riskiness, base on Sharpe ratio. For those not familiar with the term, please refer to the wiki below
https://en.wikipedia.org/wiki/Sharpe_ratio

Based on the report, linked below. Mr. Buffett ratio between 1976-2011, was 0.76, vs the market 0.39. It seems Mr. Buffett was having almost double the return, per unit of risk. For comparison, I calculated from Yeoman Cap 18 years of monthly data, the ratio is 0.56, with risk-free rate of 2.5%. Warren Buffett won the game.

http://www.econ.yale.edu/~af227/pdf/Buff...dersen.pdf

But wait a minute, don't value investing prefer volatility? Is it a contradiction here? Yes, short-term volatility is a friend of value investing, not a risk. But over a longer term, I tent to agree with Howard Mark's statement, "prices of fundamentally risky securities fluctuate more than those of safer ones (over longer term)". The definition of risk here, is "possibility of permanently loss of capital"

I adjusted the calculation, based on yearly performance, rather than monthly,with similar risk-free rate. The adjusted ratio, based on data from Mr. Buffett shareholder letter, from 1965-2014

BH: 1.2
S&P 500 : 0.5

For comparison, I calculated Yeoman Cap's 18 years data, the ratios were

YC: 0.4
Asia x-Japan : 0.2

One observation, Mr. Buffett's SD was lower than S&P 500, while almost double in return. In Yeoman Cap, its SD was higher than Asia ex-Japan, while double in return.

An interim conclusion of mine. Concentrated approach yield better result, if not similar, per unit of "real" risk. I am practicing it, and hope I am right, many years later.

All comments are welcomed.

(sharing interim finding of my own "researches")

Hi CF. thanks for sharing. I guess we all faced similar dilemma at one point or another.

As for me, I assign weightage on the basis of margin of safety. Generally, higher weightage for higher MOS.

2 Key considerations:

- How confident are we in our valuation?
- What if we are wrong?

These considerations flow down to MOS, and risk management anchors on MOS. With this consideration, my portfolio can swing between concentrated and diversified.


As for your interim research. I generally like you thought process.
We could probably get a conclusive finding if Warren Buffett or Yeoman have 2 portfolios. One concentrated and one diversified. While both are value oriented, they used distinct processes. This can complicate comparisons.

investing is a very personal and sometimes lonely activity. i think it boils down to your personality, temperament and needs.

IMHO i think that concentrated investing is a waiting game compared to cigar butt investing, for buffett he is buying compounders that will grow astronomically and it makes sense to be concentrated because the truly wonderful company is hard to come by, and buying at a reasonable price where there is a true MOS is even harder. and if i do find that wonderful company and at a reasonable price, assuming i am correct, it would be risky for me to cash out, because i might not be able to get back in, and my cashflow will be from dividends, which will take years of growth before it becomes significant.

i do acknowledge that it will make you rich if you are correct.

on the other hand, the cigar butt/ diversified approach gives one free puff, which when sold gives me cash in hand that i can use and/ or reinvest and sometimes the free puff can be substantial and occur in a short time, luck plays a an important role. because the portfolio is diversified, hiccups happen randomly and there is cashflow on a continual basis (theoretically). there is also dividends.
also, because i am not an expert and acknowledge that i have blind spots, i have to submit to the diversified approach so that my mistakes are not large and can be covered up, hopefully, by my wins.
to paraphrase graham, its like a game of roulette where i am the house.

asset values are much easier to estimate than future earnings and durable moats, and assets also gives me psychological benchmark when prices swing wildly.

i feel that one of my biggest investing mistake was being overconfident in my analysis putting 16% of my portfolio in 2 stocks. they did not turn out badly, but strategically i think it was a bad idea.

just my $0.02 worth. hopefully soon it will be worth $0.04

[Nebula]

@Nebula - Havent check out Deep Value, but have been great admirer of Tobias's work. I still rmb reading his "Quantitative Value" back in early 2013. He really nailed down the effectiveness of using a quantitative value method. The central tenet of his argument is that quant value method mitigates behavioral biases inherent in qualitative analysis. His methodology is similar to that employed by LSV.

Buying truly beaten down stocks is really exemplification of value investing- a high quality stock can be a bad investment and a low quality can be a good investment. Its all about how much we have paid for it. Looking forward to hearing more from you. I would like to discuss some Singapore stocks here in the future, so we could prob pick a few stocks and tear them down tgt!

Hey HSquare Cap, yes that would be great. been looking for net nets recently and found some decent ones that have been bashed due to poor earnings and its cyclical nature.

you can check out Asia Enterprise, HTL, Jadason.

PEC is selling slightly below net net.

let me know what you think.

[HSquare.Cap]

Hi Value Buds. How ya doing?

Mr. Market has a bad day today and its bloodbath out there. Hope you are sticking to you strategy. Always rmb - change is constant but value is timeless.

Written a note on market psychology today. Appears to be a good time to share. Have a look.

https://hsquarecapblog.wordpress.com/201...sychology/

Join us @hsquare_capital if u have twitter. We can have a real time conversation there!

Cheers
Hsq.Cap
Twitter: @hsquare_capital
https://hsquarecapblog.wordpress.com

[CityFarmer]

Mr. Market is offering. The 1st SD of monthly volatility of Asia markets, is about +-6%, and the latest dive from Jul, is more than -7%. The number is for reference, and might not be meaningful to some.

I am actively looking at "good" stocks, and turning greedier.     May be time for "spring-cleaning" on my portfolio.

Wish you all a good time in the "sales".

[GFG]

Let me share some interim findings of mine.

I have a long-term uncleared doubt, is concentrated fund more riskier than broadly diversified one, thus having a higher return in general? Is the "riskier" is an illusion, or a reality?

I found this report, from Yale University on Mr. Buffett portfolio riskiness, base on Sharpe ratio. For those not familiar with the term, please refer to the wiki below
https://en.wikipedia.org/wiki/Sharpe_ratio

Based on the report, linked below. Mr. Buffett ratio between 1976-2011, was 0.76, vs the market 0.39. It seems Mr. Buffett was having almost double the return, per unit of risk. For comparison, I calculated from Yeoman Cap 18 years of monthly data, the ratio is 0.56, with risk-free rate of 2.5%. Warren Buffett won the game.

http://www.econ.yale.edu/~af227/pdf/Buff...dersen.pdf

But wait a minute, don't value investing prefer volatility? Is it a contradiction here? Yes, short-term volatility is a friend of value investing, not a risk. But over a longer term, I tent to agree with Howard Mark's statement, "prices of fundamentally risky securities fluctuate more than those of safer ones (over longer term)". The definition of risk here, is "possibility of permanently loss of capital"

I adjusted the calculation, based on yearly performance, rather than monthly,with similar risk-free rate. The adjusted ratio, based on data from Mr. Buffett shareholder letter, from 1965-2014

BH: 1.2
S&P 500 : 0.5

For comparison, I calculated Yeoman Cap's 18 years data, the ratios were

YC: 0.4
Asia x-Japan : 0.2

One observation, Mr. Buffett's SD was lower than S&P 500, while almost double in return. In Yeoman Cap, its SD was higher than Asia ex-Japan, while double in return.

An interim conclusion of mine. Concentrated approach yield better result, if not similar, per unit of "real" risk. I am practicing it, and hope I am right, many years later.

All comments are welcomed.

(sharing interim finding of my own "researches")

Hi CF. thanks for sharing. I guess we all faced similar dilemma at one point or another.

As for me, I assign weightage on the basis of margin of safety. Generally, higher weightage for higher MOS.

2 Key considerations:

- How confident are we in our valuation?
- What if we are wrong?

These considerations flow down to MOS, and risk management anchors on MOS. With this consideration, my portfolio can swing between concentrated and diversified.


As for your interim research. I generally like you thought process.
We could probably get a conclusive finding if Warren Buffett or Yeoman have 2 portfolios. One concentrated and one diversified. While both are value oriented, they used distinct processes. This can complicate comparisons.

investing is a very personal and sometimes lonely activity. i think it boils down to your personality, temperament and needs.

IMHO i think that concentrated investing is a waiting game compared to cigar butt investing, for buffett he is buying compounders that will grow astronomically and it makes sense to be concentrated because the truly wonderful company is hard to come by, and buying at a reasonable price where there is a true MOS is even harder. and if i do find that wonderful company and at a reasonable price, assuming i am correct, it would be risky for me to cash out, because i might not be able to get back in, and my cashflow will be from dividends, which will take years of growth before it becomes significant.  

i do acknowledge that it will make you rich if you are correct.

on the other hand, the cigar butt/ diversified approach gives one free puff, which when sold gives me cash in hand that i can use and/ or reinvest and sometimes the free puff can be substantial and occur in a short time, luck plays a an important role. because the portfolio is diversified, hiccups happen randomly and there is cashflow on a continual basis (theoretically). there is also dividends.
also, because i am not an expert and acknowledge that i have blind spots, i have to submit to the diversified approach so that my mistakes are not large and can be covered up, hopefully, by my wins.
to paraphrase graham, its like a game of roulette where i am the house.

asset values are much easier to estimate than future earnings and durable moats, and assets also gives me psychological benchmark when prices swing wildly.

i feel that one of my biggest investing mistake was being overconfident in my analysis putting 16% of my portfolio in 2 stocks. they did not turn out badly, but strategically i think it was a bad idea.

just my $0.02 worth. hopefully soon it will be worth $0.04

Yes agreed. There is no right or wrong approach.
The scuttle butt approach of broad diversification is better if you think you can find good companies, but cannot have absolutely high certainty. Yeoman has achieved very good results doing this.
But there are 2 differences between WB and Yeoman:
1) WB gets exposure to many more opportunities, with complex instruments like derivatives etc while Yeoman is more of a passive, simple equity shareholder.
2) WB manages a lot a lot more capital and its hard to not be concentrated and still be able to monitor and analyse all your holdings

[HSquare.Cap]

@CF, great to know tt u are navigating well. You know u are doing well being feeling happy on days like these.

For value buds out there. Some great words to keep us on track:

"We don’t have to be smarter than the rest. We have to be more disciplined than the rest."
–Warren Buffett

"The market does not know you exist. You can do nothing to influence it. You can only control your behavior."
--Alex Elder

Cheers
Hsq.Cap
Twitter: @hsquare_capital
https://hsquarecapblog.wordpress.com

[CityFarmer]

@CF, great to know tt u are navigating well. You know u are doing well being feeling happy on days like these.

For those has look at particular stocks, wishing for good offer, for years, will understand the feeling...