[split] What is a realistic return on value investing?

[moneyandco]

I'm probably the only one clueless but what is T10 ratio and A12+D0?

You are probably the only one "dare" to ask. I am very sure more are clueless on that, including me.

Who are the audience of the report? If it is for general blog reader, some of the info might be beyond them.

I like the distribution chart of the monthly return, personally. It give quite a bit of info on the performance.

Good question. It started out as part self articulating (helps me organize my thoughts) part marketing material for a prospect.

Unfortunately the prospecting didn't work out, so it has now become part self articulating and part ego trip.

The underlying modelling and tracking part though is very much part and parcel of the investment process.

[specuvestor]

Thanks much... so what is the risk number you use? 30, 90 or 180 days volatility?

So what do you do if it is a good stock with bad volatility (for example those in cyclcial industries or commodities) according to your report?

T10 is basically the top 10 contributors / bottom 10 contributors (risk adjusted basis, not by asset value) in the portfolio. The higher the ratio, the more unevenly spreaded between different counters it is. I intend to maintain it within 1.5 - 2, anything more than that indicates over exposure on a selected group.

Isn't a big number a good thing because it shows there are concentrated stocks on a risk adjusted basis that are performing very well? I would understand the logic of keeping to 1.5-2 if it is NOT risk adjusted.

[moneyandco]

Thanks much... so what is the risk number you use? 30, 90 or 180 days volatility?

So what do you do if it is a good stock with bad volatility (for example those in cyclcial industries or commodities) according to your report?

T10 is basically the top 10 contributors / bottom 10 contributors (risk adjusted basis, not by asset value) in the portfolio. The higher the ratio, the more unevenly spreaded between different counters it is. I intend to maintain it within 1.5 - 2, anything more than that indicates over exposure on a selected group.

Isn't a big number a good thing because it shows there are concentrated stocks on a risk adjusted basis that are performing very well? I would understand the logic of keeping to 1.5-2 if it is NOT risk adjusted.

These are monthly volatilty numbers over either 5 years (60mth) or incep (102mth) period.

I have no interest in individual stock or industry volatitiy per se. The volatility measure is just a way to keep track of portfolio consolidated risks and how it compares with diversified indexes and supposedly hedged funds. The portfolio no. also allows people to calculate common ratios like Treynor or Sharpe if they are interested in that sort of thing.

In an ideal world where risk modelling works perfectly fine, theoretically the ratio should be very close to 1.0. However, there are limitations to how you can quantify risk and hence I allowed a broader band of up to 2.0

Anything above that means the portfolio is too slanted and relying on too few basket of stocks within to generate a disproportionate share of returns.

This is where my approach probably differs from most forumers here whom I understand are practicsing highly selective stock picking and generally have pretty concentrated portfolios. The common outperformance profile for such an approach is to witness a few stocks delivering the big returns and even out other counters that are less than ideal either due to gestation or errors.

From a portfolio management perspective, I do not like to rely too much gains derived from too little counters to be driving the whole thing which is essentially what a T10 > 2 is saying, so I will take action to minimize that. It is a little similar to what most people who follow mechanical asset allocation approaches call "rebalancing", but I do not like such strictly by the book mechanics which I feel doesn't respond well to actual market dynamics, so I ended up devising something of a halfway house between strict rebalancing and individual discretion.

I know this is probably a little counter intuitive to most intrinsic value approaches, but yea I've thought through that on a philosophical and implementation level and feel it's the best approach for me.

[CityFarmer]

An interesting approach, which similar to quantitative approach. IMO.

IMO, the approach might be too complex, for a general institutional investors to appreciate. They prefer simple concept, e.g. the concept of Aggregate Asset Management (http://www.aggregate.com.sg/) or Yeoman Capital Management (http://yeomancapitalmanagement.com/)

Aggregate Asset Management, uses similar broadly diversified approach, mainly with quantitative approach on stock selection. Its average performance, with short history, is ~12%

Yeoman Cap, uses its proprietary yet simple 3-Rights approach, and also broadly diversified. Its CAGR for 14 years was around 13-14%.

Both attracted quite a attention from institutional investors. You might want to refer to their website for further detail.

(sharing a view from an amateur)

[moneyandco]

An interesting approach, which similar to quantitative approach. IMO.

IMO, the approach might be too complex, for a general institutional investors to appreciate. They prefer simple concept, e.g. the concept of Aggregate Asset Management (http://www.aggregate.com.sg/) or Yeoman Capital Management (http://yeomancapitalmanagement.com/)

Aggregate Asset Management, uses similar broadly diversified approach, mainly with quantitative approach on stock selection. Its average performance, with short history, is ~12%

Yeoman Cap, uses its proprietary yet simple 3-Rights approach, and also broadly diversified. Its CAGR for 14 years was around 13-14%.

Both attracted quite a attention from institutional investors. You might want to refer to their website for further detail.

(sharing a view from an amateur)

Thanks for highlighting that. Yes I am aware of these 2 funds as well as their various competitors.

The challenge is you can’t really tell how sophisticated the methodology employed actually is just based on marketing promotion materials in brochures or website.

In my earlier professional days, I have seen how the way most fund management companies manage their investments bear little resemblance to how they actually sell it to their customers.

For really sophisticated investors on the private equity and hedge fund side, much of their work is dumbed down to a few sexy “common sense” bullet point principles and nicely colored model diagrams to generate a few marketing sound bites. On the other end though are a vast majority of garbage mutual funds that are basically simple ratio and assumption driven standard off the shelf financial model masqueraded as in depth industrial or technical knowledge to sell to the mass market.

If there ever was a serious prospect again or some concrete plan comes up to set up a proper investment holding business, you can bet I’ll try to put in lots of bit sized points, boxes and nice simple model /principles in colloquial language as well to promote the business.

[yeokiwi]

The only half decent public forum that focuses on Singapore investment. Other popular investment forums range from cannot make it to absolutely atrocious. Look out for contributors with high reputation points, they are mostly a bunch of zhuo bo lan uncles who can put any banker / consutlant / me to shame.

I like your description of valuebuddies though.

[CityFarmer]

If there ever was a serious prospect again or some concrete plan comes up to set up a proper investment holding business, you can bet I’ll try to put in lots of bit sized points, boxes and nice simple model /principles in colloquial language as well to promote the business.

If it is right to do it, when opportunity arises, it is always better to do it, right before the opportunities are knocking on the door, IMO.

May be it is different in finance world...

I have started to read the two articles from your website. It is short, but I need some time to fully digest them. It might help in my current "research" topic. Thanks for the articles.

I may rise similar topic for discussion in the near future, if any.

[specuvestor]

These are monthly volatilty numbers over either 5 years (60mth) or incep (102mth) period.

Monthly volatility means your vol would be pretty low compared to daily. Any reason why you choose 60 or 102? Just curious how you come to this number or just arbitrary? Thanks

I know this is probably a little counter intuitive to most intrinsic value approaches, but yea I've thought through that on a philosophical and implementation level and feel it's the best approach for me.

Yea know yourself is good.

[opmi]

looks like a lot of outperformance comes from dividends or/& dividends reinvested...

[moneyandco]

These are monthly volatilty numbers over either 5 years (60mth) or incep (102mth) period.

Monthly volatility means your vol would be pretty low compared to daily. Any reason why you choose 60 or 102? Just curious how you come to this number or just arbitrary? Thanks

I know this is probably a little counter intuitive to most intrinsic value approaches, but yea I've thought through that on a philosophical and implementation level and feel it's the best approach for me.

Yea know yourself is good.

Hi specuvestor,

Yes monthly observations do yield lower annual volatilities most of the time though it is not always the case.

For me the absolute volatility of the porftfolio is not of importance. As I am using it mainly to benchmark against various groups, as long as the measurement basis is consistent I am fine.

As for why it is monthly, the reason is mostly practicality in administration. I do not have a Bloomberg terminal or any live financial platforms that allow me to easily take measurements of the entire portfolio on a daily basis and doing it manually is just too much trouble and of little value.