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Value Investing
Value investing is most likely first created by Benjamin Graham. No doubt, many value investing users including myself recognise how useful Graham's valuation methods and pointers are. We must recognise that Graham focuses on simple mathematics and statistics models to explain the price movement and company's performance logically and rationally. He has not emphasise the quality of assets the company has. Ever since 1970s, the Security and Exchange Commission sets a regulation requiring all public-listed companies to publish more detailed 10-Ks, which these details never happen during Graham's time. During Berkshire Hathaway's annual meeting this year, Warren Buffett, Graham's disciple, remarks that the universe of companies he will invest based on the valuation developed by Graham has disappeared. I believe it is the day when he closes his Buffett Partnership Limited (BPL). In his last annual letter to his partners, who invest in BPL, he states that it is not this valuation methodology that work so well for him becoming wrong. It sends a signal to him to stop doing until everything makes sense. It seems to me that he starts to develop new valuation method, where growth and value investing are joined at the hip. Up to now, many authors try to illustrate that valuation methods that Buffett is currently using in their own interpretation. I am not entirely convinced due to some shortcoming of that valuation methods.
So, I read three books written Martin J Whitman recently. I am somehow very convinced with his way to reform the valuation method developed by Graham. Whitman correctly points that Graham has not paid much attention how rigidly inflexible General Accepted Accounting Principles (GAAP) and these accounting standards adopted by each country's accounting governing body are. Within his first two books he has written, he stresses that in the role of analyst it is important to find out what the numbers mean rather than what the numbers are. My admiration of Whitman's thoughts and analytical methodologies tells me that I should start learning accounting at immediate and advanced level by understanding the financial reporting even though I have roughly strong foundation of accounting at introductory level. I am going to do it after reading two books.
Our Quests in the Real Investing World
I think it is difficult to control your emotions as you see the price per share on your internet browser. Therefore, there is strong need to have strong discipline for a investor than high IQ. It is best illustrated by this example from 'The Quants' book. I will summarise this example for the purpose of reading at comfortable pace.
At 6 August 2007, on afternoon, AQR, who is leading by Cliff Asness, smell something wrong. At this point, the stocks that AQR's model picks to buy and sell are moving in strange directions. This means huge losses to AQR. Everybody at AQR are extremely worried because this kind of situation does not make sense to them. Everybody is asking each other whether anyone know. The only absolute answer is that they do not know what is going on out there. Red numbers are all over their computer screen. These numbers are still sinking. At that time, Asness' greatest fear - there is nothing he can do- is here. Three of them suggested to Asness that this has the feel of a liquidation. Asness questions who the culprit behind this is. They speculate that it may be Global Alpha, Goldman Sachs' quant team, who has made popping 40% return in 2005 and is losing money in 2006 and first half of 2007. Another guy, Mendelson, concludes that Global Alpha is one of them who is capable of leaving such a big footprint. Asness tries his luck to make a call to his old colleagues at Global Alpha. Even with a few calls made by Asness, no one is picking up the call.What can we learn from this incident? Clearly, quantitative models ignore the business model the company operates on, how strong the company's fundamentals, how the company perform on such condition of the economy. As we can see that all quants at that time have no clue as to why everything goes wrong, which it shouldn't happen like that in the rational world. In reality, the world is still irrational, making things worse if you use a lot of leverage. We must always remember that leverage is double-edge sword: boosting gains if things goes right and even boosting losses if things goes wrong. It is all attributed to the margin requirements when anyone wants to leverage. For most value investors who do their own analysis correctly, they may not have made such huge losses like those quants at that time. So far, it seems that most quants do not know when to stop and only Edward Thorp seems to me that he is only one practical quant, knowing when to stop.
On the same day, a established quant, Boaz Weinstein, shrugs off upon receiving bad news from email at 10am. He thinks that it is temporary one, just a case of high volatility. It is just a matter of time that losses in the morning will turn into profits in the afternoon. But, nothing changes in 2pm. He begins to panic by visiting his office immediately, questioning his staffs about what is going on. His trusted employee, Benson says that the stocks that they are betting against are going up. He adds that there are sign of covering short action in the big scale across a lot of industries. He further says that there is a feeling that a big gorilla getting out of a lot of position fast. They came to one conclusion: There is doubt that it will last much longer and if this guy keep on unwinding his trades, they have to unwind their positions.
At PDT, the unusual behavior of stocks that PDT tracked had begun to slip sometime in mid-July and had gotten worse in the first days of August. The previous Friday, five of the biggest gainers on the Nasdaq were stocks that PDT had sold short, expecting them to decline, and five of the biggest losers were stocks PDT had bought, expecting them to rise. It was Bizarro World for quants. Up was down, down was up. The models were operating in reverse. The Truth wasn’t the Truth anymore. It was the anti-Truth.
The market moves PDT and other quant funds started to see early that week defied logic. The fine-tuned models, the bell curves and random walks, the calibrated correlations—all the math and science that had propelled the quants to the pinnacle of Wall Street—couldn’t capture what was happening. It was utter chaos driven by pure human fear, the kind that can’t be captured in a computer model or complex algorithm. The wild, fat-tailed moves discovered by Benoit Mandelbrot in the 1950s seemed to be happening on an hourly basis. Nothing like it had ever been seen before. This wasn’t supposed to happen!
The quants did their best to contain the damage, but they were like firefighters trying to douse a raging inferno with gasoline—the more they tried to fight the flames by selling, the worse the selling became. The downward-driving force of the deleveraging market seemed unstoppable.
Quant funds everywhere were scrambling to figure out what was going on. Clearly, every quants does not know when this will stop. Quant funds everywhere were getting crushed like bugs beneath a bulldozer.
Muller, who has returned from a short break to PDT office after realising that something is wrong, had been swapping ideas about what was happening with other managers, ringing up Asness and grilling him about what was going on at AQR, trying to find out if anyone knew what was happening at Goldman Sachs. Everyone had theories. No one knew the answer. They all worried that it would be fatal if the unwind lasted much longer.
As the losses piled up at AQR, Asness continued to put in frantic calls to Goldman Sachs Asset Management. But GSAM was in radio silence. At the height of the convulsions, Robert Jones, who ran Goldman’s quantitative equities team, emailed Asness with a terse three-word note: “It’s not me.” At PDT, Muller kept ringing up managers, trying to gauge who was selling and who wasn’t. But few were talking. In ways, Muller thought, it was like poker. No one knew who was holding what. Some might be bluffing, putting on a brave face while massively dumping positions. Some might be holding out, hoping to ride through the storm. And the decision facing Muller was the same one he confronted all the time at the poker table, but on a much larger order of magnitude: whether to throw in more chips and hope for the best or to fold his hand and walk away. Other managers were facing the same problem. “We were all freaking out,” recalled AQR cofounder John Liew. “Quant managers tend to be kind of secretive; they don’t reach out to each other. It was a little bit of a poker game. When you think about the universe of large quant managers, it’s not that big. We all know each other. We were calling each other and saying, ‘Are you selling?’ ‘Are you?’”
Books
Book Title: The Financial Numbers Game: Detecting Creative Accounting Practices
Author: Charles W. Mulford and Eugene E. Comiskey
Rating:7/10
Remark:
It is very interesting book, exposing you how public-listed firms tried to conceal not-so-pretty information away from the financial statements. Unfortunately, it require immediate accounting level, meaning that people who have taken financial reporting module in ACCA or undergraduate accounting course., to understand this book.
Book Title: The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It
Author: Scott Patterson
Rating: 7/10
Remark: Very interesting and entertaining book. It allows me to learn more about few well-known and successful quants. It is quite enough to illustrate that the quants can make very large profit in a decade and lose all in a day or a year if they give no considerations to black swan events.
Book Title: Distress Investing
Author: Martin J. Whitman and Fernando Diz
Rating:8/10
Remark: This book is very insightful for people who do not know much about distress investing. It is very basic book to learn the practical things about distress investing. It explains the clear distinction between practical distress situation and academic ones, which rarely happen in the real world. Slightly technical stuffs. With enough understanding of US bankruptcy law and bonds, one can understand every chapter of this book. This book deserves to be in your bookshelf.
Book Title: Active Value Investing: Making Money in Range-bound Markets
Author: Vitaliy Katsenelson
Rating: 7/10
Remark: The author attempts to define many terminologies that are not loosely defined by professionals. It is quite well-done definition together with insightful discussion.Unfortunately, it tends to be heavy on three areas, quality, valuation, and growth. His own quantitative-based valuation method seems to be maths heavy. I wonder how useful it is.
Book Title: Review of Buffett Beyond Value: Why Buffett Looks to Growth and Management When Investing
Author: Prem Jain
Rating: 6/10
Remark: I read this book because I want to know more about how growth and value investing styles can be joined at the hip. In the end, I find that this book is too simple but nevertheless interesting to read.
Book Title: Value Investing: A Balanced Approach
Author: Martin J Whitman
Rating:8/10
Remark: It is really good book that lets us to walk through about how and what market participants do in the stock market. Whitman points out the problems with GAAP, Financial Economics, and Graham and Dodd. He also bring some interesting real life cases to illustrate the facts as well as imaginary example to get idea how to get free lunch indirectly.
Movies and Dramas
Galileo (Japanese Drama 2007)
Synopsis:
A lady rookie detective, Kaoru Utsumi has no clue on how to solve the mysteries that seems to defy the logic. These mysteries are something we cannot believe for sure. Shunpei Kusanagi, a male detective, who is transferred from Utsumi's department to his new department, suggests her to consult associate professor, Manabu Yukawa about how to solve these mysteries. Sure enough, Yukawa solves them all with the use of mathematics and physics.
Rating: 10/10
Remark: I simply love the logic reasoning to explain how these mysteries come about.
Galileo Special (Japanese Movie 2008)
Synopsis:
This special movie is based on three years ago prior to that drama version. Kusanagi begins to consult Yukawa, who is his university badminton teammate, about the answer to explain the mystery. This mystery is about how the young man gets killed in a closed room that is subsequently burnt down.
Rating:7/10
Remark: Nice story but I think the stories from drama show are much more interesting.
Jejoongwon (Korean Drama 2010)
Synopsis:
Historically, Jejoongwoon is the first Korean modern hospital ever built. This drama focuses on the story how Hwang Jung change his job from butcher to doctor. At that time, butcher job is the lowest ranked position, which a lot of people despise them. The interesting part is how Korean intern doctors who are taught by western doctors save people. It is quite insightful how three western doctors, who do exist in the real life in the past, modernise Korea.
Rating:7/10
Remark: It is very interesting historical story.
Puzzle (Japanese Drama 2008)
Synopsis:
Misako Ayukawa takes a job of English teacher in a elite high school but her English skill is poor. In this drama, she grabs and commands her three male students to accompany her for the quest to get treasury, money, and etc. Before she gets them, she must solve the puzzle that tells her the route of getting them.
Rating:6/10
Remark: Average drama show.
Clash of the Titans (Hollywood Movie 2010)
Synopsis:
This movie is based on the story how Zeus' son, a mortal, Perseus embarks his journey to save beautiful princess, Andromeda from the titan, Kraken. To defeat Kraken, Perseus must find the way how to kill him.
Rating:7/10
Remark: Powerful sound and graphics effects when compared to 1981 version.
Clash of the Titans (Hollywood Movie 1981)
Synopsis:
This movie is based on the story how Zeus' son, a mortal, Perseus embarks his journey to save beautiful princess, Andromeda from the titan, Kraken. To defeat Kraken, Perseus must find the way how to kill him.
Rating:8/10
Remark: The flow of the story is better than 2010 one. I think it is quite remarkable to see quality acting in this vintage movie.
Joshi Deka (Japanese Drama 2007)
Synopsis:
Hatakeyama Kurumi, who is the best sharpshooter, as a rookie detective is to partner with veteran detective, Sakura Hanako, who has excellent arrest record. At first, they do not work as a team well. They tries hard enough to solve the cases.
Rating:7/10
Remark: Interesting twist. I think Nakama Yukie will be forever Yakumi in my eyes no matter she acts in other dramas.
Pandemic (Japanese Movie 2009)
Synopsis:
A patient, who has a cold, came to a hospital for a check-up. It appears to be normal cold based on the test and Tsuyoshi Matsuoka's diagnosis. He is asked to go home for a good rest and take regular medicine. Little wonder, it turns out to be deadly contagious illness that make a lot of people in Japan suffering in similar fashion. Deaths came to the people who do not survive. Doctors and medical researchers in Japan do not know what type of illness is and how to kill this virus that cause the illness.
Rating:9/10
Remark: Good story.
Fire Boys (Japanese Drama 2004)
Synopsis:
Asahina Daigo, who is saved by legendary fireman when he is young kid in the fire, gets his dream fulfilled. His dream is to be fireman just like this legendary fireman. As the story goes by, he discovers who the legendary fireman is and his natural gift of saving people.
Rating: 7/10
Remark: Decent firefighting drama.
Untouchable (Japanese Drama 2009)
Synopsis:
Narumi Ryoko loses her reporter job in the first rate magazine firm, National Journal. After that, she gets new job, reporter, in the third rate magazine firm, Shukan Untouchable. The latter firm tends to report juicy scandals. She is given the tasks to find out the interesting stories of popular icons. Along the way, she discovers the evil organisation that create darkness all over Japan. So, she wants to expose that organisation.
Rating:9/10
Remark: Very good twist. Interesting story.
Shinzanmono (Japanese Drama 2010)
Synopsis:
A male detective, Kaga Kyoichiro, is transferred to the new district, the Nihonbashi. Within this district, there is a murder, which is his first case in charge in new district. He slowly dissect each lie made by many people, who live in that district. He gets close to the identity of the murder.
Rating:10/10
Remark: Excellent story telling. Hiroshi Abe is top-notch actor, taking charge of the lead male character in this drama show.
Tokyo Dogs (Japanese Drama 2009)
Synopsis:
Takakura So, a young kid, witnessed his father's death, a criminal, who was almost caught by his father, shot him down. Fast forward, he grew up to be elite police, finding that murderer from USA to Japan. From the failure of the mission to capture that murderer, who is the leader of the best Japan's drug syndicate, in US, he was sent to Japan by his employee, NYPD to find that murderer. At Japan, he works with japanese police, who assigns him to team with Kudo Maruo. There is a character mismatch. Can they work together? Can he find that murderer?
Rating:8/10
Remark: Decent story. The catch in this drama is how So and Maruo deal each other.
The Cincinnati Kid (Hollywood Movie 1965)
Synopsis:
This movie tells a story how Cincinnati Kid wants to win the stud poker game over a legendary poker player, Lancey Howard.
Rating:9/10
Remark: Very interesting suspense over stud poker between Cincinnati Kid and Lancey Howard. This is the thing that caught my attention when I was reading a investment related book.
Tekken (Hollywood Movie 2010)
Synopsis:
Jin Kazama does not understand the world. His mother taught him how to fight but she does not want him to participate the competition called Tekken. When he witnesses his mother's death, he decides to participate Tekken in order to get closer to Heihachi Mishima, who he suspects as the prime culprit behind this murder. Over time, he discovers the truth and understands why his mother forbid him to participate Tekken.
Rating:5/10
Remark: A standard story.
Evangelion 2.0 You Can (Not) Advance (Japanese Animation 2009)
Synopsis:
This movie starts with how a new eva pilot, Asuka Langley Shikinami, kill off an angel when Shinji Ikari just comes back from his mother's grave. The main theme in this movie is that the angels are capable of 'eating' humans and offers greater powers that the humans cannot imagine of. In this stage, Shinji has to solve his own problem on how to save his teammates without killing them.
Rating:9/10
Remark: Excellent story. Very profound.
Tony Del Piero wrote and posted at at 6:50 pm
