Chroma Investing » Investing Links

A Few Lessons in Behavioral Finance

chroma — Tue, 23 Mar 2010 05:35:38 +0000

My Investing Notebook has a presentation called Confessions of a Value Investor: A Few Lessons in Behavioral Finance. I am ordinarily not a fan of looking at presentation, because it is easy to make incorrect conclusions without understanding the context or the point the author is trying to make. In this case, I think the presentation lays out some of the fundamentals of behavioral Finance, in a clear way. It is vital to understand where we can get in the way of our own investments. If you have no experience with behavioral finance this is a good introduction. Enjoy.

Reviewing Forecasters – The Guru Grade

chroma — Fri, 19 Mar 2010 04:18:34 +0000

After listening to the noise, er, Financial bobble heads, I have often thought, wouldn’t it be great if someone recorded what these idiots said and then held them to their predictions. Well it turns out their is a place that has at least partially granted my wish. It is called CXO Advisory Group (Yes, I know it is a very sexy name) and they have something they call the guru grade. To be honest I really wish they had this for economists, because my perception is that economists are more wrong (My Talebian influence coming through) than the gurus that are currently being measured, and just 14 out of 35 them have a 50% or better success rate. Obviously, I am not an economist. Feel free to bash the film business. I will probably agree with you.

CXO Advisory is not just Guru Grade. As described on their website they, “… present models, research summaries, analyses and reviews designed for objective, unique and concise value to serious individual investors and traders, financial advisors and fund managers – a modicum of actionable conclusions found in a very noisy environment. The default approach is to challenge any and all conventional market wisdom with analytical skepticism.”

They have research that suggests what works and doesn’t work, including technical analysis. This is an interesting value investing link, none the less.

Looking Outside to Get Inside

chroma — Thu, 18 Mar 2010 05:12:29 +0000

One of the things about the pursuit of knowledge, is that it is satisfying for its own sake. I have found that you can often find useful information, or perspectives in other disciplines. One of my new favorite blogs Psy-Fi is the kind of place that opens your mind to other perspectives, but then circles around in the behavioral Finance tradition. Or as their log line says, “a Sideways look at Psychology and Finance.” The latest post is just such an example where the author discusses a conflict within evolution and how that, loosely relates to finance. Does it get any cooler than that? The blog is very well written, thoughtful and insightful in ways that transcend the daily craziness that is often the investing world. If you have not checked the blog out, do yourself a favor and correct course.

Simoleon Sense interviews James Montier

chroma — Tue, 09 Mar 2010 01:33:06 +0000

My friend Miguel at Simoleon Sense has conducted another one of his terrific interviews. This time it is with James Montier, who is always someone worth listening to. I have written previously about Montier’s perspectives before. You can check out Montier bitch slaps EFH or Good Decisions, Bad Outcomes. He hails from the behavioral Finance camp, which it is safe to say, the right team to be on.

I think he gets investment risk better than any one. I will quote two passages, the first lays it out, “Modern risk management is a farce; it is pseudoscience of the worst kind. The idea that the risk of an investment, or indeed, a portfolio of investments can be reduced to a single number is utter madness. In essence, the problem with risk management is that is assumes that volatility equals risk. Nothing could be further from the truth.”

The second is where he talks about his trinty of risk which I would like to devote a whole post to in the near future, “…I don’t think of risk as a number, but rather as a permanent impairment of capital (as Ben Graham put it). Now that permanent impairment can be generated by three potential sources (which aren’t mutually exclusive). Firstly, there is valuation risk – you can simply overpay for an asset. Secondly, there is fundamental or business risk – something goes wrong with the underlying economics of the asset. Thirdly, financing risk or leverage (which no matter how hard you try can’t make a bad investment good, but can make a good investment bad).

I’m not sure that any of them is easier or trickier to monitor. I think you to consider all three aspects in order to gain a holistic view.”

Enjoy the first part of the interview.

An aid to Empirical Finance Research

chroma — Tue, 02 Mar 2010 04:37:14 +0000

I am a fan of empirical evidence that supports investing strategies. This sounds like an obvious statement, but many people don’t care, or at least that is how seems if you view their actions. I have previously highlighted evidence that could potentially enhance returns like Low price to book, and help protect against loss like the Altman Z score.

I have discovered a blog that sifts through Finance Studies to look for papers that can help with investing. The blog is called the Empirical Finance Research Blog. While it may sound dull, it is actually a terrific resource. The writer reviews financial papers and then evaluate them for practical investing on a scale of 1 to 10, 10 being the best. He also lays out his proposed investment strategy based on the research. One of the best aids I have found. I have one complaint. And it is selfish. The blog posts irregularly. His last post was from January.

New Beginning Investing Blog – The Fallible Investor

chroma — Tue, 23 Feb 2010 17:21:40 +0000

I came across a new investing blog that I think is terrific for beginning investors. It is the Fallible Investor. The writer is an Australian value investor who shares a lot of the same tastes as I do: Taleb, Montier, Klarman. I particularly like his concept of laying out scenarios for a business, good and bad and then describing the pros and cons of those scenarios. Even in a Net Net stock we need to look at the downside. Sure we may be protected by a margin of safety, but was is the likely scenario if everything goes south. IF liquidation is the likely outcome, have we really adequately calculated liquidation expenses and more importantly, would the liquidation be forced or as Klarman discusses “an orderly” liquidation. Each of these different scenarios effect the range of valuations. Also, what if our investment does better than expected? Having thought about the upside can help lead us to a better exit strategy.

The Fallible Investor recommends reading his posts from oldest first to get a sense of his investment philosophy. Enjoy!

F Wallstreet Returns – Investing Links

chroma — Mon, 08 Feb 2010 05:46:02 +0000

One of my favorite investing blogs was F Wallstreet, until Joe Ponzio stopped blogging because his hedge fund was taking up too much of his time. Joe has returned with an analysis of Breitburn, a natural gas and oil company that Ponzio thinks has been overly beaten up. Check it out and let me know what you think. He has a four page analysis that is interesting. I have no conviction about commodities, as they seem a speculator’s market to me. That is not a slight. I am just not very good at speculating about the future.

Free Value and NCAV Screeners

chroma — Fri, 08 Jan 2010 05:10:18 +0000

Now this is my kind of deal. Jae Jun over at Old School Value has really pulled all the stops for the new year. He has posted new value screeners that he offers for free. Yeah, that’s right for Free. I have already checked out the free Net Net screener which he calls Ben Graham Screener and sure enough, not only does he turn up some old faithfuls I have found on other screens but some new names as well. Because this is a free service generated from raw numbers there are certain inaccuracies. Some of the companies that pass the Net Net screener are not actually NCAV stocks. These companies can be quickly ruled out. What do you expect for free.

In addition to the Ben Graham Screener, Old School Value also has following screeners:

Cheap Magic Formula Stocks- He uses a market cap of $50M

Truly Cheap Stock which have have the following characteristics

P/B less than 0.5
P/S less than 0.5
P/Cash Flow less than 10
P/FCF less than 15

Profitable but Leveraged companies- He calls this a contrarian screen because no one likes the debt but the companies are generating Free Cash Flow.

Negative Enterprise Value- Or companies with lots of cash on their balance sheets.

Check out The screeners and let me know what you think, particularly if you find any exceptional companies, I will do a write up one.

Free Magic Formula Lists – Chroma Investment Links

chroma — Sun, 06 Dec 2009 18:14:42 +0000

I haven’t posted many links lately. I have been busy researching new investing ideas. But I wanted to turn you on to some interesting sites. Todays links are all related to Magic Formula Investing. Joel Greenblatt of Gotham Capital fame devised this system of essentially low P/E, High ROIC companies. He outlined the Magic Formula Investing Approach in his The Little Book That Beats the Market (Little Books. Big Profits)Little Book that Beats the Market. He has extensively back tested it. I have a great deal of respect for Joel Greenblatt but will profile Greenblatt on another post.

If you are interesting in Magic Formula Investing start with Greenblatt’s site: Magic Formula Investing. He posts a “column” there. If you sign up you can get a list of recent Magic Formula Investing stocks by selecting number of stocks and minimum market cap.

Magic Diligence is another site devoted to the Magic Formula Investing strategy. Magic Diligence proposes to review the Magic Formula List weekly and give tips on the best companies from the list to invest in. It has a pay service element.

The last link is essentially a list of Magic Formula stocks.The list is updated weekly and should be a good alternative for anyone interested in this system of investing. He uses different criteria for his screener, by introducing a liquidity requirement and a higher minimum Market cap amount ($100) You can find the site here. Note this site has not be updated for a couple of weeks as of this posting.

Greenblatt is an interesting, witty guy and a phenomenal investor. Although I do not subscribe to the Magic Formula Investing Strategy, in an effort to present new investors with various viewpoints, I have included these links. After all the idea is to find companies worth investigating. This may be the ticket for you.

Disclaimer: If you purchase the book through this blog. I will receive approximately $.50. I have not actually made any money this way, but I thought it better to disclose the fact, in case someone actually did buy a book at Amazon.