Sunday, September 28, 2014

09/28/2014 When "Bear" is a redundant call


Style Model
Large Value
Sector Model
XLF
0.82%
Large Portfolio
Date
Return
Days
SHOO
4/28/2014
-5.55%
152
SR
6/2/2014
1.39%
117
CFI
6/9/2014
1.51%
110
RRD
7/21/2014
3.07%
68
ESI
8/4/2014
-69.67%
54
BSET
8/11/2014
-6.99%
47
STRA
8/18/2014
0.59%
40
PBI
8/25/2014
-5.62%
33
CLF
9/2/2014
-27.41%
25
AFL
9/15/2014
-2.16%
12
(Since 5/31/2011)
S&P
Annualized
12.37%
Sector Model
Annualized
25.13%
Large Portfolio
Annualized
19.72%

 

Rotation: selling SHOO; buying KFY.

KFY is positioned well for an improving job picture.  We have to keep in mind the fact that the “unemployment rate” and the “employment rate” have BOTH dropped during this so-called recovery.  The most important metric is the latter.

The KFY stock price is therefore artificially low under the illusion that a low unemployment rate bodes poorly for the company going forward.  But the unemployment rate actually reflects people giving up and dropping out of the workforce under a hopeless future.

That future cannot continue forever, and the low employment participation rate will have to mean revert – giving KFY a good boost when it does.

Value investing isn’t about knowing WHEN something will happen so much as knowing that it is overdue.  Employment could remain hopeless for years, of course – but it is overdue to recover now, and it’s time to put our toe in the water to test the tide.

 The Sector Model continues to outperform the Full Model:



All theories aside, stock selection is an unnerving business, especially with catastrophic declines like ESI.  From a simple quant formula like Greenblatt, ESI stands top of the list.  The worse it gets the better it looks.

But that’s not much consolation for the person who holds it while it keeps getting “better.”

From a financial health perspective, of course, ESI looks rather poor.  The company is having troubles.

The key question is how long until it recovers.

As for the market, XLF and Large Value are a good combination.  Talk of a bear market is premature (and in the case of ESI a tad redundant anyway…).

Tim

 

 

Sunday, September 21, 2014

09/21/2014 Clontz's Law of Timing


Style Model
Large Value
Sector Model
XLF
2.38%
Large Portfolio
Date
Return
Days
SHOO
4/28/2014
-3.52%
146
SR
6/2/2014
4.77%
111
CFI
6/9/2014
-2.18%
104
RRD
7/21/2014
5.76%
62
ESI
8/4/2014
-65.41%
48
BSET
8/11/2014
-2.02%
41
STRA
8/18/2014
2.07%
34
PBI
8/25/2014
-3.59%
27
CLF
9/2/2014
-7.10%
19
AFL
9/15/2014
-2.32%
6
(Since 5/31/2011)
S&P
Annualized
12.91%
Sector Model
Annualized
25.85%
Large Portfolio
Annualized
21.22%

 

No rotation.

The Full Model keeps getting pummeled, while the Sector Model ticks along rather quietly:



ESI has suffered a devastating series of declines.

This is when folks typically say, “I’m a long term investor.”  Normally those “long term” holds turn into even more catastrophic losses, but I’m not sure how much worse it could do.  A 100% loss isn’t all that far away at this point.

The WORST investment I had was International Paper during the early 2009 vortex.  I held it for about four months, was down more than 75% at one point, and then ended up selling it for a 15% profit.  But that’s not the kind of ride one ever wants to experience outside of an amusement park.

And this brings to mind the question of “risk” versus “volatility.”

In the most simplistic terms, Fama sees stocks that have higher volatility to be more risky, and even Haugen had to agree in his “Beast of Wall Street” study.  The difference between Fama and Haugen is that Fama sees “risk” and “reward” to be positively correlated, while Haugen does not.  That is, to Fama the more risk, the more reward.  Haugen broke that down by market capitalization and found that WITHIN the same market cap, the more risk, the less reward.  So, if you had a basket of large cap stocks, those with the highest beta would have the lowest returns.  The only reason higher beta stocks did better overall was because small caps tend to outperform large caps, and small caps also tend to have higher beta.

Haugen also noted that “risk” is only truly measured by Fama in terms of investor behavior.  That is, to a robot programmed to ignore beta, there is no risk involved because that robot will not be scared into selling at the wrong time.

A human, on the other hand, will almost always buy and sell at the wrong time.  A friend of mine calls this “Clontz’s Law of Timing” because I always tell him that any time he picks will be the worst possible time – just expect it and move on.

Clontz’s law was certainly true in the case of ESI.  It lost 45% on the day I bought it, and is down 65% now.

Fortunately, it is only one in a basket of stocks.  It’s annoying, but not the end of the world.

Tim

 

 

 

Sunday, September 14, 2014

09/14/2014 Aflack!


Style Model
Large Value
Sector Model
XLF
0.30%
Large Portfolio
Date
Return
Days
SHOO
4/28/2014
-3.20%
138
SR
6/2/2014
9.54%
103
CFI
6/9/2014
-1.01%
96
RRD
7/21/2014
8.02%
54
CHFC
7/28/2014
1.80%
47
ESI
8/4/2014
-44.51%
40
BSET
8/11/2014
-2.42%
33
STRA
8/18/2014
2.34%
26
PBI
8/25/2014
-0.67%
19
CLF
9/2/2014
-6.17%
11
(Since 5/31/2011)
S&P
Annualized
12.57%
Sector Model
Annualized
25.45%
Large Portfolio
Annualized
22.73%

 

Rotation: selling CHFC; buying AFL.

All I can hear is that stupid bird screeching “Aflack!”

In any case, the Sector Model keeps plugging away, hovering around the 30% mark for the year:



 

The full model took a huge hit from ESI, but it’s left me recalculating and recalculating again to decide the best course of action going forward.

The current struggles are in the concept of combining the sector and style models in stock selection.  Today, the choice of AFL fits the bill.  It is both a financial services company and a large value stock.  If it works, then the full model MAY have better performance going forward.  But I’ll remain skeptical until small caps function correctly.

Time will tell.

As for the broad market – large value turns out to have a better historical correlation than I originally suspected.  During Large Value selections the S&P has historically advanced at a 20% annualized rate.  That bodes well for a rally here.

Time will tell.

Yes – I just said that twice.  Ultimately time shows us whether our theories were correct or not.  Those who ignore those lessons will be more and more convinced they are “right” while their retirement accounts go nowhere.

Theories are places to start – not places to stop.

The current sector and style matrix calls for Large Value Financials: the money is in, well, money.

Large Value
Mid Value
Small Value
Large Blend
Small Growth
Mid Blend
Large Growth
Mid Growth
Small Blend
Finance
1
2
3
4
5
6
9
22
43
Industrial
7
10
12
14
20
23
33
51
68
Utilities
8
11
13
15
21
24
35
53
69
Energy
16
17
18
19
26
29
40
61
72
Staples
25
27
30
31
42
48
57
70
76
Cyclicals
28
32
34
36
49
50
63
71
77
Healthcare
37
39
44
46
55
60
65
74
79
Materials
38
41
45
47
56
62
66
75
80
Technology
52
54
58
59
64
67
73
78
81

 

Tim