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

 

 

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

 

 

 

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