I have been reading a rather remarkable book on value investing: Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioural Errors by Wesley R. Gray and Tobias E. Carlisle: Wiley Finance, December 2012. Quantitative Value
It is one of the "best of breed" in the line of investment writing. It is a pleasure to read a work of this quality. The prose is concise. Arguments are developed in a logical manner, supported by the judicious use of footnotes. I especially like the thoughtful tenor of the book and its approach to addressing many of the issues which I have faced in my investment voyage e.g. paralysis through over-analysis; checklists to assist with more disciplined decision-making; the efficacy of various metrics as indicators of future performance, etc.
The philosophical foundations of the book's approach are outlined here on Mr. Carlisle's website: Greenbackd
I would be remiss not to include the website authored by Mr. Gray. It is also substantial: Turnkey Analyst
I have subscribed to their blogs.
The authors advocate a mechanistic, bottom up value approach to overcome behavioural biases on the part of investors. Their thesis is powerful - to the point where I will change my approach in two ways:
- segmenting my portfolio to include a subset which takes the mechanistic Quantitative Value approach; and,
- changing my top down strategic approach by incorporating some of the value analytics in the winnowing out process once I have locked onto a strategic investment theme (e.g. rail safety).
Why?
In a recent analysis of my losing investments, I attributed losses to the following:
- inadequate research e.g. some managers had shady backgrounds; others were incompetent; others were more interested in looting than management
- investing in an "idea" as opposed to a solid business
- holding onto a position with the hope that things would get better - in the absence of a compelling fundamental rationale to do so (this was the biggest mistake)
To address these behaviours, I will take a more mechanistic approach and learn the method by investing real money over a period of at least three years. I find that the only way to learn an approach is by having real money on the line and I have confidence that the method advanced in the Quantitative Approach has substance to justify a change to the methodology for part of my portfolios. This marks a major change from my exclusive top-down approach.
I will also incorporate elements of the checklist which figures largely in the Quantitative Value book as part of my top down strategic approach. In a future entry, I may present a revision to the checklist which I outlined in an earlier edition of The Financial Passage Maker.
If anything, I have learned not to rush impetuously into making investment decisions. I learned that the "market" will always be there and not to sacrifice my reasoned judgement when tempted by a "siren" stock that beckons to my pocketbook.
Thoughts on the Direction of the Market
There is evidence that a rising tide lifts all boats ... but does this apply in today's market? Carlisle's blog has a fascinating piece by Vitaliy Katsenelson which, among other things, would suggest not to invest in broad market indices. Here is a synopsis of Katsenelson's thesis. I share his view.
The man's work is well worth reading. Among other things, he has penned The Little Book of Sideways Markets. It is on my reading list. When I first encountered Katsenelson, I was a bit sceptical about his thesis, but I have changed my view over the past year. As a result, I have pared down the portfolio somewhat and have increasingly favoured dividend-paying stocks. Although I have invested in a few smaller, riskier propositions recently, I have limited my stakes and have made an effort to buy companies with sound financials and good management.
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