Novel Investor

The rise in popularity of new financial products often coincides with the rising popularity of stocks. And if one takes off, you’re bound to get more.

One of the first examples of this in the U.S. was investment trusts in the 1920s. Investment trusts are a type of fund that got their start in the U.K. in the 1860s.

The first trust of any significance was created in the U.S. in 1924. One of the main selling points was the benefit of professional management. It was not an immediate hit. By 1927, only $175 million were in investment trusts. That would all change within a year. The number jumped to $790 million in 1928. Then it hit $2.25 billion in 1929 and represented 22% of all stock issues.

But the love affair investors had with investment trusts was short-lived. Like many investment fads, there are always a few bad apples that spoil the bunch.

Of all the investment trusts, one stands out as the most egregious. Goldman Sachs Trading Corp. (GSTC) launched in 1928. Within a year, its stock was up 70%, trading at a premium to its asset value.

GSTC was so successful that the directors behind GSTC — Walter Sachs, Sidney Weinberg, and Waddill Catchings — looked to replicate it. They announced two new trusts in 1929 — Shenandoah Corp. and Blue Ridge Corp. Though, the setup was unique. Continue Reading…

Early value metrics were dependent on information that was easy to find. Price/Earnings and Price/Book came out of that era. Both did a decent job of capturing value’s outperformance.

But as financial statements became more widely available, it spawned other value metrics that performed even better. Cash flow-based value metrics are a good example of this.

The cash flow metrics tested below are built using market cap (enterprise value metrics will be next). All tests were run on the following assumptions:

• No OTC stocks or ADRs.
• No stocks trading below $1/share.
• No low-volume stocks.
• Market cap greater than $50 million.
• Deciles are equal-weighted, as is the Universe.
• Benchmarked against the Russel 3000 total return index (It’s a cap-weighted benchmark. The universe of qualifying stocks is included for a better comparison).
• Stocks are bought on January 1st of each year, held for one year, then sold. Rolling backtests are done at four-week intervals with a similar one-year holding period.
• Assume all metrics are based on trailing twelve months (TTM) unless indicated.
• Data are from 2000 to 2020, sourced from Portfolio123.

For the metrics below, higher is cheaper and lower is more expensive. Each one follows a similar pattern where the cheapest decile outperforms the most expensive by a wide margin. The cheapest decile also outperforms the universe and the benchmark. Though, some do a better job of it than others. Continue Reading…

Markets have a way of luring investors into doing things they shouldn’t. Be it innovative new products or promises of high returns, there’s always something to tempt an investor’s resolve. And it ends up being costly. As with many things in life, avoiding certain things often lead to the greatest results.

I was reminded of this while browsing Another Investor’s Anthology. Part of its collection is a chapter from an outdated book by Claude Rosenberg, Jr. It’s a list of investing rules that are more likely to cost you money than make it in the long run. So investing don’ts. His list pertains to stocks specifically but is true for most investments.

Here’s the thing. None of the rules are new. They’ve been repeated so many times that they should sound obvious. Which is the point.

Common investing mistakes are common because it’s so easy to fall back into the trap of making them. Sometimes we forget how it turned out the last time. Sometimes it’s a momentary lapse of judgment. Whatever the reason, hindsight reveals what we likely already knew — we never should have done it in the first place.

But that’s life. Mistakes will be made. The goal is to limit the damage. Timely reminders of the more obvious ones may save us from ourselves someday. Continue Reading…

Ben Graham once alluded to the idea that the market cycle might as well be called the human-nature cycle… Because the rise and fall of speculative behavior follow the same path.

Graham, of course, meant it as a warning.

He saw speculation as an attempt to profit purely off of moves in market prices. Nothing else matters. Not valuation, earnings, cash flows, or what management is doing to improve the business. Just price.

In other words, if you’re buying a stock with the hope of flipping it to someone else at a higher price, then you’re speculating.

The keyword being hope. When you buy a stock for no reason other than the price is going up, you’re gonna need it. You might as well be gambling. Continue Reading…