The TSLA Market / Economy

[ParlaySlow]

@anon38180840

You have high confidence on the ability of an individual amateur investor to identify alpha (greater than market risk-adjusted returns) and successfully implement it over decades. It looks to me that you generally view firms where assets and earnings are being highly discounted (i.e. this microcap building supply house) as being comparable in risk as something like Home Depot. The logic being, if I can buy earnings at a 8-10% discount instead of a 5% discount at a comparable risk profile, then I have generated alpha.

Perhaps you’d acknowledge that the risk of the APT investment of HD is higher, but how do you go about determining whether you are being properly compensated, and how much work does it really take to maintain this analysis? To be clear, I do believe that APT has higher expected returns than HD (just not risk-adjusted).

If you don’t have a good way of quantifying this, you are opening yourself up to a lot of personal behavioral risk as you try to stick with this strategy over 30+ years. As mentioned, returns of individual stocks have positive skewness. Most stocks simply don’t do very well, and the overall returns of a diversified portfolio over some period of time can always be explained by outsized performance of a small number of stocks.

If this strategy of picking individual value stocks is a significant component of your overall portfolio, I’d suggest you evaluate just how detrimental it may be to your long term net worth if perhaps you are overestimating your skill and knowledge and/or ability to deal with your personal investing biases.

We both agree that these types of small-cap value (conservatively priced, good profitability history) have higher than average expected returns. Your explanation would be that it’s market inefficiency, mine would be different. I might suggest simply tilting your portfolio to something like: https://www.avantisinvestors.com/content/avantis/en/investments/avantis-u-s-small-cap-value-etf.html. Here you can own 600+ of these stocks with no work and drastically reduce your behavioral risk. AVDV is the int’l version of this fund with over 1200 stocks.

I see you write things like “this is that extremely rare 5% of the time that the market can be beaten”, when referring to general inevitably of the market correcting significantly over some known timeframe. That indicates that you think you can generate alpha not just in microcaps, but in the broader $50 trillion+ US market, and I’m certain you cannot.

[anon38180840]

@ParlaySlow

The logic being, if I can buy earnings at a 8-10% discount instead of a 5% discount at a comparable risk profile

I mean HD is trading at a P/E around 24, APT at <5.

@ParlaySlow

Perhaps you’d acknowledge that the risk of the APT investment of HD is higher, but how do you go about determining whether you are being properly compensated, and how much work does it really take to maintain this analysis? To be clear, I do believe that APT has higher expected returns than HD (just not risk-adjusted).

I don’t consider them that much more risky, given their strong balance sheet and earnings history. HD is trading at 360x Book Value, and their Tangible Book is negative. APT is trading below tangible book.

In fact, a common thing I find when I go hunting for these stocks from time to time is companies that are undervalued because the market views them as too conservative. They aren’t going to grow as fast so they trade at a lower multiple, especially in a market where everyone seems rabid about growth. Then they just kind of sit there, overlooked, and dip over time until the valuation gets low enough to pop up on the radar of people hunting for deep value like me.

@ParlaySlow

If this strategy of picking individual value stocks is a significant component of your overall portfolio

It is now, the plan isn’t necessarily to keep it that way forever, or even for long.

@ParlaySlow

I might suggest simply tilting your portfolio to something like: AVUV - Avantis® U.S. Small Cap Value ETF | Avantis Investors . Here you can own 600+ of these stocks with no work and drastically reduce your behavioral risk. AVDV is the int’l version of this fund with over 1200 stocks.

I’ll check these out, but it seems like in order to get that many stocks in there you’d have to expand the boundaries on the criteria significantly. IIRC Graham suggested 30 stocks if possible. Currently I’ve got nine of them. I’d rather be more diversified, but there aren’t a ton out there that meet the criteria. I’ve passed on a few for major flaws.

I very much prefer the risks associated with this strategy in the current environment to the risks of being broadly invested right now.

@ParlaySlow

I’d suggest you evaluate just how detrimental it may be to your long term net worth if perhaps you are overestimating your skill and knowledge and/or ability to deal with your personal investing biases.

I’ve thought about this quite a bit, the key to me is that I’m not going to continue this strategy if I fail at it, and I’m young enough (I’m 35, my girlfriend who I plan on marrying is 24) with enough earning potential to overcome a major setback in my current portfolio. Like I expect to make at least $100K most years, I live off around $50-60K a year. So I can put $22K into a SEP-IRA and $6K into a Roth… So even in an imaginary scenario where I lose 100% of my current retirement accounts, but the global economy is somehow still functioning fine and everyone else did not get wiped out, so I switch to straight index investing and returns going forward are 8%, I end up with over $3M by the time I’m 65, and a million in my early 50s.

They say you can’t beat the sports books, but some people can. I tried in college when I realized I was good at poker and math and knew sports. I set aside around $100 and made a bunch of $1-5 bets, and figured out that I could not beat the books.

They say you can’t win more than 10 bb/hr at the poker table, some people say you can’t win more than 6-8bb/hr. I win 15-20 bb/hr, because I didn’t listen to those people and kept working on my game even after I hit the theoretical maximum earning power.

The key to me is that if this goes like the sports betting, I’m not going to keep doing it for long.

[ParlaySlow]

@anon38180840

I’ve thought about this quite a bit, the key to me is that I’m not going to continue this strategy if I fail at it, and I’m young enough (I’m 35, my girlfriend who I plan on marrying is 24) with enough earning potential to overcome a major setback in my current portfolio. Like I expect to make at least $100K most years, I live off around $50-60K a year. So I can put $22K into a SEP-IRA and $6K into a Roth… So even in an imaginary scenario where I lose 100% of my current retirement accounts, but the global economy is somehow still functioning fine and everyone else did not get wiped out, so I switch to straight index investing and returns going forward are 8%, I end up with over $3M by the time I’m 65, and a million in my early 50s.

Nothing on the magnitude of losing 100% of your retirement accounts. Let’s set aside valuation completely. Each individual stock has positive skew in its return distribution.

When you only own ~10 stocks, your median return is likely to be below average because of this skewness. You can easily have a portfolio that underperforms the market by several points over decades. This is an uncompensated risk borne entirely from the lack of diversification.

This risk might be bearable if typical returns won’t allow you to meet your financial goals, or if you have a very long time horizon and strong discipline to stick with your strategy. This isn’t consistent with just seeing how it goes for a few years.

[anon3530961]

You should also consider the time value of money required to research all of this stuff vs just buying index funds. It could be fun for you to do it though in which case if its an enjoyable hobby then it may be worth the time even if you don’t get favorable results. It all seems quite stressful to me, spending the time to find those positions and then also determing entry and exit points for all of them. I’m comfy just clicking buy on VTSAX or SPY or w/e every time I have a decent amnt of powder

[DrChesspain]

@anon3530961

I’m comfy just clicking buy on VTSAX or SPY or w/e every time I have a decent amnt of powder

In many ways, it’s as simple as Noah Wiley finding the chow line at GITMO.

[kre8tive]

Around 1,000 Dutch locals have vowed to throw rotten eggs at Jeff Bezos'...

Will this effect AMZN?

Actually, had no idea where to post this.

After finding out their local landmark that’s over a century old will be torn down to accommodate the whims of Bezos, some locals have decided to take things into their own hands.

[Riverman]

Bo Burnham: Inside - Jeff Bezos

[iron81]

The bizarre thing is the bridge isn’t even used. It’s a rail bridge with the tracks leading to it ripped out. And they’re going to put it back together.

[suzzer99]

Cruise stonks mooning today. Looks like covid is over again.

[Melkerson]

@anon3530961

You should also consider the time value of money required to research all of this stuff vs just buying index funds. It could be fun for you to do it though in which case if its an enjoyable hobby then it may be worth the time even if you don’t get favorable results.

I hear this argument a lot and it sounds like you are aware that a lot of people enjoy it. What I’m curious about is if you have ever met anyone who does this who doesn’t enjoy it somewhat. Anyone who hates it just indexes or does something else anyway.

[Riverman]

I love CW but the idea you can sort by PE or whatever and beat the market is just straight up ridiculous. There are lots of really really really smart people doing this around the clock and they almost all, maybe all all in the long run, underperform VSTAX.

[Formula72]

P/E ratios are meaningless. It doesn’t factor debt nor gives any useful info for calculating growth. Amature investors in the last 20 years would have done far better if the cliche argument that a high P/E ratio was better to invest in than a lower one.

[Formula72]

They don’t want to “beat” the market, they just want to gamble and hit it big.

If a casino offered all their customers the opportunity to play a game that involved wagering a bet that would gaurentee a return of 8% after a year with the caveat that they couldn’t gamble in any other casino game during that period, few would be interested.

[Melkerson]

@Riverman

I love CW but the idea you can sort by PE or whatever and beat the market is just straight up ridiculous. There are lots of really really really smart people doing this around the clock and they almost all, maybe all all in the long run, underperform VSTAX.

Obviously, you’re right. It’s basically screaming for the TobiasFunkeMaybeItCouldWorkForUs meme that I’m to lazy to put up.

Having said that, some things you just need to experience first hand. So, I get what motivates Cuse. Is there anyone here that never went through that phase even a little?

[spidercrab]

@Formula72

P/E ratios are meaningless

In this case (APT), the P/E ratio of 4.5 or whatever or worse than meaningless because it’s based on the most recent 4 quarters, which ended 9/30/2021 and include the quarter ending 12/31/2020. When they file their year end results in the next week or two, the 4th quarter of 2020 will roll out of the trailing 12 months income and be replaced by the 4th quarter of 2021. Because the 4th quarter of 2020 was abnormally high, the P/E ratio is going to roughly double overnight.

[anon38180840]

@anon3530961

You should also consider the time value of money required to research all of this stuff vs just buying index funds. It could be fun for you to do it though in which case if its an enjoyable hobby then it may be worth the time even if you don’t get favorable results.

Yeah it’s very debatable on the time value side, but I do enjoy it. There’s no way it’s worth the time now, but if you compound it over years, the extra earnings could be worth while.

@anon3530961

then it may be worth the time even if you don’t get favorable results.

Yeah, it ceases to be fun if I’m not getting favorable results.

@Riverman

I love CW but the idea you can sort by PE or whatever and beat the market is just straight up ridiculous.

I have four screens on my brokerage site based on different measurements of price to earnings, debt, and profit. I take the results and plug them into a spreadsheet with 15-20 data points that funnel into 10 criteria that Ben Graham used. 7 or more is a buy, 6 I’ll consider if a 7th is close. I also weigh that in Graham’s system was built in a time where dividends were way more common than buybacks, so if a company doesn’t meet his dividend yield criteria but does buybacks, I’ll weight that in too.

The ones that pass that test, I research their filings, a couple years worth of news, analyst coverage, and random analysis from blogs or contributor sites.

This helps me eliminate the ones that are obviously highly risky or that I think are actually not worth the stock price.

It’s not just based on P/E or one or two factors. It’s basically Graham’s system with a couple tweaks to attempt to modernize it. Just before his passing he had back tested it against years of data and it worked, and it worked for plenty of others who followed his teachings.

@Surf

I sort of feel like the financial numbers aspect of companies is probably the thing that is most efficiently baked into stonk prices right? Like honestly I feel like a random subjective insight would be more likely to yield an edge that amateur number crunching?

A big key is that most of the companies I find are small caps that may be too small for hedges to mess with. So it’s kind of like playing live 2/5 in Texas instead on online 25/50 on a Rest of World site.

@Formula72

P/E ratios are meaningless.

P/E is one of 10 factors, it’s just one of the easiest to screen for initially. I can auto screen for a few of my factors but not all, so that’s one that I guess gets overweighted as a result.

@Formula72

It doesn’t factor debt

I’m not in front of my spreadsheet but there are either 3 or 4 factors that deal with debt.

@Formula72

nor gives any useful info for calculating growth.

Two are earnings based, one measuring results over 10 years and one measuring consistency.

@Melkerson

Having said that, some things you just need to experience first hand.

I mean there are 100% people who can beat the market, just not many of them. Some of them say Graham and Dodd are the GOAT authors for amateurs and their methods are basically the GOAT value investing methods and have stood the test of time. They also suggest that the little guy actually has an advantage in terms of available ROI because there’s less competition in finding the small market cap value.

So it’s possible.

@Melkerson

So, I get what motivates Cuse.

Right I mean if I listened to everyone who said certain things are mathematically impossible, you could cut my poker winrate in half and I wouldn’t have any of this money to invest. I also have done a good job in the past of figuring out when I’m giving up edge and quitting.

I have to be logical in analyzing my results and do my best to try to evaluate my process and edge on top of my results, and be realistic about my weak points.

@spidercrab

In this case (APT), the P/E ratio of 4.5 or whatever or worse than meaningless because it’s based on the most recent 4 quarters, which ended 9/30/2021 and include the quarter ending 12/31/2020. When they file their year end results in the next week or two, the 4th quarter of 2020 will roll out of the trailing 12 months income and be replaced by the 4th quarter of 2021. Because the 4th quarter of 2020 was abnormally high, the P/E ratio is going to roughly double overnight.

Right, I’m anticipating their annual EPS to end up between 0.20 and 0.25. But the low P/E made it through my screens, and got me looking and they meet plenty of other criteria as well. The key here is those earnings dropping off made their value sheet really strong. The earnings should be as good or better than they were pre-pandemic, and the price is similar. But they’ve made an extra $1.80 to $2.00 a share that’s now cash/short term investments on hand, and they plan to begin buybacks.

Their earnings history through 2019 looks strong, and anyone judging their current drop in earnings as evidence of further future decline is ignoring that they benefitted from a black swan event giving them a windfall.

So I’m looking at it as a stock that should be trading at least 40% higher, maybe more, based on the balance sheet. There is also potential for earnings growth based on new housing starts, but that’s just an added bonus that could come in while I’m waiting for the buybacks.

[wheatrich]

He’s just using P/E as a filter guys. Obviously there’s low P/E’s that are that way b/c it’s trash.

People saying such and such will never beat the market when all you had to do to crush everything last year was short everything that exploded over the summer because people were home instead of outdoors that quarter b/c everyone was a goddamn idiot thinking those various product orders were sustainable.

Even FB recently had zero news and it went down 20%, if people just now figured out FB sucks and users are down slightly and they were lighting a ton of $ in the metaverse, where the hell have you been.

Still think FB is only a buy if you think the metaverse stuff pans out or it just keeps going down. I thought tiktok was where the kids go these days and FB does not own that.

[bobman0330]

@wheatrich

People saying such and such will never beat the market when all you had to do to crush everything last year was short everything that exploded over the summer because people were home instead of outdoors that quarter b/c everyone was a goddamn idiot thinking those various product orders were sustainable.

The problem with this strategy is you end up shorting Tesla in summer 2020 and you’re currently sitting on a >100% loss.

[ParlaySlow]

So all anyone had to do to beat the market was short a bunch of stuff before it went down? Good point.

[Riverman]

Wheatrich,

If you are confident you can beat the market please post your trades in advance.