Saturday, 25 July 2015

Weekend reading

One from the archives: James Montier's 2006 paper titled the "Little Note that Beats the Market"
"In general we find that the EBIT/EV value strategy is very powerful. For instance in the UK, it 
outperforms the equally weighted market by nearly 13% p.a. over our sample! Performing even better than the Little Book strategy! A pure value strategy based on this modified earnings yield seems to perform particularly strongly in the US and UK.

However, pure value strategies may have added career risk for professional investors. We show that a pure value strategy suffered far worse during the bubble years, than the Little Book strategy. So a fund manager following the Little Book strategy was unlikely to have been fired whilst a pure value fund manager would have found their life very uncomfortable."

Peter Lynch's investment principles (originally on Value Walk)
Peter's Principle #7: The extravagance of any corporate office is directly proportional to management's reluctance to reward shareholders

Peter's Principle #17: All else being equal, invest in the company with the fewest colour photographs in the annual report

Buffett’s Error of Omission in Disney — Magic Innovators in Asia? (BeyondProxy)

Great collection of Japan related articles and analysis from Undervaluedjapan

BreakingviewsNikkei and Dealbook on the recent purchase of the Financial Times

A very well written primer on John Malone and his empire (Jnvestor)

Morgan Downey, the author of Oil 101, interviewed on the Investors Podcast
The interview is pretty good but the book is highly recommended for its straightforward description of the oil industry.

Warren Buffett, and Bill and Melinda Gates on Charlie Rose

Dr. Henry Kissinger fireside chat with Eric Schmidt (Google Talks)
They talk a bit about his most recent book World Order, as well as other recent political developments. My favourite book from him is Diplomacy, which does a wonderful job of describing the history of international relations (and the good news is that it is also somewhat shorter than the Lord of the Rings trilogy). Would also recommend his book on China titled very fittingly On China. The Economist TV ads at the beginning of the video are priceless (as is the whole interview)

Howard Marks interviewed by Barry Ritholtz (Ritholtz)

Billion-Dollar Bloodlines: America’s Richest Families 2015 (Early to Rise)

History of the NBA in Africa (NBA)

Europe's Demographic Tides (Cook and Bynum)
A new map created by Germany’s BBSR shows in greater detail than has been previously available the population shifts impacting Europe. The BBSR collected data between 2001 and 2011. While that might sound slightly outdated, these are actually the most up-to-date figures Europe has to offer, as 2011 is the most recent year for which comprehensive population data is available for the whole of Europe. According to its makers, the map provides a level of detail previously unavailable, as it is the first ever to collect data published by all of Europe’s municipalities. The results are impressively comprehensive and reveal a few surprises

Sunday, 19 July 2015

Weekend reading

Bloomberg special report on Asian hedge funds (Bloomberg)

Greenlight Capital's Q2 2015 letter (Value Walk)

Claire Barnes' Q2 2015 letter (Apollo Asia)

Platinum Asset Management (Australian-listed value investing firm) Q2 2015 letters to investors (Platinum)

Continuing series from the Observer - excerpts from the book Great Minds of Investing:
Mario GabelliBill AckmanJoel Greenblatt and 10 Warren Buffett quotes

Pat Dorsey Follows Buffett’s Lessons to Pick Stocks (Barron's)

Samsung: The activist vs the ‘owners’ (FT). Highlights of EM corporate governance...
One more related to the subject from Breakingviews

On corporate governance in Asia, here is a telling tale from Japan (Undervaluedjapan)

Infamous Japanese Activist Returns in Father-Daughter Team (Bloomberg)

Iran: The oil and gas multibillion-dollar ‘candy store’ (FT)

Oldie but goodie, in the context of what's going on in Europe - A Primer on the Euro Breakup: Default, Exit and Devaluation as the Optimal Solution from Jonathan Tepper (Policy Exchange)

“Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else.” - President Lyndon B. Johnson

It was with President Johnson’s salty humor in mind that the author decided to write this paper in plain English for the layperson in order to reach as wide an audience as possible. The paper is, however, based on a wide review of economic and legal academic and professional literature.

What Drug Dealers Can Learn From Walgreens, with Stephen J. Dubner (Big Think)

Two recent podcasts from the LSE: decoding glamour and on finding nature's deep design

Alvin Roth on Matching Markets (EconTalk)

Jim Kwik: Brain Coach and Superhero (interview with James Altucher)

The math behind basketball's wildest moves (TED)

For something lighter. BBC documentary on Richard Branson's Necker island in the Caribbean (YouTube)

Summer Reading Book Review: One Summer - America 1927 (Minority Report)

Great quote from Stan Druckenmiller - The Secret to Good Returns (csinvesting)

"The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered. I'm here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they're teaching at business school today is probably the most misguided concept everywhere. And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that's kind of the way my philosophy evolved, which was if you see - only maybe one or two times a year do you see something that really, really excites you. And if you look at what excites you and then you look down the road, your record on those particular transactions is far superior to everything else, but the mistake I'd say 98 percent of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully."

Sunday, 12 July 2015

Weekend reading

On the recent events in the Chinese market:
Story of China Still Intact Despite Market Downturn (Mobius)
Uncertainty persists despite China's stock bounce (Asian Review)
Market turbulence in China tests Xi’s reform agenda (FT)
Kerr Neilson's, portfolio manager of the Platinum International Fund, take on the Chinese stock market (Barron's)

Activist investors love spin-offs. Here’s why you should, too (Fortune)

Male Investors vs. Female Investors (WSJ)

The Rise of Asia’s Wide-Moat Machine Innovators (Beyond Proxy)

Meet Leon Cooperman, CEO & Founder Of Omega Advisors (Value Walk)

Our heretical (and not-so-simple) views on the Greek referendum (Alcimos; originally found on Vienna Capitalist)

Billionaire Rales brothers ready for a new act in split of Danaher (Washington Post)

The Inside Story of How the iPhone Crippled BlackBerry (WSJ)

A Dozen Things I’ve Learned from Ben Horowitz about Management, Investing and Business (25iq)

On Philanthropy: A Conversation with Oscar Tang, Ronnie Chan and Steve Schwarzman (Value Walk)

Graphics of languages spoken across the world (SCMP)

George Mumford, who was the psychology and mindfulness coach to Phil Jackson's teams in the NBA, recently published a great book called the Mindful Athlete, which I highly recommend. Chapter 1 of the book is excerpted on his website

Recent podcasts I've listened to:
Michael Singer (author of Untethered Soul and Surrender Experiment) on James Altucher
Mimi Ikonn interviewed by Brian Rose (London Real)
Sam Harris on Tim Ferriss' podcast

Sunday, 5 July 2015

Weekend reading

Barry Ritholtz interviews Richard Thaler and Leon Cooperman

Tom Gayner: The evolution of a value investor (Talks at Google)

A dozen things I've learned from Leon Cooperman about investing (25iq)

Interview with Peter Cundill protege Tim McElvaine on Japan (Manual of Ideas)

Todd Sullivan on creating shareholder value through buybacks (Manual of Ideas)

Growth Matters (Mobius)

How Fanuc quietly took over the world (Nikkei Asian Review)

A prisoner ID in one hand - and a CFO award in the other (FT)

Former Enron chief financial officer Andrew Fastow says that following accounting rules to the letter contributed to the infamous collapse of the US energy trader and landed him in jail.

Life after default: Malaysia's tips for Greece (Breakingviews)

As he prepares for a referendum that could determine Greece's future in the euro zone Prime Minister Alexis Tsipras could seek some inspiration from Mahathir Mohamad, Malaysia's leader during the 1998 financial crisis. Breakingviews imagines a conversation between the two.

Ad man Rory Sutherland, vice chairman of Ogilvy, interviewed by Brian Rose (London Real). Also linking a few of his earlier TED talks, which are a joy to watch (here, here and here)

Your questions about sleep, answered (RAND blog)

How Shake Shack leads the better burger revolution (Fast Company)

Interview with Tim du Toit

A new series I plan to do more of is to post interviews and conversations with fellow investors about value investing, approaches, stocks etc. In this inaugural post I’ve the pleasure to host Tim du Toit, a Hamburg based value investor, whom I’ve known for a long time. He has been publishing a newsletter for many years and not too long ago he launched two quantitative value investing research tools – quant-investing and quant-value. Below is a short interview with Tim about his journey as a value investor and also some thoughts about the research tool.

I’ve been tinkering with the screener over the last few weeks and found it to be quite straightforward to use. In terms of coverage it extends to all major global markets in Europe, North America and Asia Pacific and over 22,000 stocks spanning all sectors. You can work with four different factors covering various elements of (i) valuation (e.g. multiples, various yields), (ii) quality (e.g. margins, returns), (iii) momentum, (iv) volatility and finally (v) growth (e.g. free cash flow or dividend).

Below is a sample screen I’ve selected for companies (i) trade in the US, (ii) market cap over $100m, and (iii) FCF yield up to 20%. Once you’ve done that you’ll get a list of companies, which you can tweak and sort as you like by many of the factors listed above. You can also set up your own templates to make your life easier. For geeks like me you also have the option to export it to Excel where you can live out some of your wildest fantasies with the list of companies.

In addition to the screener the website also has a list of quant strategies that Tim backtested and wrote about in a research paper (here and here). These strategies will consist of different valuation metrics coupled with other quality or momentum factors. The screener will allow you to search for stocks given a certain strategy’s criteria and build a portfolio of them over time. As noted above quant strategies can help your research and investment process but key is sticking to them over time even when they might not make sense.

Overall, I find the screener to be a very useful addition to my research process as it covers all the key elements in terms of valuation and other fundamental metrics that I use. The dataset is wide enough to have a great sample of global stocks to work with. While it won’t have the robustness of a Bloomberg terminal for instance you are also not paying $20k+ for the pleasure of financial data but you get many of the core features in the screener.

And now for the interview.


Tim, you are well known in the value investing community but for those who might be unfamiliar with your work could you tell us a bit about your background and how you came to value investing?

In 1986, shortly after finishing school, I enrolled in a stock market correspondence course. A year or so later I pooled my limited funds with an amount from my father and started to invest in the real world.

Made every investment mistake

I then went on to make nearly every investment mistake you can think of (technical analysis, broker recommendations etc) until I read a unknown 84 page book called “Winning on the JSE” by Karl Posel an engineer and former professor of applied mathematics.

This book was my introduction to value investing. It broke investing down into a logical process. The book also made me realise that investing was not a recent human activity and that there must be some good research and books about what has worked, not in the short term but over long periods of time in up and down markets.

So from about 1998 this is what I have done, studied the results of every possible book, research paper and investment study I could lay my hands on that showed superior long term performance – and I still do.

This of course led me to Graham, Buffett, Dreman, O'Shaughnessy, Greenblatt, Pabrai, Lynch, Piotroski, Antonacci etc.

All this research led me to develop my own unique investment approach that is value investing based.

I’ve known you for a few years and in that period you’ve gone from stock picking to a more quant based investing approach. What moved you to do it? What were some of the key lessons learnt along the way?

As I mentioned all the study and research I did made me a classic value investor.

Why I changed from pure value investing

This however changed when I read the outstanding book by Joel Greenblatt called The Little book that beats the market, where he introduced me to the Magic Formula. After finishing the book I started doing a lot more reading and research into quantitative investing and how it can be combined with value investing.

What works on European markets?

As part of my research a friend and I in 2012 set out to find the investment strategy that would have given you the best returns in the European markets over the 12 year period from June 1999 to June 2011.

As you know 1999 to 2011 was a horrible time to be an investor (not just in Europe) as it included both the bursting of the Internet bubble (2000) the financial crisis (2007 and 2008) as well as the European sovereign debt crisis (2010 to 2013). We called the study Quantitative Value Investing in Europe: What Works for Achieving Alpha.

Astounding returns +1157%

What we found astounded me, with the best performing strategy returning 1157% over the 12-year period.

In fact the top 10 strategies we found generated an average return of 881%, a return I’m sure you will also be proud of.

Valuation not the most important

The thing about the study that will surprise you (it surprised me) is that valuation was not the most important factor in any the best performing strategies.

Valuation was important but is not the first thing you should look at.

What was more important was to first look for companies with strong share price momentum and select the most undervalued companies from this list.

You may be asking if the research study changed me from classical value investor to a completely quantitative value investor.

A bit of both

The answer is I became a bit of both.

I still enjoy analysing companies and have of course remained a value investor but I make sure all of the ideas I analyse come from one of the best investment strategies in the research study as well as from continued research.

But I’ve also become a quantitative investor investing part of my portfolio in ideas that are quantitatively generated.

In terms of your investment process, how do you go about selecting ideas for your portfolio? Any bias towards certain geographies, industries, company size? What are your thoughts on portfolio composition, size limits, risk management etc?

I use the Quant Investing screener to generate ideas.

I may still look at an idea from a friend or fund manager I respect but that does not happen very often.

I am completely indifferent in terms of company size, location or industry. That said I prefer companies where there is enough volume traded daily for me to get in and out easily and I do not like to invest more than 20% of my portfolio in any one industry.


I size positions so that they make up a maximum of 4% of my portfolio when I buy. I keep the position as long as the company remains an attractive investment. When it becomes overvalued or is not on my screens after a year I sell.

If I invest quantitatively (buy a basket of companies with a high EBIT/EV for example) I do not put more than 2% of my portfolio in any one investment. This is because I have not done as much research on the companies.

A stop-loss limit?

Since 1987, when I started investing, I have been an on and off supporter of stop loss limits. This changed earlier this year when I sat down and researched all the research papers about stop-loss strategies I could find.

The conclusion of the research is, especially if you use momentum to get investment ideas, that a stop loss strategy adds a lot of value. With a trailing stop loss level of 15% to 20% giving the best results.

Because limiting losses helps you a lot with the psychological problems we face as investors, mainly the pain of losses, I recommend that you seriously consider implementing a stop loss system for your portfolio.

There are numerous studies on the outperformance of quant based value approaches, however key here is the limited interference of human actions in the process. How closely do you adhere to the recommendations of the tool to build a portfolio? Do you ever find yourself saying "there is no way this stock is going into the portfolio”?

That is a good question and something that is very hard to do.

If you get a list of company names from the screener and you do even the slightest amount of research, even if you just read the company names, it will lead to you changing in the investment process.

So you must either do no research at all or lay down strict rules about what exactly you want to research before you invest.

That said if you choose 20 investments from a list of 40 companies the screener generated based on your investment strategy that is also fine. If your strategy is good the investment ideas will give you a satisfactory return.

You can read about all the best investment strategies we have tested here: Best investment strategies

Could you tell us a bit about the idea behind Quant Investing? When did you start developing the tools, what are some of the core features and who do you see as your key audience? What are some of the new features that you are working on and planning to roll out in the future?

I am always looking for ideas and insights that can increase my investment returns. But to make sure that the ideas really work I needed a database to test ideas.

As I did not find anything that fit my needs (and budget) so I decided to build it myself. So that is how quant-investing was born.

This allows me maximum flexibility and the ability to try out all ideas I read about or think of.

I had to get a good data source, which you know is expensive, is why I make the screener available to other like-minded investors for a small monthly payment.  

This does not mean the screener only has tools I use, I am always glad to include the ideas of subscribers to make the screener as useful as possible.

Reason for good strategies and data quality

Because I use the screener to invest my own money is the reason why subscribers can be sure the data quality as well as the performance of the investment strategies are good.

I eat my own cooking.

Useful for all kinds of investors

When we developed the screener we included ratios and indicators so that it can be used by as many different types of investors. Whether you are:
  • Growth,
  • Value,
  • Short term momentum,
  • Smart Beta
  • Net Net or
  • Dividend investor

The screener will definitely be able to give you interesting investment ideas.

New developments - Large companies on steroids

We recently added a feature to the screener where you can select market leading companies, basically large companies on steroids. The idea comes from James O'Shaughnessy’s excellent book What Works on Wall Street.

Value rank

We also just finished development of a valuation ranking system we called Q.i. Value that ranks companies based on a combination of the best valuation ratios we have tested including the work from the research paper Quantitative Value Investing in Europe: What Works for Achieving Alpha.

It ranks the whole universe of companies in the screener (22,000) using four valuation ratios and thus helps you to select the most undervalued companies. Q.i. Value is calculated with the following ratios indicators:
  • EBITDA Yield
  • Earnings Yield
  • FCF Yield
  • Liquidity (Q.i.)

You can find more information here:

What makes this screener stand out from other screeners?

The first thing you will notice when you use the screener are the four filters (or funnels) that allow you to select up to four ratios and then use a range slider (for each ratio separately) to choose the range of companies you want to include.

The image below gives you an example of how easy it is to screen using four filters (or funnels):

Over 83 ratios you can use

The four ratios mentioned above are just examples. The screener has more than 83 ratios and indicators you can use to search for companies that exactly meet your investment strategy. You can find a list of all ratios and indicators here: Glossary.

For those who are interested where can they find more information about the site and what’s the best way to reach you?

Here are the best places to look at on the website.

Information on the best investment strategies we have tested: Best strategies
The latest ideas we have researched and other interesting articles: Quant Investing Blog
Where you can find pricing information and sign up to get your own investment ideas: Join today

Your FREE guide to screening

If you click on the following link you can download a free guide, in simple to understand English, to help you make the most of any screener. To download your personal copy of the guide simply click the following link: Guide to screening

Any questions?

If you have any questions please feel free to email me at

Any quant investing books that you enjoy reading and would recommend to others?

Other good books you want to take a look at are:
What Works on Wall Street by James O'Shaughnessy
Quantitative Value by Wesley Gray and Tobias Carlisle

Tim, anything you’d like to say in closing?

Each investor has his or her own unique approach to investing and that is a good thing else we will all be buying the exact same companies.

This is also the reason why we programmed the screener with over 83 ratios and indicators to ensure you find something that fits your investment strategy.

The idea with the screener is to allow you to, as easily as possible, find investment ideas that fit your investment style.

We test strategies all the time to give you an idea of what works and what not.

Please note we do not do this to change your investment style but just to help you with ideas to improve your returns.

And who does not want that.

Let me end on a more philosophical note.

Investing is not a difficult skill to master but it is more difficult than it looks.

If you are interested in investing your own money my best advice is to ignore the popular media completely. Read books and research studies by other investors that have been successful over long periods of time in up and down markets.

Learn from each of them but build your own investment strategy by taking the best from what you've learned that makes sense to you. Each person has got a different temperament and invests in a different way.

However if you follow time-tested investment strategies and build your investment strategy on what has worked you cannot do anything else but have outstanding returns over long periods of time.

Thanks Tim!


P.s. If you are an investor, fund manager, analyst, fellow blogger etc and interested in having an interview posted on the site do drop me a message.

For the purpose of transparency, neither this blog nor me benefit financially from any of you choosing to sign up.