1. Buy a basket of stock in the highest book to market decile, rinse and repeat. (Lowest price to book.)
2. Hold more cash when the market is above long term trend lines, deploy that cash when it is below.

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

What do you think when you look at the above graph and consider the following?

More thoughts

• While markets are reasonably micro-efficient they are certainly prone to times of macro-inefficiency.
• The high risk premiums from equity market can be reasonably explained by investors taking a short term view. Those taking long term views are better placed to exploit the risk premium.

Simon Sinek has a simple but powerful model for inspirational leadership all starting with a golden circle and the question “Why?”

No related posts.

According to the guidance M2 expects substantial growth since the last financial year.

• Revenue is forecast to grow by 12 per cent in 2010-11 to between $425 million and $445 million from the forecast $380 million to $400 million in 2009-10.
• Net profit is expected to explode 52 per cent to $22 million and $23.5 million in financial 2011 from the 2009-10 guidance figure of about $15 million.
• Earnings per share is forecast to rise 36 per cent to between 18.1 cents and 19.4 cents from the previous year’s guidance of 13.3 to 14.3 cents. Excluding non-cash amortisation of customer contracts, underlying eps is forecasted to up 42% to 20.7-22 cents.

The market still appears to be substantially undervaluing MTU. On underlying eps MTU is trading at a forward P/E of 8.7 which is ludicrously low for a company executing their growth story in such fine fashion.

Disclosure: Long MTU

The highlights of the announcement were:

1. Mothercare PLC proposed acquisition of 25% of Headline Group via investment of $12.2M.
2. “Baby on a Budget” acquisition in W.A. Seven stores, deal multiple of 4x EBITDA .
3. Headline to acquire 100% ownership of Skansen KCG in returns for shares in HLD.
4. Current stores operating above expectations.
5. Roll-out of Mothercare stores to be accelerated.

Headline Group Limited has exclusive rights and is currently launching the world’s leading retail parenting centre into Australia under the international brands of Mothercare and Early Learning Centre Toys.

Thoughts anyone?

Disclosure: No position at time of writing, but looking closely.

Many studies have shown that individual investors, managing their own accounts, do about 5% worse than they would if simply buying an index fund.  The top investment managers have regularly beaten the averages, so it is a big spread.

I commented

You’re comparing average investors with top managers. While I know that was merely an introduction and not central to your point, I found it incongruent from a guy who normally takes such care with his assertions. On top of which there is plenty of evidence to show that agency costs are a permanent feature of fund managers and as Patrick said that the average manager under-performs.

The average investor contains all investors. Do you know of any evidence that analyses experienced investors, say 10 years plus experience and accounts over say $300k, or any other figures?

Another commenter replied,

“CXO Advisory in March cited an SSRN paper that showed Chinese investors with large accounts (presumably more experienced) had higher returns than those with small accounts. The difference was quite significant, and apparently due to reasons that might be expected – buying value stocks and trading less frequently. They also have links to additional studies.”

I decided it was time to pull together some of the literature on individual investors.

Can Individual Investors Beat the Market?

We document strong persistence in the performance of trades of individual investors. The correlation of the risk-adjusted performance of an individual across sample periods is about 10 percent. Investors classified in the top performance decile in the first half of our sample subsequently outperform those in the bottom decile by about 8 percent per year. Strategies long in firms purchased by previously successful investors and short in firms purchased by previously unsuccessful investors earn abnormal returns of 5 basis points per day. These returns are not confined to small stocks nor to stocks in which the investors are likely to have inside information. Our results suggest that skillful individual investors exploit market inefficiencies to earn abnormal profits, above and beyond any profits available from well-known strategies based upon size, value, or momentum. read more

Wow! Not a bad starter, but let’s keep digging. If you know of any research highlighting how individual investors can outperform then please leave a comment.

In general individual investors tilt the scales in their favour by looking to exploit the excess returns offered by small caps, value stocks and momentum stocks. There is plethora of research on all three.

Momentum

Research into momentum in stocks shows stocks do exhibit positive momentum over 3 – 12 months. While over the longer term of multiple years a negative correlation is found, i.e. momentum stocks eventually fall back to the pack.

• Momentum studies like this, Momentum Strategies by Louis Chan, Narasimhan Jegadeesh and Josef Lakonishok, reveal how past earnings surprises predict large drifts in future returns as analysts and the market are slow to respond.
• Momentum Profits, Non-Normality Risks and the Business Cycle by Ana-Maria Fuertes, Joelle Miffre and Wooi Hou Tan. This paper show that momentum profits are not normally distributed and, relatedly, that the momentum profitability is partly a compensation for systematic negative skewness risk in line with market efficiency.
• For more on momentum.

I’ll post on value vs growth and small vs large caps in separate posts, but for anyone unfamiliar with the large body of evidence the basic story is both value and small caps have in the past outperformed growth and large caps by significant margins. I do mean to imply that all investors should manage their own investors. I actually believe the contrary, most investors should invest in index funds with long term perspectives, investing more when markets are historically undervalued and less when they are overvalued. Alternatively they should seek out small cap value focused fund managers with a record of outperformance. As with everything there are exceptions. Self directed investing takes a lot of time and skill and is an art that few truly master.

Advantages of Individual Investors over Institutions

The following is a quick incomplete list, primarily to get some thoughts down for further investigation.

• Jack be nimble jack be quick. Individual investors can react faster to opportunities and change their asset allocation much faster than institutions.
• Patience. Institutional imperatives force most funds into high turnover strategies. Individual investors can wait for fat pitches.
• Small caps outperform. Large institutions can’t take meaningful positions in small caps. Even small institutions find it hard to take meaningful positions in small caps without pushing the price up on entry and down on exit.
• Management costs. With active fund managers charging between 1-2.5% and sometime with an added 20% of excess returns, individual investors are given a head start.
• Agency costs.  On top of fees are agency costs. Institutions’ primary aim is to make themselves money, while they’d like to make their investors money too, conflicts can and do arise.
• Flexible guidelines. Most funds are constrained by their strategies, which for the most part are designed to fit in with particular themes, e.g. large cap growth. Plus many are mandated to be 100% invested all the time. Talk about a handicap. Individual investors can invest in the best opportunities regardless of style, market cap or any other arbitrary restriction and they can move to cash when markets are overvalued.
• Comparison.  Most funds ‘need’ to follow relative return investing styles. The smartest investors all say absolute returns should be focused on, with relative returns a mere point of interest. Individual investors can focus on their absolute returns without fear of being fired for underperforming.

In fairness, institutions have many advantages over individual investors, but as they also have large marketing departments I’m sure you;ve already heard their side of the story. Finally I in no way mean to slate Jeff Miller and encourage readers to add his blog, A Dash of Insight, to their regular reading list.

After checking both her injuries and that she had ambulance cover (do all pensions get that?) I called an ambulance. While waiting, many people came to help and I left after a small crowd had gathered and I had given my contact details. In hindsight I was cross at myself that I considered letting my on-time obsession get in the way of offering the best help I could. My partner often tells me that’s there’s many things more important than being on time, I now see that helping someone in need is certainly one of those things. It was wonderful to see so many stop and offer assistance on a miserable rainy day.

Now on to the training. I was really impressed by the presenter, whose name I never found out as I ended up being so late. He knew the system and underlying valuation extremely well and handled all questions with great aplomb. The methodology behind StockVal is very sound and I now understand their value calculations. There is a lot more analytical input going on behind the scenes than I thought, which adds to the value users receive. Simplistically, the valuation is based on return on equity (ROE), risk and percent reinvested.

Here are the current top ten “Very Low Required Return”, i.e. the least risky stocks with the highest margin between value and price.

and the top five “Low Required Return” stocks.

all figures copyright StockVal.

Of interest to me is the number of fund managers in this second top five. With Clime Capital, CAM, and Wilson Investments,WIL, filling positions four and five, followed by WAM Capital and Templeton Growth in the 6th and 7th spots. Fund managers looks like a good group to explore right now.

Disclosure: I received a StockVal subscription in return for the header advertising on this site. Clime Capital is coincidentally the owner of StockVal.  I am long fund manager Hunter Hall. I am obsessed with time.

No related posts.

Well it turns out that the reverse is true. Academic studies in America and Australia show that their are limited abnormal returns gained after insiders buy, yet insiders do sidestep abnormal negative returns with their sales. Further investors can also on average earn abnormal returns by following suit when the insider sales are publicly disclosed. Keep in mind we’re talking averages here. So please don’t go selling your shares the next an insider in one of your companies unloads a few shares. Though perhaps it is worth keeping this in mind the next time you see large insider sales. It may be a good trigger to dig deeper and ponder whether that company is the best place for your funds.

The following graphs are based on a study by Uylangco, Easton and Faff (2010). They concluded “imitators may earn small abnormal returns by imitating directors, especially with respect to sales.”