This question is for anyone but it would be great to see a comment from Numi/Bromion since it’s probably an important part of what you guys do.
I’m curious if anyone has experience studying historical situations to determine the signals that could have been noticed regarding a stock’s appreciation/decline over a several year timeframe. I think ultimately the difficulty is trying to pull yourself back 10, 20, 30 years in history and trying to experience the situation as it occured then.
This would include looking at financials and relevant news. Does anyone have a good way to do this?
Yes, I do this extensively and believe it is the single best way to learn to invest. It’s like spending time in the batting cage: if you’re a reasonably okay hitter, you’re bound to develop into a better hitter with practice. Maybe you have the DNA to be a great hitter if you put in the time.
Thirty years is a stretch. It’s pretty hard to even get good info about most companies 10 years back. Financial data, sure. But not much qualitative. You also have to realize that the market has structurally changed a lot in the last 30 years so be careful reaching conclusions on very old data.
I will decline to give examples since that is my business model and people are willing to pay me a lot to do this. That said, contrary to what lots of people believe, the market does literally give away free money if you know what to look for. For example, there is a particular type of company that you just short when it goes public – if you spend more than an hour on it, it will be wasted time. This type of company has over an 80% probability of declining materially within 12-months of IPO and is prone to long-term bankruptcy. So you short it if the borrow cost is low, done. You may think that is fairly rare but there have been at least two in the last 18 months and one is down over 50% in less than a year in a market that is up over that time period. The second one is down around 25%. Probably both have at least another 50% downside from here.
If you know how to cut the data there are lots of interesting tricks like that. The reason these exist is because quants simply focusing on numbers with no business understading would miss the subtle dynamics. On the other side, “Value-tards” who invest in low multiple value traps and do other stupid things along those lines wouldn’t crunch much or any data at all beyond low P/E screens. So there is a middle ground, and it is less tapped than you would probably expect but only in certain pockets.
One thing I used to do is just take lists of worst and best performing stocks of the prior year or so and grind and grind, not just the financials but qualitative issues. I’d grind non stop till I was satisfied with knowing how and why something happened, then it’s on to the next one. Most people in my experience are lazy and just calculate a couple ratios and call it a day.
That’s good but it would be better to break it up by industry or some other way, IMO. You want to look at a dozen or more of the same situation, not just a bunch of one off examples I think.
I agree that it’s the best way to learn to invest. Books like Intelligent Investor, The Little Book that Beats the Market, and Reminiscences of a Stock Operator are great to get you started and provide you with a framework to understand investing. But the best way to improve after that is to study historical cases, which can teach you a lot of things no books ever will.
It would be really helpful if you can elaborate on how you look at the qualitative data - e.g., how you figure out what was relevant at the time, and how to best integrate historical financials with the qualitative data to give you an accurate picture of what was happening.
I’m not looking for specific examples but really just some tips on the best way to study old qualitative data in a time efficient manner.
I’m glad this question was asked, as I had some similar questions. I would appreciate some additional color on the process of educating oneself from bromion, since from what I gather you are self-taught. I think I have a basic understanding of how you screen for shorts (a lot of fraud and pumped up stocks) but in terms of the qualitative aspects of long postions…
When you’re educating yourself, what materials are you looking at? Are you looking at performance and then reading conference calls from the past? Analyst coverage? Does the “story” come before looking at the financial statements?
My biggest winners have been companies where analysts dropped coverage, the stock fell out of favor, and then some material shift in strategy, selling off a unit, etc. have been a catalyst for increased cash flow a few years later. The problem is that I have only identified these stocks through other people’s writeups on seeking alpha.
You want to understand what was driving the financials – look at a housing stock for example (very easy to understand), what happened that caused the financials to change? How did the balance sheet flow through to the income statement and vice versa? Look at all public housing stocks that have been public for the last decade including the ones that went bk. I would make a table out of those with historical financial data to start with. Then read about the housing market.
At what price are these a value? What are the key qualitative factors that matter such as location of the property, regulatory impacts, etc.?
This would take maybe a month and is a big project but you would be up to speed quickly on the industry after that.
An easier one would be restaurants. What separates a good restaurant from a bad one? Which concepts do best? What is the valuation range these trade at and what gets the market excited? Restaurants are good because there are a lot of them with a very wide range of outcomes.
Qualtiative: Read the old filings, particularly the 10-K and proxy statements (skip the Qs unless you want data). Try to get old presentations and conference call transcripts. Google / LexisNexis are helpful too.
The problem is it is so broad I can’t write you a specific guide.
Everyone in this business is self taught. I have a friend in his early 40s who has been the #2 at "famous billionaire hedge fund manager’s"fund for several years. Has he learned a lot from his boss? Sure. But he is still self taught.
I don’t really care about stock price performance but I prefer down a lot that has stopped going down if looking at longs. I will buy longs that are up some as well. I never buy parabolic moves.
I look at the numbers first since this can tell you a lot more than the story – this probably takes 10 minutes as a first pass. Then I read the company’s presentation. I will look to see who covers it – is this a no revenue company covered by Roth and Chardan? (pass) – but don’t spend much time on the analyst coverage since most coverage is really only in place because 1) the buyside demands it (the stock is no longer an orphan so why I am looking at it unless I think it’s a GARP stock I might like) or 2) the company will need to raise capital and the sell side is helping build a following of suckers to prop up the price (no thanks).
That is true of small caps which is what I focus on. Clearly for something like KO the coverage has different implications. Keep in mind that you are not the customer of sell side research even if you are paying for it – the company is the customer. Many stocks are sold, not bought, if you follow my meaning.
If it’s interesting after reading the presentation / 10-K (quick skim, don’t spend more than 20 minutes) and looking at the numbers, I will start reading the conference calls. I won’t spend more than 1 hour on something unless it jumps out as interesting for some reason, there are too many other stocks.
Orphans that undergo positive change are the best ideas for small cap longs IMO. I love names where analysts dropped coverage 2+ years ago where there is something positive happening at the company.
The best focus is case studies and understanding why stocks become mispriced (and what causes the pricing to change). Is a biotech stock mispriced because the Street misunderstands the probability the drug will be approved? Ehh maybe, who knows? But you can do the work to figure out if a new product is ramping or not and what that probably implies for the financials. Most people just blindly listen to management (the market systematically overweights what mgmt says, IMO) so you can get a real edge if you do the work (easier said than done).
MBA programs are similar to the CFA (more comprehensive though) in that they teach practical business skills. If you want to learn modeling or basic valuation, that’s a pretty good place to start. They don’t teach much or anything about how the market actually works and why, though. At least that has been my experience talking to a lot of people.
A lot of the actual practitioner work is pretty subtle. There is a stock I am short by a particular analyst who is known to enable frauds (by me at least, I guess the SEC doesn’t know). This specific analyst has a history of providing extremely bullish forward numbers which sends the stock way up. This is designed to help the company raise money (which, since this is a zero sum game, basically means anyone who bought the stock has been defrauded). You can then fade the pump profitably. I’ve done it 4x now (100% success). You won’t learn that in business school.
History is never given enough credit when analyzing financial markets. I’m not talking about looking at historical prices/charts but actually reading history. Read Anatomy of a Bear by Russel Nappier and this might be something you’re looking for.
Joel Greenblatt’s killing it with his liquid alts offering through Gotham Capital. I really like his style of investing. It’s not what I do (no portfolios have 200 positions), but similar in some ways. This is probably another thread, but would be curious on the HF guys’ take on investors like Greenblatt warming to liquid alt strategies. I believe his are actually fee neutral to the LP.
This is a great question and sorry for just now seeing this.
Do you have access to a Bloomberg? If so, one of the most useful functions you can use is ‘SURP’ for Earnings Surprise. Look at how the actual results for quarters dating back 3-4 years compared with consensus, and how the stock reacted the day after. Was there a big move? If so, why was the news surprising and was there an uptrend in the stock for the foreseeable quarters? Or, if there wasn’t a big move, was it because the investor base had gotten used to the “good news” or maybe the report wasn’t so good after all? And if the report wasn’t good, were there warning signs that things would get worse?
If you don’t have access to Bloomberg, I suggest you read historical transcripts, with a particular focus on Q&A. Sometimes the problem with the Q&A is that you have a bunch of butt-kissing sell-side analysts asking inane questions. Typically this happens if everyone is really pumped up about a stock and they only miss one quarter after a while. However, frequently when companies miss quarters, it’s not the only time it happens, especially in situations where the stock is owned mostly by growth or GARP investors. When that happens, you should read subsequent transcripts after the stock had missed a few quarters to see what kind of questions analysts are asking then, versus the signs they should have noticed a few quarters prior if they were really astute.
The inverse approach basically works even better for longs, because most analysts aren’t naturally skeptical (and henceforth mediore). But sometimes, skepticism is overrated - some stocks can run, and they run for a long time. Look at stocks that might have been bombed out for a while in the past, but then went on a big run. Find out when they started beating and raising - maybe the first one or two quarters this happens, but analysts don’t quite believe this is real. Find out what metrics seem to be most predictive of the company’s outperformance for a foreseeable period of time, and then again also look at the types of questions analysts ask that seem to get at the key metrics that move the needle for the investor base (whether it’s revenue, EPS, gross margins, operating margins, or whatever).
I think this should be an excellent start for you. I don’t want to give away too many secrets of my investment process but this should get you a long way. For any company I am serious about investing in, I will read 8-12 quarters of transcripts, 10-K’s and 10-Q’s to figure out what’s going on. I will know the story cold before I decide to size up the position. You’d think this is the type of work that most serious investors should do, but they don’t. Everyone is always looking to take shortcuts and get big paychecks. Your curiosity and hard work early in your career will pay dividends over the long term.