Net nets

I tried the strategy, and probably because the companies knew I was invested in them, they did terribly.

I tried analyzing the companies, and picking the best of them, but it was too time consuming.

Does anyone have any thoughts about this?

I long ago concluded that maybe you can beat the market by a point or two, but that the real reason for investing is because you enjoy it.

One would make more money spending the time learning investing by spending the time getting a master’s degree or something like that.

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I tried the strategy, and probably because the companies knew I was invested in them, they did terribly.
I tried analyzing the companies, and picking the best of them, but it was too time consuming.

The first problem might be a fluke, or it might be the problem that good deals down in the bottom fishing zone are pretty scarce in the modern era.
This is a tough screen to implement, in a variety of ways.

The second problem is common: you generally do NOT want to look at the firms in a quant screen, and most especially not NetNets.
Murphy’s law of MI: if you filter the picks, the one you filter out will be the ones that do best.
In NetNets, every single stock is going to have problems, or they wouldn’t be that cheap.
So even if you’re good at security analysis, spotting problems is not too hard, but sorting them is trickier…which ones matter?

I long ago concluded that maybe you can beat the market by a point or two, but that the real reason for investing is because you enjoy it.

Well, I do disagree with you there. The reason to invest is to make money.
You can enjoy yourself in other ways!
There isn’t really anything to be gained with low volatility either, as long as the CAGR is good measured on the day you retire.
But, if you have multiple ways to invest that are equally likely to work well, then sure, invest in the way that suits your personality and is more fun.

I find the secret is to keep it simple, with (as you note) modest goals.
I like KISS.
Here’s a screen for your humble consideration. Using the Value Line 1700 set of stocks, old school.

Screen 1:
Take the 1200 of the 1700 stocks that are closest to their 52 week highs, just to “crowd source” out things that are doing badly or at least unfashionable.
Of those, take the 50 with the highest ROE.

Screen 1:
Take the 1200 of the 1700 stocks that are closest to their 52 week highs, as before.
Of those, take the 50 with the highest 5-year growth of sales per share.

Do an SOS: sum the ranks on those two screens and pick the best sum of ranks.
Monthly, buy top 20 stocks, hold-till-drop at rank 50.
i.e., for any stock no longer ranked in the top 50, replace it with the highest sum-of-ranks stock you don’t already own.

After friction, that would have beat the S&P 500 by 11.0%/year since May 1997.
OK, big deal, you can prove anything with a carefully tuned backtest. Great backtests are a dime a dozen.
But I created that screen some time in September 2018.
Since January 2019, without modification, it has beat the S&P by 5.5%/year—not too bad, especially given the high S&P return since then.
Only 3.25 years, but that’s not nothing. At least it didn’t blow up immediately.

And, even if it turns out to be totally overtuning (in the backtest era) and luck (post discovery so far), how bad can it be?
High ROE firms tend to outperform average firms over the long run (by 5.2%/year top 20 in VL, last 20 years, no friction).
High sales growth firms tend to outperform average firms over the long term (by 7.0%/year top 20 in VL, last 20 years, no friction).
You’re unlikely to do much worse than the broad market sticking to those two categories.

So…if the screen works, you outperform.
If it doesn’t, you probably track the market over time. (or so I predict)

Re the out of sample results:
This post describes almost the same thing, from Sept 2018.
https://discussion.fool.com/isn39t-mi-nothing-but-backtests-on-a…
But the figures above are from the specific variation that I saved on my computer.

Jim

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Well, I do disagree with you there. The reason to invest is to make money.

I think you are a special case. You have a real gift for investing. I think most people who study investing beat the market by a point or two per year. That’s what I do. This is after 25 years of studying the market, good newsletters, friends who are great at investing and give me great tips, etc.

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Using the Value Line 1700 set of stocks, old school.

For the last 20 years I have been concerned that Value Line may not continue; one day I may be right. Do you have a method for constructing a pseudo Value Line list? As I recall it is not as simple as the largest 1,700 companies??

Craig

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I think you are a special case. You have a real gift for investing. I think most people who study
investing beat the market by a point or two per year. That’s what I do. This is after 25 years of
studying the market, good newsletters, friends who are great at investing and give me great tips, etc.

Perhaps a misunderstanding
I was just responding narrowly to this bit…
“… the real reason for investing is because you enjoy it…”

I really think that the reason to do investing is to make money, so I disagreed.
If one enjoys the process, which I sometimes do, that’s just a bonus.
As for my having a gift for investing, no, not really–perhaps I have a gift for sounding like I do : )

If you didn’t like my off the cuff screen suggestion:
Non-quant stock tip of the day: deep in the money long dated call option on GOOGL.
Random pick: Jan 2024 $1300, current price around $1060-$1065, leverage about 2.1:1
When the Jan 2026 calls are listed, preferably on a calm day that prices are high, sell the Jan 2024 calls and buy Jan 2026 calls. (lowest strike you can get for the same money)
The theory is that, by Jan 2026, 3.6 years from now, you will have made a lot of money.
Wild speculation: multiple opportunities during this stretch to exit at over 25%/yr return compounded, possibly 30%+, which would count as having fun.
Unfortunately this costs over $106k per contract, and it’s option contracts with leverage, so it’s not exactly for everybody.
But they are about to do a 20:1 split in seven weeks so you can wait till then and get the equivalent position in smaller bites of about $5300 each.
The price probably won’t have soared that much by then, though who knows.
Of course, I’m often wrong. Check back in 2026.

Jim

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For the last 20 years I have been concerned that Value Line may not continue; one day I may be right.
Do you have a method for constructing a pseudo Value Line list? As I recall it is not as simple as the largest 1,700 companies??

I don’t know their criteria.
I think there were some efforts on the board along those lines a while back?

If pressed, I would take “biggest N” plus a more or less random selection matching their historical distribution of market caps.
They include some very small stocks, but only a tiny number of them, 30 or so, so they likely aren’t very important to results.
I think (?) their selection of smaller firms is biased towards those doing somewhat well: better than average indications of growth and earnings for their market cap range.
You might also do well if you could find a metric of popularity—higher share turnover, perhaps.
Note, they also include a smattering of big Canadian stocks.

At the moment they’re making money, so at the moment I don’t think they’ll disappear.
They could easily be bought out, but it would cost little for an acquirer to keep the flagship service going.
They’d get the bragging rights of having such a long illustrious history.

Jim

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I really think that the reason to do investing is to make money

On the surface, of course. But more interesting is what is beneath it. For many people who have no need for any more money — and there are many of those nowadays — this is not the real reason but just a means to satisfy a deeper need: Pathological fear (having everything but nevertheless being afraid to lose all), Greed, craving for power, feeling superior, excitement of gambling, altruism (being able to give away more: Gates, Buffett, Soros and many others) or anything else.

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just a means to satisfy a deeper need: Pathological fear, greed, craving for power, feeling superior, excitement of gambling, altruism …

Don’t forget getting the chicks.
That seems to work pretty well here in Monaco (observations only), if you’re not particularly fussy about the ladies you attract.

Jim

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Don’t forget getting the chicks.
That seems to work pretty well here in Monaco

Been a while since I’ve been in Monaco but the proliferation of chicks obviously on the prowl for the big money was impossible to miss.

RAMc

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Don’t forget getting the chicks.
That seems to work pretty well here in Monaco (observations only)

I’ll keep that in mind for when (or if…) I am rich enough to impress them…

if you’re not particularly fussy about the ladies you attract.

Oh, I see. Maybe I’ll stay here, then…

I hope your ears are recovering from the noise you had in Monaco last week-end.

I hope your ears are recovering from the noise you had in Monaco last week-end.

Not so bad, really.
Where I live it sort of faces away from the track, so mostly all I heard was very frequent helicopters. And birdsong.
And torrential rain, of course.

In my imagination I might have heard somebody swearing… Leclerc?

Jim

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In my imagination I might have heard somebody swearing… Leclerc?

Pauvre Charles… Ferrari made him loose the race in the pits… This could be the difference between winning the championship or not. The last French speaking champion was Villeneuve in 1997, so I hope Leclerc recovers from this!

Where I live it sort of faces away from the track

You ruined it. Instead of inviting you to a bottle of good Champagne while watching F1 from your balcony I now have to buy my own balcony there for no taxes, F1 and chicks (oh, and to buy a Ferrari for the latter; hope they will do with the old “Magnum, P.I.” 328 GTS I love).

Where I live it sort of faces away from the track

You ruined it. Instead of inviting you to a bottle of good Champagne while watching F1 from your balcony I now have to buy my own balcony

The perfect solution: I have a neighbour friend who invites me over.
He has a rooftop balcony overlooking the track, and nice taste in Champagne.
And anecdotes that would curl your hair.

Words to live by:
What’s better than a villa on the Riviera? A friend with a villa on the Riviera.

Jim

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Wish I could recommend your post more than once. Thanks for the laugh. You are too clever :slight_smile:

And for those not using VL, a reasonable analog (analogue for those in the UK lol) to the VL 1700, may be the S&P1500.

FC

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Their criteria would have a reasonable facsimile in the S&P 1500 (the 500, the midcap 400 and the smallcap 600 if profitable MRQ & TTM). Easy to identify in GTR1.

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For shiggles, using criteria close to the S&P1500 as the universe (Fidelity’s screener), and these screening criteria sum of ranks as described, I’ve come up with the following list of the current 20 MungoROERevGrSOS - NOT in ranked order


Symbol	Company Name
COOP	MR Cooper Group Inc
TPL	Texas Pacific Land Corp
CNR	Cornerstone Building Brands Inc
VVV	Valvoline Inc
NSP	Insperity Inc.
BRDG	Bridge Investment Group Holdings Inc
HALO	Halozyme Therapeutics Inc
CHH	Choice Hotels International Inc.
LPX	Louisiana-Pacific Corp
BXC	BlueLinx Holdings Inc
ARCH	Arch Coal Inc
NRG	NRG Energy Inc
BCO	Brink's Co (The)
ATKR	Atkore Inc
PJT	PJT Partners Inc
CNS	Cohen & Steers Inc
MATX	Matson Inc
CNR	Cornerstone Building Brands Inc
BCC	Boise Cascade Co
MUSA	Murphy USA Inc
GDEN	Golden Entertainment Inc
WIRE	Encore Wire Corp
TPL	Texas Pacific Land Corp
NRG	NRG Energy Inc
ABC	AMERISOURCEBERGEN CORPORATION
FTNT	Fortinet Inc
KLAC	KLA Corp
CDW	CDW Corp
WAT	Waters Corp
MTD	Mettler-Toledo International Inc
NVR	NVR Inc.

First 12 are outside the S&P 500, last 8 are in it.
LPs/Unit Trusts excluded.

If Folio still existed, or even baskets at Fidelity, I’d probably jump on all of these right now.

Not easy to do this without the S&P1500 index indicators in a screener.

FC

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Weird that TPL is twice listed.
Would you mind reiterating the criteria here?
I’m a Fidelity guy, so would like to set this up.

I made a GTR1 version. (Note that VL fields and gtr1 fields are not exactly the same.) From 1988 to now, CAGR 19 beats SP1500 equal weight CAGR 12, with similar GSD.

http://gtr1.net/2013/?~MungoROErankSGPS_20220530_mungofitch:…

17 of the 30 tickers in FlyingCircus’s list are in the top 50 of the gtr1 version. (Maybe Sales Growth was used instead of Sales Growth per Share.):

Symbol  gtr1
 COOP    15
  TPL   #N/A
  CNR   #N/A
  VVV    43
  NSP    29
 BRDG   #N/A
 HALO     3
  CHH   #N/A
  LPX     4
  BXC   #N/A
 ARCH    42
  NRG     2
  BCO   #N/A
 ATKR     5
  PJT   #N/A
  CNS   #N/A
 MATX    28
  CNR   #N/A
  BCC    35
 MUSA    16
 GDEN   #N/A
 WIRE    14
  TPL   #N/A
  NRG     2
  ABC   #N/A
 FTNT     1
 KLAC     9
  CDW    34
  WAT   #N/A
  MTD    48
  NVR   #N/A
Ticker  styp.a  dspo:1    aprc     MktCap   PH52  ROE    SGPS   rROE  rSG   sumRanks  sp1500.a  FClist
 FTNT     11     3152   297.87     47,816   0.78  2.93   2.77   1009  982     1991        1       26
  NRG     11     4576    46.45     11,022   1.00  0.80   3.90   984   1000    1984        1       12
 HALO     11     4424    48.30     6,663    1.00  1.67   2.75   1003  981     1984        1       7
  LPX     11    12462    70.63     5,800    0.85  0.96   3.01   992   992     1984        1       9
 ATKR     11     1502   107.72     4,644    0.85  0.78   2.58   983   970     1953        0       14
 CHDN     11     7346   204.18     7,764    0.72  0.80   2.48   986   965     1951        1      #N/A
  BX      11     3760   121.04     84,816   0.76  0.55   3.96   943   1002    1945        0      #N/A
 AAPL     11    10453   149.64   2,421,951  0.77  1.51   2.22   1002  938     1940        1      #N/A
 KLAC     11    10498   371.27     55,406   0.76  0.77   2.35   981   954     1935        1       27
 STLD     11     6420    87.79     16,565   0.86  0.56   2.81   946   985     1931        1      #N/A
 QDEL     11     7890   103.45     4,329    0.70  0.42   6.89   910   1015    1925        1      #N/A
 CACC     11     4051   590.00     7,753    0.81  0.60   2.42   955   962     1917        0      #N/A
  DVA     11     6690    97.78     9,250    0.71  1.07   2.08   995   921     1916        1      #N/A
 WIRE     11     7523   126.97     2,505    0.81  0.46   2.79   930   984     1914        1       22
 COOP     11     1679    43.59     3,222    0.80  0.38  125.93  891   1017    1908        1       1
 MUSA     11     2200   254.41     6,157    0.93  0.62   2.24   963   942     1905        1       20
  NUE     11    15080   137.74     36,647   0.73  0.52   2.46   940   964     1904        1      #N/A
 REGN     11     7850   692.80     74,842   0.94  0.40   3.28   897   996     1893        1      #N/A
  MA      11     4030   357.78    345,229   0.87  1.35   1.95   1001  891     1892        1      #N/A
  IT      11     7214   266.59     21,471   0.74  6.79   1.88   1016  872     1888        1      #N/A
 TSCO     11     7118   192.43     21,529   0.75  0.56   2.17   949   934     1883        1      #N/A
 ALSN     11     2568    39.60     3,844    0.92  0.66   2.05   970   912     1882        0      #N/A
 ABBV     11     2368   150.00    265,067   0.88  0.76   2.01   980   901     1881        1      #N/A
 LSTR     11     7362   152.92     5,677    0.83  0.50   2.27   934   945     1879        1      #N/A
 EXPD     11     9495   110.65     18,562   0.78  0.38   2.90   892   987     1879        1      #N/A
 MTDR     11     2597    61.86     7,307    0.95  0.35   4.91   863   1009    1872        1      #N/A
 ULTA     11     3673   425.08     22,201   0.82  0.62   2.04   962   910     1872        1      #N/A
 MATX     11    12471    89.73     3,638    0.71  0.62   2.04   960   908     1868        1       17
  NSP     11     6375    99.99     3,830    0.75  3.88   1.83   1011  853     1864        1       5
 VALE     31     5082    18.09     20,900   0.82  0.64   1.97   966   895     1861        0      #N/A
 QCOM     11     7671   139.76    156,531   0.70  0.84   1.87   990   868     1858        1      #N/A
  OXY     11    15080    70.86     66,409   0.98  0.43   2.09   918   924     1842        1      #N/A
  CE      11     4368   159.21     17,244   0.88  0.45   2.06   925   916     1841        1      #N/A
  CDW     11     2246   171.10     23,118   0.78  1.13   1.80   996   845     1841        1       28
  BCC     11     2344    82.57     3,257    0.91  0.53   1.99   941   899     1840        1       19
 SBLK     12     3647    32.54     3,342    0.95  0.33   3.02   846   993     1839        0      #N/A
  LYB     12     2925   117.08     38,358   0.94  0.46   1.98   931   898     1829        1      #N/A
  RIO     31     8041    73.19     8,660    0.87  0.41   2.09   904   923     1827        0      #N/A
  MCO     11    13359   307.49     56,732   0.72  0.83   1.78   989   836     1825        1      #N/A
  HCC     11     1290    34.48     1,781    0.81  0.31   2.99   833   991     1824        1      #N/A
 NXST     11     4659   176.70     7,139    0.88  0.30   3.07   828   994     1822        0      #N/A
 ARCH     11     1421   168.24     2,604    0.95  0.67   1.83   971   851     1822        0       11
  VVV     11     1429    33.51     5,971    0.90  2.17   1.74   1005  816     1821        1       4
 SCCO     11     6640    62.76     48,519   0.80  0.42   2.03   912   907     1819        0      #N/A
  SLM     11     9750    19.49     5,247    0.89  0.36   2.24   875   941     1816        1      #N/A
 LCII     11     9329   117.60     2,989    0.72  0.33   2.60   845   971     1816        1      #N/A
  SHW     11    15080   276.35     71,887   0.76  0.82   1.77   988   826     1814        1      #N/A
  MTD     11     6173   1326.52    30,085   0.72  9.38   1.70   1017  797     1814        1       30
 MSFT     11     9127   273.24   2,043,571  0.77  0.44   1.94   922   890     1812        1      #N/A
  AMN     11     5170    95.63     4,276    0.74  0.37   2.11   883   926     1809        1      #N/A
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