Share structure on small cap performance

Came across an interesting article today.

The author compares share structure of small caps to their share performance.

The first time I had heard of this from memory:

http://smallcapdiscoveries.com/why-share-structure-tells-you-more-about-a-company-than-you-realize/

Li Lu quote

Li Lu "I'm not ideologically opposed to anything. I am against ideology."

Heilbrunn Center for Graham & Dodd Investing - CSIMA interview - Issue XVIII

Counter Intuition from Deep Value

Deep Value excerpts of interest on counter intuition:
Excerpt 3:


I'm uploaded these quotes as I find most people including myself often mistake and automatically correlate company business performance to their stock price performance.

Excerpt 1:
"As Graham theorized, and Mauboussin has demonstrated, it is the rare company that does not return to the pack. In most cases competition and other corrective forces work on the highly profitable business to push its returns back to the mean. The better bet is the counterintuitive one: deep undervaluation anticipating mean reversion. It’s Warren Buffett in his American Express investment, rather than his See’s Candy investment. An appreciation of mean reversion is critical to value investment."

Excerpt 2:
"These results establish two propositions. First, valuation is more important than growth in constructing portfolios. Cheap, low-growth portfolios  systematically outperform expensive, high-growth portfolios, and by wide margins. The second, more counterintuitive finding is that, even in the value portfolios, high growth leads to underperformance and low or no growth leads to outperformance. This is a fascinating finding. Intuitively, we are attracted to high growth and would assume that high-growth value stocks are high-quality stocks available at a bargain price. The data show, however, that the low- or no-growth value stocks are the better bet. It seems that the uglier the stock, the better the return, even when the valuations are comparable."

Excerpt 3:
"It wasn’t an improvement in the fundamental performance of these unexcellent companies that led to the market price outperformance. Like Peters’ excellent companies, the operating performance of the unexcellent companies declined on average, although not to the same degree as the excellent companies. In the unexcellent companies, 67 percent experienced a decline in asset growth rates, 51 percent had lower average returns on capital, 51 percent had lower average returns on equity, and 56 percent had lower average returns on sales. Strikingly, examined at the end of the five-year period, Peters’ excellent companies were still more attractive on a fundamental basis than Clayman’s unexcellent companies. What stands out, however, is that only three of the unexcellent companies had a decline in the ratio of price-to-book value, which means that the market revalued up 36 of 39 companies. This amounted to an average revaluation across the portfolio of 58 percent, a clear example of reversion to the mean."

Seth Klarman quote on analysis

Seth Klarman quote on the time spent analysing stocks:

But information generally follows the well-known 80/20 rule: the first 80 percent of the available information is gathered in the first 20 percent of the time spent. The value of in-depth fundamental analysis is subject to diminishing marginal returns.

Most investors strive fruitlessly for certainty and precision, avoiding situations in which information is difficult to obtain. Yet high uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen.

Investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty.

The time other investors spend delving into the last unanswered detail may cost them the chance to buy in at prices so low that they offer a margin of safety despite the incomplete information. 

Inconsistent behaviour

Poignant quote from 4th edition of 'What Works on Wall Street'

Money Management Performance

Past records of most traditional mangers cannot be predictive of future returns because their behavior is inconsistent.  You can’t make forecasts based on inconsistent behavior.

Warren Buffett on solving difficult problems

Warren Buffett on solving difficult problems:

"After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers. The finding may seem unfair, but in both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult. On occasion, tough problems must be tackled as was the case when we started our Sunday paper in Buffalo. In other instances, a great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable, problem as was the case many years back at both American Express and GEICO. Overall, however, we've done better by avoiding dragons than by slaying them."

Stock price volatility vs fundamentals

Listening to Value Investing Podcast and heard an interview with Lauren Templeton & Scott Phillips about stock proce volatility vs fundamentals.

Here is an except from a Financial Times article by Phillips I found that summarizes the point:

"According to long-term research conducted by Robert Shiller, measuring the ratio of stock price volatility relative to fundamentals, stock prices are 14 timesmore volatile than the underlying fundamentals (measured by long-term dividends). For a value investor who can stomach this volatility, this means 14 times the opportunities to make a wise long-term purchase."

Source: 

http://www.ftpress.com/articles/article.aspx?p=1626977