Thought For A Day
Mark Mobius Articulates The Discipline
Of Buy And Sell Decisions
The thought of giving up a once-treasured possession can be an emotional exercise for anyone, even if the object of affection has outlived its use. As investors, we can find it difficult to sell a once-favored holding — even more difficult than the decision to purchase it. But sometimes, you just have to let go.I’ve often been asked about my team’s process, not only in selecting potential opportunities, but also when and how we determine a particular holding may not be worth keeping in a portfolio and bears replacing with something we deem to be a better opportunity. Emotion simply can’t play a role in our decisions. Instead, we pair bottom-up, rigorous research with step-by-step analysis, first identifying potential bargains within a dataset of more than 25,000 securities, then conducting deep quantitative and qualitative analysis to assess each company’s long-term value potential.Our quantitative analysis includes five-year historical audited financial statements and five-year forecasts based on projected future normalised earnings, cash flow, or asset value potential. Qualitative analysis covers understanding of the company’s business, management quality, ownership structure, corporate governance and commitment to creating shareholder value. That includes an understanding of who owns and controls the company, how it operates, and in what markets. As you can see, our research approach is extensive.
As I’ve said time and again, we firmly believe an on-the-ground presence is necessary to provide local, first-hand understanding of investment opportunities. Our Templeton Emerging Markets team currently numbers 53 investment professionals spread across 18 global offices and visits as many companies as we can—approximately 1,500-2,000 per year— to tour facilities and conduct management interviews. I personally travel more than 250 days a year.
Deal Breakers
Our ongoing fundamental research drives all buy and sell decisions. Our analysts set a target price for particular stocks based on the intersection of their research and our overall investment philosophy. We review all our holdings regularly to ensure our analyst recommendations are as up-to-date as possible and accurately reflect changes in company fundamentals. As value managers, we seek to invest in companies that are trading at a discount compared to our five-year valuation projections, and we adhere to a strict sell discipline based on valuation thresholds. Any one of the following triggers may cause us to sell stocks:
• The current security price exceeds our estimation of full value
• We believe significantly greater value potential exists in another security
• A fundamental change occurs at a company to alter our forecasts
One of our deal breakers includes unhealthy corporate governance. Corporate governance is a very, very important issue to us; we want to ensure the interests of shareholders are being addressed. So the first things we look for are a strong culture and ethical conduct.
Getting into the guts of governance means we conduct analysis of ownership structures, the management team’s track record, the company’s corporate governance history and its commitment to creating shareholder value. We look for managers who know the business well and have experience in a given field. We track management’s ability to cope with a rapidly changing business environment, and evaluate whether the risks a company takes seem rational and have the potential to be properly rewarded.
Understanding risk is core to our process. A dedicated Performance Analysis and Investment Risk Group (PAIR) team regularly examines our portfolios and analyses the risks.
Collaboration is critical, so the members of our investment teams communicate on a daily basis. We also hold weekly peer reviews in which we examine company weightings, valuations and price targets to ensure a portfolio is managed in accordance with its investment objectives. In addition, the Templeton Emerging Markets Group holds semi-annual meetings to evaluate investment methodology and portfolio performance, optimization of resources, and to discuss portfolio-related themes such as company-specific issues, country-related issues and global industry trends.
Volatility and Valuation
Emerging markets have traditionally been volatile and can be dominated by retail investor flows and sentiment changes, but we seek to use this volatility to identify potential bargains. We believe strong growth prospects in many emerging markets aren’t always recognized in equity valuations, and can lag those of developed markets by a considerable margin. As such, select companies or sectors in our portfolios may not perform as we’d like in a given month or year, but we are long-term investors, not short-term traders and we abide by our sell discipline.
Sometimes a falling market tide will drop even the soundest of ships, and that’s when bargains can be born. But there are times when stocks are priced cheaply because they are distressed. We may invest if we believe these sorts of companies can turn things around, given some time. Even good companies can fall on temporary hard times.
We think the best indicator of whether a stock is a good value or has completely lost its luster (what one might call “a value trap”, or fallen but still expensive relative to its intrinsic value) boils down to growth. If we don’t see any future growth potential, a company isn’t worth investing in; but if it’s inexpensive and earnings projections look good then there can be a case to invest. Of course, when a particular stock market is rapidly rising, it can be harder to find individual values. If a stock approaches what we deem to be fair value, we may consider reducing a position.
For all our stock-specific analysis, I should add that we do also examine macroeconomic factors in a particular country that support our investment themes, but don’t tend to be more bullish on one country or region than another, since we focus on individual companies. We believe there are great companies in all countries around the world, and that most markets have at least some attractive stocks.
We have maintained the same investment strategy for more than 25 years, and don’t expect to change. Our team inherited the same investment philosophy and methodology from our founder, Sir John Templeton, who summed up his thinking well with these words: “To buy when others are despondently selling and to sell when others are buying requires the greatest fortitude and pays the greatest ultimate rewards.”
Investment Adventures in Emerging Markets – Notes from Mark Mobius
Mark Mobius, Ph.D., executive chairman of Templeton Emerging Markets Group, joined Templeton in 1987. Currently, he directs the Templeton research team based in 15 global emerging markets offices and manages emerging markets portfolios. As he spans the globe in search of investment opportunities, his “Investment Adventures in Emerging Markets” blog gives readers a taste for what he does, when, where, why and how. Dr. Mobius has written several books, including “Trading with China,” “The Investor’s Guide to Emerging Markets,” “Mobius on Emerging Markets,” “Passport to Profits,” “Equities—An Introduction to the Core Concepts,” “Mutual Funds—An Introduction to the Core Concepts,” ”The Little Book of Emerging Markets,” and “Mark Mobius: An Illustrated Biography.”
Book Review: Trading Bases
His passion for trading snuffed by not being able to work, hopped up on pain meds, and trapped in the apartment leads to him to watching more sports than ever before. A baseball lover at heart and a statistical junkie, Peta finds a reason to wake up in the mornings. He decides to try his hand at making a statistical model that would identify edges for baseball team wins and losses that would provide him with a betting edge over the Vegas Line.
Peta eventually creates a hedge fund that bets baseball games that returns 41% in 2011 with similar daily volatility as the S&P 500. The book outlines Joe’s views on gambling. Baseball is his preferred niche since the juice/spread is the smallest in comparison to other sports, the ability to use statistics to get an edge is available, and the natural alignment between the better and the team– rooting for your team to win versus the convolution of winning and beating a point spread.
Joe explains his model with care, logic, and facts–backing up his assertions with anecdotes, experiences and back testing in terms of the body of baseball evidence from the historical stat stockpile. He builds on the pioneer work of Sabermetrics, Bill James, and Nate Silver. In general his system uses time tested relationships of team win/loss records, runs allowed/runs scored, starting pitching assumptions, WAR/PECOTA analysis, and more. He relates his journey on a monthly basis showing his results, the breakdowns of what went right and what went wrong, his acceptance of a “lumpy” higher return than a smooth more accepted rate of return by clinging to the belief that reversion to the mean will occur–eventually. He uses a concept called “cluster luck” to identify “lucky or unlucky” pockets in team’s prior records that should be ignored and removed from overall estimates. This is a key to his being able to form an opinion against the betting line of under or over valuation. His model then picks matchups that should be bet on and he uses a very systematic approach to determining the amount of the fund to bet on any one game–essentially using fund manager skill sets.
One notable opinion of his describes his fondness for “skill sets displayed” versus the recording of errors (mistakes committed and sometimes unfairly attributed). He uses SIERA (skill-interactive ERA) for pitcher evaluation and special modeling for playoffs and interleague games. He also walks the reader through his decision making process for when to tweak the model or when to stand pat—. Over tweaking will result in removing the natural capture of mean reversion. Joe has a friendly writing style and comes across as genuine, interesting and likeable.
I think any spec would like this quick reading book–you will learn something here about baseball stats and baseball betting theory; you may well enjoy the woven storyline of his trading career experiences as these snippets and stories move betwixt his model outlining. It is written for an above average mind, but its not too heavy to put someone off who doesn’t deal with wall street or modeling on a daily basis. I read ever page, every micro-print footnote, and every end note.
A Trade or a Gamble?
If you are constantly trading just for the sake of trading, just for the rush of being “in the game”, just for the momentarily thrill of being right you are gambling. You are trading without an edge, without any solid information and are therefore completely vulnerable to the random vagaries of price.
Towards the end of last year I decided to do something about my toxic addiction and created two separate accounts – one for trades that would only follow my trading plan – the other for all my trading/gambling impulses. But before I share my experience with you allow me to define the difference between a trade and a gamble. The key distinction is information. The less information you posses the more likely the chances are that your trade is gamble.
A techincal trader who only looks at the five minute chart to gauge his support and resistance points is just gambling. On the other hand a trader who looks through the hourly, daily, weekly and monthly support points, carefully calculates Fib retracement positions and only acts when multiple time frames confirm his analysis has a much greater chance of success. Similarly a fundamental trader who mindlessly reacts to the latest economic release without understanding the prior market expectations, the current price flow and and countervailing information on the other currency in the pair is also just gambling.
Notice the unifying theme? Like everything else in life success in trading requires hard work and homework. There is no magic formula, no simple 5 minutes per day method to make you money. In trading, working hard is no guarantee of winning, but not working hard is an assurance of losing, because trading at its core is a game of information and you must always be up to date on what’ s gong on in the market or become the sucker at the table.
Now back to my experiment. I subdivided my trading into two accounts – one where I traded only calendar risk on a reactive basis with very disciplined entries and exit rules and strict adherence to money management. The other account was just for my whims and impulses. An interesting thing occurred. My “trading plan” account which I traded far rarely and more carefully became much more profitable and incurred much lower drawdowns. Meanwhile the equity in my gambling account bounced up and down like a hopped up rubber ball. Suddenly the thrill of “being in the game” wasn’t so much fun. Like a reformed smoker who appreciates the smell of fresh air, I was no longer drawn to making impulsive trades. That’s not completely true. I still dabbled in my gambling account (who amongst us can completely give up our vices?) but my need to trade constantly has been reduced substantially. The less you gamble, the more you realize how stupid it is and that has been the most valuable lesson learned so far.