How to invest like Jim Slater – and beat the market by a factor of 20

How to invest like Jim Slater – and beat the market by a factor of 20

The veteran investor’s stock-picking formula outperformed spectacularly when he invented it 50 years ago. Here are four stocks that pass his tests today

Jim Slater: ‘I was convinced that the stock market winners of the past would have some common characteristics’ Photo: PA

By Richard Evans

12:09PM BST 23 Jun 2014

“It is only necessary to be 6 inches taller than the other people in a room to see above everyone’s heads.”

This is Jim Slater’s recipe for investing success – that if you concentrate on learning about a particular aspect of investment, you can quickly become more knowledgable about it than “the other people in the room”.

You will then make better choices – and bigger profits.

Read more of this post

AQR’s Cliff Asness: My Top 10 Peeves

Financial Analysts Journal Volume 70 · Number 1

My Top 10 Peeves

Clifford S. Asness

The author discusses a list of peeves that share three characteristics: (1) They are about investing or finance in general, (2) they are about beliefs that are very commonly held and often repeated, and (3) they are wrong or misleading and they hurt investors.

The ABCs Of A Crash: No Alpha, All Beta, & Consensus Contagion

The ABCs Of A Crash: No Alpha, All Beta, & Consensus Contagion

Tyler Durden on 06/21/2014 19:33 -0400

The vicious circle of central-bank inspired low volatility begetting increasing fragility (instead of 2004-2007’s virtuous circle)is nowhere more clear that in the collapse of alpha generation opportunities and the implicit capitulation of every hedge fund, retail investor, and Goldman muppet to be all-in on stocks. Removing collateral, gating bond funds, and constant warnings that they bonds (not stocks) may be frothy has done nothing but herd an ever more brainwashed investing public into an ever more concentrated ownership of stocks. This, as Citi’s Matt King explains, has distorted markets to no longer follow fundamentals (no matter what you are pitched on TV or by your broker). Read more of this post

‘Consistent’ Earnings Surprises

‘Consistent’ Earnings Surprises

Byoung-Hyoun Hwang 

Cornell University – Dyson School of Applied Economics and Management; Korea University – Department of Finance

Baixiao Liu 

Florida State University

Dong Lou 

London School of Economics & Political Science (LSE)
May 5, 2014

Abstract: 
We hypothesize that analysts with a bullish stock recommendation have an interest in not being subsequently contradicted by negative firm-specific news. As a result, these analysts report downward-biased earnings forecasts so that the company is less likely to experience a negative earnings surprise. Analogously, analysts with a bearish recommendation report upward biased earnings forecasts so that the firm is less likely to experience a strong positive earnings surprise. Consistent with this notion, we find that stock recommendations significantly and positively predict subsequent earnings surprises, as well as narrow beats versus narrow misses. This predictability is concentrated in situations where the motivation for such behavior is particularly strong. Stock recommendations also predict earnings-announcement-day returns. A long-short portfolio that exploits this predictability earns abnormal returns of 125 basis points per month. Read more of this post

Lululemon: ‘A Sheer Debacle in Risk Management’ Stanford Study

Lululemon: ‘A Sheer Debacle in Risk Management’ Stanford Study

by ManiJune 20, 2014, 12:05 pm

A Stanford study notes despite companies disclosing risk factors in their SEC filings, there is often a disconnect between identifying and managing the risks

Lululemon Athletica inc. (NASDAQ:LULU) (TSE:LLL) struggled to respond to anticipated product quality issues and contain the fallout on social media, notes a recent Stanford University (Larcker, David F. and Larcker, Sarah M. and Tayan, Brian, Lululemon: A Sheer Debacle in Risk Management (June 17, 2014).

In a research note dated June 17, 2014, authored by David Larcker, Sarah Larcker and Brian Tayan of Stanford, with the title: “Lululemon: A Sheer Debacle in Risk Management”, they point out that despite anticipating the risks, companies such as Lululemon are ill-prepared to manage them when they materialize.

Lululemon’s anticipated risks in time

As reported earlier, Lululemon Athletica inc. (NASDAQ:LULU) (TSE:LLL) is still facing problems in attracting customers because of the major PR fiasco in 2013. Read more of this post

Reforming China’s Monopolies

Reforming China’s Monopolies

Peijun Duan 

Central Party School

Anthony Saich 

Harvard University – Harvard Kennedy School (HKS)
May 7, 2014
HKS Working Paper No. RWP14-023

Abstract: 
This working paper focuses on an aspect of governance that is crucial to the next phase of China’s development: reducing state monopolies in order to enhance economic efficiency and promote more equitable growth. It is important to note that monopoly control in the Chinese political economy is not simply an economic phenomenon but also a phenomenon deeply embedded in a comprehensive system of power. Monopolies in the economic sphere (resources, prices, markets, and assets) are serious, but they are derived from the legacy of the centrally planned economy. They are also rooted in the traditional structure of Chinese society and its culture. In this paper, we will present a comprehensive examination of the phenomenon of monopoly control in the Chinese system.

On Value Traps

06 Jun

On Value Traps

David Merkel

One thing that floors me regarding my readers, is who reads me.  I have many professional readers who read me regularly, and I thank you for doing so.  Tonight’s piece stems from an e-mail from one of my professional readers:

Hi David,

Big compliments for your blog, it’s probably the best on the net and one of the very few I am reading these days. I really like your overall approach to investing and I am using some of your methods myself with success in my ZZZ Fund (ZZZ on Bloomberg) like having an even-weighted portfolio of 30-40 stocks with regular rebalancing or focusing on the strongest players in weak industries (southern European banks anyone?). Read more of this post

Does Mandatory Shareholder Voting Prevent Bad Acquisitions?

Does Mandatory Shareholder Voting Prevent Bad Acquisitions?

Marco Becht 

Université Libre de Bruxelles (ULB) – Solvay Brussels School of Economics and Management; European Corporate Governance Institute (ECGI)

Andrea Polo 

Universitat Pompeu Fabra – Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE); Stanford University – Arthur & Toni Rembe Rock Center for Corporate Governance

Stefano Rossi 

Krannert School of Management; Centre for Economic Policy Research (CEPR)
May 30, 2014
European Corporate Governance Institute (ECGI) – Finance Working Paper No. 422/2014
Rock Center for Corporate Governance at Stanford University Working Paper No. 188

Abstract: 
Corporate acquisitions can be ruinous for acquirer shareholders. Can shareholder voting prevent such corporate disasters? Previous empirical studies based on U.S. data are inconclusive because shareholder approval is discretionary. We study the U.K. setting where bids for relatively large targets are subject to mandatory shareholder approval. Our findings suggest that under the U.K. listing rules shareholder voting can deter bad acquisitions. We find that shareholders gain 8 cents per dollar at the announcement of a Class 1 deal or $13.6 billion over 1992-2010 in aggregate. In the United States acquirers lost $214 billion in matched deals during the same period. In the U.K. relatively smaller Class 2 transactions do not require a vote and shareholders lost $3 billion. Our results are robust to confounding effects and other controls. A Multidimensional Regression Discontinuity Design (MRDD) inspired test supports a causal interpretation of our findings. Class 1 deals just above the assignment threshold perform better than Class 2 deals just below. Our evidence suggests that mandatory voting makes boards more likely to refrain from overpaying or from proposing deals that are not in the interest of shareholders.

Assessing the Cost of Accounting-Based Long-Short Trades: Should You Invest a Billion Dollars in an Academic Strategy?

Assessing the Cost of Accounting-Based Long-Short Trades: Should You Invest a Billion Dollars in an Academic Strategy?

William H. Beaver 

Stanford University

Maureen F. McNichols 

Stanford University

Richard A. Price III

Utah State University – Huntsman School of Business
February 26, 2014
Rock Center for Corporate Governance at Stanford University Working Paper No. 177

Abstract: 
The bulk of the academic literature studying market efficiency assumes that investors are fully diversified and that they can construct long-short portfolios at zero cost. We relax these assumptions and under more realistic assumptions examine the attractiveness of long-short strategies as stand-alone investments and as a part of a diversified portfolio. We highlight costs and considerations unique to our setting which include: the relevance of idiosyncratic risk and nontrivial downside risk; the generally positive short position returns which reduce long-short strategy returns; the cost of capital; financing costs; and rebates received on the short portfolio. Our analysis reveals that as stand-alone investments, long-short strategies are not preferable over the market. However, long-short strategies do contribute significantly to the performance of an overall diversified portfolio.

Can Governance and Forensic Accounting Metrics Predict Stock Returns?

Can Governance and Forensic Accounting Metrics Predict Stock Returns?

Ophir Gottlieb 

GMI Ratings
May 23, 2014
Rotman International Journal of Pension Management, Vol. 7, No. 1, 2014

Abstract: 
Arguably, governance and forensic accounting metrics should be predictors of future stock returns. Do empirical tests confirm this view? This article describes the logic and analytics used to calculate a metric called the Forensic Alpha Model (FAM), which was then used to test the hypothesis that it could predict future stock returns. The results of these tests, conducted with out-of-sample data, confirm that forensic accounting and governance metrics did indeed predict future stock returns. Implementing the FAM requires enormous data collection, detailed peering, industry normalizations, forensic accounting and governance taxonomies, sophisticated measures of association and interactions, rigorous testing, and advanced supervised machine learning.

On the Value of Valuation Metrics; Valuations matter, but they are not timing tools

On the Value of Valuation Metrics

By Cullen Roche · Comments (11) · Monday, June 9th, 2014

A recurring theme in my work is a rejection of “value” based methodologies to analyze markets.  I’m a big believer in fundamental analysis and especially top down macro work, but I have never found valuation metrics to be particularly useful because they don’t provide us with sufficient information about what we’re really trying to achieve. Read more of this post

Does Value Investing Work in the Technology Sector?

Does Value Investing Work in the Technology Sector?

Wesley R. Gray, Ph.D. 05/16/2014 09:53

Share on facebookShare on twitterShare on emailShare on printMore Sharing Services54

A recent blog post suggests that value investing in the tech sector is a waste of time.

The article tells a compelling story and argues for 2 points:

Successful tech stock investing is done when the stocks are dear, not when they are cheap.

Tech companies should not get credit for huge piles of cash on their balance sheets. Read more of this post

Disaggregating Operating and Financing Activities: Implications for Forecasts of Profitability

Disaggregating Operating and Financing Activities: Implications for Forecasts of Profitability

Adam M. Esplin 

University of Alberta – Department of Accounting

Max R. Hewitt 

Indiana University – Kelley School of Business – Department of Accounting

Marlene Plumlee 

University of Utah – School of Accounting

Teri Lombardi Yohn 

Indiana University – Kelley School of Business – Department of Accounting
October 20, 2012
University of Alberta School of Business Research Paper No. 2014-09
2014, Review of Accounting Studies, 19 (1): 328-362 

Abstract: 
Researchers, practitioners, and standard setters emphasize the importance of disaggregating financial statements into operating and financial activities. However, there is a lack of research demonstrating that this disaggregation improves forecasts of profitability. In this study, we consider whether and when the operating/financial disaggregation improves forecasts of profitability. Contrary to the use of an ‘aggregate’ forecasting approach by most related prior research, we first show that the operating/financial disaggregation only provides forecast improvement over a benchmark model incorporating aggregate information when the ‘components’ forecasting approach is used. We also compare the operating/financial disaggregation to the unusual/infrequent disaggregation currently required by U.S. GAAP. We find that the operating/financial disaggregation yields less accurate forecasts than the unusual/infrequent disaggregation. However, when using the ‘components’ forecasting approach, we find that the co bination of both disaggregations improves forecasts of profitability. Finally, we document that the incremental usefulness of the operating/financial disaggregation relative to a benchmark model incorporating aggregate information is a function of growth and accounting conservatism. Overall, our study provides timely evidence concerning how analysts and investors might best use the operating/financial disaggregation for forecasting profitability.

Thin Capitalization Rules and Multinational Firm Capital Structure

Thin Capitalization Rules and Multinational Firm Capital Structure

Jennifer L. Blouin 

University of Pennsylvania – Accounting Department

Harry Huizinga 

Tilburg University – Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

Luc Laeven 

International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

Gaetan Nicodeme 

Université Libre de Bruxelles (ULB) – Solvay Brussels School of Economics and Management
February 2014
CEPR Discussion Paper No. DP9830

Abstract: 
This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential data on the internal and total leverage of foreign affiliates of US multinationals, we find that thin capitalization rules affect multinational firm capital structure in a significant way. Specifically, restrictions on an affiliate’s debt-to-assets ratio reduce this ratio on average by 1.9%, while restrictions on an affiliate’s borrowing from the parent-to-equity ratio reduce this ratio by 6.3%. Also, restrictions on borrowing from the parent reduce the affiliate’s debt to assets ratio by 0.8%, which shows that rules targeting internal leverage have an indirect effect on the overall indebtedness of affiliate firms. The impact of capitalization rules on affiliate leverage is higher if their application is automatic rather than discretionary. Furthermore, we show that thin capitalization regimes have aggregate firm effects: they reduce the firm’s aggregate interest expense bill but lower firm valuation. Overall, our results show than thin capitalization rules, which thus far have been understudied, have a substantial effect on the capital structure within multinational firms, with implications for the firm’s market valuation.

Corporate Scandals and Household Stock Market Participation

Corporate Scandals and Household Stock Market Participation

Mariassunta Giannetti 

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Tracy Yue Wang 

University of Minnesota – Twin Cities – Carlson School of Management
January 16, 2014
European Corporate Governance Institute (ECGI) – Finance Working Paper No. 405/2014

Abstract: 
We show that after the revelation of corporate fraud in a state, the equity holdings of households in that state decrease significantly both in the extensive and the intensive margins. Using an exogenous shock to fraud detection and exogenous variation in households’ lifetime experiences of corporate fraud, we establish that the impact of fraud revelation in local companies on household stock market participation is causal. Even households that did not hold stocks in the fraudulent firms decrease their equity holdings, and all households decrease their holdings in fraudulent firms as well as non-fraudulent firms. As a consequence of the decrease in local households’ demand for equity, firms headquartered in the same state as the fraudulent firms experience a decrease in valuation and in the number of shareholders.

New Zealand’s Orr: One of the World’s Most Innovative Investors

New Zealand’s Orr: One of the World’s Most Innovative Investors

05 JUN 2014 – LOCH ADAMSON

When Adrian Orr left New Zealand’s central bank in February 2007 to run the country’s fledgling sovereign wealth fund, he knew he was taking a calculated risk. An economist by training, Orr had never led an asset management team or overseen a diversified investment portfolio. As deputy governor and head of financial stability at the Wellington-based Reserve Bank of New Zealand, he’d been closely involved in managing reserves, assessing macroeconomic risk and participating in policy discussions — and he liked the idea of using his skills to help build a lasting institution for New Zealand. But he had no inkling of the size of the challenge he was about to face. Read more of this post

Charlie Munger: Investment Practices of Leading Charitable Foundations

From the Vault: Charlie Munger on Institutional Funds Management

by VW StaffJune 02, 2014, 4:55 pm

Speech of Charlie Munger, Vice Chair, Berkshire Hathaway, at Miramar Sheraton Hotel, Santa Monica, CA, on October 14, 1998, to a meeting of the Foundation Financial Officers Group sponsored by The Conrad Hilton Foundation, The Amateur Athletic Foundation, The J. Paul Getty Trust, and Rio Hondo Memorial Foundation. Read more of this post

The Effect of Forced Refocusing on the Value of Diversified Firms

The Effect of Forced Refocusing on the Value of Diversified Firms

John G. Matsusaka 

University of Southern California – Marshall School of Business; USC Gould School of Law

Yongxiang Wang 

University of Southern California – Marshall School of Business
April 25, 2014
USC Law Legal Studies Paper No. 14-20
USC CLASS Research Paper No. CLASS14-19

Abstract: 
This paper studies how investors responded when Chinese regulators required a group of large, publicly traded companies to divest their non-core hotel and real estate assets in 2010. The quasi-experiment allows direct estimates of the effect of diversification on value that are free from common selection problems in the literature. On average, stock prices rose 1 to 2 percent in response to forced refocusing, suggesting that corporate diversification was a value-destroying strategy for those firms. The implied “excess value/diversification discount” has at best a weak connection to the announcement return. The abnormal return was most positive for companies in which the ultimate controller had small cash flow rights, suggesting that investors were concerned with the possibility of tunneling.

Shadow Banking: Why Modern Money Markets are Less Stable than 19th c. Money Markets but Shouldn’t Be Stabilized by a ‘Dealer of Last Resort’

Shadow Banking: Why Modern Money Markets are Less Stable than 19th c. Money Markets but Shouldn’t Be Stabilized by a ‘Dealer of Last Resort’

Carolyn Sissoko 

USC Center for Law and Social Science
April 25, 2014
USC Law Legal Studies Paper No. 14-21
USC CLASS Research Paper No. CLASS14-20

Abstract: 
An important policy question that is currently being discussed by central bankers and academics is whether the “shadow” banking system should have a permanent backstop from the central bank akin to the extraordinary support that was provided by the Federal Reserve to the shadow banking system in 2008. I answer this question by (i) using a macroeconomic analysis of banking (ii) to explain the role played by the first lender of last resort in 19th c. Britain and (iii) applying this analysis to the modern shadow banking system. I conclude that because of its heavy reliance on collateralization, the shadow banking is a poor substitute for the traditional banking system and does not merit the support of a “dealer” of last resort.  Read more of this post

A View Inside Corporate Risk Management

A View Inside Corporate Risk Management

Gordon M. Bodnar 

Johns Hopkins University – Paul H. Nitze School of Advanced International Studies (SAIS)

Erasmo Giambona 

University of Amsterdam – Finance Group; Tinbergen Institute – Tinbergen Institute Amsterdam (TIA)

John R. Graham 

Duke University; NBER

Campbell R. Harvey 

Duke University – Fuqua School of Business; National Bureau of Economic Research (NBER)
May 16, 2014

Abstract: 
A number of theories have been proposed to explain why firms hedge. Unfortunately, these theories are hard to test: While we might observe the hedges, it is hard to answer the question of “why” hedging occurs. Our paper attacks the “why” by directly questioning the managers that make the risk management decisions. Our results present a fresh, inside view of corporate risk management. Rather than hedging being conducted solely by “firms”, our results suggest that personal risk aversion in combination with other executive traits plays a key role in whether a company hedges. As such, our results suggest an important deficiency in many modern theories of risk management which ignore the role of the individual manager.

Empirical Evidence on Repeat Restatements

Accounting Horizons Vol. 28, No. 1 DOI: 10.2308/acch-50615 2014 pp. 93–123

Empirical Evidence on Repeat Restatements

Rebecca Files, Nathan Y. Sharp, and Anne M. Thompson

SYNOPSIS: This study examines the characteristics and market consequences of repeat

restatements. We find that 38 percent of the restating companies in our sample restate at

least twice between 2002 and 2008, and 31 percent of repeat restatement firms restate

three or more times during the same period. Our tests identify several auditor and

restatement characteristics that distinguish single from repeat restatements at the time of

the first restatement. Repeat restatements are more likely among clients of non-Big N

auditors and those with lower ex ante accounting quality. However, firms that switch

auditors between the end of their misstatement period and the restatement announcement

are less likely to experience repeat restatements. Although subsequent restatements tend

to be less severe than the first in a series of restatements, firms suffer similar declines in

stock prices with up to three restatement announcements. In addition, firms often restate

the same fiscal periods multiple times, and these ‘‘overlapping’’ restatements are more

frequent when managers are distracted by other difficulties, such as discontinued

operations or internal control weaknesses. Our findings should be valuable to investors,

regulators, and other parties interested in repeat restatements. We provide research

design recommendations for researchers to incorporate in future research.

Are Capitalized Software Development Costs Informative About Audit Risk?

Accounting Horizons American Accounting Association Vol. 28, No. 1 DOI: 10.2308/acch-50580 2014 pp. 39–57

Are Capitalized Software Development Costs Informative About Audit Risk?

Gopal V. Krishnan and Changjiang (John) Wang

SYNOPSIS: Capitalization of software research and development costs (SDC) under

SFAS No. 86 is the only exception to SFAS No. 2 that calls for immediate expensing of

R&D costs. Although intangible assets have become increasingly relevant for firm

valuation, they remain largely unexplored in audit research. This is an important topic

because intangible assets, especially those that are internally developed, pose greater

challenges in assessing audit risk relative to tangible assets. Capitalization of SDC offers

a unique opportunity to study how auditors assess audit risk associated with the

recognition of this intangible asset. While capitalized SDC could shed light on software

products’ potential commercial success and inform the auditor about the client’s

business risk, the accounting flexibility allowed by SFAS No. 86 also increases the risk of

earnings management, and thus implies higher audit risk. Using audit fees as a proxy for

audit risk, our results indicate that capitalized SDC are negatively associated with audit

fees for firms where capitalization is inconsequential to beating analysts’ forecasts, and

also for firms with low analysts’ following. These results support the notion that

capitalized SDC signal lower business risk, especially for firms with low earnings

management risk or high private information.

Fee pressure and audit quality

Accounting, Organizations and Society 39 (2014) 247–263

Fee pressure and audit quality q

Michael Ettredgea,⇑, Elizabeth Emeigh Fuerherma, Chan Li b

abstract

This study investigates the association of audit fee pressure with an inverse measure of

audit quality, misstatements in audited data, during the recent recession. Fee pressure in

a year is measured as the difference between benchmark ‘‘normal’’ audit fees and actual

audit fees. We find fee pressure is positively and significantly associated with accounting

misstatements in 2008, the center of the recession. Our results suggest that auditors made

fee concessions to some clients in 2008, and that fee pressure was associated with reduced

audit quality in that year

Creating Value by Changing the Old Guard: The Impact of Controlling Shareholder Heterogeneity on Firm Performance and Corporate Policies

Journal of Financial and Quantitative Analysis / Volume 48 / Issue 06 / December 2013, pp 1781-1811

Creating Value by Changing the Old Guard: The Impact of Controlling Shareholder Heterogeneity on Firm Performance and Corporate Policies

Hua Deng^a1, Fariborz Moshirian^a2, Peter Kien Pham^a3 and Jason Zein^a4

Abstract

Theory suggests that controlling shareholders can influence firm value through both shared benefits creation and private benefits consumption. Using negotiated control-block transfers from 31 countries, we look beyond ownership concentration and investigate how controlling shareholder heterogeneity influences the relative importance of these two effects. We document that a control transfer precipitates positive firm outcomes particularly when the vendor has maintained control over an extended period and the acquirer displays a strong incentive to engage in restructuring. In such cases, we observe a sustained positive price reaction, more focused corporate investments, lower leverage, higher operating efficiency, and superior long-term performance.

Wisdom of Crowds: The Value of Stock Opinions Transmitted Through Social Media

Wisdom of Crowds: The Value of Stock Opinions Transmitted Through Social Media

Hailiang Chen

Prabuddha De

Yu (Jeffrey) Hu

Byoung-Hyoun Hwang

Social media has become a popular venue for individuals to share the results of their own

analysis on financial securities. This paper investigates the extent to which investor opinions

transmitted through social media predict future stock returns and earnings surprises. We

conduct textual analysis of articles published on one of the most popular social media

platforms for investors in the United States. We also consider the readers’ perspective as

inferred via commentaries written in response to these articles. We find that the views

expressed in both articles and commentaries predict future stock returns and earnings