Deep Value Investing
This is the first in a series of posts where I describe how I stumbled upon Deep Value Investing, and my approach to shooting for 50 - 100% yearly gains.
Been trying to figure out how to start investing in value stocks-given by high exposure to growth via ETFs like $SPUS and my individual stock picks ($TSLA, $AMZN mainly).
I set off thinking about what I’m really after. I know, at least for this portion of my portfolio, I’m not content with 7%/yr compounding. I want 50% - 100%/yr returns, so even a relatively small amount of money invested could start to compound at a much faster pace. Of course, this high potential for return will also come with high risk, and my hope is that I can manage some of this risk through research, and a focus on fundamentals.
This was the state of my mind over the past few months, and 2 weeks ago when I came across the concept of Deep Value Investing, entirely by accident. It came from an unlikely source — Gamestop, which at this point I’m certain everyone on planet Earth has heard about. I read a piece on the WSJ about the person that created the movement on Reddit, a gentleman called Keith Gill. Turned out, he had started a YouTube channel called “Roaring Kitty” about 6 months prior, where he shared his ‘deep value investment’ philosophy. I played one video, and I was hooked. Over the course of 2 weeks, I got sucked into his world.
In total, I watched over 50 hours of streams, and soaked in everything like a sponge. How to screen stocks, more financial jargon than I had ever known existed, and what to look for. The videos themselves were just prompts — I took down alot of notes on things I didn’t know, and researched incessantly.
All this culminated in me designing and building a dashboard in Google Sheets that allowed me to instantly pull in the metrics I’d need to make a buy decision on a stock – all through the fundamentals, and a meticulous screening process.
I then went beyond Roaring Kitty, reading other resources on Deep Value investing and following others that have taken this path.
I still have no idea if this will work out, but I have to try. Discovering Deep Value Investing was like bumping into exactly what I aspired to accomplish from investing - and it was mesmerizing.
• • •
Today, I’ll start sharing this journey with you so that we can learn together.
I will make mistakes along the way, no doubt. Writing down my ideas helps me to critically evaluate them, and discover what works and what doesn’t.
Finally, and perhaps scariest of all, I’ll be putting real money on the line. I will track the performance of this portfolio over time to see how close I can get to the 50 - 100% annual returns I aspire to.
I’m excited to be starting this journey, and thrilled that you’re joining me so we can all learn (and hopefully make some money along the way!)
• • •
How To Find Stocks To Study
I initially thought of just setting up a screener-one of the many that are available. There were a few issues here:
- Thousands of stocks means you can’t review everything
- Setting up filters, while helpful at first, is daunting. It’s tricky to know what to filter for, and the filters that do make sense are not hard limits (where 99.9 is acceptable, but 100.0 is rejected)
- I also didn’t trust in my ability to source good ideas initially - I felt like I needed some guidance, or indication that someone has looked over this opportunity and saw enough to decide to invest
I’m not afraid to admit it, this last point weighed heavily on me. It’s one thing to read a bunch of investing books and pontificate in an armchair (where pontifications often take place) about what is good and what is not. It’s another thing entirely to put real money down - especially in companies that the market may be pricing very low (perhaps they’re crap?).
So it was such a relief to discover the Roaring Kitty approach - radically different as it was.
It relied on two primary sources for stock discovery:
- Insider buying
- Fund tracking
1. Insider buying
I love this one! In the US, Canada and a bunch of other markets — insiders (employees and directors) are required to publicly disclose trades they make of their company stock. What better way to discover stocks than through leaders at their own businesses!
It’s by no means fool-proof (insiders have their own biases to contend with), but nevertheless – significant purchases are a strong vote of confidence and definitely merit careful study!
Let’s do this
I’m not here to just learn, so it’s time to do some doing:
- Head to http://openinsider.com (or https://www.gurufocus.com/insider/)
- Pick out stocks where you see multiple insiders buying (these are known as ‘cluster buys’). Extra points for those with substantial amounts ($100k+).
- Write down the ticker in your tracking sheet.
You can take your own sweet time doing this, but I like to reserve deeper dives for later — when I’m assessing the fundamentals of a company.
I just make sure to filter out Financials right off the bat, since I know that these are almost universally haram.
Here’s a few things to note:
- If insider’s keep buying when the stock price drops, that’s a massive vote of confidence
- If the person doing the buying is recently appointed, it carries less weight (they may be doing it out of a sense of obligation)
- Routine insider purchases should carry less weight
Here are a few that I noted down while doing this exercise:
2. Fund tracking
Similarly, funds are required to disclose their holdings in companies - though the notice period varies, depending on how much they own.
- If a fund purchases more than 5% of the stock in a public company, they need to disclose this (through a Form 13-D within 10 days).
- For all other trades, funds (with over $100m in assets) must disclose their complete holdings through a 13-F filing within 45 days of each quarter end.
You have to be very selective about which funds to track - and frankly, I have zero experience here. Instead, we could just review the performance of previous fund picks and see which ones have a good track record behind them. Roaring Kitty helpfully shares a list, that I use as a starting point for my own.
Let’s do this
I was able to get a list of some of the funds that Roaring Kitty tracks to use as a starting point:
- Scion Asset Management
- C Icahn Carl C
- Oshaughnessy Asset Management
- Berkshire Hathaway
- Towle & Company
- Greenlight Capital
- Fairfax Financial Holdings
- Baupost Group Elc
- Abrams Capital Management
- Weber Alan W
- Lapides Asset Management
- Perceptive Advisors
- Ares Management
- Oaktree Capital Management
- Mhr Fund Management
- Hussman Strategic Advisors
- Third Avenue Management
- Walthausen & Company
- Portolan Capital Management
- Knowledge Leaders Capital
- Mcclain Value Management
- Signia Capital Management
- Bernzott Capital Advisors
- Sheffield Asset Management
- Hodge Capital Management
- Weitz Investment Management
- Intrepid Capital Management
- Old West Investment Management
- Luminus Management
- Kopernik Global Investors
Here are the steps to follow:
- To find the list of holdings for each of these funds, head to https://whalewisdom.com
- Search for the fund name, and click on Top Holdings.
- Note down the top holdings
For example, here’s the link to Scion Asset Management (that Michael Burry, of The Big Short fame runs): https://whalewisdom.com/filer/scion-asset-management-llc#tabholdings_tab_link
- Put more emphasis on positions that the fund entered or added to, since those reflect active decisions made on their part based on recent information.
- Call options carry less weight, since they suggest less conviction on the magnitude of the move
Note: Remember that the numbers are likely at least a few months old, due to the large filing window.
Here’s what I got from the first 4 funds:
Already, I started to notice a problem. There are so many leads to analyze! If this is going to work, I need a quick way to go through a company and decide on whether to invest in it or not.
That’s what the next section is all about.