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Marc Gerstein

 
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  • What Warren Buffett Is Missing [View article]
    "You are either 100% value or 0%, mixing in technical analysis means you aren't buying and selling based solely on intrinsic valuations, which means you aren't a value investor at all."

    Who cares!

    This isn't about qualifying for membership in some sort of value-investors club. It's about earning stock-market returns. As one who knows presumably knows what works, I assume you're aware that pretty much any strategy can work if well executed (not necessarily all at each and every point in time, but over a reasonable time frame, any well-executed strategy can succeed).

    I actually like the idea of combining valuation with technical analysis. I don't do it myself because my technical-analysis skills are limited. But I tip my hat to those who can do both. And doing both is a worthy goal. There's no virtue to holding a well-valued stock that languishes indefinitely with its low valuation (Q: How long can the market continue to remain wrong? A: A heck of a lot longer than you can continue to remain solvent!) when it's possible to hunt for well-valued stocks that are showing signs of starting to move.

    It may be great to "buy" an attractively valued stock, but as soon as the trade is complete, who the heck wants value; the dream is to have said value stock to convert into an overpriced, over-hyped piece of junk that can be sold at a handsome profit. The challenge is to find situations where we can get some movement toward realization of the dream. I tend to try for that with hybrid value-growth or value-sentiment approaches; If the author wants to hone his skills on value-technical approaches, more power to him.
    Jan 10, 2011. 12:29 PM | 2 Likes Like |Link to Comment
  • What Warren Buffett Is Missing [View article]
    I'm baffled by this article.

    Is it an attempt to make a case for GMXR, NRG, and NRG. If so, it's not persuasive because it really doesn't say much about GMXR, NRG or NCI except some guesswork on whether Warren Buffett could or couldn't buy it which, ultimately, is a "Who cares?" issue. The prior article you wrote on GMXR is more interesting and if you want to make a case for NRG or NCI, that's what you should do.

    Or . . . is this some sort of attempt to tell us something about Warren Buffett? If so, I think you need to step it way up considering he's one of the most written-about investors on the planet (and, probably, on Seeking Alpha) and nobody needs a rehash of basics that were voluminously covered over and over again over the last 20 years. That's especially so since those ideas (based heavily on what others believe about Buffett as opposed to what Buffett actually says and does) may not present all that accurate a picture. You assume, for example, that Buffett won't invest in small caps. That's not necessarily the case. He may or may not choose to own them in his portfolio (we don't know -- the holdings that are disclosed are only the largest; there are others), or he may or may not choose to acquire such companies outright. If you look through the record of what Berkshire has acquired over the years, you may be surprised at its periodic non-conformity to the stereotypes. Buffett is not by any means the humble, folksy-Norman Rockwell type of investor many assume he is. He's actually a very hard-boiled go-anywhere do-anything sort, as evidenced by his dalliances in precious metals, structured derivatives, private placements, etc.

    Charlie, the world does not hear about what a student thinks Warren Buffett is missing. On the other hand, some of your other articles suggest a strong talent for analysis, including a willingness to take very bold stances (i.e. your Life Partner Holdings piece) and build your case.

    If you really really really want to join the army of Buffettologists, then you really need to step it up. I'm not sure, though, that this would be worth the effort. You do good work when you evaluate stocks on your own, and I think you have a lot more upside if you avoid distractions (such as efforts to invoke Buffett) and stick with the sort of analysis you've done in your other articles.
    Jan 7, 2011. 01:01 PM | 6 Likes Like |Link to Comment
  • Forget BRICs, Try Killer BEEs: The Next Group of Big Emerging Economies [View article]
    Cool name and cool idea.

    Now, you need to create your BEE or KillerBEE index, license it to PowerShares, MSCI or whoever for use in an ETF, and enjoy your royalties!
    Jan 6, 2011. 12:33 PM | 6 Likes Like |Link to Comment
  • Time to Sell Gold? [View article]
    As an apparent Buffettologist (I assume that from the title of your blog and newsletter: "Buy Like Buffett"), I suggest you allow a bit for the fact that times change. I know full well all the Mr. Market allegories and the case for contrarianism and value and certainly the merits of using CNBC anchors as a contrary indicator.

    That said, much of this body of thought reaches back to a day when information was a heck of a lot less readily available than it is today and a lot of investors, even experienced respectable investors, would act based on homework that was shallow or incomplete simply because it was so darn difficult to do. (When I started as an analyst, to get an annual report or 10-K, you had to travel to the SEC with a suitcase filled with coins for the copy machine -- which hopefully wasn't broken or tied up with a line of users -- or call the company and beg them to send it to you via some method faster than third-class mail. I was once faced with an administrative assistant to a CFO who told me she couldn't send me a 10-Q until she got her boss's permission; she had assumed these documents were confidential and could not be released to the public! Fortunately, her boss told her to send it.)

    Nowadays, for better or worse, even novice investors know a heck of a lot. It may be naive to suggest everybody knows everything, but I think it is realistic to assume everybody except the most reckless amateur is reasonably well versed in the basics.

    That means that knee-jerk contrarianism, such as you seem to be relying on here, may be outdated as a method.

    This doesn't mean you need to agree with the consensus; not by any means. But I think you do at least have to respect it and take the trouble to understand why the consensus view is what it is and explain your reasons for disagreeing with the rationale. In the old days, it was those who knew versus those who didn't. Today, it's most prudent to assume everybody knows and that the arguments are based on different interpretations of agreed-upon facts.

    For the record, experts who are bullish on gold tend, one way or another, to come back to the debasing of currencies, which we are seeing in the U.S. and the Eurozone. That's not the whole bull case, but, for starters, I do think it's incumbent upon you to address the issue and say why you don't think it doesn't justify bullishness on gold.
    Jan 6, 2011. 12:19 PM | 10 Likes Like |Link to Comment
  • Reflecting and Looking Ahead: ETF Pullback Choices This Week [View article]
    The Folio Investing graph you see in my articles is a screen shot. There are many software packages out there that let you do "screen captures" (define an area of your screen and then convert the chosen area to an image file; I use JPG). The one I use is called FastStone Capture, which is available as a shareware (I found it by hunting on Google). Like most shareware packages, there's a free trial followed by a registration fee. I don't recall how much I paid for FastStone, but it definitely was modest.
    Dec 31, 2010. 07:26 AM | Likes Like |Link to Comment
  • Reflecting and Looking Ahead: ETF Pullback Choices This Week [View article]
    I'm not sure what you're getting at.

    My affiliations are very clearly stated in my Seeking Alpha profile, as is the case with all Seeking Alpha contributors. I absolutely hope all readers click on it: I ALWAYS check the profiles when I read works by other contributors -- nobody should EVER consider an opinion on an investment-related topic without knowing something about the person who is expressing the opinion. I also hope readers will click links in my profile and go to the sites of the organizations with which I'm affiliated, namely stockscreen123.com (the individual investor version of portfolio123.com) and the Forbes Low-Priced Stock Report, based on a stock selection protocol created on stockscreen123. I'm also affiliated with Ariston Advisors, a firm created by an ex-Reuters colleague that works with screen-based models to manage money.

    Contributors aren't trying to hide affiliations. Quite to the contrary, we very much want to promote these endeavors through our articles. I'm not revealing any state secrets here. Seeking Alpha has a strong Contributor Relations organization and over time, they've worked hard to help us more effectively promote our affiliations, a recent innovation being the way they revised the author profile format such as to allow us to more conspicuously call attention to our companies, our blogs (or in my case, newsletter) and any books we might have published.

    Thus far, my Seeking Alpha articles have pretty much stemmed from stockscreen123/portfol... The Low-Priced Stock newsletter is newer (launched in mid-2010) and I expect to be writing more in the new year about the small end of the market. We're also revamping the Ariston offerings and I expect to be writing about those, too, in 2011.

    As to Folio Investors, I have no affiliation with them except for being a customer (Ariston Advisors also executes all client trades through Folio Investing) and a tremendous admirer of the way they do thing and I beleive they offer a terrific way to implement the kinds of screen based strategies about which I write.
    Dec 30, 2010. 10:59 PM | Likes Like |Link to Comment
  • Morningstar's Investing Tool: Finding the Next Super Star [View article]
    I haven't looked at the Schwab rankings in quite a while, but as i recall, it was a system that was reasonably well balanced across the basic fundamentals. Perhaps S&P is the closest similar system. I believe they do post explanations and performance records (pretty decent, as I recall) though I don't remember how to navigate to them. Schwab assigns account execs, so I expect that the one covering your account should be able to help.
    Dec 29, 2010. 08:51 PM | 1 Like Like |Link to Comment
  • Morningstar's Investing Tool: Finding the Next Super Star [View article]
    This blanket remark is intriguing considering that you, in your Seeking Alpha profile, describe yourself as "a graduate student with a Masters in Financial Engineering hoping to learn a great deal from those that are more knowledgeable than I."

    As one who has spent the last 30 years working with rating systems, I hope i'm at elast somewhat knowledgeable on this topic, although I don't know if I'm more knowledgeable than you since we haven't met. While nothing quantitative can ever be foolproof, my experience has been that there are many credible rating systems out there that are far more useful than a lot of the "financial engineering" I've seen. Rating systems do not attempt to supplant the research-oriented human brain. Actually, they try to harness that very phenomenon.

    If you read the documentation associated with any well-known rating system (you can try Morningstar for starters), you'll see that they work with very well established concepts; the very things a prudent investor doing his/her own research would embrace. Good growth trends are preferable to bad growth trends. Lower valuations are preferable to higher valuations. Strong balance sheets are preferable to weak balance sheets. Good earnings quality is preferable to bad earnings quality. Etc. etc. etc. Are these the notions of fools? I think not.

    Ranking systems differ in terms of how, exacty they define these ideas and how much emphasis they place on each. Ultimately, though, the aim is to spotlight the companies you would be most likely to prefer if you had the time and wherewithal to do an equally disciplined analysis on your own of thousands of companies, keep detailed notes, and then compare all the companies you looked at.

    Whether a particular rating system spotlights companies that appeal to you, specifically, depends on how closely your ideas on what makes for a good stock match up with those of the designer of the system; hence the importance of checking the documentation so you understand how the model works. If you are an aggressive growth-oriented investor, you probably would not like the stocks favored by Morningstar's model since they build a hefty value orientation into their approach. You might, on the other hand, prefer rating systems offered by Value Line or Investors Business Daily. Again -- I cannot repeat this often enough -- you should look at explantions/documentation explaining what the rating system is about. You cannot expect any proprietor to give away detailed tricks of the trade, but the credible outfits will tell you enough to allow you to assess the match between the system and your own style. Black-box systems, those that are devoid of meaningful explanaton, should be avoided, not necessarily becasue thy're bad but simply becasue you have no way to assess whether or not they're suitable for you.

    Another issue is whether a rating system "works." No rating system will be good for all seasons since the market goes through ebbs and flow in terms of what kinds of stocks are faovred and what kinds are shunned. When value is in, expect Morningstar to do better than Value Line. When momentum is hot, expect the reverse. Note, though, that the market is not a one-trick pony. Ultimately, over the long term, any well constructed system should do well.

    Finally, there's the issue of what it means to "rely on" a company's rating. Models issued by companies like Morningstar tend to have many stocks in the highest grade, perhpas 100 or more. Also, these models stand implicitly on a probability foundation (we can never say a stock with such-and-such characteristics "will" outperform; we can only say that based on historical experience, there is a good chance stocks with such-and-such will outperform) so not every stock can be expected to perform in accordance with its rating. So those who use ratings typically combine them with other protocols, some objective (e.g. screens), some qualitative (e.g. looking at ratings of companies that come into the news) and many using a combination of both.

    So before tossing out dismissive one-liners, I suggest you do a bit more homework. Morningstar, Zacks, and Market Grader all do credible work and are represented in the Seeking Alpha tools area. Learn what they're about. You might also want to look into the Validea "guru" based system. Outside Seeking Alpha, you should look at Value Line, S&P (forget the bond rating disasters; their stock ratings are a completely different animal and frankly, quite sensible), and Investors Business Daily. You can also come to StockScreen123 and check out the systems I've developed, including the QVGM (Quality-Value-Growth-... model I tend to use to support my own real-money stock investing.
    Dec 29, 2010. 04:04 PM | 5 Likes Like |Link to Comment
  • A Lump of Coal for Christmas: This Week's ETF Pullback Choices [View article]
    Actually, that's what I plan to discuss next week for the year-end article.
    Dec 23, 2010. 10:47 AM | Likes Like |Link to Comment
  • Netflix CEO Reed Hastings Responds to Whitney Tilson: Cover Your Short Position. Now. [View article]
    Personally, I don't have a position in NFLX stock and don't care which way it goes except insofar as this bull-versus-bear debate makes for a nice spectator sport (hence my reason for reading the Tilson article and this one)..

    But I have to say I'm very deeply troubled by this particular piece.

    I've been an analyst since 1980 and over the years have had countless conversations with executives -- one on one, in meetings and on conference calls -- and have never seen any executive, much less a CEO, come straight out and issue a specific recommendation for his/her company's stock. Generally, it is presumed management is bullish. The typical course if for the executive to explain the company's business, discuss its opportunities, and address the risks but at the end of the day, keep hands off when it comes to saying "buy" (or "cover the short") with respect to the stock.

    That could easily have been done here with some modest editing. I presume Mr. Hastings vetted this with Netflix legal and I'm a bit surprised they didn't edit or if they did, I'd be surprised Hastings rejected the edits. All that needed to be done would have been to delete the cutesy language wherein Hastings encourages his good buddy Tilson to cover the short.

    Yes, I know there's a safe harbor disclaimer at the bottom. Perhaps the lawyers said that was enough. In a strict black-and-white sense, it is. But while the law may not have been violated here, good sense and executive etiquette were definitely trampled, and if corporate lawyers and executives are going to take the position that pasting in some mandatory legal boilerplate is sufficient to allow CEOs to do cheerlead for their stocks, that would be sad. I'm sure the lawyers who allowed this to go through are familiar with the phrase "slippery slope." I think Hasting just delivered an important kick to start this aspect of securities law moving down the first part of the hill.

    And by the way, from my own experience, the few CEOs i did encounter over the years who did edge close to the line of accpetable comemenatary (albeit none nearly as close as Hastings in this case) . . . well, let me just say owning a portfolio of those stocks would not have turned out to have been wise.

    Reed, judging by your photo, you're obviously young by CEO standards, quite young. Please chalk this thing up to youthful error and don't repeat. Again, you should talk about and even advocate for your company. Just stop giving advice on NFLX stock. when you get into habit of standing so close to the edge of legality, sooner or later you run the risk of losing your balance and falling over in the wrong direction.
    Dec 20, 2010. 09:23 AM | 13 Likes Like |Link to Comment
  • Protecting Your Portfolio From Inflation [View article]
    "gold, it turns out, has historically been a terrible inflation hedge"

    Can you expand on that? This is an proposition that can't simply be stated. It calls for some discussion.

    As to REITs, I can envision historic evidence to the effect that they have performed well during inflationary periods, but how solid is that relationship? They also performed well during periods of little inflation (the pre-crisis 2000s for example). I think it's necessary to address some of the other factors that influence REIT performance. One I'm thinking about right now is supply. For example, shopping malls (big malls and strip malls) are an important REIT category, but it seems we've had a lot of overbuilding in this area. Could that trump inflation going forward?

    I also wonder about good-dividend-paying shares of companies whose earnings and dividends stand a good chance of rising along with inflation. Dividends, and high coupons on bonds (or "duration" on mutual funds -- Morningstar's has this #) can be important in that they provide continuing reinvestment opportunities. In prolonged inflationary periods, interest-on-interest becomes a huge factor in overall performance, even to the point of allowing one to accept some capital losses on principal.
    Dec 12, 2010. 10:43 AM | Likes Like |Link to Comment
  • 7 Oversold, Highly Efficient Companies [View article]
    I'm curious as to why you chose turnover as the only focus for the fundamental part of your strategy (and why inventory turnover was omitted). High turnover is nice, but not if it comes at the cost of margins that are too low. Return on capital balances margin and turnover, and this can be an important way to compare companies in different kinds of industries, some normally volume oriented and others pricing oriented.

    I re-created a version of your turnover strategy on Portfolio123. You don't give details so I had to do some guesswork, but anyway, I created a two-factor (TTM Asset Turns, TTM Receivables Turns) equally-weighted ranking system to pick the top companies from among those that pass a screen calling for RSI(14)<40. Assuming a 25 stock portfolio and weekly re-balancing, the backtest results were pretty good.

    I then changed the ranking system to use TTM return on equity and TTM return on assets. The results were a bit better than the turnover-only model. Interestingly, when I cut the list size from 25 to 15, the turnover model fared a lot more poorly while the return model improved. I can see a reason for this. Return is a more balanced and substantial way to measure company quality meaning there;s a better chance that any single company that comes to one's attention will truly be better. With turnover only, there may be more of a need to bring in a bigger sample and play a numbers game.

    I see in your company blurbs that you mention turnover compared to peer average. I'm not sure if that was part of your model, so I changed both ranking systems (returns and turnover) to sort based on industry peers rather than the whole universe. The performance fo the turnover strategy deteriorated, while the performance of the returns strategy improved.
    Dec 10, 2010. 09:18 AM | Likes Like |Link to Comment
  • The Global Frontier: ETF Pullback Choices of the Week [View article]
    I just added the rule and ran the tests. The return was cut by more than 50% and there was no reduction in drawdown.

    Actually, the only success I've seen in seriously addressing the drawdown is the market timing model we use at portfolio123/stockscre... based on risk premium and moving average crossover, not in the price of anything, but in the trend of the consensus EPS estimate of S&P 500 companies. In other words, we get bearish if the estimate revision trend is pointing downward.
    Dec 6, 2010. 01:03 PM | Likes Like |Link to Comment
  • Warren Buffett in His Own Words: 23 Timeless Quotes on Investing [View article]
    Attacks and ideological rants are disappointing, although not uncommon (and sadly, both do seem to be on an upswing) but I am surprised that you'd have thought this article might be safe from this sort of thing. As soon as I saw it, I anticipate exactly what ultimately occurred. There is more -- much, much, much more -- to Buffett than the folksy homespun Grahamesque image, meaning that anything anyone wants to say about him would, necessarily, omit many vital factors. Hence it's hard to imagine any sort of open discussion on Buffett not turning into something of a free for all.

    I suspect this particular article, which presented only the folksy side of Buffett may have been a particular lightning rod because many are angered or offended by what they perceive to be a case of a folksy image deliberately crafted to conceal a very aggressive unfolksy reality. Whether or to what extent this is true is a question that is very hard to resolve now, and financial historian may debate it at least for a generation hence.
    Dec 6, 2010. 12:40 PM | 1 Like Like |Link to Comment
  • The Global Frontier: ETF Pullback Choices of the Week [View article]
    I've heard more times than I can count about how unacceptable the 2008 drawdown was. Realistically, though, there isn't much one can do about it absent a market timing system (which I dabble in). Back then, pretty much all models failed because the only variables that really worked were "Who owns the securities and how badly do they need to raise cash?" So I dismiss that part of the backtest and recognize that I'll have to deal with similar crises outside the context of the model. (I have seen people try hard to eliminate the big drawdown, but THAT strikes me as the ultimate in data mining.)

    As to the rest, I guess you could say hunch if you like that word. It was a general sense of hos I think ETFs behave and I used backtesting to determine if I'm in the ballpark, which is pretty much what testing is all about. Would the weights change much with 20/20/60? I doubt the change would be significant. 10/10/80? Again, not likely significant. 5/5/90? I suspect that would be overloading one factor. Ditto 120 and 5, but here, i did want multiples of 30 and 5 because investors, particularly those that trade technicals, think in terms of 30-day cycles and the trading week (5 days). So I really did want 5 and not 10, and I really do want 120 and not 90 (I wanted to stretch beyond a signel quarter) and not 150 (stretching to much beyond a quarter).

    Again, all this is art combined with science and there is no single correct model. When it comes to details, there are many different ways to implement the same basic idea. And with pullback being the main theme, I really did need to significantly overweight the 5-day factor. So 30/30/40 would make for a different approach than the one I'm looking for , and even 25/25/50 changes the flavor of the strategy.
    Dec 5, 2010. 10:21 AM | Likes Like |Link to Comment
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