The Learning Never Stops

Cover Story, by Mark Robertson, Managing Partner

Posted on May 1st, 2013

This month we visit some letters, questions and commentary ... celebrating your curiosity and achievements. Can old dogs learn new tricks? What about young dogs?

One of your all-time favorite cover stories dealt with the combination of well-placed skepticism and the conscious decision to “leave the couch” as a long-term investor. In a nutshell, we asked, “Can investing really be this simple?” The answer is wrapped in over seven decades of experience and deployed regularly with measured courage. At the same time, we recognize that the learning quest is a never-ending road. We believe in Occam’s Razor. You could say that our cornerstone is trend reversion centered on imagination and long-term time horizons. This month we visit some letters, questions and commentary … celebrating your curiosity and achievements. Can old dogs learn new tricks? What about young dogs?

We share the following blog post and some subscriber correspondence. Names are withheld, but you know who you are out there … and some have been paraphrased to combine multiple letters and comments into digest form.

As a kid, they were among the moments I dreaded most. The “choosing of sides” on the playground or the sandlot were gut-wrenching moments because I often didn’t merit selection as a draft choice. “What about him?” “Oh yeah … he can be on your team if you want.”

Collective Long-Term Success. We can cite several examples of positive relative returns, from +1.0% (since 2005) for Solomon Select to +0.3% over the trailing five years for Tin Cup. But it’s the most widely-followed tracking portfolio that means the most to us in many ways. Now 7.6 years in the making and built from your consensus favorites, the MANIFEST 40 has a +4.2% relative return over that 7.6 year period. Keep in mind that we’ve been in a recent slump thanks to the info tech and education services stocks and that Berkshire is at +0.8% over the last 8 years.

Things are not always what they seem.

I had pretty good hands and was pretty good at catching a football. When it came to basketball, there were times when I heard, “Wow, the ‘fat kid’ can really shoot.” Funny, but if I close my eyes and listen, I can still hear those words.

Fast forward a few decades. We were on a mission trip in West Virginia taking up residence in a Scout camp in the mountains. We decided to play a pickup game of basketball. My friend Don and I smiled at each other as the muscle-bound high school seniors and college freshman in the group loaded up their rosters with their colleagues. We were left standing on the sidelines. Make no mistake. It’s still pretty gut-wrenching to endure this rite of passage as an “old man” but we suspected that we had the unknowing youngsters in our crosshairs. Don and I ended up on the same team. Amusement transformed into amazement as the “old men” taught the punks a thing or two. I think Don made about ten closely guarded shots in a row. Me too.

Our message is simple. Whether you’re talking about old books or old dogs, be careful about the judgments you make based on the cover. In some cases, maturity is just what you need and it can prevail over youthful exuberance.

Where Trend Reversion Meets Imagination

“It sometimes seems Manifest Investing has advanced from instructing us to doing the initial research for us. Our analysis becomes secondary and yours is primary. How many of us check “EAGLE” (Equity Analysis Guide) first and then if we can come close to your analysis? Doing your own homework has no significance anymore. Perhaps that is only my perspective but I doubt it.”

We agree that you’re not alone. We disagree that your homework has no significance. The foundation of Manifest Investing is the same bedrock embraced and deployed by the investors that have shaped the modern investment club movement over the last several decades. As analysts we know that building a vision of and for the growth, profitability and valuation characteristics for the companies we study and own forms the core of a disciplined approach.

Part of our research effort is to go “periscope up” in order to check the findings and research of sources like Value Line, Morningstar and Standard and Poor’s.

Consensus Generation. Information from some of our favorite sources of research are continuously funneled into the forecasts and composites at Manifest Investing.

We continuously calculate consensus expectations for comparison purposes. But your own analysis is and always should be primary. Deploy imagination and build your vision of what the company will look like five years from now. Check it against the legions of analysts. Our role is to make this easier to do.

Reconcile any differences. Trust. Verify.

It troubles me when EAGLE has a projection significantly different from other ACE, whether lower or higher. It would seem projected P/E is the usual villain. Value Line was a reliable support (usually) or contrary projection to your analysis. Significant information was available in the “Look Up Industry” section but they have quit publishing industry revenues, net margins, etc. that seemed so valuable to me.

Speaking of reconciling differences … first, be very careful with ACE earnings growth projections. To make a long story short, they’re basically 50% high, virtually all the time — when reconciled versus history. At Manifest Investing, we actually pay very little attention to EPS growth forecasts. Focus on the long-term growth trend and build a considered net margin or return-on-equity expectation. You’ll be far better off than the average investor.

That said, we do embed sales and EPS forecasts for the current year and next year in our trend analysis. We’re constantly (and continuously) on the vanguard for threats of declining growth rates or margins — and on the opportunity side of things, increasing slopes/potential.

We do believe that it makes sense to reconcile our return forecasts versus the Value Line low total return (VLLTR) forecast for any company — a subject touched on last month when Mark Hulbert featured our perspective on the “best four-year forecasting method.”

There will always be exceptions. When you see a large difference between VLLTR and PAR for a company, it’s generally because Morningstar and S&P have significantly different expectations for the company you’re studying. Again, reconcile and be aware of the differences.

Regarding the quality characteristic … yes, we have to factor versus industry or peer group averages. Keep in mind that an “instant industry study” that displays averages for growth forecasts and profitability is available for every company. That said, there is no perfect grouping and some industries, sub-industries and peer groups leave a great deal to be desired.

For purposes of a study, you might find it appropriate to build your own industry. For example, this month we feature C.H. Robinson (CHRW) in Solomon Select and suggest comparisons to Expeditors (EXPD) and Echo Global Logistics (ECHO). The Air Transport (Freight) industry includes FedEx and UPS, arguably asset-based logistics companies … so you might want to gauge versus EXPD and ECHO. As the accompanying figure shows, a quick dashboard can yield study group growth and net margin averages — as well as an average forecast P/E ratio.

Build Your Own Industry or Peer Group Study. From this quick analysis of Air Transport (Freight) companies focused on logistics, we find that the cap-weighted sales growth forecast is 10.1% and industry P/E is 23.4×. The weighted net margin forecast (not shown) would be 5.4%. Shares: Outstanding shares (millions). Value: Market cap. In this example, %-of-total becomes a measure of market share.

I don’t doubt your projection tools as I would tend to believe them over others, but only wished you could post these figures so all of us would have access to them, and would have the tools to further allow us to become comfortable analysts.

We’re with you. We think the grandfather of the modern investment club movement, George Nicholson, was right was he focused us on patience, discipline and a few key characteristics that matter.

We think it’s important to constantly and continuously compare our work versus the analysts. The results achieved by Tin Cup, Solomon Select, scores of model investment clubs and other implementations of the core method delivers validation. The learning never stops and we’re continuously watchful for incremental enhancements but the core philosophy and approach never changes.

Believe me, the investment community became more friendly when you and Kurt started Manifest Investing. Before you I had two different brokers who cost me a total of $100,000/year in transaction costs… [We suspect that overall performance is better, too.] If MANIFEST goes into the asset management business, let me be one of the first to know.

Wow. 1. Thanks for the kind words. 2. You’re buying dinner the next time we see you.

How well do our methods work? Fair question and very common/natural curiosity for new participants. The truth is we’re not sure and there are no guarantees. That said, we can cite numerous examples of superior performance and we never stop learning about the drivers and factors.

As Ken Kavula has shared, he uses the methods for retirement funds and I’ve used the approach for college and retirement accounts comprehensively since the mid-1990s and outperformed the market in virtually every account or portfolio along the way. We think the foundation is formidable.

There are many techniques and methods. How well do they really work under the light of day? Scrutinize at will.

Something New: Rewards

Because of your TSLO coaxing several months ago, I made a bundle on Apple selling at $670. Big Smile and Thanks. I have since been using TSLO just like you mentioned today and have been able to retain some earnings that would go into someone else’s pocket.

Several months ago, we explored the topic of stocks that behave like roman candles or cruise missiles. The context was that certain stocks “flame out” from time to time and that investors can and should discover/explore and understand protective measures. Specifically, we made a fairly persuasive case (at least in our minds) that stocks like Apple should be considered for trailing stop limit orders.

Subscribers and audience members were encouraged to make their own determination. Using Investopedia or your brokerage account educational materials, explore. Learn what they are and how they work. You can then decide whether or not TSLOs make sense to you. You decide.

But it came with a warning. These protective measures should NOT be applied across all of the stocks in your portfolio. Stocks that do not behave like roman candles really don’t need this type of protection from the perspective of a long-term investor.

Fast forward several months, and Apple has fallen from $705 to a recent low of $385 … a drop of some 45% and fairly quickly. Several of you have written, admitted that you were skeptical, pleaded guilty to old dog status — but implemented TSLO protective measures based on your studies and the logic involved. One investor intended to reinvest the proceeds of sale from a few thousand shares at $675 back into Apple at $400. We think this investor should buy dinner the next time we’re together too.

Our collective quest for learning is a never-ending work in progress. Historical lessons (like growth diversification) and new findings (like protective measures) are the types of things that make us smile. It’s all cumulative and we believe that all dogs, old and new, love to deploy a new trick or two and experience successful investing.


Mark Robertson

Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.

Expected Returns, May 2013

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