Dasan Stock Digest: Hedge Fund Value Investing

Who should read DSD?

Self-confident investors, that understand and believe in the merits of Dasan’s “new generation Value investing” will benefit from reading the DSD. As you can see, stock market investing can be extremely risky and monthly drawdowns as much as 10% are common. If you can handle being in “unpopular” investments, often investing against the flock of Wall Street, DSD may be for you. This strategy over the last ten years has generally been down the same amount as the S&P 500 in down months, and up 2-3 times as much over the course of up years. So if the S&P 500 loses 8% in a month (a very bad month), this strategy will probably lose 8% that month. However, in a good year for the S&P 500 like 2008 in which the S&P 500 went up about 25%, this process returned about 75%.

These returns are round numbers and depend on your own exact entry points on investments. The DSD will be updated on the exact day Dasan adds or removes a stock from the Dasan Portfolio, so your results will not be the same – they may be slightly better or worse depending on the size you are investing and the exact moment you decide to act on the information.

This service could be used quite easily on “auto-pilot” by someone who wants to have a portfolio of generally large and mid-cap, highly liquid stocks. The Dasan Portfolio does not usually employ leverage.

The Dasan Portfolio is usually heavily skewed toward the long side, with only two or three short ideas at a time. I find shorting stocks to be a much more difficult art than buying stocks. Therefore, if you are running this approach in tax-sheltered accounts (IRAs, IRRAs, and Roths) you can just use the long ideas and ignore the shorts. I do not short stocks only on a pair basis- they must be shorts that “hold up on their own” and have accounting issues, technological obsolescence, unsustainable fads or outright fraud.

Institutions & the DSD

For analysts or portfolio managers who need another layer of detail, the DSD provides earnings call recaps on several stocks, along with bull and bear theses. These reports may provide them with the “crux of the matter” and “key metrics” for the stocks in question to supplement their own research. The casino and technology industry metrics reports may also be useful if they also invest in these sectors.

Caveats

We could give the DSD free to 90% of the investors and they still could not make money with it. It takes a lot of discipline to buy the right stocks when the majority of opinion is against you.

Investing in stocks is very risky and part of the reason this approach works for Dasan is he has been investing like this for a decade, and spends 8-10 hours every day studying and researching stocks. You may not be able to duplicate the same results with your own portfolio, because you have not paid the price in research time needed to have the same level of conviction yourself. Unless your belief in this philosophy is rock-solid, the stock market will test your mettle. We strongly believe that in the stock market, you are paid for being uncomfortable, not for doing the easy thing, which is usually selling as soon as the market goes down.

One idea is to start small, using this approach with only a small portion of your total risk assets. Dasan writes frequent updates, especially when stocks are volatile, but it may not be enough to “keep you in” stocks when naysayers voices are loud in the media.

The Dasan Portfolio Investment Process

1. Monitor metrics in the technology, gaming, media, telecom and retail industries.  Identify major secular shifts and themes in technology. Carefully observe macro trends and stock market indicators, especially fund flows and other measures of market psychology.
2. Monitor carefully a limited universe of technology, gaming, media, telecom and retail stocks. This includes listening to quarterly earnings calls not only for specific stock information, but also to fill in my “mosaic.”
3. Add new stock position to the portfolio only after doing extensive research and attempting to value the company. Always do a form of “Greenwald/Buffett” analysis for competitive advantage. Always use rudimentary technical analysis of the chart to determine wise entry points.
4. New positions are “on probation” and stop-loss points are at least written down, if not actually entered as ordered.  As positions work and grow, continually re-evaluate the competitive positioning, execution, and financial management of the company.  Valuation is reassessed continually; I do not sell based on initial “price targets” because new information arrives at all times, and valuations can stay high for extended periods.  “Buy like a value investor, sell like growth”
5. Hold investments long enough to drive performance. Holding period on successful stocks is from 6 months to 5 years. Average holding period is 18 months. Looking for stocks that over time can go up two, five, even 10 times in value. Not taking risky “binary” outcome bets in size. Content to buy a stock that appears that it could go up 25-50% in the next year. Unsuccessful stock holding periods tend to be shorter.
6. Repeat Steps 1 through 4.

Core Areas of Competence

1. Technology. Especially (recently) in the mobile space, handsets, software, PCs, semiconductors, some Internet. In general, I prefer companies higher up on the value chain and dislike component and telecom gear makers. I don’t like to bet on unproven nascent technology. I like to invest in names that people have a visceral dislike for because they are using disruptive technology. “Digital losers” are great shorts in many cases.
2. Telecom & Media. Wireless carriers, handset makers, content companies, studios and even traditional cable companies are great sources for ideas. Although the carriers have not been worth investing in for the last 3 years, understanding their business has been a great source of other profitable ideas.
3. Gaming. Casinos, slot makers. Understanding the world’s major casino markets: Macau, Vegas, Singapore, Atlantic City, and Pennsylvania is important. Understanding capital structure and being able to correctly identify the waterfall is important.
4. Retail. Retail apparel stocks are fertile ground for my type of investing, because Wall Street sell-side Retail analysts are extremely weak. They often get lost in the day-to-day fashion issues and miss the big picture. These companies also release sales figures monthly, so there are many opportunities for savvy value investors to get good entry points.

Portfolio Construction & Risk Control

1. I believe in a concentrated portfolio. I follow a hundred companies closely, but I will only own about a dozen at once.  This approach is less risky than most funds I have seen with about 35 positions that they barely know. I know my companies very well. I sometimes have a position that grows to a large portion of the fund and will begrudgingly sell some of it even if I think it is good, just for risk control.
2. I do not “swing for the fences.” I am investing my money, and letting my clients invest along side me, not the other way around. I do not ever start with a position size greater than 5% of the fund. I consider taking huge bets to be a big mistake. If I took a 10% position, what am I hoping for? The position will never be able to double or triple, because I will have to sell a lot of it before it gets there. If it drops in half, it will be damaging to my overall results.
3. I sometimes round trip stocks, because I think the big mistake is selling a good investment too soon. You can indeed go broke by taking profits. I am stubborn, but not too stubborn. If I think I have the story right and the Street is wrong, I will hold my ground. However, I will not fight the charts much.
4. New positions, on probation, get tighter stops. If I am stopped out, I may still buy back in the same stock if my thesis on the stock starts to play out. Then I will only buy back in at a higher price than the stock peaked at before.
5. When I am going to be away for a few days, or if I just see many signs that risk is growing in the market, I will enter stop orders on all of my positions. This allows me to think clearly and keep my wits. On paper, it looks like this has hurt my performance, but that misses the point that I have been able to let winners run a lot longer by having these stops in place.
6. I try very hard to be calm in the face of inevitable market sell-offs. I understand intellectually the idea of “Mr. Market” and every day I try to condition myself to understand it on an emotional level. My returns tend to mirror the S&P on down months, but outperform by 2 times on up months. This is due to stock selection, but maybe even more due to attempts at rational behavior in the face of constant short-term market panics.

What is the difference between DSD & DSD Pro?

DSD Pro was developed for our clients who are hedge funds, mutual funds, portfolio managers, investment bankers, etc. This product provides these clients with industry metrics and earnings call reviews with updated segments. These reports are not sterilized of industry and accounting jargon such as ASP, ADR, RevPar, Churn, Subsidy, EBITDA, etc.