Monthly Archives: February 2013

The Structural Flaw in Data-Driven Quantitative Analysis

Rodin's ThinkerPeople who lean more towards fundamental analysis tend to think differently than others using alternate methods. There is a distinction between those people that rely on news and statements by management and fundamental analysts who rely solely on numerical analysis, which are probably more like technical analysts in their thought processes. Those who take a qualitative approach tend to question their assumptions more, because they rely on opinions and obviously everybody who engages in any kind of analysis should always question the underlying assumptions and learn the limitations of their systems.

I want to make it clear that I am not deriding technical analysis as a foolhardy approach. Even the most rigorous fundamental analysis is subject to the issues I discuss here. However, the severity and prevalence of the issues for fundamental analysis is lower. Technical analysis by its very nature exposes itself to the flaws of forecasting.

The Security Blanket of Numbers

Fundamental analysts using a numerical approach are not ultra-reliant on historical analysis to the extent that they limit exposure to assumptions regarding the future, however they share their faith in numbers with technical analysts. Rarely is the world so black and white, and often you might find yourself using a mixed approach. Something about the way we are wired makes us more comfortable trusting calculated numbers than the statements of individuals. I might not be exposed to a representative sample of people, but I see this worship of numbers far too often. It could be due to the fact that most people I know are science and engineering types. If you are surrounded by people more attuned to the philosophical theory of knowledge it might be different. Continue reading

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Lessons from the Intelligent Investor Part 2: Inflation

Pile of BooksThis is part 2 of my series dedicated to the teachings from one of the best value investment books of all time, “The Intelligent Investor” by Benjamin Graham. I encourage you to pick up a copy of the book and read along. Today I’ll be discussing Inflation, a topic which Graham has dedicated chapter 2 to in his book. Graham, more than any other investor in history preached the importance of not losing money. Usually this is taken in the context of minimizing risk in a particular investment, but applies equally to the often invisible capital erosion effect of inflation. For today’s young investors, inflation often doesn’t play a part in investment decisions. While this is due in part to a lack of understanding of the mechanics, it’s also due to the fact that inflation has averaged just 1% (or thereabouts) for the recent past. Continue reading

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Buying Bio-Reference Labs (BRLI)

BRLI logoToday Bio-Reference Laboratories (BRLI) is down more than 4.5% on no news to $26.45 at the time of this writing. In a recent article I performed a detailed analysis of the company and estimated an intrinsic value of $39.23. A buy target was set at $27.46 based on a 30% margin of safety.

A quick review of the company’s fundamentals does not reveal that anything significant has changed since the time of this analysis, and I am therefore adding to my position at this price level since the stock is trading below the target buy price. For tracking purposes I am adding BRLI to the Stockodo Portfolio. Based on an allocation of 10% of a $200,000 portfolio, a total of $20,000 will be allocated to BRLI, resulting in a purchase of 750 shares.

Related: Value Investing Workflow

An entry at $26.45 represents a 32.5% margin of safety over the company’s intrinsic value. My exit target will be 15% higher than IV, which would currently be at a price of $45.11 which would represent a simple gain of just over 70% if it is realized. On the downside we will look to exit the position only if the fundamentals that prompted us to select this stock in the first place change for the worse.

Readers: What is your opinion of an investment in BRLI at these price levels? Let me know in the comments below.

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