26 Oct Milk and Seaweed, Charts and the CNAV strategy – What do they have in common?
My little kid is turning two and is starting to have a mind of his own.
He is starting to develop his own dress sense, preferring his dinosaur pajamas over the frog and the crab ones. He wants to decide when to shower and how long he gets in the tub.
He prefers his fire engine and his bus over the hippo and the elephant toy. He can sing ‘Wheels on the bus’ soulfully, rap it, or even give it a reggae twist.
And he is most determined when it comes to food. We try for him to eat healthy – minimum sweets and cold stuff, lots of fish and lots of veg. But we also understand that for a two year old, just about everything on the table is novel and a culinary experience in itself.
Just the other day, we had friends who returned from holiday in Korea and bought back packets of seaweed. Our little friend caught on quickly. He was fascinated by the texture and the saltiness and kept asking for more. We put a stop to it before it got out of hand.
Seaweed for breakfast
The next morning at breakfast, he was sitting at the table having his milk and cereal. He loves his milk, and having it cold from the fridge is a special treat. In no time he spied the seaweed on the counter and badgered me for it.
There are precious few two year olds who have seaweed for breakfast. And even less who have it with milk and cereal. I tried to explain to him in my most patient manner that savory and sweet don’t go well together. I even conceeded to him a sheet or two if he were to finish his breakfast quickly.
That explanation did not go down well with him. He was persistent. Out of desperation, I tore open a pack and broke off a corner for him. He chomped away at it in glee.
It would have been the end of the story had I not been suddenly overcome with a tinge of sadomachoism. I passed him another piece which he gratefully grabbed and stuffed his face with. I then suggested that he takes a mouthful of milk.
The cold milk hit the seaweed full blown in his mouth. The grimace on his face was priceless. It was the moment he realized that putting two yummy food together does not make them doubly awesome. On the contrary, both of them end up destroyed.
Since the beginning of this year, we have conducted eleven runs of our Value Investing Mastery Class. Participants learn how to calculate the Conservative Net Asset Value (CNAV) of a stock within 15 minutes. Every single class is sold out, and it remains so till the end of the year.
We have had great feedback about the course and we are finalizing dates for 2015. We hope to increase the frequency so that the CNAV strategy goes out to even more retail investors.
The Investment Game
During the class itself we would play an investment game. We would split the class into teams and provide them with information on five stocks. The teams are to analyze the stocks based on these real life data extracted from the firms annual reports. They will then decide whether they want to purchase or sell the stocks. Team with the largest portfolio after a few years win the game.
It was a blast for the players. They get a million bucks to spend while putting something they have just learnt into practice.
It was a blast for me as well because I get to be a fly on the wall, manuevering amongst the teams and listening to their sometimes heated discussions. Shall we buy this? Is counter A better than counter B? How about we put fifty percent in each? Or maybe more?
Now the strategy is rather straightforward, and most teams are in general consensus about which are the better stocks. But there is something interesting I have discovered over the many sessions we conducted.
Stock charts and CNAV
Despite us having been discussing about CNAV the entire day and made not a single mention of charts, every team would defer to the stocks charts we have diabolically provided.
The discussion then shifts to up and down trends, (or the lack of trends), volume (or the lack of volume), and how the stock would trade in the coming year based on the patterns they see. With that information, they then adjust their buy sell decision accordingly.
Without fail. Every. Single. Time. #truestory.
The CNAV strategy allows us to discover undervalued stocks at great prices, applying filters to sieve out value traps. Very often undervalued stocks trading at a discount to their Conservative Net Asset Value are overlooked by investors. They do not see much action on a daily basis, the prices stagnant and volumes thin.
Yet when teams play the game and see this situation manifested on the charts they get put off and make decisions to invest their money elsewhere. Or they choose to invest a lesser amount in a perfectly reasonable CNAV stock.
Now, the CNAV strategy is a great tool. So is technical analysis. But putting the two of them together in this manner is nothing short of criminal. CNAV allows an investor to get in before the price start to run. Technical analysis uses current price patterns to predict future movements. They are not complementary.
In this case, putting two good strategies together does not give investors a higher chance of success. They are at opposite ends of the spectrum. Having more of one would mean having lesser of the other.
Less is more.
As our little friend has discovered, milk and seaweed really do not go well together. Investors who try to get more out of their strategies by mixing and matching might just end up with a mouthful of soggy seaweed and salty milk – not very pleasant at all!