LSV Asset Management - LSVEX Fund

LSVEX vs. DFA

LSV Asset Management (LSVEX Fund) is a value equity management firm which was formed in 1994 by Lakonishok, Shleifer and Vishny – all of them are professor of Economics or Finance at distinguished universities in the U.S. Lakonishok is a well-known market behaviorist who believes that investors are irrational, being controlled by fear and greed: they usually hold onto losing stocks for too long, afraid to admit they have made bad decisions, but also quit too early on promising stocks, just to have their hands firmly grip onto their small rewards. By exploiting this, better-informed investors can make killings on consequent anomalies.

When deciding which stock to be put on LSVEX portfolio, Lakonishok also used common value indicators: cash flow to price, book to price, sales to price, dividend to price etc... However, he screens out cheap stocks of those near bankruptcy or takeover, plus the stocks that just went public, while his not-so-secret key factor in his model is diversification. Regarding small-cap stocks, no stock in LSVEX is too big to fall, and no single industry is too important as weighted in percentage. For large-cap stocks, Lakonishok fancies some undervalued companies that he thinks they “aren't as bad as the market thinks they are”. That makes up a portfolio that consistently beating the market, both in bulls and bears, in large-cap and small-cap.

When comparing to LSVEX, people often think of Dimensional Fund Advisors (DFA), one founded and directed by Fama – another famous professor of Finance in the same Illinois area as Lakonishok. Fama believes in efficient-market, that the stock price is correctly adjusted at anytime because they reflect information known to investors, so picking stock to “beat the market” is just some illusion. With that approach, Fama includes in DFA portfolio almost everything, except for those also near takeover. DFA is passively managed, thus its fees and cost are undoubtedly low when compare to other funds.

As a result, for different reasons, DFA’s and LSVEX’s portfolios both have the advantage of diversification while they also let out dying stocks. In the end, the two firms pick the same stocks or group of stocks even though their theories contradict one another.

LSVEX vs. SPY

For the analysis of LSVEX and SPY, monthly data from Yahoo! Finance was used for the period from 2009 to 2017.

LSVEX slightly outperforms SPY, so I recommend buying LSVEX.

The Reminiscences of a Stock Operator

Reminiscences of a Stock Operator - as simple as the title sounds, without using any metaphor or symbol for indirect meaning, the book by Edwin Lefèvre in 1923 is about a famous stock operator named Larry Livingston. Many people believe Jesse Livermore to be the real life Larry Livingston, for the rise and fall as a legend stock operator in his life. Despite those corresponding events, this book is “a fictionalized memoir only of Livermore’s early and ascendant years” only (foreword), and I should not wonder myself which part of it is true or nonexistent. The book has become the guideline of investors for its useful lessons while the interesting, humorous (and even sarcastic) voice of Larry Livingston keeps you hook until the end.

Larry Livingston starts off as a quotation-board boy in a stock-brokerage office. His talent in arithmetic and his great ability in memorizing numbers have led him to start predicting the market, and he began to make his fortune at some “bucket shops”, those that let you bet on stocks for even a tiny sum of money. Soon he became too good at this game, made more money than any kid at his age, and was kicked out from any shop in Boston. With some money on hand, he decided to come to New York at the age of twenty-one.

Despite high hopes for his future, he failed and lost all of his money, not only once, but thrice, before he began to understand the system, understand the differences between the game in bucket shops versus the trading on Stock Exchange. He said that “A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don’t believe in tips.” He was a loner most of his life, but he enjoyed the game and the money it brought him. He gained more valuable lessons, be more cautious when trading, and eventually became a millionaire. He was famous, and people tried to approach him. He started to spend more money, had more vacations, but then strayed away from his principles of trading, and got into some bad investments. Inevitably, he went bankrupt. That hit him hard than any failure he had experienced, but that was also a good chance to freshen up his mind. He stood up again, slowly but surely this time, and made a good fortune when the market sharply rose before World War I. He paid off his debts, and concluded his story with some more valuable lessons of the stock market and its players.

Of many valuable lessons from his books, there are some I find greatly helpful and interesting. After he failed the third time in New York, he realized what was going wrong with his method. “There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win.” In order to become better, avoid things that will get you worse. In fact, believing in yourself is hard, especially after continuous failures, but that should not get in the way of your learning. “My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision. All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable don’ts.” Be cautious, but do not be indecisive, that is another guideline for anyone feeling stuck and afraid of losing more, for anyone will surely encounter mistakes in their lives: “If a man is both wise and lucky, he will not make the same mistake twice.  But he will make any one of ten thousand brothers or cousins of the original.  The Mistake family is so large that there is always one of them around when you want to see what you can do in the fool-play line.” While you can improve yourself by avoid making the same mistakes, you should accept that there are far too many mistakes in life and try not be frightened by them. People were wiped out of the stock market not because they were ineligible, but because the fear was too much for them to handle and they ended up disbelieve in themselves. “The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. The market does not beat them.  They beat themselves, because though they have brains they cannot sit tight.” The last sentence really struck my mind, even though it is not some totally new wisdom, as people keep saying that your greatest enemy is no one but yourself. Overcoming bad habits, fear, indecisiveness, and forgiving yourself will open your mind for learning new things, and help you advancing in life.

In conclusion, within the range of a few words, I cannot describe the true value this great book contains. Although it was published almost a hundred years ago, and the system has changed a lot, it still holds many lessons that are applicable in investing world. If you are interested in the stock market, and see yourself as an investor, my recommendation is to start with this book as your guideline. Even if you do not have too much interest in the stock market, there are many psychological perspective and lessons in life you can take from the book. The Reminiscences of a Stock Operator by Edwin Lefèvre is a classic, marvel, one of the most widely read and highly recommended investment book ever that will enrich yourself with lots of wisdoms.