Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: their processes, challenges and philosophies and security selection. I'm David
Speaker 1: cone I, lead mutual fund and active research at Bloomberg Intelligence.
Speaker 1: Over the last decade, value investing has gone through long
Speaker 1: stretches of underperformance, while markets have been dominated by a
Speaker 1: narrow group of large cap growth stocks. At the same time,
Speaker 1: one signal that's constantly drawn attention, especially during periods of volatility,
Speaker 1: is insider buying. Today, we're going to explore what happens
Speaker 1: when you combine those two ideas, value investing and insider
Speaker 1: behavior into a systematic investment approach. Joining me as my
Speaker 1: guest today are John Spears and Jay Hill, who are
Speaker 1: both managing directors at tweety Brown Company and portfolio managers
Speaker 1: for the Insider Value ETF ticker COPY and the International
Speaker 1: Insider Plus Value ETF ticker ICPY. John, Jay, thank you
Speaker 1: for joining me today.
Speaker 2: Thank you for having the opportunity to be with you.
Speaker 1: David, Thank you very much for having us.
Speaker 3: David, appreciate your interest.
Speaker 1: So to start tweety Brown, you know as a long
Speaker 1: lineage rooted in Benjamin Graham. How is your definition of
Speaker 1: value evolved in today's market environment?
Speaker 2: Well, Benjamin Graham defines in security analysis and in The
Speaker 2: Intelligent Investor he defines basically defines the intrinsic value is
Speaker 2: the value of the business. If all three of us
Speaker 2: owned a company and we hired Goldman Sachs to sell it,
Speaker 2: it'd be that estimated intrinsic value what we'd receive for
Speaker 2: if we sold the business. And there's another way of
Speaker 2: looking at value or undervaluation, and that is yield. J
Speaker 2: Hill at our firm, I think coined the phrase owner
Speaker 2: earnings yield. So it'd be if you own the whole company,
Speaker 2: what kind of return do you get on your investment?
Speaker 2: How much cash could you take out of the business
Speaker 2: every year? So, and you can compare yields on all
Speaker 2: different kinds of things. That higher dividend yield is often
Speaker 2: considered to be a sign of undervaluation. Earnings yield of
Speaker 2: course you can compare of course to treasury bills. But
Speaker 2: that's those are the two I think the two big
Speaker 2: ideas when they add anything to that jay.
Speaker 3: Yeah, just owner earnings yield. It's a term You're probably
Speaker 3: not going to find it in textbooks, but it's one
Speaker 3: that we use. And the numerator is what I guess
Speaker 3: the financial literature would call NOPAD. So after tax ebit Okay,
Speaker 3: so ebit times one minus the tax rate, and the
Speaker 3: denominator is the enterprise value right the market cap plus
Speaker 3: the net debt is the simple definition. And the basic
Speaker 3: idea is if you bought the whole company and paid
Speaker 3: off all of the debt and then therefore you have
Speaker 3: ebit and no interest expense on an after tax basis,
Speaker 3: if you owned the whole company, how much money could
Speaker 3: you put in your pocket? And generally we're looking for
Speaker 3: owner earnings yields of eight percent or higher.
Speaker 1: Okay, Now, if we go step further, you know what
Speaker 1: led you to combine inside of buying with value investing?
Speaker 1: And you know why do you think that combination is
Speaker 1: so powerful?
Speaker 2: Well, the key thing I think is is self interest.
Speaker 1: And we.
Speaker 2: Have done a lot of empirical research and it examined
Speaker 2: a lot of empirical research, mostly from academia, and a
Speaker 2: big influence on our process in our empirical research was
Speaker 2: a book written by Nahat Seihan, who's a professor of finance.
Speaker 2: He's chair of the Finance Department at the University of Michigan,
Speaker 2: and he wrote a book called Investment, An Intelligence from
Speaker 2: Insider Trading, And in that book there is a long,
Speaker 2: a long, turned back historical study that he describes. Initially,
Speaker 2: the study began in nineteen seventy eight and ended nineteen
Speaker 2: ninety three. And the fascinating thing is that he had
Speaker 2: a schedule in it where he took all the insider
Speaker 2: transactions and he looked at the stock price in relation
Speaker 2: to book value and earnings, and you rank the stocks
Speaker 2: from cheapest to most expensive. And he found that the
Speaker 2: insiders who were opening up their own wallets and buying
Speaker 2: the stock when the stock was at the cheapest twenty
Speaker 2: percent of stocks ranked on price to book value, the
Speaker 2: cheapest twenty percent of stocks ranked on price earnings again
Speaker 2: from cheapest to dearest, that the excess return using an
Speaker 2: equal weighted index was a little bit more. It was
Speaker 2: around ten to eleven percent in both of those long
Speaker 2: run studies. And that just made our eyes pop out.
Speaker 2: That's as you know, it's tough as the dickens to
Speaker 2: beat the market. The odds are against active management. Long
Speaker 2: run index funds tend to beat most active managers who
Speaker 2: are smart and working hard, et cetera. But here was this,
Speaker 2: here was this great study. So we've had separate individual
Speaker 2: experience of getting ideas from watching insider trades. We've used
Speaker 2: this technique on a one off basis for fifty years,
Speaker 2: and so we thought we see if we could study
Speaker 2: this ourselves and think about looking at other investment carearacteristics
Speaker 2: beyond just price to book value and PE. And our
Speaker 2: studies began in nineteen ninety six and ended in twenty
Speaker 2: twenty two, and we found similar results the results that
Speaker 2: are described in that booklet called Insider Investment Factor. But
Speaker 2: I think we sent to you. I think Conrad sent
Speaker 2: that to you has some tables, not only professor seance table,
Speaker 2: but our own research. The results were just as good
Speaker 2: as what he found, So that that just motivated us
Speaker 2: to got the idea that if we could package this
Speaker 2: and if it worked as well as the empirical data,
Speaker 2: if we put it in a portfolio and had the
Speaker 2: tax advantages of an ETF, it'd be an attractive thing
Speaker 2: both for our own money and for our outside clients money.
Speaker 2: I don't know if you know this but we were
Speaker 2: fortunate to have about fifty million of our principles and
Speaker 2: employee wealth invested in in copy and in a little
Speaker 2: bit less or less so an I coopy combining, and
Speaker 2: it's at least fifty million.
Speaker 3: So that's David. What I would add to that is
Speaker 3: we found that when you combine quantitative cheapness with material
Speaker 3: free will insider buying, that that combination be both just
Speaker 3: cheap stocks on a standalone basis or just looking at
Speaker 3: insider buying in isolation, it's the combination that created the outperformance.
Speaker 3: And that's really what excites us. We think that the
Speaker 3: if you own enough of these that the law of
Speaker 3: large numbers the group averages tend to outperform. There will
Speaker 3: be several individual instances of individual companies where it doesn't work,
Speaker 3: but a large group of these held in a portfolio
Speaker 3: we think provides the opportunity for significant outperformance.
Speaker 1: If we single out just the inside apart. Though, what
Speaker 1: do you think is you know, you mentioned, you know,
Speaker 1: you've seen all this research that shows it works, But
Speaker 1: what do you think it's you know, where's the edge
Speaker 1: coming from? Is it just people want to follow what
Speaker 1: the insiders are doing?
Speaker 3: Yeah, I mean, I think it's undeniable. No one can
Speaker 3: dispute this that insiders know the business better than anyone else.
Speaker 3: They know it better than their investment bankers. They know
Speaker 3: it better than sell side research analysts, they know it
Speaker 3: better than buyside analysts. And insiders have the unique ability
Speaker 3: to influence outcomes. They can create their own catalysts, right, so,
Speaker 3: insiders have the ability to implement a new cost cutting program,
Speaker 3: or introduce new products, or have insight into when industry
Speaker 3: fundamentals maybe bodding them out and might be set to improve.
Speaker 3: They also have the ability to, you know, spin off
Speaker 3: of a business that they think is undervalued. And they
Speaker 3: also have the ability in some cases to put the
Speaker 3: whole company up for sale and sell one hundred percent
Speaker 3: of the business to a to a knowledgeable buyer.
Speaker 2: They can also initiate a dividend increase, and they can
Speaker 2: initiate a share buyback program. In many instances, we see
Speaker 2: share buybacks and insider purchases, and we've done studies that
Speaker 2: we've done empirical studies on share buybacks, which seem to
Speaker 2: us to be an extension of the idea of insiders
Speaker 2: having insight information and taking advantage if the evaluation is
Speaker 2: low enough to enhance the value per for the remaining
Speaker 2: shareholders after the purchases are made and the share account
Speaker 2: is reduced.
Speaker 1: Yeah, I was gonna ask about buybacks in a little bit,
Speaker 1: but I still want to kind of say on the
Speaker 1: theme of the insider activity and how do you kind
Speaker 1: of separate, you know, meaningful insider activity from any potential
Speaker 1: noise because there are a lot of insider transactions.
Speaker 2: There are, indeed, it's a blizzard of information. Well, one
Speaker 2: of the first things is the size of the transaction.
Speaker 2: We just thought that a transaction size of at least
Speaker 2: one hundred thousand dollars would show some conviction. And again
Speaker 2: going back to delving into whether or not the insiders
Speaker 2: are required to buy their own shares, having you know,
Speaker 2: have a certain amount in relation to their salary. That's
Speaker 2: that's common at companies. But we look into that, we'll
Speaker 2: go into the public documents and see if the if
Speaker 2: the purchase is voluntary free will they don't have to
Speaker 2: do it, so they're taking advantage of the price they see,
Speaker 2: they like the investment. There's only one reason why insiders
Speaker 2: by by their own stock. It's it's just to make
Speaker 2: money they think it'll go up. So that's that that
Speaker 2: reduces the the quantity of of of things that are
Speaker 2: of interest to us.
Speaker 3: Another way to say that, David, is if we find
Speaker 3: that the insider by is not free will, meaning it
Speaker 3: was required to meet a minimum ownership guideline, that doesn't
Speaker 3: count the field.
Speaker 2: Is the field is reduced by requiring voluntary or not
Speaker 2: requiring that they be free will purchases and that we
Speaker 2: have cheap valuation.
Speaker 1: So there's part of kind of a behavioral process in this,
Speaker 1: or I should say behavioral factors. Do you see, you know,
Speaker 1: insiders effectively acting as contrariancs during periods of market stress.
Speaker 1: Does that kind of show up in your process?
Speaker 2: Absolutely? Absolutely. Insiders often buy after a bad earnings call.
Speaker 2: You'll see sometimes these You'll look at HP and Bloomberg
Speaker 2: and you'll see that, you know, the stock was trading
Speaker 2: at ten the day before the earnings announcements, now it's
Speaker 2: at eight, and there is often a behavioral contrarian reaction
Speaker 2: to that sort of thing. There. Many of the many
Speaker 2: of the purchases are after the end of a quarter.
Speaker 2: In addition, just general market moves when the market as
Speaker 2: a whole is going down. Our experiences that insider transactions
Speaker 2: go up.
Speaker 3: David, We have a great recent example of this. There's
Speaker 3: a company called ak LKQ that distributes after market and
Speaker 3: collision auto parts. And this is a company that in
Speaker 3: twenty twenty five had a bad quarter, stock collapsed. Three
Speaker 3: insider stepped up purchased about eight hundred thousand dollars worth
Speaker 3: of stock at an average price of thirty two. This
Speaker 3: was in August of twenty twenty five, and then in
Speaker 3: January of twenty twenty six, company put out a press
Speaker 3: release saying that the board is conducting a strategic review
Speaker 3: of the company and looking to potentially sell the whole business.
Speaker 1: Now, this is a you know, mainly quantitative process. Can
Speaker 1: you walk us through what you screen for? You know,
Speaker 1: what has to be true for a stock to get
Speaker 1: on your radar?
Speaker 2: Well, sure, Well, first it has to be a transaction
Speaker 2: of at least one hundred thousand dollars, and second, it
Speaker 2: has to be a free will you know, voluntary purchase.
Speaker 2: They have to be opportunistically buying the stock. And then
Speaker 2: third we have a proprietary score, we call it the
Speaker 2: value score, and it has to be above a certain level.
Speaker 2: So that that narrows the field and when it is
Speaker 2: when the value score is above a certain level, those
Speaker 2: are the ones we focus on and we will do
Speaker 2: an in person tweety Brown analysts review. Tweety Brown analysts
Speaker 2: are generalists, a great deal of experience. I don't know
Speaker 2: anyone who knows more about the uniform rental businesses than
Speaker 2: Jay Hill and has had insights about how you buy.
Speaker 2: You buy a uniform rental company and and you can
Speaker 2: get rid of all the sgn A because you just
Speaker 2: moved that capacity into an existing plant. Anyway that there
Speaker 2: will be an experienced analyst take a quick look. Typically
Speaker 2: it doesn't take more than a day or two at
Speaker 2: at the particular business and with a lot of diverse
Speaker 2: knowledge of you know, we've studied banks, We've studied oil
Speaker 2: and gas pipelines, oil and gas companies. UH. One one
Speaker 2: of our analysts is experienced and looking at pharmaceutical companies
Speaker 2: and getting ideas that get sort of assessing where they
Speaker 2: are and in UH trials with with the Food and
Speaker 2: Fruit and Drug Drug Administration, so things like that will
Speaker 2: look will look for instances in the in the in
Speaker 2: the pharmaceutical business where they're spending UH as a percentage
Speaker 2: of sales, a lot of money on R and D,
Speaker 2: and we could think of some of that as being
Speaker 2: investment types spending that reduces reported profits but does not
Speaker 2: necessarily reduce the value of the company if it we're sold.
Speaker 3: The only other thing I would add to that, David,
Speaker 3: is we're looking at least that inception when we're thinking
Speaker 3: about putting a new portfolio into one of these two
Speaker 3: ETFs that we want to pay roughly the same price
Speaker 3: that the insiders paid.
Speaker 2: Interesting, yeah, yeah, that's very important. Yeah.
Speaker 1: Yeah, So there is a you know, once the stock
Speaker 1: passes that quantitative screen that there is sounds like there
Speaker 1: is a fundamental qualitative aspect of this where you know,
Speaker 1: it's not just a pure quant portfolio. There needs to
Speaker 1: be an analyst actually kind of digging into the stock
Speaker 1: once it gets past that screen.
Speaker 2: Right right, Bob Wykov calls it quantamental.
Speaker 1: That's good. I like that.
Speaker 2: So yeah, and the machine when we get we get
Speaker 2: this feed of insider purchases from countries around the world
Speaker 2: and obviously including the United States, but UK companies in
Speaker 2: Europe who shares trade in the Euro, other companies in
Speaker 2: Europe that have their own own currency, Switzerland, Canada, South Korea,
Speaker 2: We've done some in Philippines, Taiwan, Singapore, Australia, We'll wait
Speaker 2: to look at a Mexican company, South Africa, so a
Speaker 2: lot of a lot of different places. And then once
Speaker 2: we get that information about the insider purchase, we put
Speaker 2: it in, We put it in the meat grinder in
Speaker 2: the and and the meat grinder does a lot of calculations,
Speaker 2: that's more than thirty different calculations and comes up with
Speaker 2: its value score. And that's that's where we focus. The
Speaker 2: human human part human research.
Speaker 3: Port of the judgment involved here is that the analyst
Speaker 3: goes back and make sure is that our proprietary scoring
Speaker 3: system is working with good data to making sure that
Speaker 3: the data is solid, that it's not garbage in, garbage out,
Speaker 3: so verify the data, verify that the stock.
Speaker 2: Is truly cheap.
Speaker 1: And then when we have that.
Speaker 3: Material free will purchase in excess of one hundred thousand
Speaker 3: with a minimum value score, then that's a candidate to
Speaker 3: go into copy or eye copy.
Speaker 2: And really the rebuttable presumption is that unless we see something,
Speaker 2: you know that the data is wrong or in some
Speaker 2: instances we'll do will delve further into the if the
Speaker 2: company has above average leverage, will delve into the the
Speaker 2: covenants and UH and depending on the particular business, the
Speaker 2: particular industry, will will look at different kinds of disclosures
Speaker 2: in public documents that pertain to an analysis of a
Speaker 2: bank or an oil and gas company or whatever.
Speaker 3: The other thing, David were human judgment I think played
Speaker 3: some role is sometimes there's a company that meets all
Speaker 3: the criteria, but there's a conflicting signal. A common conflicting
Speaker 3: signal would be, hey, there's insider buying, but there's also
Speaker 3: been material insiders selling.
Speaker 2: Yeah, mixed, a mixed signal. It doesn't hit you in
Speaker 2: the face. Now, some with some companies in the United States,
Speaker 2: you will some of the data serves as we'll report sales,
Speaker 2: but we have a we we can investigate sales pertaining
Speaker 2: the option exercise. So sometimes we'll we'll overlook the sale
Speaker 2: if the if the insider is exercising the stock option
Speaker 2: way earlier, way way before, way before it the end
Speaker 2: of the option period, and and this is increasing ownership,
Speaker 2: so they're really in a way buying it by exercising
Speaker 2: the stock might have to sell some shares to beat Yeah,
Speaker 2: So we'll we'll delve into things like that.
Speaker 1: And you and earlier touched upon share buybacks, and so
Speaker 1: I'm just curious of how you distinguish between, you know,
Speaker 1: value creating buybacks or just pure financial engineering.
Speaker 2: Yeah, that's that's it's the value score has to be cheap,
Speaker 2: has to be cheap. I think most share buybacks are
Speaker 2: in companies that really are not super cheap. They're not
Speaker 2: high score, high value score type companies. And of course many,
Speaker 2: many big companies will buy back their own own stock
Speaker 2: to offset dilution from exercise of options. Anything to add
Speaker 2: to that, Jay.
Speaker 3: Yeah, just in other words, by definition, what we believe
Speaker 3: share repurchase makes the most sense when you're buying backstock
Speaker 3: when when the company is inexpenser and by definition a
Speaker 3: company that has a high value score looking at those
Speaker 3: thirty metrics, it's cheap. It's likely in the bottom two
Speaker 3: death sisles ranked against all companies in terms of cheapness.
Speaker 3: So the odds are that are a significant share repurchase
Speaker 3: with a company that has a high value score, that's value,
Speaker 3: a creative share repurchase, that's the type of share repurchase
Speaker 3: we think makes a lot of sense and adds value
Speaker 3: per share to the non selling shareholders.
Speaker 2: Yeah, I mean if you've got if you've got a
Speaker 2: company that let's let's make the mass simple. It earns
Speaker 2: one hundred dollars and it's got one hundred shares, so
Speaker 2: it's it's earning a dollar a share. Now, leaving aside
Speaker 2: financing costs or loss of interest. If the company buys
Speaker 2: back ten percent of its shares, Let's say, if I've none,
Speaker 2: doesn't have to borrow any money. They just do that.
Speaker 2: You'll have ninety shares divided into one hundred in earnings,
Speaker 2: so your your your earnings per share are going to
Speaker 2: go up about eleven percent just by doing that. So
Speaker 2: it can it can really make a huge difference if
Speaker 2: if the company is cheap. And there's one that we
Speaker 2: recently went in the portfolio company called Verssan Media, VS
Speaker 2: and Tea, and it came across the insider buy a
Speaker 2: wire when director and a nine year director of Comcast,
Speaker 2: his name is David Novak, who had been previously the
Speaker 2: founder of Young Brands. He bought he opened up his
Speaker 2: wall and bought about five point two million dollars worth
Speaker 2: of stock. And I think that their buyback program is
Speaker 2: twenty percent of the outstanding shares. I don't know over
Speaker 2: what period, but that's a very significant amount. And the
Speaker 2: stock is at five and a half times earning, so
Speaker 2: call it a twenty percent earnings yield. So, assuming the
Speaker 2: business doesn't fall apart, it's in broadcasting, the own cnpc ms.
Speaker 2: Now they own rotten Apples and what's the fan Dango
Speaker 2: and they own a bunch of stuff. Yeah, the golf channel,
Speaker 2: right right, yeah, sports channels exactly. So if the business doesn't,
Speaker 2: if the earning power doesn't fall apart, that those buybacks
Speaker 2: at such a low valuation could be very accreative.
Speaker 1: I mean, okay, okay, I do want to ask you about,
Speaker 1: you know, the portfolio, and you know, if we just
Speaker 1: look at copy, you know, it's really diversified, about maybe
Speaker 1: one hundred and seventy holding somewhere around. Then how do
Speaker 1: you balance diversification with conviction?
Speaker 2: I would say we don't have that much conviction in
Speaker 2: individual names. I mean, I'm saying I'm saying that myself. Jay,
Speaker 2: there's certainly stocks that each of us like more than
Speaker 2: others that are in the portfolio. But the whole big
Speaker 2: strategy idea is to try to mimic the studies which
Speaker 2: we're all equal weighted studies, and the averages that are
Speaker 2: reported for those studies are all equal weighted, and at
Speaker 2: least in a Seihun study they used they used an
Speaker 2: equal weighted index to measure out performance. But again it's
Speaker 2: a law of the Irige numbers idea that hopefully if
Speaker 2: we have a big sample of these, we'll get we'll
Speaker 2: get it'd be great if we'd get anything near what
Speaker 2: the studies have shown. In the studies, of course, are
Speaker 2: just they're factor studies. The studies are not portfolios. They're
Speaker 2: just how this stock with this characteristic and you've got
Speaker 2: a lot of how that did on average, So.
Speaker 1: It's the portfolio in terms of you know, position sizing,
Speaker 1: it's equal weighted.
Speaker 3: It's equal weighted. So in copy there's roughly, you know,
Speaker 3: like you said, one hundred and eighty to one hundred
Speaker 3: and ninety nains, each new position comes in at roughly
Speaker 3: fifty basis points. And then in eye copy, which is
Speaker 3: the international component of copy, so non US stocks and
Speaker 3: I copy, that's about one hundred and twenty stocks. So
Speaker 3: each new position is roughly a seventy five basis point position.
Speaker 3: You talked about, you know, diversification. We don't have any
Speaker 3: set in stone rules, but I think in general we
Speaker 3: don't want any more than twenty to twenty five percent
Speaker 3: in any one particular industry. And also we don't outside
Speaker 3: of the United States, So the United States is a
Speaker 3: separate category. It's the largest capital market in the world.
Speaker 3: But in other countries, we want no more than twenty
Speaker 3: percent in any particular country. And again that's not set
Speaker 3: in stone, but those there's parameters that we've set in
Speaker 3: place that we think add to diversification.
Speaker 1: So do you do rebalancing to keep the portfolio equal weighted,
Speaker 1: you know, over a certain time periods.
Speaker 2: Well, no, I would, I would say we're doing we're
Speaker 2: doing valuation improvement. Well, well we'll a stock that has
Speaker 2: a higher value score can get a higher values score
Speaker 2: excuse me exactly, as a lower value score gets a
Speaker 2: lower value score as a result of increase in the
Speaker 2: in the price of the stock goes up, so the
Speaker 2: valuation is not as cheap or the earnings the fundamentals
Speaker 2: fall apart. So those and we're always trying to get
Speaker 2: new cheaper stuff into the portfolio, stuff with higher value
Speaker 2: scores in and we will sometimes replace it. Well, but
Speaker 2: if something as a high value score goes in and
Speaker 2: a lower value score goes out, so we're opportunistically refreshing
Speaker 2: the inventory.
Speaker 3: Yeah, David, I mean you asked about sell discipline, and effectively,
Speaker 3: each new idea that passes our criteria right material free
Speaker 3: will insider by combined with a high value score, we
Speaker 3: approve that investment. It comes into the portfolio, and then
Speaker 3: we need to reduce a stock that's in sell a
Speaker 3: stock that's in the portfolio, and they the selling criteria
Speaker 3: is what John mentioned. Effectively, it's it's really a combination
Speaker 3: of eliminating the companies that have the lowest value score
Speaker 3: today and or are the oldest vintage insider buys. In
Speaker 3: other words, if if a stock that's in the portfolio
Speaker 3: the insider by happened two to three years ago, where
Speaker 3: there's been a long time period since that inside that
Speaker 3: triggering insider purchase occurred, we'll look to move that stock
Speaker 3: out and replace it with newer vintage insider buys.
Speaker 2: And sometimes we'll reset the clock. We'll well, we'll that
Speaker 2: can happen when the value score is still pretty good
Speaker 2: and insiders continue to buy it. So it might be
Speaker 2: two years pass and and the stock still has a
Speaker 2: good value score and they're they're continuing to buy it.
Speaker 2: We'll treat that in a way as a fresh as
Speaker 2: a fresh thing, and and we'll give it more time.
Speaker 1: So there isn't you'd say, a typical holding period. It
Speaker 1: just really entirely depended on its you know, valuation and
Speaker 1: insider behavior.
Speaker 2: Well, there's not. I would say that that based on
Speaker 2: the empirical data. Our our empirical data, it looks like
Speaker 2: the excess returns UH peak two to three years after
Speaker 2: the date of the insider purchase. Now, Professor sayan study
Speaker 2: just had an assumption of a one year holding period,
Speaker 2: so he didn't go beyond that, but we went we
Speaker 2: went out three years and and and it just seemed
Speaker 2: that way. So and it may sort of makes sense
Speaker 2: if you could get anything like the excess returns in
Speaker 2: the studies. Those excess turn returns generally indicate that the
Speaker 2: the share price the valuation account is probably going up
Speaker 2: at a much faster rate than the companies at real value.
Speaker 2: It's unusual to get twenty thirty type an your returns
Speaker 2: for very long.
Speaker 3: It is possible, though, David, because the portfolio tarover is
Speaker 3: largely a function of the number of new ideas that
Speaker 3: meet our criteria. So if there was let's say, a
Speaker 3: big market sell off and a ton of insider buy
Speaker 3: amongst cheap stocks, it's entirely possible that we could replace
Speaker 3: really the whole portfolio in a year or less. If
Speaker 3: there's a bunch of new names that meet our criteria
Speaker 3: that would come in, and then we'd have to move
Speaker 3: out the older names and the names with lower value scores.
Speaker 2: Right, yeah, yeah.
Speaker 1: Do you ever in counter situations where the signals look great,
Speaker 1: but the investment might just not pan out, you know,
Speaker 1: where the fundamentals just kind of just don't follow.
Speaker 2: Fundamentals do tend to follow the value score. I can
Speaker 2: think of well leveraged, too much leverage, and events that
Speaker 2: happened verly soon after the insider purchase that kind of
Speaker 2: make the data we were looking at stale. Such as
Speaker 2: a company you buy the stock, you know, in March,
Speaker 2: and by September the company announces a major, very very
Speaker 2: large acquisition that requires really leveraging up the existing balance sheet,
Speaker 2: and they paid a very high price for this company.
Speaker 2: They should have used the money or the borrowing power
Speaker 2: to buy back their own stock much better deal, and
Speaker 2: they did that. So something like that might say, using
Speaker 2: sort of zero based budgeting this thing, I think, you know,
Speaker 2: the value score has gone down pro forma given this
Speaker 2: wild acquisition. And as you may know, a lot of
Speaker 2: acquisitions don't work out. There have been academic studies of that,
Speaker 2: or Warren Buffett often writes about that.
Speaker 3: I mean, I think, David, a lot of the names
Speaker 3: are not going to work out. That's just the truth.
Speaker 3: Our little methodology here, combining insider buying and quantitative cheapness,
Speaker 3: is not going to work in every instance. What we're
Speaker 3: trying to capture is the group result of a large,
Speaker 3: broadly diversified group of companies. In copies case, it's almost
Speaker 3: two hundred stocks. In the other portfolio it's one hundred
Speaker 3: and twenty stocks. What we're looking is for the group result,
Speaker 3: a little bit like insurance underwriting. Right, not all clients
Speaker 3: are going to be profitable. What we expect to happen, though,
Speaker 3: is the group result the law of large numbers to
Speaker 3: develop to UH to generate a significant outperformance. But with
Speaker 3: lots of individual names that don't.
Speaker 2: Work, there's skewedness there there. It's humbling and surprising to
Speaker 2: see see some of the some of the big, big winners.
Speaker 2: I mean that what we've had, we've had gold miners
Speaker 2: up through the roof UH, we've had good, excellent results
Speaker 2: from the South some of the South Korean UH companies
Speaker 2: that just hit you in the face in terms of
Speaker 2: how cheap they were. They're not as cheap anymore. But
Speaker 2: it's stuff we couldn't have. I don't think anyone had
Speaker 2: a crystal blonde. Which ones would be the big winners,
Speaker 2: which ones would have the skewness that makes makes the
Speaker 2: average good, that.
Speaker 1: Actually brings you in the next question. You know that
Speaker 1: it's the same investment philosophy for both copy and eye copy.
Speaker 1: But are you seeing like different types of companies if
Speaker 1: you compare, you know what's in the what's domestic and
Speaker 1: what's international? Are there, you know, different sectors that seem
Speaker 1: to be coming up more in one versus the other.
Speaker 2: I don't notice that, do you, Jake?
Speaker 3: I don't either. No, No, I mean I think we
Speaker 3: mentioned this earlier. I mean I copy is really just
Speaker 3: the the non US names within copy, so that there's
Speaker 3: a lot of overlap. But but no, I don't. I
Speaker 3: don't think we've noticed any significant differences in the like
Speaker 3: say the companies or the industries in I copy versus copy.
Speaker 1: Okay, and this is my last question. If an investor
Speaker 1: could take away one lesson from your approach, what would.
Speaker 2: It be, follow the money to make money and buy cheap.
Speaker 3: What I would say, David, is that look we we
Speaker 3: we came up with the ticker symbol co O p
Speaker 3: Y copy right is like upon on. We're copying the insiders,
Speaker 3: and we just think that adding insider buying to value investing.
Speaker 3: We're long term believers in value investing and adding this
Speaker 3: simple common sense qualitative, I guess metric insider buying just
Speaker 3: makes perfect common sense. And I'll reiterate with John said earlier.
Speaker 3: If there's a free will buy, insiders only buy their
Speaker 3: stock for one reason, they think it's going up. And
Speaker 3: insiders uniquely have the ability to effectuate change, to catalyze change,
Speaker 3: to become their own catalyst. And we think that that
Speaker 3: combination's powerful.
Speaker 2: Yeah, we call it in insight information, not insider.
Speaker 1: That's pretty good.
Speaker 2: And I think they also from us the standpoint of
Speaker 2: a tax paying investor, and we're all tax paying investors
Speaker 2: at tweety brown, some more than others. Living if they
Speaker 2: live in New York City, that it's very attractive being
Speaker 2: able to essentially avoid most capital gains taxes. We've done
Speaker 2: one big distribution and kind of some of some of
Speaker 2: the stocks with large unrealized gains that were no longer
Speaker 2: high valuation scores. Evaluation scores that going down because the
Speaker 2: stocks had gone out, and I think we were able
Speaker 2: to eliminate about forty five percent or something like that
Speaker 2: of the total unrealized gain in the in the portfolio.
Speaker 2: So nice. It was amazing, and it's it's.
Speaker 3: Worth reiterating, David, we believe in this strategy, and the
Speaker 3: partners at tweety Brown have roughly fifty million dollars invested
Speaker 3: right along aside our client.
Speaker 1: Well, it's it's a great place to end. But this
Speaker 1: is a lot of fun. I want to thank you
Speaker 1: both for joining Meg Well, thank you for the opportunity. David,
Speaker 1: you have quite a reputation. You're the guru of active investing.
Speaker 1: It I appreciate that.
Speaker 2: Thank you very much.
Speaker 3: We appreciate your Andrew.
Speaker 1: Thank you, David. I also want to thank our listeners.
Speaker 1: If you liked the episode, please share it, subscribe and
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