Few questions here:
1) How reliable are the data coming from this data mining technique? I see
you still recommend checking the 10K or annual reports, so I am wondering how
big of an error can be found in the data obtained via your data mining
algorithms. Also there seem to have been some errors with currency in the recent past. Can you elaborate more on how you ensure accuracy of data?
2) Given that most of the work that Benjamin Graham recommended is already
done by your software, what kind of additional work is recommended for the
individual investor? Benjaming Graham in the book recommended shortlisting
the stocks based on the criteria (done by Serenity already) and then that the investor
could pick 20-30 out of those filtered, based on his preferences for certain sectors or personal
choices. Therefore him saying something like that would make it sound that once Serenity has you down to a list of Graham stocks, the additional work in doing much due diligence on which ones to pick might not necessarily be justified. Hence, let's assume the investor wants to build a portfolio of enterprising stocks. Would it be appropriate to
say that after using your screener, the investor might as well pick 30
stocks out of the hundreds that result from a search without digging too much deeper into it?
Or would it be appropriate to say that the investor may be better served by diversifying more among those Graham pass-grade stocks by purchasing let's say 50+ instead of investing extra time by narrowing it down to his favourite 20-30? Or even better, simply just pick the top 30-50 that appear the most undervalued by the Serenity number?
If you recommend additional legwork, other than checking the financial statement to verify that Serenity's numbers are correct, what would that additional work be? Quantitative analysis has been done by Serenity, so I assume that would have to do with analysing the competitive landscape of that particular industry and other qualitative dimensions or analysing inside ownership, buy backs, stock options etc?
3) Related to answer number 2, how would said work / approach differ (if it would), if instead of the enterprising stocks in the example the investor wants to build a portfolio of NCAV? Also, while Graham recommends more divesification for NCAV, such as 30+, would a portfolio of 40+ including both NCAV and enterprising be already diversified? Or it should be 30 NCAV alone?
4) Regarding the Serenity %, understand that according to the current bond rate, it would have to hit 70%. That excludes the margin of error? Meaning, that if the stock hits the 70%, the Serenity number is the price it should be appropriate to buy at, to which we have to include a further discount to account for our desired margin of error?
Thanks so much for answering and sorry if I may have asked things that you responded to elsewhere!
Submitted by Riccardo. Created on Sunday 12th July 2020. Updated on Sunday 12th July 2020.
Responses And Links
Dear Riccardo,
Thank you for your excellent questions!
Defensive vs Enterprising Price
For the benefit of readers, your previous emails are pasted below as well.
This is a very commonly asked question on Serenity, and as you rightly noted:
Q1. Data Reliability
Regarding your first question, Serenity sources all financial data from professional data vendors; and recently moved to a new data provider — Finnhub Stock Api — in March 2020. The source of data for every analysis done by Serenity is given in the individual stock pages (in the Stock Data tab).
Since different data providers use different standards of data classification, there usually are a few integration issues that require ironing out during the transitional period of the first few weeks. But otherwise, Serenity simply uses the data provided by its data vendor.
However, minor errors can always creep in when multiple complex informational systems are interfacing with each other. That's the reason Serenity recommends that one always do one's personal due diligence before making a final investment decision. Filtering by automated quantitative statistical analysis is only the first step of the investment research process.
Q2. Diligence and Diversification
The additional effort for the investor after the quantitative screening process, would be in narrowing the list down to the most reliable investment options — by virtue of data reliability and any other personal preferences — while maintaining adequate though not excessive diversification.
Your third question should also have been addressed by the links on position sizing and diversification in the above response.
Q4. Margin of Safety
All calculations on Serenity are based on Graham's final framework which include built-in Margin of Safety requirements and so don't require any further discounting. But one can always apply more stringent rules if one so desires.
However, it's highly recommended that one first completely familiarize oneself with Graham's core framework which is detailed in Serenity's Quick Reference and its footnotes. The footnotes include links on adjusting for interest rates and customization for non-U.S. economies.