Value After Hours S06 E03 Verdad's Dan Rasmussen on quant small, cheap, levered stocks-US and Japan
Jan 29, 2024
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Dan Rasmussen of Verdad discusses quantitative deep value investing, challenges of small and micro stocks, correlation between size and liquidity in investing, potential improvements in the Japanese stock market, relationship between 10-K report size and investment performance, crisis strategy using high yield spreads, launching and improving a multi-strategy fund, and asset allocation, leverage, and derivatives in constructing portfolios.
Value investing can capitalize on the unpredictability of the market and non-fundamental factors driving market outcomes.
Size, value, and momentum factors play an interplay in different market conditions.
Accurately predicting correlations and volatility can improve portfolio's risk-adjusted returns and adjust portfolios based on these factors.
Deep dives
The Value of Deep Value: A Discussion on Investment Strategies
This podcast episode features a discussion on various investment strategies, with a focus on deep value investing. The guest, Dan Rasmussen of Verdad, provides an overview of his firm's investment approach and the different strategies they employ. They manage a variety of funds, including micro-cap deep value strategies, crisis strategies, and high-yield credit. Rasmussen highlights the importance of unpredictability in the markets and how value investing can capitalize on this. He also discusses the impact of factors such as size and liquidity, and shares insights on the performance of different asset classes and sectors.
The Challenges of Value Investing in an Unpredictable Market
The episode delves into the challenges of value investing, particularly in an environment where growth stocks have outperformed value stocks. Rasmussen reflects on the period from 2018 to 2020, known as the 'value winter,' when value stocks were decimated while growth stocks thrived. He discusses the frustration of seeing non-fundamental factors driving market outcomes and the difficulty of predicting the future growth rates of companies. Rasmussen argues that value investing is a way to bet on the unpredictability of the market and offers insights on the interplay between size, value, and momentum factors in different market conditions.
The Information Content of 10-K Filings and Considerations for Credit Strategies
The conversation also touches on the information content of 10-K filings and its implications for investment decisions. The researchers behind a study discussed in the episode found that the change in 10-K file size significantly predicts future stock returns. Longer and more complex filings are associated with obfuscation and burying bad news among large amounts of distracting information. Turning to credit strategies, Rasmussen explains their crisis strategy, which is triggered when high yield spreads exceed 600 basis points. He elaborates on the potential opportunities in high yield credit when spreads blow out, highlighting the liquidity premium and the value of focusing on size, quality, and other fundamental metrics in bond markets.
The Importance of Predicting Correlations and Volatility
One of the main insights discussed in the podcast is the importance of accurately predicting correlations and volatility in investment strategies. The speaker argues that while expected returns are difficult to predict, correlations and volatility can be more reliably forecasted. By using weighted average correlation matrices and historical volatility data, investors can adjust their portfolios based on these factors. The speaker highlights that volatility and correlations between different asset classes tend to fluctuate over time, and by incorporating these factors into an optimization model, investors can potentially improve their portfolio's risk-adjusted returns.
The Potential of Japan's Stock Market and Predicting Market Behavior
Another key point of discussion in the podcast is the potential of the Japanese stock market and the importance of understanding market behavior. The speaker mentions recent changes in Japan, where the government is pressuring companies with stocks trading below book value to increase their prices. This development, coupled with improvements in the quality metrics of Japanese small caps, creates an exciting opportunity for value investors. The speaker also comments on the predictability of certain market factors. For instance, they highlight the relationship between high-yield spreads and oil prices, where wider spreads tend to coincide with oil sell-offs. While the speaker acknowledges the difficulty of predicting expected returns, they emphasize the value of understanding volatility, correlations, and the long-term lessons of investing.
Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, and Jake Taylor. See our latest episodes at https://acquirersmultiple.com/podcast
We are live every Tuesday at 1.30pm E / 10.30am P.
About Jake
Jake's Twitter: https://twitter.com/farnamjake1
Jake's book: The Rebel Allocator https://amzn.to/2sgip3l
ABOUT THE PODCAST
Hi, I'm Tobias Carlisle. I launched The Acquirers Podcast to discuss the process of finding undervalued stocks, deep value investing, hedge funds, activism, buyouts, and special situations.
We uncover the tactics and strategies for finding good investments, managing risk, dealing with bad luck, and maximizing success.
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ABOUT TOBIAS CARLISLE
Tobias Carlisle is the founder of The Acquirer’s Multiple®, and Acquirers Funds®.
He is best known as the author of the #1 new release in Amazon’s Business and Finance The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market, the Amazon best-sellers Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014) (https://amzn.to/2VwvAGF), Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012) (https://amzn.to/2SDDxrN), and Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors (2016) (https://amzn.to/2SEEjVn). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.
Prior to founding the forerunner to Acquirers Funds in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam.
He is a graduate of the University of Queensland in Australia with degrees in Law (2001) and Business (Management) (1999).
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