Author: Chris Rees, TenStocks
Covestor model: TenStocks
One of the ways TenStocks seeks out investment ideas is through the use of screens. The aim is to filter over 10,000 public companies to produce a short list of possible investment candidates for deeper investigation. We have thirteen screens, each sifting and sorting the investment universe from a slightly different angle. The process we use is a little like the Japanese art of chicken sexing.
Discerning the sex of a chicken with any degree of accuracy is extremely difficult. For some reason, the Japanese are very good at it. An experienced chicken sexer can sex 20,000 chicks a day, successfully sorting them into male and female. Females are more valuable and desirable because they lay eggs.
Chickens are sexed by discerning fractional differences in feather formation, which is very difficult. Finding good nest egg laying investments on Wall Street is not easy either.
Good sexers know that all chicks are not created equal: there are over 400 different breeds and for some of them, sex cannot be reliably detected using the feather method. For the more complex breeds, they use a method called ‘venting’. This involves squirting the poo from the chick and then trying to determine sex by discerning a small bump where the poo was. It’s a messy business, but it increases your success rate.
It takes us about an hour to chicken sex the global investment universe. In an undervalued market the screens will cough up maybe fifty possible egg-laying females. In an overvalued market the list will shrink to ten or less. The last time we ran the screens on June 16 it produced 11 candidates for further digging. When the first investment screen is finished, the harder work begins. We don’t rely on the feather method alone. To increase our probability of success we also squirt the poo.
For us, the poo is the stuff on the balance sheet we don’t want to pay for, like goodwill or worthless inventory and any other items or red flags we find that need to be discounted or avoided. We are primarily hard asset buyers. We want to strip out anything intangible, fuzzy or uncertain to come up with a solid valuation. Then, if we can, we try to make an initial investment at a healthy discount to that valuation.
We think squirting the poo out of investments before we buy them makes for smarter investing. Of the 11 companies that made it through our first screen this month, seven were full-of-poo Chinese fraud candidates. Of the remaining four, three were also deemed unworthy of our capital. Only one made it through. But we didn’t buy it. We already own it.
