^^ Awesome post by BWYF.
I’m thinking I should drop the CFA and take some philosophy courses.
Phophecy, is that you edupristine?!
Nothing is simple my friend. When you study and research, and keep studying, you turn something that’s complex into something that’s relatively simple. I am talking about the economy. And that’s not even my area of expertise.
All the resource in the world is not going to help you understand. Picking stocks and trading are very similar. Entries don’t matter much. Exits are where to make or loss money. Picking the right stock doesn’t matter much. You have to sell it for a profit/loss someday. Exits are important. But you have a bunch of guys doing the same old things. How are a bunch of guys doing the same old things going to beat each other? The smart ones are laughing their way to the bank! LOL. Remember in wall street, people usually don’t promote things that work. Things that actually work are kept hidden.
@ brain_wash_your_face Controversial? It is only controversial because you are clueless.
My jaw dropped to the floor reading this thread.
Wow. Just wow.
joke post?
Back to the original topic, I read somewhere (I think HBR) that most CEOs that are not founders come from marketing and sales, because growing the top line is one of the most valuable activities for a company.
After that, CEOs that come from operations seem to be the most common.
Fewer CEOs come from finance, although that is different with banks and asset managers.
Interesting. I can certainly believe that.
Some of the things said in this thread are truly mindblowing. The denial that there is randomness in markets, in particular, although it is also comical to hear “it’s easy to pick stocks.” In a market that has been going up and up and up for 5 years, of course it looks easy to pick stocks, because even when you’re wrong, most of the time you make money anyway because most stocks move together over the medium to long term.
People who made money shorting stocks in this environment are the ones that are impressive, because it’s a high hurdle to overcome to make money by shorting in an upwards-rocketing market. So congrats bromion and congrats numi. But neither of them would say “it’s easy.” Maybe it’s not impossible, but it still takes a fair amount of work and a stomach for waiting out risk.
Now, what about randomness in stock markets. One could say at a philosophical level, perhaps all fate is determined by physical laws interacting, and that the course of events in the past and in the future is the only possible course of events that can possibly take place. In that sense, you might say that there is no randomness in markets, but the truth is that we still experience the world as if we had free will. We do not have enough information to predict whether Putin will invade all of Ukraine in a week, or not. Whether ISIS will get their hands on a nuke from somewhere and drop it on TelAviv. Whether Obama will keel over from a heart attack tomorrow, whether Pfizer’s Viagra will suddenly develop unexpected side effects and expose the company to enormous lawsuits. Whether a clean source of energy to displace fossil fuels will be developed, whether an earthquake will level Silicon Valley or Los Angeles. Whether Ebola will spread to China… etc. Whether a pension plan will go bankrupt tomorrow and suddenly need to be liquidated, etc…
The market reacts to existing information, and the efficient market hypothesis (if you believe it) says that the market price is a best estimate of future earnings based on currently knowable data discounted to the present at the discount rate of the marginal buyer.
But one of the reasons that prices change from day to day is that new information comes to light. Maybe Ms. Sam Walton dies of a heart attack and her billion dollar estate needs to be liquidated to be divided amongst heirs. Suddenly that changes demand. Or new news comes in and adjusts expectations.
The reason that most financial models have a random componenet is that we don’t know what future events and newsflow will be, but we do know that a lot of it will affect our estimates of what earnings may be or affect how much risk we are willing to take with our investments for a given rate of return.
One interesting thing is that if you take a random number between 0 and 1, and then add another random number between 0 and 1, and keep adding so that you get: 1/N * Sum of N RAND() #s, you’ll get something that approximates a bell curve. Or you can flip a coin and add 1 for heads and -1 for tails and take the sum over 1000s of flips… you’ll get a distribution that looks like a bell curve.
The reason it makes sense to model stock prices with a normal curve is because every day, there are a million little random things that can happen or don’t end up happening and they sum to change the stock price. That’s like adding up a million coinflips every day and seeing what they add up to. In practice, you get a distribution that is not truly normal (or lognormal) because some events have much bigger effects than other, and there are more ways that things can go wrong than things can go right (principle of entropy). But the point is that there’s a reason why it makes sense to model the future with randomness in it, even if you believe the deterministic view of the world.
Randomness deals with the fact that we aren’t able to know everything or predict everything. At best, with analysis, you can reduce the effect of randomness, which is how some fund managers may be able to squeeze a stronger sharpe ratio out of their capital than others. But none of them can eliminate randomness (and therefore risk), and if they could, they should be earning no more than the rate on treasurys anyway…
Nassim Taleb has good stuff in Fooled by Randomness. It basically points out how people often attribute things to skill that are better described by randomness, and conversely ascribe to randomness things that may be random, but may be the result of bad decisions. The examples are truly mind-opening, and cover many areas of life, so as much as the guy irritates me, I have to respect that book.
I also like Michael Mauboussin’s “The Success Equation” which talks about separating skill from luck and what kinds of things help managing that.
To quibble with mygos here a bit, there are approaches that can be totally wrong. But I do agree that no investment approach is totally right (if by totally right you mean it performs well in all macroeconomic environments).
As to what’s wrong with tthe intangible approach?
If you can identify an intangible aspect that is a genuinely forward indicator of future performance, then you are likely to do well, since it will represent unique knowledge that can’t be mimicked by computers.
The problem is that long-term investment success requires a systematic approach so that it can work in expansions and contractions. When interest rates are rising and when interest rates are falling. When stock prices are rocketing and when stock prices are collapsing. The problme with intagible investment strategies is that there is no way to systematize it. And a big problem is that “lots of products/services sold” does not mean “lots of profit”. In fact, if the cost of expansion is higher than your cost of capital, aquiring more customers and generating more revenue will destroy firm value and send the stock price down. This is because each customer is increasingly expensive to service, and you cannot expand production to meet that demand without eating into earnings.
There are some people who may have their brains wired to do things by feel. George Soros is reputed to say that he knew it was time to close a position because he would get an ache in his back, presumably from his stress and worry. That’s investing by feel. Unless you have a track record of success in many economic environments, most people who invest that way succeed for a season or a portion of a business cycle, and then get crushed when the environment changes, because they are overconfident and thus overexposed. i.e. their feel only works in a particular part of the business cyle.
Peter Lynch of the Magellan fund did have an approach that wasn’t based intagible but it was based on buying what you saw being successfully sold. However, that really seemed to be a strategy that worked best in the 1980s, before the world was globalized and when the US middle class was increasing its purchasing power via debt. His “buy what you know” idea sounds like walking around looking at what’s being successfully sold in stores, but there was undoubtedly concrete modeling going on in due diligence. The “walking around” was just a preliminary screen. My own sense is that this was a style that worked best in the 1980s and 1990s, but isn’t very good for a deleveraging environment that we see now, because the purchasing power of the typical US consumer is on the way down. One might be able to do some of this by shifting to consumer patterns in the emerging markets, but that requires a lot more knowledge of how consumer patterns change from society to society.
In general, even if you have success in investing by intangibles, you will find it difficult to convince serious investors to invest with you, because they will want to know more about how your process works than “it just feels right.”
Finally, even if you can select stocks by feel, you still have to figure out how much of it to put into your portfolio. This require decisions about how to balance the risks of being wrong (or simply having a client pull their funds because they can’t stomach a temporary low price, even if you are right in the long term), and the possibility for profit. Many people get so excited by company stories that they forget that position sizing in a portfolio is also key to performance.
I read nothing in this thread, but the thing you have to ask yourself is do you want to be a CEO of a F500 company? I sure don’t.
Truth. But this is Vandelay. He wants to be able to subtly mention his massive wealth, of course while not appearing douchey, to gain the admiration of men and women worldwide. A F500 CEO might be just the position he needs. Just a few resume tweaks and he will be rolling!
Sigh, the paper chase.
This reminds me of a B School talk I was at. At my hacksaw B School, a hacksaw company CEO came to speak to our class. One of the fluffy questions was “What was your greatest failure in your career?” to which the man said tongue in cheek, “Divorcing my third wife.”
Now he got a nice chuckle from the room, but it begs the question to the ends you’d go to get that paper. Sarcasm always has a hint of truth. I for one like my work life balance and do not feel there would be value in a tradeoff of my time for more money.
^true. I suppose it just strokes your ego to be CEO. Like mark cuban says, any fortune 500 CEO loves waking up in the morning, looking in the mirror, and saying “I fucking made it.”
^ Before or after they drink half a bottle of scotch to calm their nerves about getting railroaded by angry shareholders, thrown in jail for fraud committed by their employees without their knowledge, fearing for the safety of their kids getting kidnapped for randsom, etc., etc.
I wouldn’t take another $250k a year if it meant being away from my son anymore than I am now. Not a chance in hell. Beyond that, maybe I’d consider it (factoring I’d be able to retire earlier and spend more time then), but it’d have to be damn lucrative. An hour a week with my kid is worth more than I could ever realistically be paid.
Great to hear, man. makes me happy for you!
LOL
Yes, agree with you in intutive approach is greatly a hidden process and to answer about “why?” and “How” may be difficult if not utterly impossible to justify. The process is more intuitive at later stage but to start with the intuition also has some basis specially as it requires a thorough and deeper understanding of the parameters affecting the outcome and this understanding (or feeling) is by definition intrinsic in nature. To be able to “identify an intangible aspect that is a genuinely forward indicator of future performance” may be uncommon in a common investor (as much as common sense is quite uncommon in common man) but not so rare too. Some people have inherent capacity to assimilate a huge amount of data in mind and mine it for arriving at a ‘intuitive’ solution to a problem. Benjamin Graham and Phillip Fisher (and more recently Buffett) had that ability. If one could analyse the human mind each intuitive thought is result of highly complex systematic analysis and process (that is why many great inventions are outcome of some apparently ímmediate ‘intuitive’ spark). So, in many cases it may not be totally wrong, as in many cases (you agreed to it that) it may not be totally right too.
I am inclined to agree with much of your exposition, so restrain myself from discussing it further. However, knowing your depth of understaning of anything regarding investment (which I admire greatly) I think you may enjoy reading the meaningful book “Active Investment Management” by Charles Jackson , specially the later part concerning the skills. Though it is like a text book but the ideas expressed are quite nice and touches on similar thoughts as ours.