Be the bid!

[snoopy369]

Cash and Gold are always investment opportunities...

[Asher]

CASH4GOLD!!!!!!

[DanS]

In any event, I believe these broad market levels to be attractive and will be investing (indexes and individual stocks) accordingly. It doesn't matter to me that I have some indexes and stocks that are under water, so long as I bought them at reasonable prices.

[KrazyHorse]

Originally posted by DanS


I understand the scenario, but I don't think that a value investor would look at it that way. He would sit on his hands rather than make a bad investment, even if he thought it was less bad than what others were doing. If he is forced to invest in a bad investment by your scenario, then he's not following value investing.

This is argument by definition. Call it value prime investing. If value investing allows you to beat an index funds plus risk-free asset strategy then value prime investing should allow you to beat the market when restricted to 100% equities.

He is doing something else. That's probably why you have some funds that are labeled as value funds, but they aren't really value funds.

This is the tension that Sten Sture experienced, by the way.

You have avoided my question. If the only advantage of value investing is to know when to pull out of the market into risk-free assets then it is not a stock picking method. If there is additional advantage then your explanation as to why there are no significant number of mutual fund managers who consistently beat the market is so much mumbo-jumbo.

[KrazyHorse]

Originally posted by DanS
In any event, I believe these broad market levels to be attractive and will be investing (indexes and individual stocks) accordingly. It doesn't matter to me that I have some indexes and stocks that are under water, so long as I bought them at reasonable prices.

If most of your investments are broad-based then you probably aren't doing that much harm to yourself. But you haven't answered my academic question: if successful stock-picking is not a very narrowly-distributed ability then we should see mutual funds which consistently outperform the market. We do not see any significant number of these.

[KrazyHorse]

Originally posted by KrazyHorse
I don't deny the existence of a small number of people with idiosyncratic ability. But the number of people who have optimism and ability biases is much, much higher.

[Aeson]

Originally posted by KrazyHorse
If most of your investments are broad-based then you probably aren't doing that much harm to yourself. But you haven't answered my academic question: if successful stock-picking is not a very narrowly-distributed ability then we should see mutual funds which consistently outperform the market. We do not see any significant number of these.

First of all, I agree that for most people there's no point in individual stock picking. Necessarily, the bottom 50% hould avoid it even in the most favorable hypothetical conditions. (Though buying options is a better lottery ticket even for them than the actual lottery tickets they're "investing" in. )

The "bottom" % is larger than 50% though, since the large capital holdings are going to be in the hands of those with higher than average aptitudes. (I'll address that later.)

But to the direct reason why large firms can't get the same (overall portfolio) returns from 'value' investing as smaller investors can... One of the reasons is because they have so much capital, they simply can't put a decent % of of their portfolio into these opportunities (which necessarily are limited). The very act of moving large amounts of capital into a given stock drives the price up, undermining the value (perceived or actual) in the first place.

Much the same thing with short opportunities. The larger the short interest, the lower the price goes and the bigger the risk becomes of a short squeeze.

As for the issue of aptitude... We tend to put too much value into a piece of paper that says "This person is qualified for..." It does have meaning, but the lack of it doesn't necessarily have a meaning. Incompetence is all too common even among professionals. Less common than across the entire population, but still present.

A firm with hundreds of professional traders is necessarily going to have their overall trading pushed towards an industry "norm". A smaller firm, or individual, may vary dramatically from that "norm" (either way). Those aforementioned pieces of paper are enough to move that "industry norm" above the population wide norm, but that still leaves room for independent traders, not just the top end, but a gradient from "industry norm" to "exceptional" to make better money to some extent or the other.

Basically... yes, only an exceedingly few traders are going to have success like ~Buffet... but there's room for well-informed and intelligent traders to beat the market on their own to some extent or the other.

[DanS]

Originally posted by KrazyHorse
You have avoided my question. If the only advantage of value investing is to know when to pull out of the market into risk-free assets then it is not a stock picking method. If there is additional advantage then your explanation as to why there are no significant number of mutual fund managers who consistently beat the market is so much mumbo-jumbo.

I'm not avoiding your question, it's just difficult to answer your hypothetical as crisply as you wish. Value investing has implications in allocation and stock picking. As an example, if it's tough to find good individual stocks in which to invest, you may look for other asset classes to find value. To demand that you stick to only one asset class is unfair, but I recognize that's what a stock fund manager has to do, more or less.

As somebody who's looking after his own money, I look for value in individual stocks when I have to and indexes when I can. When there's a broad swath of stocks that seem like good values, it makes sense to look at indexes because of the built-in diversification, low cost, and simplicity.

I agree that we must look at the historical record to confirm that value investors are doing better than the indexes, but my problem is that "value funds" aren't really value funds. And it doesn't seem satisfying to reference Berkshire Hathaway, because assuredly there are value investors who have done worse. Also, it's an insurance company on top of a capital allocator and stock picker. But look at page 2 of the 2007 annual report and you will see a comparison against the S&P 500 going back to 1965.

[KrazyHorse]

Originally posted by Aeson
But to the direct reason why large firms can't get the same (overall portfolio) returns from 'value' investing as smaller investors can... One of the reasons is because they have so much capital, they simply can't put a decent % of of their portfolio into these opportunities (which necessarily are limited).

This argument doesn't make any sense. Mutual funds generally manage a few hundred million in assets. Are you claiming that the opportunities are so small that at any one time there is room for less than a few hundred million in "smart money"? If so, then what hope do you have to be in this group, given that there is 15 trillion dollars of value in US equities?

[Aeson]

I'm saying that every dollar in makes the next dollar in worth less. You're driving up the price as you make the purchases, reducing the margin between your evaluation and the actual price. Thus the more money invested, the less the 'value' becomes.

In some cases (small cap stocks), this can be an extreme effect. In others (like heavily traded issues such as Google) it would be negligible.

[KrazyHorse]

Originally posted by DanS


I'm not avoiding your question, it's just difficult to answer your hypothetical as crisply as you wish. Value investing has implications in allocation and stock picking. As an example, if it's tough to find good individual stocks in which to invest, you may look for other asset classes to find value. To demand that you stick to only one asset class is unfair, but I recognize that's what a stock fund manager has to do, more or less.

Is value investing solely a means of choosing asset classes or is it also a means of differentiating between assets in a class? If it is also a means of differentiating between assets in a class, and it can be practiced successfully then it should be able to beat an index of that asset class. That's not a complex statement. Where are the mutual fund managers who can beat the stock index consistently???

As somebody who's looking after his own money, I look for value in individual stocks when I have to and indexes when I can. When there's a broad swath of stocks that seem like good values, it makes sense to look at indexes because of the built-in diversification, low cost, and simplicity.

And my postulate is that unless you're one of the vanishingly few you're simply fooling yourself into thinking that this methodology does you any better than simply allocating to indexes of assets.

I agree that we must look at the historical record to confirm that value investors are doing better than the indexes, but my problem is that "value funds" aren't really value funds. And it doesn't seem satisfying to reference Berkshire Hathaway, because assuredly there are value investors who have done worse. Also, it's an insurance company on top of a capital allocator and stock picker. But look at page 2 of the 2007 annual report and you will see a comparison against the S&P 500 going back to 1965.

I'm well aware of BH. But my classification of their ability would be "idiosyncratic". There are many thousands of fund managers and many millions of private investors. Unusual ability seems to be present at most in tiny fractions of a percent of these and would appear to not be a teachable skill.

[Aeson]

Originally posted by KrazyHorse
Are you claiming that the opportunities are so small that at any one time there is room for less than a few hundred million in "smart money"?

There will be various opportunities, of various "value". Necessarily the "best value" will offer smaller room than the other "value" opportunities in addition to it.

The "room" in the "value" will depend on the evaluation.

If so, then what hope do you have to be in this group, given that there is 15 trillion dollars of value in US equities?

What hope does anyone have, professional or independent? Either your evaluation is better than the current market evaluation, or it's not. That's irrelevant to the issue of how buying issues affects price.

[KrazyHorse]

Originally posted by Aeson
I'm saying that every dollar in makes the next dollar in worth less. You're driving up the price as you make the purchases, reducing the margin between your evaluation and the actual price. Thus the more money invested, the less the 'value' becomes.

I know exactly what you said. And it doesn't make any sense, if you are arguing that there are a significant number of people who can beat the market consistently.

In some cases (small cap stocks), this can be an extreme effect. In others (like heavily traded issues such as Google) it would be negligible.

Yes, and as I just said, individual mutual funds have only a few hundred million in assets. Are the total opportunities at any one time so small that an individual fund crowds them out? If so, then you need to be among the smartest couple of hundred million dollars in the market in order to take advantage of them. And what are the chances of that?

[KrazyHorse]

Originally posted by Aeson


There will be various opportunities, of various "value". Necessarily the "best value" will offer smaller room than the other "value" opportunities.

The "room" in the "value" will depend on the evaluation.

Aeson, you are obviously not thinking very clearly about this.

Your claim seems to be that the entry of a single "smart" fund worth a couple of hundred million crowds out a significant portion of the excess value in the market. That means that to get in on significant excess value you need to be among the top couple of hundred million!

What hope does anyone have, professional or independent? Either your evaluation is better than the current market evaluation, or it's not. That's irrelevant to the issue of how buying issues affects price.

I already explained how your hypothesis that this particular diseconomy of scale allows individual investors to take advantage of what mutual funds cannot doesn't make any sense.

[Aeson]

Originally posted by KrazyHorse
I know exactly what you said. And it doesn't make any sense, if you are arguing that there are a significant number of people who can beat the market consistently.

The number of people who can beat the market consistently varies as "consistently" varies. Meaning the more "consistent" you want it to happen, the fewer people will qualify.

What I'm saying about the upward pressure on price due to buying makes sense in any case.

Yes, and as I just said, individual mutual funds have only a few hundred million in assets. Are the total opportunities at any one time so small that an individual fund crowds them out? If so, then you need to be among the smartest couple of hundred million dollars in the market in order to take advantage of them. And what are the chances of that?

The chances of that will depend on the evaluation, the issue being evaluated, how crowded the trade is...

Some issues will have more people spending time evaluating them. Other issues will have fewer people spending the time evaluating them. The people with the best chance of making money on that specific issue are those who are evaluating them best, and that will vary from issue to issue.