Re: Improving On Buffett And Desert Cat
 

"Your technique actually may be valuable for fulcrum stocks, but that means it can only be used rarely, esp. by value investors."

Those last few words are blasphemous and obscene. At least for a two plus twoer. Value investors can't bet overlays at racetracks?

The fact is value investors should be more anxious than others to use my techniques even with fulcrum stocks. Hypothetical(?) example:

Phillip Morris is doing well but has to deal with a very real chance of going broke if they lose lawsuits badly.

I'm pretty sure there is a 20% chance of that disaster. My lawyer friends agree with me. I also think that the average investor in Phillip Morris has no taste for gambling and they will drive the stock down to about 60% of what it would be worth if there was no litigation. I'm not entirely sure about that but I invest anyway. But suppose I had Desert Cat telling me in no uncetain terms that without litigation, the stock is indeed worth almost double what I paid for it, if there was no litigation. That would confirm my suspicions that the low price was due to an overreaction to uncertainty. And I'd bet more.

There are probably already hundreds of good stock analysts who have been silently been reading this thread and have added the parameter "estimate of what public has made the stock price and why they are wrong" to their calculations. Stop arguing with me and do it too.

Re: Improving On Buffett And Desert Cat
 

"I'm pretty sure there is a 20% chance of that disaster."

How did you reach this conclusion?

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
"I'm pretty sure there is a 20% chance of that disaster."

How did you reach this conclusion?

[/ QUOTE ]

I didn't. That was still part of the hypothetical.

Re: Improving On Buffett And Desert Cat
 

I think the parameter "estimate of what public has made the stock price and why they are wrong" is much too difficult for people to handicap to make it practical to use.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]
"I'm pretty sure there is a 20% chance of that disaster."

How did you reach this conclusion?

[/ QUOTE ]

I didn't. That was still part of the hypothetical.

[/ QUOTE ]

DS,

You wrote some books,you own a piece of 2+2,you have played poker successfully I assume,and you have probably made some very rewarding market/real estate investments along the way,whatever....CONGRATULATIONS your the best!

But believe me... I have MUCH more experience in the REAL stock market world then YOU do or ever will have.... whether it be real life trading experience,market mechanics,investment levels,licensing,etc.(and I would even say a large percentage of this forum as well... and I have NEVER tried to throw this in someones face until now).I did not just graduate college,read a few books,open some online account... and then call myself a market GURU.

The difference with YOU however is......most of the other members either ask,listen,learn,participate,contribute,or even ignore the vast majority threads with this subject line(the stock market/investing)....and after a certain level of acceptance is reached by those involved ,inclusive of ME.....its OVER and DONE with.

We then move on....

They DONT debate these other vague and ambiguous "issues" AD NAUSEUM.

IMO...90% of your market related posts/threads are basically hypothetical in nature to begin with.... just in their delivery alone

You sound like a broken record...ALWAYS trying to stubbornly prove your side of some theoretical argument as CORRECT....when in fact there really is NO correct answer to most of your threads to begin with in BFI

I would also think these 20 page debates with YOU vs. EVERYONE else.... certainly belong in the Theory-type forums as there relevance here in BFI is ZILCH as far as I am concerned

Does ANYONE actually benefit from your threads/responses....I know I havent yet?

Its actually making me NOT want to answer or contribute to some of the other GREAT threads/questions in BFI.....as reading about someone else or myself arguing to death with you these last few days is making me numb

Stephen Feraca
[img]/images/graemlins/confused.gif[/img]

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
You are saying Jack's probability doesn't change because they are not independent.

[/ QUOTE ]

This is exactly what I'm saying. I'm looking at the question of "true value" as a math problem, and assuming that the worse "mathematician" will never have an edge over the better one. Obviously this is never perfectly correct in the real world - not even in math. And in the stock market the price probably reflects the input of finance geniuses. Because geniuses may have insights that even Warren Buffett lacks, your point is probably true in the realistic sense, yes.

But in a Joe Schmoe example I can't see it - how could Joe Schmoe's advantage not be overshadowed in every way by a genius? It seems like you're basically saying a chess master will sometimes lose to a chess amateur. I guess this analogy doesn't apply to sports betting or to stocks. I don't understand why.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
I will try to rephrase things differently. If there are stocks where my theory isn't true and my technique is unnecessary, then it is also unnecesary to have anywhere near the 50% cushion you require, when investing in these stocks, as long as you have any sort of reasonable value assigning skills.

The above is pure logic. You don't even need to know what a stock IS for it to be true.

Obviously fulcrum stocks are the most suceptible to my techniques. But the other stocks are not immune to them and when you say that you need a 50% cushion you have implicitly agreed. Your error is the PURE LOGIC error of not seeing how your insistence on conservatism MEANS you agree with me.

But enough with the theory. Let's get back to Buffett. Forget one example. He has presumably made thousands of trades where he rated the eventual worth of a security a lot different than the market did at the time of his trade. Assuming he honestly told you his original ratings then it could be checked five or ten years later. Your contention is that if that they were done one would find that the prices averaged out to his ratings. My contention is that that isn't even close. Yes they moved toward his ratings and away from the markets. But I bet they didn't even move halfway toward them. In fact if he used anywhere near the same criteria you use (think the real value is double before investing) the proof of that is one line.

[/ QUOTE ]
I have given your premise much thought and I would agree that the market generally does a good job of valuing stocks and a value investor would be better served to try and understand why a market price is suddenly substantially different than his analysis. It seems to me that when Buffett has discussed stocks he has purchased he has sometimes explained why he felt the market was discounting the price in error. This would mean that Buffett does not select stocks without taking market price in to consideration and he attempts to understand why the market price is different than his valuation estimate.

Even if a company is selling at a low multiple to cash flow, it would not be a good buy if there were to be a future negative change in their business. The market often does a good job of forecasting these negative changes and often this is where investors may erroneously see value. A good TA investor would attempt to understand why the market’s forecasting may be wrong this time.

If one does not correctly understand why their analysis differs substantially from the collective wisdom of the market it will be difficult, if not impossible, to hold on to that position until value is realized.

If a baseball pitcher has an 80% winning percentage it would be foolish to randomly bet against him even money. If he is going up against a team at their stadium where he is hit consistently and has a 0 - 5 record, then an even money bet against him makes sense.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]

First of all what I am saying is unquestionably correct in the real world. I will get to that in a minute. In the theoretical world I am saying that that if Jack is right about something 90% of the time and Jill is right even as little as 51%, then when they disagree, Jack's probability has gone down to 89.9% or whatever. If they are totally independent chances it easy to figure out the exact answer. You are saying Jack's probability doesn't change because they are not independent. He will get every question right that Jill will, plus more. If that was the case Jill's disagreement means nothing.


[/ QUOTE ]

David,
The biggest hole that I can see in your position is that you don't know what the market's "goals" are. When betting on a horse race there is presumably only one goal, and one time line. You want to win the bet and the race occurs on day X and will be over in less than 2 mins. In the market you have no idea what the average investors goals and time lines are for the particular stock your looking at. A retired person who lives off dividends has different needs than a hedge fund manager who gets his bonus check based on quarterly results. Someone who is putting away $500 a month for their child's education has a different perspective than someone who is saving up for a year to buy a new car. Buffet has his own criteria for what companies to buy, but he has no idea what the criteria of the people who researched and decided against buying Company X were using, and so that information becomes a lot less valuable to him.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]

But enough with the theory. Let's get back to Buffett. Forget one example. He has presumably made thousands of trades where he rated the eventual worth of a security a lot different than the market did at the time of his trade. Assuming he honestly told you his original ratings then it could be checked five or ten years later. Your contention is that if that they were done one would find that the prices averaged out to his ratings. My contention is that that isn't even close. Yes they moved toward his ratings and away from the markets. But I bet they didn't even move halfway toward them. In fact if he used anywhere near the same criteria you use (think the real value is double before investing) the proof of that is one line.

[/ QUOTE ]

I always buy stocks with a specific return expectation. For the first few years, my results were better than I predicted. Since then they were a little worse, and much worse so far this year. I'm not sure if it's variance, or if my easy early success led me to be less conservative in my return estimates.

Either way I don't have any data that proves or disproves your contention.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
"Your technique actually may be valuable for fulcrum stocks, but that means it can only be used rarely, esp. by value investors."

Those last few words are blasphemous and obscene. At least for a two plus twoer. Value investors can't bet overlays at racetracks?

[/ QUOTE ]

Actually Buffett started out betting the ponies, and sold a tip sheet as a kid called "Stable-boy Selections". Typically as a value investor you want to invest at least 20% of your portfolio in your best ideas. A fulcrum typically can go to zero, so it's too risky to make that large of a commitment.

I've actually used 5% as my portfolio limits for any stock that has a real risk of going to zero. But I haven't had very good success with these picks, and it may be for the exact reason you postulate, that I'm ignoring the market's opinion that actually has value with such risky positions. But the easier solution for me is to ignore fulcrum stocks, and find clearly defined value stocks with limited downside risks, put a quarter of my portfolio into four of them, and then go play poker until their value is realized;)

The fact is value investors should be more anxious than others to use my techniques even with fulcrum stocks. Hypothetical(?) example:

[ QUOTE ]

I'm pretty sure there is a 20% chance of that disaster. My lawyer friends agree with me. I also think that the average investor in Phillip Morris has no taste for gambling and they will drive the stock down to about 60% of what it would be worth if there was no litigation. I'm not entirely sure about that but I invest anyway. But suppose I had Desert Cat telling me in no uncetain terms that without litigation, the stock is indeed worth almost double what I paid for it, if there was no litigation. That would confirm my suspicions that the low price was due to an overreaction to uncertainty. And I'd bet more.

[/ QUOTE ]

This is a really good example, and Phllip Morris was a value investor favorite for a long while. But I don't believe they ever thought the risk of going to zero was anywhere near 20%. Their arguments were the world needs Philip Morris to pay all those damages and taxes, so in a worst case scenario shareholders would be diluted heavily, but still retain some value.

Edit: And let me make it clear that I don't ignore the market price. I have to understand why something is so cheap and why I disagree with the market, just to be sure I've allowed for all known risks. If something is just mysteriously cheap, that's a red flag that I don't understand it properly. But I don't adjust my value estimates for it.

Re: Improving On Buffett And Desert Cat
 

David,

I agree fully with the fundamental idea that you are using in this thread, but I don't believe it would have as much of an impact as you appear to think.

[ QUOTE ]
In other words, no matter how good you are, if your opinion differs markedly from the present price, the true valuation is almost certainly somewhere between those two prices. And probably closer to the market price.


[/ QUOTE ]

Everything about this was fine until the last sentence. If you picked a random handful of FA investors, you MIGHT be (and probably are) correct (I doubt you have data for this but it is a reasonable assumption). However, if we are dealing with the upper-eschelon of the FA investors, that last sentence is probably much less likely to be applicable.

[ QUOTE ]
If, on the other hand your evaluation of a stock's worth is significantly different from your guess as to what the market price is, you have a play if you are about right about the market price. My gut feeling is that the best situation occurs when the actual price is shaded slightly toward you own valuation. In other words if you think a stock is worth 20 and you think the public will price it at 29, I would feel best about shorting it if it is about 27. Its an indication that some rich, smart people might be agreeing with me.


[/ QUOTE ]

I'm not sure how you can say that last sentence with any sort of real confidence. If the actual market price is shaded in the FA's direction, it is definitely possible that there are other FA investors who have noted the discrepancy and acted accordingly thus driving down the price. However, I don't think one can say with any real confidence that that particular explanation is more likely than the FA's "market price estimate" being wrong.

[ QUOTE ]
But it is not moronic to say that the market is one of the best experts in telling you what a stock should BE. There are a few people who are even a little better than that. But if they are disagreeing with Mr. Market they should be very aware that the disagreement could signify that they have made at least a partial mistake.

BUT, their discomfort and trepidation should reduce if they can PINPOINT the reason why Mr. Market is disagreeing and refute his reason. When that happens they don't need to give themselves as large a margin of error.


[/ QUOTE ]

This is really the key to the whole thread and probably should have been placed in the original post. The only real question is to what extent this would actually help. I don't know the answer to that question because I don't know how many "plays" are turned away because of a narrow margin.

I also believe that guessing the market price after having done one's own analysis is probably much harder to do than David seems to think and probably has a very large variance. I would think a byproduct of this is someone's "market estimation skills" being worse than their FA skills could cause them to miss some good opportunities.

Finally, I think if any FA wasn't practicing this in at least some form, then I'd have to wonder how smart they really are. I would be willing to bet that most successful FAs practice this in at least some form and are not blindly throwing their money into the pot without at least wondering why such a large +EV opportunity exists when so many other people are analyzing most of the same information.

One note:

Stephen,

I think you are reading a little too much into David's words. He is very direct and likes to make sure there aren't gray areas when it comes to a parameter of the argument. You say "ad naueum"; I say thorough. And this isn't "David vs. Everyone" it is merely David's idea being put out in the open for critique.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
Edit: And let me make it clear that I don't ignore the market price. I have to understand why something is so cheap and why I disagree with the market, just to be sure I've allowed for all known risks. If something is just mysteriously cheap, that's a red flag that I don't understand it properly. But I don't adjust my value estimates for it.

[/ QUOTE ]

This is not really any different than what David is trying to say so long as you are factoring it in somewhere. Out of curiosity, what do you do when you seen a large discrepancy between your estimate and the market price? I'm sure you recheck your assumptions to make sure they still hold true. But if you don't adjust your estimates or at least dilute the amount of capital that you should optimally throw at such an opportunity, then it is likely that you are investing sub-optimally.

Re: Improving On Buffett And Desert Cat
 

David,

[ QUOTE ]
But it is not moronic to say that the market is one of the best experts in telling you what a stock should BE.

[/ QUOTE ]

Can you please elaborate on this statement of yours? In what sense does a current stock price tell you what the stock price "should be"? And what exactly do you mean here by "should be"? Obviously if the price is $4 today, then it is more probable that tomorrow (without any other knowledge) it will be somewhere in the range between $3.5 and $4 than in the range between $3 and $3.5, for instance, but this is a rather trivial point I think.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
David,

[ QUOTE ]
But it is not moronic to say that the market is one of the best experts in telling you what a stock should BE.

[/ QUOTE ]

Can you please elaborate on this statement of yours? In what sense does a current stock price tell you what the stock price "should be"? And what exactly do you mean here by "should be"? Obviously if the price is $4 today, then it is more probable that tomorrow (without any other knowledge) it will be somewhere in the range between $3.5 and $4 than in the range between $3 and $3.5, for instance, but this is a rather trivial point I think.

[/ QUOTE ]

I agree. I'm not really sure what David is trying to say. We aren't graded by our ability to accurately estimate future prices, but by our ability to make decisions that are profitable. Factoring in *current* prices, as long as it's done by a constant factor, should never materially alter one's decision to buy or sell, unless bid-ask spreads are extremely high.

What he's saying essentially is that the market price is a pretty good unbiased estimator of future prices. I don't disagree, but there's no real significance in terms of beating the market, except when you're dealing with derivatives. You don't make money by agreeing with the market.

Re: Improving On Buffett And Desert Cat
 

I respect that Crushin

I just guess his recipe for investing orientated threads/debates is not my cup of tea...and if other posters have no issue with that or want to continue to discuss them with DS,I will stay away and keep my mouth ZIPPED

GL
Stephen [img]/images/graemlins/cool.gif[/img]

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
...What he's saying essentially is that the market price is a pretty good unbiased estimator of future prices. ....

[/ QUOTE ]

No he's saying that the current market price is at least a decent indication of the current, true value. Perhaps I"m being a nit, perhaps you meant future earnings.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
I respect that Crushin

I just guess his recipe for investing orientated threads/debates is not my cup of tea...and if other posters have no issue with that or want to continue to discuss them with DS,I will stay away and keep my mouth ZIPPED

GL
Stephen [img]/images/graemlins/cool.gif[/img]

[/ QUOTE ]

FWIW I think David is really saying that if you disagree with the current valuation by a wide margin, you should be highly suspicious of the valuation you've arrived at. It's much more likely the market is right.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
FWIW I think David is really saying that if you disagree with the current valuation by a wide margin, you should be highly suspicious of the valuation you've arrived at. It's much more likely the market is right.


[/ QUOTE ]

If he had said that in the first place there would only be three posts in this entire thread. [img]/images/graemlins/smile.gif[/img]

Jimbo

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]
David,

[ QUOTE ]
But it is not moronic to say that the market is one of the best experts in telling you what a stock should BE.

[/ QUOTE ]

Can you please elaborate on this statement of yours? In what sense does a current stock price tell you what the stock price "should be"? And what exactly do you mean here by "should be"? Obviously if the price is $4 today, then it is more probable that tomorrow (without any other knowledge) it will be somewhere in the range between $3.5 and $4 than in the range between $3 and $3.5, for instance, but this is a rather trivial point I think.

[/ QUOTE ]

I agree. I'm not really sure what David is trying to say. We aren't graded by our ability to accurately estimate future prices, but by our ability to make decisions that are profitable. Factoring in *current* prices, as long as it's done by a constant factor, should never materially alter one's decision to buy or sell, unless bid-ask spreads are extremely high.

What he's saying essentially is that the market price is a pretty good unbiased estimator of future prices. I don't disagree, but there's no real significance in terms of beating the market, except when you're dealing with derivatives. You don't make money by agreeing with the market.

[/ QUOTE ]

If the market correctly prices securities their can be no abnormal profits from research. Only when incorrect pricing occurs are abnormal profits possible. If a mis pricing is suspected by an analyst he ought to do a double take because the market is fairly effecient in pricing securities and the error is more likely to belong to the analyst then if for instance he differed in his valuation assesment from someone less competent, me for instance.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]
...What he's saying essentially is that the market price is a pretty good unbiased estimator of future prices. ....

[/ QUOTE ]

No he's saying that the current market price is at least a decent indication of the current, true value. Perhaps I"m being a nit, perhaps you meant future earnings.

[/ QUOTE ]

No I meant future prices - value is dependent upon the discounting mechanism (and the holder, to a lesser extent), so there's no such thing as the single current true value, other than the current price. Also, David keeps proposing hypothetical tests (not just in this thread but in earlier ones) regarding how he thinks any single security's price in the future is likely to be closer to the current price than any one person's estimate of its value. This is likely to be true even if you're a much better estimator of a security's "true value" than the market, as long as the market premium or discount to the true value tends to persist over time.

What some arguing against David are missing, however, is the following. If Stock X is trading at $50 and you estimate its "value" to be $70. But say, your threshold for buying is such that you'd only buy X if it traded at $45. Then it's entirely disingenuous to say that you think X is worth $70, because by your own action, you'd rather have $50 than a share of X. Clearly it's not worth $70 to yourself.

Re: Improving On Buffett And Desert Cat
 

"Edit: And let me make it clear that I don't ignore the market price. I have to understand why something is so cheap and why I disagree with the market, just to be sure I've allowed for all known risks. If something is just mysteriously cheap, that's a red flag that I don't understand it properly. But I don't adjust my value estimates for it."

Yes you do. Your comment is an oxymoron. Unless your definition of "value" is something other than "the price where you have no edge whether you buy it or short it".

Meanwhile in spite of the hard time I have been giving you, and in spite of the fact that you are way more experienced and successful in the stock market than I am, would you be so kind as to tell this fellow Stephen that his posts are way off base.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
...What he's saying essentially is that the market price is a pretty good unbiased estimator of future prices. ....

[/ QUOTE ]

No he's saying that the current market price is at least a decent indication of the current, true value. Perhaps I"m being a nit, perhaps you meant future earnings.

[/ QUOTE ]

No I meant future prices - value is dependent upon the discounting mechanism (and the holder, to a lesser extent), so there's no such thing as the single current true value, other than the current price. .....

[/ QUOTE ]

Well I guess we're talking about the same thing. What you're indicating is a rate of return that's acceptable to the investor and in order to acheive that rate of return the threshold price that offers at least that return currently. The true value of a stock is the present value of future earnings more or less.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]
FWIW I think David is really saying that if you disagree with the current valuation by a wide margin, you should be highly suspicious of the valuation you've arrived at. It's much more likely the market is right.


[/ QUOTE ]

If he had said that in the first place there would only be three posts in this entire thread. [img]/images/graemlins/smile.gif[/img]

Jimbo

[/ QUOTE ]

Thank You Jimbo [img]/images/graemlins/smile.gif[/img]

And David....you are right.....and this "Stephen fellow" gives up

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
I will try to rephrase things differently. If there are stocks where my theory isn't true and my technique is unnecessary, then it is also unnecesary to have anywhere near the 50% cushion you require, when investing in these stocks, as long as you have any sort of reasonable value assigning skills.

The above is pure logic. You don't even need to know what a stock IS for it to be true.


[/ QUOTE ]

Unnecessary for what? Unnecessary for who's goals, yours or his? You don't make your argument correct by invoking magical phrases like, "Amen", "Right on", or "It's pure logic". Let's suppose that, as you say, your theory is not true and your technique is unnecessary. Why does this imply that DC's strategy of only buying bargains at 50% discount to Instrinsic Value is by "pure logic" now obviously too conservative? You use the phrase 50% "cushion". "Cushion" is not the idea. The idea is to do research to find the best bargains possible without insisting on such rare super bargains that you can't find them often enough to put your money to work adequately.

You have to decide on some cutoff point which you think is optimal. DessertCat has settled on buying bargains at a 50% discount. There's no reason why supposing your theory is untrue should imply a change in the optimality of that cutoff point.

If buying at 40% discounts to DC's evaluation of intrinsic value amounts to pulling the cash trigger too fast and missing out on the adequately plentiful 50% discounts that a little more patience and research will uncover then supposing your theory to be untrue does not change that fact. Your Pure Logic is Pure Baloney in this case.

PairTheBoard

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
All this of course is related to my Fundamental Theorem Of Investing. Don't invest unless you can explain why people are taking the other side.

[/ QUOTE ]

So in order to be long the stock market, I have to be able to explain why people are short the stock market? WTF

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
FWIW I think David is really saying that if you disagree with the current valuation by a wide margin, you should be highly suspicious of the valuation you've arrived at. It's much more likely the market is right.


[/ QUOTE ]

If he had said that in the first place there would only be three posts in this entire thread. [img]/images/graemlins/smile.gif[/img]

Jimbo

[/ QUOTE ]

Thank You Jimbo [img]/images/graemlins/smile.gif[/img]

And David....you are right.....and this "Stephen fellow" gives up

[/ QUOTE ]

David likes to challenge the status quo and use logical analysis to do so. I'm fairly certain that David wants some of his ideas challenged here to see if people can shoot them down IMO.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]
All this of course is related to my Fundamental Theorem Of Investing. Don't invest unless you can explain why people are taking the other side.

[/ QUOTE ]

So in order to be long the stock market, I have to be able to explain why people are short the stock market? WTF

[/ QUOTE ]

That's a good question.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
All this of course is related to my Fundamental Theorem Of Investing. Don't invest unless you can explain why people are taking the other side.

[/ QUOTE ]

So in order to be long the stock market, I have to be able to explain why people are short the stock market? WTF

[/ QUOTE ]

That's a good question.

[/ QUOTE ]

Try reading the thread.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]
I will try to rephrase things differently. If there are stocks where my theory isn't true and my technique is unnecessary, then it is also unnecesary to have anywhere near the 50% cushion you require, when investing in these stocks, as long as you have any sort of reasonable value assigning skills.

The above is pure logic. You don't even need to know what a stock IS for it to be true.


[/ QUOTE ]

Unnecessary for what? Unnecessary for who's goals, yours or his? You don't make your argument correct by invoking magical phrases like, "Amen", "Right on", or "It's pure logic". Let's suppose that, as you say, your theory is not true and your technique is unnecessary. Why does this imply that DC's strategy of only buying bargains at 50% discount to Instrinsic Value is by "pure logic" now obviously too conservative? You use the phrase 50% "cushion". "Cushion" is not the idea. The idea is to do research to find the best bargains possible without insisting on such rare super bargains that you can't find them often enough to put your money to work adequately.

You have to decide on some cutoff point which you think is optimal. DessertCat has settled on buying bargains at a 50% discount. There's no reason why supposing your theory is untrue should imply a change in the optimality of that cutoff point.

If buying at 40% discounts to DC's evaluation of intrinsic value amounts to pulling the cash trigger too fast and missing out on the adequately plentiful 50% discounts that a little more patience and research will uncover then supposing your theory to be untrue does not change that fact. Your Pure Logic is Pure Baloney in this case.

PairTheBoard

[/ QUOTE ]

PTB,

The 50% number isn't an arbitrary number set by DC that is meant to say, "I want a minimum 50% return on my investments." I believe it is a cushion that is used to protect himself from variance. What DS is trying to say is that there needn't be such a large cushion if you can more accurately determine which of the investments is more likely to do well, which his "accounting for the other side of the market" is meant to do. The misleading thing about the title of this thread is the fact I can guarantee there's zero chance that successful FAs take this into account at least somewhat.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
All this of course is related to my Fundamental Theorem Of Investing. Don't invest unless you can explain why people are taking the other side.

[/ QUOTE ]

So in order to be long the stock market, I have to be able to explain why people are short the stock market? WTF

[/ QUOTE ]

That's a good question.

[/ QUOTE ]

Try reading the thread.

[/ QUOTE ]

If this was covered in the thread, I missed it, but I'm guessing Sklansky meant to provide some caveat, such as "in order to beat the market..." Since stocks drift up, investing in index funds is a good move for someone who can handle the volatility. You shouldn't need to explain why someone might be short the market in order to be long..

Re: Improving On Buffett And Desert Cat
 

David is just arguing that once you've estimated the intrinsic value of a stock independently of the market, you must subsequently re-evaluate that estimate toward the market price after seeing what the market price is. The greater the difference between your initial estimate and the market price, the more you should shift your estimate. By applying this prinicple, you can extract money from the market by selling some stocks slightly earlier than you would otherwise have sold them if you hadn't taken the market price into account (and possibly by making some adjustments on the buy end, though this is less obvious).

I think we're assuming that it's best to sell when the stock price reaches its IV.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
"Edit: And let me make it clear that I don't ignore the market price. I have to understand why something is so cheap and why I disagree with the market, just to be sure I've allowed for all known risks. If something is just mysteriously cheap, that's a red flag that I don't understand it properly. But I don't adjust my value estimates for it."

Yes you do. Your comment is an oxymoron. Unless your definition of "value" is something other than "the price where you have no edge whether you buy it or short it".

[/ QUOTE ]

I think we are arguing over whether I should use price as a signal to alert me that my valuation may be incomplete, or whether I should use the market price directly in my valuation. I can't just average in the market price. I can't even adjust how I weight my risks (that's done rationally with the best information at hand). But I can review the risks of the investment to see if I missed an important risk that I didn't weight at all.

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Meanwhile in spite of the hard time I have been giving you, and in spite of the fact that you are way more experienced and successful in the stock market than I am, would you be so kind as to tell this fellow Stephen that his posts are way off base.

[/ QUOTE ]

David, you know as well as I that no-one on 2+2 is under your or my control (though I'm flattered you asked me). Stephen is a good guy with a strong professional background that adds to this forum. He also happens to be very enthusiastic, but that's a big part of his charm;)

Thanks for all you've written here. I don't really agree with you, but I enjoyed thinking through your arguments, maybe someday soon I'll say hi in the Bellagio and give you an updated opinion.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]

What some arguing against David are missing, however, is the following. If Stock X is trading at $50 and you estimate its "value" to be $70. But say, your threshold for buying is such that you'd only buy X if it traded at $45. Then it's entirely disingenuous to say that you think X is worth $70, because by your own action, you'd rather have $50 than a share of X. Clearly it's not worth $70 to yourself.

[/ QUOTE ]

This isn't really correct at all, for at least two reasons:

1) If you had the opportunity to flip a coin, and would recieve $2million for heads, and nothing for tails - or could take $999k guarenteed - which would you take? Just because most people would take the $999k guarentee, doesn't mean the flip isn't valued at $1million.

2) Presumably it takes a while for market price to reach IV (if ever). So while there may be 'value' in the stock, it will take too long to extract it, such that you could get better value elsewhere

Finally, I'm pretty sure the main reason why we pass up the purchasing of a $50 share with $70 IV is because we are hoping to find an even better bargain. We aren't choosing a $70 IV over $50 cash, but rather waiting to find $80 IV for that $50 cash. So it's really choosing $80 IV over $70 IV.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]
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All this of course is related to my Fundamental Theorem Of Investing. Don't invest unless you can explain why people are taking the other side.

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So in order to be long the stock market, I have to be able to explain why people are short the stock market? WTF

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That's a good question.

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Try reading the thread.

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I did, where is this specifically answered? David wrote an essay about this in the Internet Magizine awhile back. I pointed out some of what I perceived as the problems with his fundamental theorem.

As far was Kem repsonded to in your post, if someone buys SPY with a 20+ year hold period, how are they are being hornswoggled? That someone has the very real expectation that his rate of return will be higher than the long term rate of return on a similar duration US treasury. Why should he care in the least why someone is selling it? Here's another example, say a person has been invested in SPY or a similar index fund and that person will be able to receive an income from US treasuries that will afford that person the lifestyle he wants for the rest of his life. Why should that person care at all about who's buying SPY from him/her?

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
First of all what I am saying is unquestionably correct in the real world. I will get to that in a minute. In the theoretical world I am saying that that if Jack is right about something 90% of the time and Jill is right even as little as 51%, then when they disagree, Jack's probability has gone down to 89.9% or whatever. If they are totally independent chances it easy to figure out the exact answer. You are saying Jack's probability doesn't change because they are not independent. He will get every question right that Jill will, plus more. If that was the case Jill's disagreement means nothing.

But that total lack of independence is obviously not the case in the stock market or sports betting. And once that is true, my contention MUST be true. It isn't even a contention. It is just an irrefutable math problem. If there are two differing opinions the true answer lies somewhere in between. On average. But closer to the guy who gets things right more often. As long as the other guy is better than random.

As to the real world, how can it not be obvious that I am right? Experts who use the Buffett-Graham-DesertCat technique make their play when their figures show they have some required big edge. When the smoke clears they are ahead, But obviously not to the extent that they thought they should be. Otherwise they all would be trillionaires. So the true price lays somewhere between their's and the market's.

Now why that should be the case is not clear. It is obviously sometimes because someone is illegally trading on inside information. But that is too rare to fully account for the syndrome.

When technical analysts say that the market will tell you where a stock is heading they are probably morons. But it is not moronic to say that the market is one of the best experts in telling you what a stock should BE. There are a few people who are even a little better than that. But if they are disagreeing with Mr. Market they should be very aware that the disagreement could signify that they have made at least a partial mistake.

BUT, their discomfort and trepidation should reduce if they can PINPOINT the reason why Mr. Market is disagreeing and refute his reason. When that happens they don't need to give themselves as large a margin of error.

I can't believe I'm going through all this again like I did thirty years ago in poker. You guys all need to just shut up, do what I say, and make more money.


[/ QUOTE ]

This is where it is answered.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]
First of all what I am saying is unquestionably correct in the real world. I will get to that in a minute. In the theoretical world I am saying that that if Jack is right about something 90% of the time and Jill is right even as little as 51%, then when they disagree, Jack's probability has gone down to 89.9% or whatever. If they are totally independent chances it easy to figure out the exact answer. You are saying Jack's probability doesn't change because they are not independent. He will get every question right that Jill will, plus more. If that was the case Jill's disagreement means nothing.

But that total lack of independence is obviously not the case in the stock market or sports betting. And once that is true, my contention MUST be true. It isn't even a contention. It is just an irrefutable math problem. If there are two differing opinions the true answer lies somewhere in between. On average. But closer to the guy who gets things right more often. As long as the other guy is better than random.

As to the real world, how can it not be obvious that I am right? Experts who use the Buffett-Graham-DesertCat technique make their play when their figures show they have some required big edge. When the smoke clears they are ahead, But obviously not to the extent that they thought they should be. Otherwise they all would be trillionaires. So the true price lays somewhere between their's and the market's.

Now why that should be the case is not clear. It is obviously sometimes because someone is illegally trading on inside information. But that is too rare to fully account for the syndrome.

When technical analysts say that the market will tell you where a stock is heading they are probably morons. But it is not moronic to say that the market is one of the best experts in telling you what a stock should BE. There are a few people who are even a little better than that. But if they are disagreeing with Mr. Market they should be very aware that the disagreement could signify that they have made at least a partial mistake.

BUT, their discomfort and trepidation should reduce if they can PINPOINT the reason why Mr. Market is disagreeing and refute his reason. When that happens they don't need to give themselves as large a margin of error.

I can't believe I'm going through all this again like I did thirty years ago in poker. You guys all need to just shut up, do what I say, and make more money.


[/ QUOTE ]

This is where it is answered.

[/ QUOTE ]

This doesn't answer the question the kem asked nor the questions I asked. Thanks for playing though.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]

What some arguing against David are missing, however, is the following. If Stock X is trading at $50 and you estimate its "value" to be $70. But say, your threshold for buying is such that you'd only buy X if it traded at $45. Then it's entirely disingenuous to say that you think X is worth $70, because by your own action, you'd rather have $50 than a share of X. Clearly it's not worth $70 to yourself.

[/ QUOTE ]

No you are saying you think it offers market returns if purchased at $70. You don't buy it at $50 because you want higher returns than even $50 offers. You feel at $45 it offers such a high enough potential return and a large enough margin of safety.

The key to successful investing is having the patience to wait for situations that offer higher returns with less risk. If you lower your standards to the market's, you can't expect to do any better than it.

Re: Improving On Buffett And Desert Cat
 

Perhaps I'll zoom in...

[ QUOTE ]
If there are two differing opinions the true answer lies somewhere in between. On average. But closer to the guy who gets things right more often. As long as the other guy is better than random.


[/ QUOTE ]

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
[ QUOTE ]

What some arguing against David are missing, however, is the following. If Stock X is trading at $50 and you estimate its "value" to be $70. But say, your threshold for buying is such that you'd only buy X if it traded at $45. Then it's entirely disingenuous to say that you think X is worth $70, because by your own action, you'd rather have $50 than a share of X. Clearly it's not worth $70 to yourself.

[/ QUOTE ]

This isn't really correct at all, for at least two reasons:

1) If you had the opportunity to flip a coin, and would recieve $2million for heads, and nothing for tails - or could take $999k guarenteed - which would you take? Just because most people would take the $999k guarentee, doesn't mean the flip isn't valued at $1million.


[/ QUOTE ]

The flip is certainly NOT valued at $1mil by these people. Its EV is $1mil. There's a difference.

[ QUOTE ]
2) Presumably it takes a while for market price to reach IV (if ever). So while there may be 'value' in the stock, it will take too long to extract it, such that you could get better value elsewhere

[/ QUOTE ]

Which means that the cash is more valuable, hence, the investment isn't worth as much as the cash.

[ QUOTE ]
Finally, I'm pretty sure the main reason why we pass up the purchasing of a $50 share with $70 IV is because we are hoping to find an even better bargain. We aren't choosing a $70 IV over $50 cash, but rather waiting to find $80 IV for that $50 cash. So it's really choosing $80 IV over $70 IV.

[/ QUOTE ]

If $50 in cash can buy $80IV and $80IV is more valuable than $70IV, then $50 is worth more than $70IV.

It's simple economics. When you can have A or B and you choose A, you're expressing a view that A is more valuable than B.

Re: Improving On Buffett And Desert Cat
 

[ QUOTE ]
Perhaps I'll zoom in...

[ QUOTE ]
If there are two differing opinions the true answer lies somewhere in between. On average. But closer to the guy who gets things right more often. As long as the other guy is better than random.


[/ QUOTE ]

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Nope doesn't anwer his question or mine.