Four Ways To Use My Ideas
 

1. As already discussed, look at companies without knowing their stock price, use your fundamental analysis skill to estimate the fair price of the stock. And consider buying or shorting if there is a fairly large discrepancy. But if the discrepency is near the border of your criteria stay away from the trade if you don't have a pretty good idea why the market is causing this discrepancy.

2. MORE IMPORTANLY (I think) is to be willing to bet on discrepancies that do not quite meet your normal requirements to invest if you think you have a pretty good idea why the market is incorrectly causing this discrepancy. The fuddy duddy FAs on this forum are already using the first strategy but rarely the second one. But the second one HAS to work if they are even half as smart as they think they are.

3. Don't make the criteria for picking stocks to consider be the ones you are most adept at analyzing but rather let them come from a basket of stocks that for one reason or other the public is least adept at analyzing. Try to find stocks that have some aspect to them that will predictibly make them overvalued or undervalued. Like I did with Schwab and Taser. If you can get skilled at this enterprise, often as much art as science, you don't even need to have FA ability to have an edge in these bets. But having that ability will of course increase your edge. (As of now I have no idea how often a stock is mispriced due to reasons that an astute investor should be able to pick out. My personal economic situation had been such that I felt it wasn't worth looking into. That may have changed).

4. This fourth technique, unlike the first three is playing with fire. But I'm told it works. The jist of it was first brought to my attention by a weird book, written forty years ago called Horse Sense by someone named Fabricand. He was a mathmetican who later wrote a similar book about the stock market which I was also told works. But it is more illustrative to talk about the horse book.

After conducting research about thousands of horse races he came to the conclusion that a certain type of bet showed a long run profit. Although he gave a few variations and exceptions, the bet in a nutshell was a win bet on the favorite when at least one other horse was "similar" to it.

He then went on to give a whole slew of very precise, complex and convoluted rules (based on the information in the Daily Racing Form) to determine whether you could call two horses "similar". Some were really weird. For instance they became more similar if there odds were more dissimilar! In other words if the favorite was 6-5 and the 5-2 second choice did not quite meet the standards of similarity, it all of a sudden did if it moved up to 3-1?
What was going on here? He didn't explain why this method worked and he implied he didn't know himself. He just said that he had highly statistically significant results with the method.

He even admitted that he didn't really know how to handicap.
The only thing he explained at all was that he stuck to favorites because their inherent disadvantage, if bet randomly was much smaller than the other horses.

Meanwhile, again, multiple sources told me his method showed a nice profit and a giant improvement over random betting.

It took me a couple of readings to realize what was going on but then it hit me. Whether Fabricand himself realized it or not, his strange rules were designed, not to predict how likely a horse was to win but rather to predict the odds the public would make it! There is of course a high correlation but that was irrelevent to him.

In essence what he had discovered was the simple fact that horses, especially favorites, that were lower prices than WHAT ONE WOULD PREDICT based on the Daily Racing Form were MUCH more likely to win then the prerace prediction.

In other words if you are an expert at predicting the public odds on the toteboard and you predict they will be 5-2 (meaning the public thinks it will win about 25%, takeout adjusted) and the actual odds are 3-2 (meaning the public makes it about 35%) the actual winning chances are about 43%. This is an astounding increase in chances yet Fabricand supposedly found about one race out of nine where this occurred.

Now Fabricand's syndrome is well known in some cases. Namely when high price horses are significantly bet down. However those bets are often bad ones as the public often jumps on them and drives the price further down to minus EVland. But the situations Fabricand found were less obvious and thus less like to become self non fulfilling.

One interesting question regarding Horse Sense was the algorithmic nature of the rules he was using to predict (although he didn't realize himself he was doing this) what a horses odds normally would be (or to be more precise whether they normally would be about the same as another good horse in the race). Would an expert handicapper do even better at this task? Who knows? But we do know that that EXPERTISE WASN'T REQUIRED. And it still came up with insane edge swings. That would lead me to believe that in the short run, until lots of people learn it, there might be algorithmic rules for predicting what price the public will make a stock. Making it easier to follow the strategies in this thread.

So lets get to this fourth strategy. A dangerous one that I have yet to use. But expect to if I get deeper into this game. But before I mention it I want to remind you of what I just wrote. Fabricand found horses that he expected to go off at 5-2 that he would lose on if he took those odds but would win on if they were 3-2! (To make things clear this didn't include every time a horse was unexpectedly low. Most races the prediction of similarity was too fuzzy to jump on discrepancies.)

Anyway, method four does not involve betting on stocks where you can figure out why the marker doesn't agree with your evaluation. But rather betting on stocks where you have no idea why their price is different from what you PREDICTED it would be. Ironically you don't want to bet on stocks that are far away from that prediction because that has already attracted unwanted attention. Like the high priced bet down horse. If you are not a fundamental analyst and my theory is correct (which I admit I am uncertain of) you should still do well if your prediction talents are there. But it is better still if you are a FA.

Here is an example. You are a FA who can also predict what a stocks market price could be expected to be. You think this one will be 80. But it is 69. For no reason you can discern. Fabricand says this is enough to short it. You do your analysis and think it should be 59. Without Fabricand and me this is too close a call. But this short fits in with the second part of #1 above so you do it. Slam dunk. How can it not be? But notice that if you think the stock should be 59 and you predicted it would be 80, it means you can explain why the market is mispricing it (although not as much as you thought) in your eyes. If you couldn't you wouldn't have made your 80 prediction.

But what about if you yourself would (without firm conviction) estimate the stock as being worth about $80. The same price you thought the market would make it. Or what about if you feel you are unqualified to properly analyze the company (but qualified to predict what a stock like this would normally sell for). In those cases, (remember it can't be too obvious) Fabricand would say that you should STILL short it. I'm guessing he is right.

For those who don't want to wade through all this lets put it more simply. Get good at predicting what to expect the market will make a stock price. If you are right, and you disagree, and you know what you are doing, you have a certain edge. And don't be afraid to jump on moderate discrepancies. But if the price is unexpected be much more careful. Unless the surprising price is partially leaning toward you value.

If you want to play a little faster and looser you can try going further with things, as long as you can find surprising prices. Sort of like what some people call "trap lines" in football. If you find such a surprising price (but not TOO surprising, since everybody sees that) the idea would be to bet WITH the market. The opposite way as common sense and your inclination. Don't make this bet if you have strong feelings about the market's error. But if this was a stock that you had heretofore ignored because you rated it aboout the same way that you had predicted the market would, you should maybe IGNORE your cursory opinion and bet the other way. If you have a little inclination as to why the market may have this somewhat surprisng price, better yet.

This last technique is designed to squeeze out every bit of profit from your talent to judge what a stock price is expected to be. If you can do that and a stock is what you expected and it is because of flawed reasons you have a clear play. But in theory you ought to have good bets when the price is UN expected and you don't know the reason (or you have an inkling of the reason and it makes sense). This is a much more ticklish strategy though. So don't try it at home. Or blame me if it isn't working for you.

Re: Four Ways To Use My Ideas
 

profound

Now ill be RIIICH BITTTCH

Re: Four Ways To Use My Ideas
 

This is all well and good, but your missing the most important ingredient; timeframe is oh so important. Just relying on correct pricing isn't going to get you the super high profit yield, because your money will still be tied into a stock which may move sideways for a long period of time.

This is why waiting for a catalyst till you invest your money, in my opinion, makes a much high probability that your invested money won't lie dormant for too long.

Re: Four Ways To Use My Ideas
 

wow, that was actually a good post david imo.

Re: Four Ways To Use My Ideas
 

great post david. it actually makes me hate the idea of trading equities a whole lot less.

is this not something that has been publically written about previously (specifically wrt stock markets)? it seems to me it makes too much sense for it not to be common knowledge amongst good traders, but maybe its not?

Re: Four Ways To Use My Ideas
 

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This is all well and good, but your missing the most important ingredient; timeframe is oh so important. Just relying on correct pricing isn't going to get you the super high profit yield, because your money will still be tied into a stock which may move sideways for a long period of time.

This is why waiting for a catalyst till you invest your money, in my opinion, makes a much high probability that your invested money won't lie dormant for too long.

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it seems to me that this is mostly a short-term strategy (there will definitely be exceptions) and the discrepancies between your expected market valuation and the trading price will often be due to upcoming events that insiders have knowledge about or that are somewhat predictable by people smarter than the general market. of course a lot of the time you won't know how long your timeline is since you don't know what's causing the discrepancy...

Re: Four Ways To Use My Ideas
 

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great post david. it actually makes me hate the idea of trading equities a whole lot less.

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to expand on this:

i've always felt that the "fundamental analysis" that is taught in books and stuff is a crock because when i find a stock that seems to be mispriced significantly, i'm always going to wonder if that's because there's someone that knows something that i don't. but for some reason i've never considered that trading in the opposite direction of what FA suggests might be a good strategy...

but really, good traders must know about this (whether they fully understand it or not), and taking advantage of it isn't likely to be easy.

i'd imagine this would work best in stocks that the stupid general public have a lot of interest in, and everyone thinks they're experts in (GOOG for example). the challenge of course is figuring out how the stupid public prices those stocks. maybe this is where TA becomes useful...

but i guess you can argue in circles why this should/shouldn't work, and its a stupid argument where performance would speak for itself, just like the whole FA vs TA argument.

Re: Four Ways To Use My Ideas
 

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i'd imagine this would work best in stocks that the stupid general public have a lot of interest in, and everyone thinks they're experts in (GOOG for example). the challenge of course is figuring out how the stupid public prices those stocks.

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actually scratch that... the moronic public doesn't try to price stocks, they just buy because they think OMG GOOGLE. maybe there's something there but it's obviously pretty complicated.

Re: Four Ways To Use My Ideas
 

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My personal economic situation had been such that I felt it wasn't worth looking into. That may have changed).


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Countdown to Sklansky Busto Thread...

Re: Four Ways To Use My Ideas
 

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The fuddy duddy FAs on this forum

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Sigh.

Go ahead poker player/investors. Find investing strategies that are easy to implement while you are still playing the horses and poker 12 hours a day, avoid strategies that require actual hard work. Us Fuddy Duddy's will watch for your results with interest...

Re: Four Ways To Use My Ideas
 

Sklansky’s got it mostly right.

What also follows from what he wrote is this:

It’s usually not a good idea to trade against a big stock move that seems insane (to you).

The economist and speculator Keynes told us -- after going broke three times-- that,
“the markets can stay irrational a lot longer than you can stay solvent.”

Re: Four Ways To Use My Ideas
 

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i'd imagine this would work best in stocks that the stupid general public have a lot of interest in, and everyone thinks they're experts in (GOOG for example). the challenge of course is figuring out how the stupid public prices those stocks.

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actually scratch that... the moronic public doesn't try to price stocks, they just buy because they think OMG GOOGLE. maybe there's something there but it's obviously pretty complicated.

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The General public is SO WRONG in many more ways than you can ever imagine:

1. The Google IPO which was a dutch-auction where basically the GP had the ability to "bid" the price and submit that bid to their broker....the openong price I believe was $85...and IMMEDIATLY was BID up to $100 the first day.Many of these GENIUS John Q.P.s...sold their stock in the $100-125 range,and took home their nice profit....while the PRO's valuing GOOG MUCH higher bid it up day after day.....it is now up over 6x that price (and so far rightfully so fundamentally it seems also).Whats more amazing is I have had a few lay person friends who were in on the GOOG IPO,sold for a nice profit......and then got SO upset "selling too early"......they proceeded by trying to re-enter...getting in and out at EVERY wrong time,or even worse SHORTING Google, recently when it blasted through $700,giving all their profits and more back.....just AMAZING.

Instead of just buying and holding for a specific time/price target....whether they sold at $150...$250...$500...or still own it after the few short years GOOG has been public....their EMOTIONS took over with devastating results to these few,as so many public market participants do
However "IF" they listened to the "MARKET".....they would be sitting on a 6 bagger....and I just saw UBS raised their target on this MONSTER to $900 yesterday.Whether I think GOOG is worth/valued at todays current price or not isnt important.......but that fairly effortless 600% rise ...with stunning Fundys as well,along with solid technicals, was completely BUTCHERED by the original public perseption

2.As to Davids comment on bookmakers putting out the so called "TRAP/SUCKER" betting lines ....while I dont think the BM is intentionally making the line lower/higher to attract a certain side(a true BM business model wants TWO sided action to earn their respective 10% or higher vigorish on exotic bets(teasers,parlays,etc).They are NOT supposed to be gambling themselves ....making what "appears" to be wrong line to attract action.Small time BM's used to do this all the time to ATTRACT more money ...and get crushed by pro's middling them on 2-3 games a week sometimes

This "TRAP" line however just "looks to good to be true to the public",and they are WRONG probably 65% of the time on these occassions.To be clear though, I am basically talking about the most widely bet sport ...The NFL

3.As to horse racing...many consider the CLOSING price to be the "TRUE line,after everythings factored in(read below)

In simple terms paramutual wagering(which is technically diff, from sports betting) is a function of bettors picking their horses,the track then TAKING out its HUGE percentage from each respective betting pool(WPS wagering,exotics,DD's,exactas,trifectas,superfecta s,etc).So the TRUE odds are anything BUT.
For example after the tracks 20%+ take on any given pool.....the favorite going off at 2-1 paying $6 to win....when in actuallity it would be 7-2 with no track-take out.This is why BEATING the horses not ONE race is so difficult,as the TRUE odds of each race dont = the pool.It is NOT a zero sum game...as many dont even understand this believe it or not

I would also suggest this CLOSING PRICE is a myriad of factors such as standard handicapping,track conditions,jockey changes,tout sheets,various TIPS,superstitios betting such as horses name/silk colors/gate number/etc...ALL baked into one.

It used to be that many "PRO's" considered the opening line from the Racing Form to be the STRONGEST line based on that PRO handicappers ability.....and would then make their FINAL choice just based on these descrepencies alone in the opening/closing price JUST prior to post time after the clueless public entered the game.Smart money also has a way of "falsly" dictating the odds IMO also

4.NOW back to the market....There are MANY indicators still widely used that give the General Public ZERO creditabilty(such as the odd lot sales/specialist short sale ratio is one STILL widely followed).The GP ALWAYS seems to be TOO late to the party...whether it be buying/casing stocks WAAAY too high....or trying to catch the proverbial falling knife,averaging down.....refusing to SELL stocks until it is too late...which has ALWAYS resulted in that final capitulation type sell-off that pros look for in finding MAJOR market bottoms every few years.This indicator IMO is a geat indicator with regard to the GP...which is just based on basic physcology for the most part.

Anyway just my 2cents....and I must say,I happen to like this thread or am slowly adjusting to the DS method of posting.............OH please say no ..JK [img]/images/graemlins/smirk.gif[/img]

GG,
Stephen [img]/images/graemlins/cool.gif[/img]

BTW...even though I did my share of gambling way back when,I DONT gamble on anything I dont feel I have an edge in anymore.I built many a BM's house....and kept alot of OTB's open in my early years [img]/images/graemlins/frown.gif[/img]

Re: Four Ways To Use My Ideas
 

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...The fuddy duddy FAs on this forum are already using the first strategy ....

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Haha funny.


On points 1 and 2 it's pretty clear when you sell and thus it's clear what the expected return is.

I'll concede that I may not have read 3 and 4 closely enough but it's not so clear. Maybe you just sell when you acheive your expected return.

From a portfolio theory perspective, a portfolio of these selections can be evaluated such that the risk being undertaken can be compared to taking the equivalent risk of buying something like SPY and comparing your expected returns to the expected returns from SPY for the equivalent risk. I also note that acheiving a higher return than the market return involves using leverage with SPY. A long winded way of saying that IMO there's a decent chance such a portofolio is sub-optimal. Maybe I should just say that you need to develop the risk aspects more thorougly FWIW.

Effecient Frontier - Risk and Returns

Re: Four Ways To Use My Ideas
 

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i've always felt that the "fundamental analysis" that is taught in books and stuff is a crock because when i find a stock that seems to be mispriced significantly, i'm always going to wonder if that's because there's someone that knows something that i don't. but for some reason i've never considered that trading in the opposite direction of what FA suggests might be a good strategy...


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The OP was tl;dr but whether someone knows something you don't doesn't really matter. Look at CROX - beat guidance, forward guidance was great, stock got pummelled anyway. It doesn't matter if they "know something", the main thing is, it got sold. Hard. You just don't want to walk in front of a moving train.

Re: Four Ways To Use My Ideas
 

Interesting article Sklansky.

1. I think Fabricand has alot more "expertise" than he realizes or admits. The guy analyzed thousands of races and has the expertise to know all of the factors that may make horses similiar or different and to an exact degree. Maybe this affected his results, maybe not. But he certainly would have done better at the track than an average Joe.

2. Fabricand goes to the track for race 1, analyzes all 8 horses and picks his favorite and assigns odds. The Joe's also show up for race one analyze the situation and come to one of two conclusions: 1) Fabricands horse is the favorite and they decide to bet on that horse with him or 2) they like other longer odds horses better and they decide to bet on subquality horses that have an "inherent disadvantage".

Given the two choices above, Fabricand's horse wins more often when it has lower odds because the Joes see no other option worthy of providing competition, so they in turn bet with Fabricand making his horse a smaller favorite than he calculated. It isn't that his system is so magical, it is simply that the situation is so clear. Maybe in some perverted way, Fabricand used the Joe's collective knowledge to his advantage. Not a single Joe could find an attractive hidden alternative to threaten Fabricands favorite.

Now, if there were Fabricands horse and another horse similar, this would probably drive the Joes away, as now they have to choose their longshot to beat TWO similar favorites. With no Joes, you have only the "SMART" money betting the race, all of which can easily pick the favorite thereby driving his odds down as Fabricand predicted.

Just a few thoughts as to why Fabricand's results turned out the way they did. He probably manipulated his statistics very well without realizing the macroelements around him (the Joes) and he also miscalculated his own unconscious expertise (intuition).

Re: Four Ways To Use My Ideas
 

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The fuddy duddy FAs on this forum

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Sigh.

Go ahead poker player/investors. Find investing strategies that are easy to implement while you are still playing the horses and poker 12 hours a day, avoid strategies that require actual hard work. Us Fuddy Duddy's will watch for your results with interest...

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Keep in mind that I wasn't calling them fuddy duddies because they were avoiding my more debatable suggestions. It was only the suggestion that they shrink their required discrepancy when that discrepancy can be explained and dismissed, thus giving them more picks, that they are fuddy duddies if they ignore.

As for the fact that my theories seem to indicate that there are winning strategies that don't take that much hard work or expertise, that's just the way it is. There are many, many endeavors where the person who does hard work will be an underdog to someone with only moderate knowledge and work ethic who comes upon a key concept or two that can be utilized against them. I do agree however that while the hard worker should have an open mind, if he is already successful, he should sit back and let others be guinea pigs.

Re: Four Ways To Use My Ideas
 

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There are many, many endeavors where the person who does hard work will be an underdog to someone with only moderate knowledge and work ethic who comes upon a key concept or two that can be utilized against them. I do agree however that while the hard worker should have an open mind, if he is already successful, he should sit back and let others be guinea pigs.

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David...............We are starting to AGREE

Stephen [img]/images/graemlins/smirk.gif[/img]

Re: Four Ways To Use My Ideas
 

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The OP was tl;dr but whether someone knows something you don't doesn't really matter.

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ummm, yes it does

Re: Four Ways To Use My Ideas
 

Great post David! Points 1-3 sum up my theories on stock trading eloquently and succinctly. There is a often a definite pattern to exploit when dealing with mispriced securities, a psychological rift that emerges beteen a stock's true value and its price, when certain conditions are present. Investors that learn to identify the market's psychological stumbles and flawed groupthink will earn abnormal profits. Even without a ton of hard work. Eat that, efficient market theorists.

Re: Four Ways To Use My Ideas
 

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3.As to horse racing...many consider the CLOSING price to be the "TRUE line,after everythings factored in(read below)

In simple terms paramutual wagering(which is technically diff, from sports betting) is a function of bettors picking their horses,the track then TAKING out its HUGE percentage from each respective betting pool(WPS wagering,exotics,DD's,exactas,trifectas,superfecta s,etc).So the TRUE odds are anything BUT.
For example after the tracks 20%+ take on any given pool.....the favorite going off at 2-1 paying $6 to win....when in actuallity it would be 7-2 with no track-take out.This is why BEATING the horses not ONE race is so difficult,as the TRUE odds of each race dont = the pool.

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Perhaps I'm misunderstanding the way the tracks skim the takeout, but I don't see why it affects the odds.

Say there are 5 horses in the race and the total pool is $100.

Before the takeout, of let's say 20%, the fav has $50 on it, and the other 4 all have $12.50. After the takeout, the fav has $40 on it, and the others all have $10.

The favorite still has the same percentage of the total pool on it, as do all the other horses.

My problem with David's horse racing example is that it's not possible to execute because the odds can change dramatically after the betting is closed. So, you're basically guessing whether or not the bet meets the criteria.

Re: Four Ways To Use My Ideas
 

The argument of the TRACK taking money out of the pool is instead of being a TRUE $10k Win Pool to payout from.....,,,after the track subtracts its 20% vig/juice.....the "adjusted" WIN pool now only has $8000 to divide amongst the various winners who played/bet on that particular horse/bet

So instead of the OUR FAV who would have been paid X to win....after the track T/O(we will call that y) you are now being paid x-y% accordingly based on the #of horses....amount bet on each horse...and the total $$$ in THE POOL

OUR... "hypothetical" pool would make it a ZERO sum gain over time,and award the "BEST" handicappers/luck boxes more money over time with same horses in the same race....with NO outside entity taking/PROFITING from our race betting pool

The tracks version(REALITY)results in 20% less money available to payout
With that LOWER TRACK pool taking this 20% of the money out ..... the ACTUAL odds are eventually affected accordingly in the payout

I think I am confusing you(i am confusing MYSELF....lol),and someone like David or other horse players can explain it better.....BUT you are not getting the TRUE THEORETICAL odds after betting at the track/OTB

Thats how they make their $$$$$,and makes it SO difficult to win over time

Some HELP please would be appreciated [img]/images/graemlins/smirk.gif[/img]

Stephen

Re: Four Ways To Use My Ideas
 

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The fuddy duddy FAs on this forum

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Sigh.

Go ahead poker player/investors. Find investing strategies that are easy to implement while you are still playing the horses and poker 12 hours a day, avoid strategies that require actual hard work. Us Fuddy Duddy's will watch for your results with interest...

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Keep in mind that I wasn't calling them fuddy duddies because they were avoiding my more debatable suggestions. It was only the suggestion that they shrink their required discrepancy when that discrepancy can be explained and dismissed, thus giving them more picks, that they are fuddy duddies if they ignore.

As for the fact that my theories seem to indicate that there are winning strategies that don't take that much hard work or expertise, that's just the way it is. There are many, many endeavors where the person who does hard work will be an underdog to someone with only moderate knowledge and work ethic who comes upon a key concept or two that can be utilized against them. I do agree however that while the hard worker should have an open mind, if he is already successful, he should sit back and let others be guinea pigs.

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Warren Buffett took $100,000 and turned it into $50 billion buying stocks. He explained how he did it He scoured financial reports looking for companies with a competitive advantage selling at a significant discount to what an informed buyer would pay for the whole company. His time horizon was basically forever and once he bought a stock he did not let the price influence his decisions. He cited many other disciples with the same mind set who also achieved signicant performance. Why would a casual observer think they could improve on these methods? Bufffet has access to the best minds on Wall Sreet and laughs at trading, leverage, TA, short term trading and most exotiic investments. Either you can do what Buffett does or find someone who can and pay them to manage your money. Trying to use a horse handicapper to devine a system that will improve on Buffett seems extremley naive.

Re: Four Ways To Use My Ideas
 

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Warren Buffett took $100,000 and turned it into $50 billion buying stocks. He explained how he did it He scoured financial reports looking for companies with a competitive advantage selling at a significant discount to what an informed buyer would pay for the whole company. His time horizon was basically forever and once he bought a stock he did not let the price influence his decisions. He cited many other disciples with the same mind set who also achieved signicant performance. Why would a casual observer think they could improve on these methods? Bufffet has access to the best minds on Wall Sreet and laughs at trading, leverage, TA, short term trading and most exotiic investments. Either you can do what Buffett does or find someone who can and pay them to manage your money. Trying to use a horse handicapper to devine a system that will improve on Buffett seems extremley naive.

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he's not attempting to improve on buffet. he's attempting to exploit the same mispricings buffet looks for, but with a different method. he's not claiming that it's better than what buffet does.

Re: Four Ways To Use My Ideas
 

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he's not attempting to improve on buffet. he's attempting to exploit the same mispricings buffet looks for, but with a different method. he's not claiming that it's better than what buffet does.

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He claims it improves on what Buffett does (in the other thread), that Buffett would have higher returns if he incorporated David's approach. Let me make it clear I'm not convinced David is right or wrong yet, but I have biases that naturally make me skeptical of it.

I may write a letter to Warren Buffett just to see what he would say.

Re: Four Ways To Use My Ideas
 

I don't think its as easy as David thinks to handicap the stock market.
A good FA can determine the value of a company with enough accuracy to make money when its shares are mispriced.
We know the market price, and thats how we can tell whether or not to buy the company.
What I don't understand is how you come up with this other number about the expectation of price. Shouldn't the expectation be the value you determined?

Re: Four Ways To Use My Ideas
 

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He claims it improves on what Buffett does (in the other thread), that Buffett would have higher returns if he incorporated David's approach. Let me make it clear I'm not convinced David is right or wrong yet, but I have biases that naturally make me skeptical of it.

I may write a letter to Warren Buffett just to see what he would say.

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if you do, please post it here first - i'm sure the forum will have some valuable feedback/suggestions.

Re: Four Ways To Use My Ideas
 

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The fuddy duddy FAs on this forum

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Sigh.

Go ahead poker player/investors. Find investing strategies that are easy to implement while you are still playing the horses and poker 12 hours a day, avoid strategies that require actual hard work. Us Fuddy Duddy's will watch for your results with interest...

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Keep in mind that I wasn't calling them fuddy duddies because they were avoiding my more debatable suggestions. It was only the suggestion that they shrink their required discrepancy when that discrepancy can be explained and dismissed, thus giving them more picks, that they are fuddy duddies if they ignore.

As for the fact that my theories seem to indicate that there are winning strategies that don't take that much hard work or expertise, that's just the way it is. There are many, many endeavors where the person who does hard work will be an underdog to someone with only moderate knowledge and work ethic who comes upon a key concept or two that can be utilized against them. I do agree however that while the hard worker should have an open mind, if he is already successful, he should sit back and let others be guinea pigs.

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Warren Buffett took $100,000 and turned it into $50 billion buying stocks. He explained how he did it He scoured financial reports looking for companies with a competitive advantage selling at a significant discount to what an informed buyer would pay for the whole company. His time horizon was basically forever and once he bought a stock he did not let the price influence his decisions. He cited many other disciples with the same mind set who also achieved signicant performance. Why would a casual observer think they could improve on these methods? Bufffet has access to the best minds on Wall Sreet and laughs at trading, leverage, TA, short term trading and most exotiic investments. Either you can do what Buffett does or find someone who can and pay them to manage your money. Trying to use a horse handicapper to devine a system that will improve on Buffett seems extremley naive.

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There are a lot of things wrong with your post.

1. He wasn't a horse handicapper. He was a mathmetician. And he went on to beat the stock market with similar methods that he wrote about. Please read my posts more carefully.

2. I also laugh at all the stuff that Buffett laughs at. I'm concerned that some of the readers here are using my posts as an excuse to believe in nonsense.

3. As long as Buffett stuck to big companies where he had major disagreements with the market price, he didn't need to think about my stuff-as long as he is great at valuing companies and the public sometimes isn't. But what no one is getting here is that in spite of his words, I'm sure he agrees with me. In other words he agrees that the eventual worth, after present value adjustments, of companies he invests in are away from the market pice and toward his price but not ALL THE WAY. This is ridiculously obvious. Otherwise he owns the world. He doesn't mention it because it isn't relevant to him.

4. Almost no one is as good as Buffett at valuing a company and finding large discrepancies. So they have to pay more attention to the market's mindset. In fact Buffett himself might not be able to succeed with his methods as well he used to. The public is probably better now. So even if you are an expert, it is less likely that your valuation will differ as much from the market price. So if Buffett was starting now he would be forced to pick from smaller discrepancies and pay more attention to David Sklansky's Fundamental Theorem of Investing.

Re: Four Ways To Use My Ideas
 

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he's not attempting to improve on buffet. he's attempting to exploit the same mispricings buffet looks for, but with a different method. he's not claiming that it's better than what buffet does.

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He claims it improves on what Buffett does (in the other thread), that Buffett would have higher returns if he incorporated David's approach. Let me make it clear I'm not convinced David is right or wrong yet, but I have biases that naturally make me skeptical of it.

I may write a letter to Warren Buffett just to see what he would say.

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Even if the returns are greater that doesn't mean that it's a better alternative because the risk may be greater as well (out of proportion to the extra returns). I keep coming back to the concept that investors want to achieve desired returns at the minimum risk possible. An analysis without quantifying the risk is an incomplete analysis.

Then we could get into investor utility. Not all investors desire the same rate of return.

Re: Four Ways To Use My Ideas
 

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he's not attempting to improve on buffet. he's attempting to exploit the same mispricings buffet looks for, but with a different method. he's not claiming that it's better than what buffet does.

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He claims it improves on what Buffett does (in the other thread), that Buffett would have higher returns if he incorporated David's approach. Let me make it clear I'm not convinced David is right or wrong yet, but I have biases that naturally make me skeptical of it.

I may write a letter to Warren Buffett just to see what he would say.

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He knows of me so I doubt he will dismiss my ideas out of hand. Here are a few specific contentions of mine that you should mention where I think he agrees with me and you are skeptical.

When he says he ignores the actual stock price, he means that as long as he considers it seriously out of whack, he has a good play. And he need not concern himself with the contention that in the long run, his profits will certainly be less substantial then they would be if his predictions, on average, were perfect. All he needs them to be is substantially different form the markets predictions and in the direction his predictions would indicate. He doesn't even have to be closer than the market's predictions in order to become a multi billionare. And in fact that is what actually has been the case.

(If he agrees with that, then he agrees that once he sees the price he must shade his prediction. Even if he doesn't realize it.)

2. The idea that pure analysis will get you a good estimate of the price of a stock regardless of the market price is only a reasonable idea for some major companies. The idea that it is important to try to figure out WHY the market is disagreeing with you is not just a good idea for "fulcrum" stocks. It is important for a whole slew of stocks. Any stock where there is any kind of a chance your analysis might have missed something. But IF you can figure out why the market is disagreeing with you, and you can EXPLAIN why it is misevaluating, you should be willing to invest even if the disrepancy between prices is smaller than usual.

Re: Four Ways To Use My Ideas
 

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The fuddy duddy FAs on this forum

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Sigh.

Go ahead poker player/investors. Find investing strategies that are easy to implement while you are still playing the horses and poker 12 hours a day, avoid strategies that require actual hard work. Us Fuddy Duddy's will watch for your results with interest...

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Keep in mind that I wasn't calling them fuddy duddies because they were avoiding my more debatable suggestions. It was only the suggestion that they shrink their required discrepancy when that discrepancy can be explained and dismissed, thus giving them more picks, that they are fuddy duddies if they ignore.

As for the fact that my theories seem to indicate that there are winning strategies that don't take that much hard work or expertise, that's just the way it is. There are many, many endeavors where the person who does hard work will be an underdog to someone with only moderate knowledge and work ethic who comes upon a key concept or two that can be utilized against them. I do agree however that while the hard worker should have an open mind, if he is already successful, he should sit back and let others be guinea pigs.

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Warren Buffett took $100,000 and turned it into $50 billion buying stocks. He explained how he did it He scoured financial reports looking for companies with a competitive advantage selling at a significant discount to what an informed buyer would pay for the whole company. His time horizon was basically forever and once he bought a stock he did not let the price influence his decisions. He cited many other disciples with the same mind set who also achieved signicant performance. Why would a casual observer think they could improve on these methods? Bufffet has access to the best minds on Wall Sreet and laughs at trading, leverage, TA, short term trading and most exotiic investments. Either you can do what Buffett does or find someone who can and pay them to manage your money. Trying to use a horse handicapper to devine a system that will improve on Buffett seems extremley naive.

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There are a lot of things wrong with your post.

1. He wasn't a horse handicapper. He was a mathmetician. And he went on to beat the stock market with similar methods that he wrote about. Please read my posts more carefully.

2. I also laugh at all the stuff that Buffett laughs at. I'm concerned that some of the readers here are using my posts as an excuse to believe in nonsense.

3. As long as Buffett stuck to big companies where he had major disagreements with the market price, he didn't need to think about my stuff-as long as he is great at valuing companies and the public sometimes isn't. But what no one is getting here is that in spite of his words, I'm sure he agrees with me. In other words he agrees that the eventual worth, after present value adjustments, of companies he invests in are away from the market pice and toward his price but not ALL THE WAY. This is ridiculously obvious. Otherwise he owns the world. He doesn't mention it because it isn't relevant to him.

4. Almost no one is as good as Buffett at valuing a company and finding large discrepancies. So they have to pay more attention to the market's mindset. In fact Buffett himself might not be able to succeed with his methods as well he used to. The public is probably better now. So even if you are an expert, it is less likely that your valuation will differ as much from the market price. So if Buffett was starting now he would be forced to pick from smaller discrepancies and pay more attention to David Sklansky's Fundamental Theorem of Investing.

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There is much that is wrong with the David Sklansky Fundamental Theorem of investing. The first is that a company's earnings, cash flow and potential are not static. The movement in these variables can far outweigh any current descrepency in price and private market value.

Buffet says that in the short term the market is a voting machine, in the long term it is a weighing machine. This means he does not look at current market prices as representing anything other than a popularity contest. Stocks swing from in favor to out of favor around intrinsic value. The real key to his success though is a competitive advantage. His companies grow earnings at an above average rate which multiplies value over time.

While it may be nice to buy a company at a significant discount to estimated private value if you look at his big investment winners the main key was to identify company’s and management teams with a unique position in an industry that could generate abnormal returns. His gains are NOT a simple movement from undervalued to fairly valued, that is a small part of his gains. The real money has come in identifying companies that can generate abnormal returns because competition is generally limited due in many cases to a company’s brand name that can’t be duplicated at any price.

Market price to Buffett is but a barometer of investor sentiment. He knows what value should be. He stays away from complicated companies or industries he does not understand to eliminate the risk of the market knowing more about nasty suprises than he does. Coke, See's etc are American staples with many decades of earnings growth. He correctly identified many of these brand names as giving a company a unique advantage and could care less how the American public valued these companies.

Re: Four Ways To Use My Ideas
 

I won't be responding to your post. I'm telling you that so that you won't think my non response was because I didn't read it. But I also can't tell you what my reason is. Except to say it has nothing to do with being irritated or anything like that.

Re: Four Ways To Use My Ideas
 

David, I have what I believe to be a solid disproof of your theory, I will attempt to post it tomorrow. In the mean time I'm not sure why you think Buffett's skill either applies to large companies or is best applied to large companies. His greatest outperformance occurred when he was able to invest in small companies and he has regularly contended he could guarantee 50% annual returns if he could invest in small companies.

Re: Four Ways To Use My Ideas
 

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Warren Buffett took $100,000 and turned it into $50 billion buying stocks.

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No he didn't. He built a company, and only part of that involved buying stocks.

Re: Four Ways To Use My Ideas
 

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David, I have what I believe to be a solid disproof of your theory, I will attempt to post it tomorrow. In the mean time I'm not sure why you think Buffett's skill either applies to large companies or is best applied to large companies. His greatest outperformance occurred when he was able to invest in small companies and he has regularly contended he could guarantee 50% annual returns if he could invest in small companies.

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That doesn't change anything. You can get to 50% a year with stocks that you thought were half price and that turned out to be 80% or higher of true value. And there are many smaller companies that are in solid stable businesses where a great analyst doesn't have to worry too much about why he can't explain the discrepancy between his opinion and the market. And lastly I still say that Buffett DOES usually make sure he can explain it before he invests. And if he can't explain it and he invests anyway, he doesn't win anywhere near what his estimates indicated he would.

Meanwhile we have to get through this simple stuff so we can get to the more sexy exciting stuff. Where you find stocks where there is a SMALL discrepancy between your value (that you have a FIRM opinion about) and the market's value, you have NO IDEA why there is this discrepancy (In other words you would have thought the market would value the stock the same as you) and you thus invest in exactly OPPOSITE OF YOUR OWN OPINION. Ironically, in order to pull off this coup that would make fuddy duddy FAs stomach churn you have to be an expert FA. Otherwise you can't be sure that the stock price is slightly weird.

Eventually you and Stephen will come around kicking and screaming. And make 100 million between you. And when you do a mere apology will not be sufficient. We are talking about a suite in Dubai liberally stocked with hostesses.

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I don't think its as easy as David thinks to handicap the stock market.
A good FA can determine the value of a company with enough accuracy to make money when its shares are mispriced.
We know the market price, and thats how we can tell whether or not to buy the company.
What I don't understand is how you come up with this other number about the expectation of price. Shouldn't the expectation be the value you determined?

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No. Suppose you know that the Giants have a tight end that has a particular pass move that is tough for the Packer cornerback to defend against. But you also know that the public doesn't know about that or take it into account properly. So your line will be different from your anticipated line. And therefore when it is you can explain it.

Re: Four Ways To Use My Ideas
 

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I won't be responding to your post. I'm telling you that so that you won't think my non response was because I didn't read it. But I also can't tell you what my reason is. Except to say it has nothing to do with being irritated or anything like that.

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I know you still believe you are right and you may be. I enjoy sharing ideas.

Re: Four Ways To Use My Ideas
 

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Warren Buffett took $100,000 and turned it into $50 billion buying stocks.

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No he didn't. He built a company, and only part of that involved buying stocks.

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He bought stocks, companies and made various arbitrage and foreign currency investments through his holding company Berkshire Hathaway. The source of his $50 billion net worth is investing.

Re: Four Ways To Use My Ideas
 

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I don't think its as easy as David thinks to handicap the stock market.
A good FA can determine the value of a company with enough accuracy to make money when its shares are mispriced.
We know the market price, and thats how we can tell whether or not to buy the company.
What I don't understand is how you come up with this other number about the expectation of price. Shouldn't the expectation be the value you determined?

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No. Suppose you know that the Giants have a tight end that has a particular pass move that is tough for the Packer cornerback to defend against. But you also know that the public doesn't know about that or take it into account properly. So your line will be different from your anticipated line. And therefore when it is you can explain it.

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I don't agree. I think this is an apples to oranges comparison. There are thousands of computers and smart people with lots of money who move the markets. The average player in the stock market is not a layman. The average sports bettor is. I still contend that this "third" parameter doesn't exist. Either that or I still don't fully understand what you are talking about. I don't see any difference between valuing a stock with FA, and this "third" parameter you're talking about.

FA guys value the stock. That is their handicap of what price they think it should be. The market price is the other variable. They bet accordingly. Give me a stock example of this "third" parameter.

Re: Four Ways To Use My Ideas
 

"pay more attention to David Sklansky's Fundamental Theorem of Investing."

Howz that theorem been working out for you over the last 10 years?

Re: Four Ways To Use My Ideas
 

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Eventually you and Stephen will come around kicking and screaming. And make 100 million between you. And when you do a mere apology will not be sufficient. We are talking about a suite in Dubai liberally stocked with hostesses.

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You got it David... [img]/images/graemlins/smile.gif[/img]

Have a Happy Thanksgiving,
Stephen

BTW ...Seriously whats "David Sklansky's Fundamental Theorem of Investing" as referred to above?