[David Sklansky]

Granted I've not studied my hypothesis when it comes to the stock market. As opposed to horses and sports. But still I would be shocked if I was way off base here.

There is no doubt that if you know all the public knowledge about a stock or option or commodity or two sports teams, your opinion of its worth, if you are not a moron, will usually be quite accurate. Certainly more accurate in the vast majority of cases than the opinion of someone without this knowledge. The problem is that this doesn't do you any good if the market is agreeing with your opinion. You only make money if you disagree with the market and you are right.

I may be great at looking at someone and estimating how many pushups they can do but if the only people who will bet me are those few who can do far more than it looks like, my expertise means nothing. Same with the fact that someone is willing to sell a stock to you for ten dollars PLUS the fact that others aren't snapping up that offer. At least some of them also have comprehensive knowledge. If the routine analysis makes the stock worth thirteen dollars and you can buy it for ten, then there is something wrong with your knowledge or your analysis. At least most of the time.

People talk about how great Warren Buffett is in evaluating the true value of a stock with public knowledge only. My guess is that he's not nearly as good as people think EXCEPT for the fact that he occasionally sees spots where he can use my Fundamental Theorem of Investing. In other words he occasionally notices a large discrepancy between his valuation and the public's valuation and ALSO has a good explanation as to why the public is erroneously disagreeing with him.

Put another way, suppose Buffet was presented with 100 randomly chosen, mid or large cap stocks, who's names were withheld from him. But not the financial and other technical information that "homework doers" use. He has to come up with his opinion of the right price for them based only on this information. The stocks that have present day prices that are more than ten percent away from Buffett's picks are checked up on in three years. Adjusting for the upward bias of stocks, who do you think will be closer in their prediction, Buffet or the market? I'd be shocked if Buffet was the favorite and even shocked if he disagreed with me.

Getting back to that pushup bet. Suppose instead of being an expert body type analyzer, I knew only two facts. The amount of pushups people will bet they can do is only slightly fewer than their true maximimum (to increase the chances someone will bet them) AND smog in this particular town they just got off the plane in as a tourist, knocks pushup levels down by 30%. If so I could be a couch potato and never have read a bodybuilding magazine but could still clean up on these bets.

More to come.