[DesertCat]

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"And a large margin of "safety" is because IV is an estimate. But it's an estimate that doesn't become more accurate by taking a vote from a disparate group of people with different investment philosophies, goals, and abilities, i.e. "the market"."

Here I can say with 100% certainty that you are wrong. But before going any further I want to say to you what I say to my private poker students who get upset when they realize that were wrong about a long cherished belief. "Don't be upset. Be happy. Because you are now going to get richer."

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You know David, I'm not offended by this. But I probably should be. I'm a professional investor with annualized returns north of 30% per year. You are an amateur investor who has a fraction of my investing experience. Don't get me wrong. I am always open to learning more. I study my craft intensely and don't feel I know everything. But it's a little disconcerting to hear that you are going to make me better at something I'm already great at, when you don't even have a track record in this area.

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Forgetting interest rates and the inherent upward bias of stocks a randomly picked stock will show a break even EV if you buy or short it. Known fact.

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A specific randomly selected stock will show an EV based on it's IV vs. the price you paid for it. I think you mean that a group of randomly selected stocks will likely approximate the markets average return, with variance that depends on the size of the group in relation to the size of the market group. That's because the mispricing that occasionally occurs is "evened out" in big groups. But for individual stocks it can be egregious.

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If there exists a perfect stock evaluator then buying or selling a stock at the price HE quotes will show break even EV.

If the perfect stock evaluator thinks the right price is ten dollars less than the market price, then shorting the stock will give you an EV of ten dollars. And you will average 17 cents profit if there is a 17 cent discrepancy.

If the expert stock evaluator is less than perfect, buying or selling at HIS price will STILL show a break even EV but only if you buy or sell RANDOMLY. But if you buy or sell into HIS prices with INFORMATION you will beat him. As long as that information isn't totally random. One example of non random information is Jimbo's opinion of a stock. If you invest at Desert Cat's price opinions randomly, except when Jimbo disagree's, you MUST show an eventual profit.

YOU MUST. DO YOU UNDERSTAND? Because you would break even even if Jimbo merely threw darts.

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Are you trying to say the market price is the sum of all skilled participants opinions? Because if you are, you are only correct most of the time. Because the market itself, is only efficient most of the time. And I'm not a market participant when the market is efficient. I think you might believe in the efficient market theory a little too strongly.

Do you realize that many market participants are unaware of earnings of a company they buy, that most participants never do any sort of valuation estimates at all? That many practise TA concepts with no FA at all? That a large participant with an urgent need for cash can quickly drive a stock's valuation down to unreasonable levels? I.e. a single participant may have a long lasting influence on price far greater than thousands of other participants, even if they are more rational and better evaluators than he.

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If instead you used the Market's opinion rathe than Jimbo's you would also show a profit. Since the market's opinion of a stock is also obviously better than random.

If the last paragraph is true, which it is, that means that the "true" expected value of a stock must be somewhere between the non perfect expert's opinion and the market price. In other words if you are an expert who has estimated a price before seeing the market price, you MUST, on average, revise your estimate TOWARD the market price after you see it. Period.

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The value of the stock is the value of the stock. It's not affected by a participants opinion, my opinion, or the stock price. If you come across an obviously mispriced stock, you should adjust your opinion based on others who are clearly wrong?

I'll give you credit in one way. The reason to have a margin of safety is to overcome uncertainty. Part of that uncertainty is that you misunderstand, or mis-estimate company risks. By having a large margin of safety, if it turns out that your risk estimates were too low, and the markets were too high, and the real valuation is in between, you can still make a profitable investment. But that doesn't imply that the real value is always between your IV estimate and the market's. My experience is that is seldom true.

So I don't adjust my estimates for market opinions. I adjust them for facts. I use my interpretation and my judgment to make the best estimates, and I stick with them until new facts require me to change.

Real World Example: Preview Systems is a microcap with over $3.50 per share in net cash, easily ascertainable from their financial filings. They have sold their business and have few remaining liabilities and employees. They announce that they will liquidate and distribute $3.25 to shareholders immediately upon completion of a shareholder vote at a meeting to be held in one month. Afterwards they expect to pay out another 25-50 cents over the next year as they complete the liquidation process. I know that management in these cases is highly incented to be conservative in their estimates for some obvious reasons. So I estimate PRVW's value to be around $3.50 per share, given the likelihood of a $3.75+ payout, discounted a little for time. For the week after the release of this information the stock price trades at $2.93.

Should I adjust my estimate because of this low price? No, think about who is setting the price. The existing shareholders don't know anything about liquidations. They bought PRVW thinking it was going to be the leader in internet ecommerce and be a $400 stock someday. Now they are just going to get a tiny fraction of that in cash. Some want out of their "dead" internet company so they can trade into a live one so they can make "high returns"? Some are frightened this means bankruptcy, or hate mgmt for failing and don't trust a word they say and just want out before they lose it all. And a 20-30% return seems small to those who were waiting for a big payday, they don't realize that over one month makes it equivalent to an annualized 1600% return. No one from Wall Street is covering them anymore, it's a sub $50M market cap. So why should I adjust a clearly rational IV estimate for a bunch of irrational actors who are selling for differing reasons?

I'll give you the river card on this one. I stuck to my estimate, bought with both fists, and the eventual payout was $3.90 total, so I made about a 30% return for one months use of my money.