[PairTheBoard]

I don't see that Sklansky's idea, even if it has merit, really brings much to the table. Suppose DC's strategy is to do his DC evaluation of Intrinsic Value, DC(IV), without looking at price. Then buy if the price is 50% of DC(IV) and hold till the price reaches DC(IV). Suppose DessertCat has determined that following this strategy maximizes his total returns.

Now Sklansky claims his DC-clone can improve on DC's strategy. How? The DC-clone will evaluate intrinsic value via DC's evaluation plus market price considerations, DC+MP. Now, will a DC-clone strategy of buying when the market price is 50% of DC+MP(IV) and holding till it reaches DC+MP(IV) improve on the original DC strategy? No. DessertCat has already determined that his strategy optimizes his total returns. The DC-clone strategy will be missing out on some of the opportunities that the DC strategy benefits from. The DC-clone strategy is essentially the DC strategy altered to something like, buy when market price is 45% of DC(IV). But DessertCat has already determined that the 50% figure optimizes for his DC evaluation of IV.

An interesting wrinkle is how the DC-clone strategy works on the sell side. If the DC-clone is holding until the market price hits the DC+MP(IV) he will be looking at a moving target for his sell price. As the market price increases and approaches the DC(IV) the Sklansky adjustment to IV via market price becomes smaller and the DC-clone's DC+MP(IV) approaches the DC(IV).

I think there is some merit to David's idea here. Certainly if DessertCat evaluated a stock and determined it's IV was $100/sh then looked and saw the stock was trading at $1/sh I imagine he would dig a little deeper to see if there was something he was missing. But generally I don't think DC has to look too far to make a decent guess for why the market is mispricing a stock in relation to the DC(IV). You see that while he disagrees with Sklansky he did have a good idea why investors were mispricing the stock going into liquidation with DC(IV)=$3.50 and market price of $2.95. And while there may be special circumstances as in that case, just a climate of overdone fear or greed covers a lot of ground in general.

PairTheBoard