[CrushinFelt]

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.

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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.


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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.

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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.


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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.

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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.


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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.