Reopening Insider Information Debate.

[David Sklansky]

"His idea is that there is likely to be a lot of information of this kind that is embedded in the market price and beyond the scope of the fundamental analyst's due diligence. Therefore, the FA must "guess" at how much of the difference between market price and FA-Value is due to information available to the market but not to the FA, and factor that guess into his calculation of intrinsic value. That is, unless the FA has special insight into the market price that allows him to apply Sklansky's fundamental theorem.

This Insider Trading topic is just Sklansky's way of providing some examples to support his proposal that we should look to his Fundamental Theorem of Investing to make more money in the market."

Not a bad analysis. Except that I don't think that the reason that the market's valuation's are sometimes more accurate than the FA is just because of insider information that is bordeline illegal. It is often due to perfectly legal information that even a great FA is not privy to, or hadn't realized might affect the stock price. In other words it might not be so smart to say "what does this stock price have to do with the price of tea in China?". When actually it might.

Also, it should be noted that information not taken into account by the FA is often probalistic. And when it doesn't pan out, the FA mistakingly thinks he made a good bet. In other words some people realize that ABC has a 20% chance of having a thirty point slide. So they keep the stock at a level five dollars below what it would be without this danger. An oblivious FA thinks he came up with a good buy and pats himself on the back when the unseen danger subsides and he picks up his predicted five dollars. Which will happen 80% of the time.