Improving On Buffett And Desert Cat

[David Sklansky]

"Your technique actually may be valuable for fulcrum stocks, but that means it can only be used rarely, esp. by value investors."

Those last few words are blasphemous and obscene. At least for a two plus twoer. Value investors can't bet overlays at racetracks?

The fact is value investors should be more anxious than others to use my techniques even with fulcrum stocks. Hypothetical(?) example:

Phillip Morris is doing well but has to deal with a very real chance of going broke if they lose lawsuits badly.

I'm pretty sure there is a 20% chance of that disaster. My lawyer friends agree with me. I also think that the average investor in Phillip Morris has no taste for gambling and they will drive the stock down to about 60% of what it would be worth if there was no litigation. I'm not entirely sure about that but I invest anyway. But suppose I had Desert Cat telling me in no uncetain terms that without litigation, the stock is indeed worth almost double what I paid for it, if there was no litigation. That would confirm my suspicions that the low price was due to an overreaction to uncertainty. And I'd bet more.

There are probably already hundreds of good stock analysts who have been silently been reading this thread and have added the parameter "estimate of what public has made the stock price and why they are wrong" to their calculations. Stop arguing with me and do it too.

[ArturiusX]

"I'm pretty sure there is a 20% chance of that disaster."

How did you reach this conclusion?

[David Sklansky]

[ QUOTE ]
"I'm pretty sure there is a 20% chance of that disaster."

How did you reach this conclusion?

[/ QUOTE ]

I didn't. That was still part of the hypothetical.

[maxtower]

I think the parameter "estimate of what public has made the stock price and why they are wrong" is much too difficult for people to handicap to make it practical to use.

[stephenNUTS]

[ QUOTE ]
[ QUOTE ]
"I'm pretty sure there is a 20% chance of that disaster."

How did you reach this conclusion?

[/ QUOTE ]

I didn't. That was still part of the hypothetical.

[/ QUOTE ]

DS,

You wrote some books,you own a piece of 2+2,you have played poker successfully I assume,and you have probably made some very rewarding market/real estate investments along the way,whatever....CONGRATULATIONS your the best!

But believe me... I have MUCH more experience in the REAL stock market world then YOU do or ever will have.... whether it be real life trading experience,market mechanics,investment levels,licensing,etc.(and I would even say a large percentage of this forum as well... and I have NEVER tried to throw this in someones face until now).I did not just graduate college,read a few books,open some online account... and then call myself a market GURU.

The difference with YOU however is......most of the other members either ask,listen,learn,participate,contribute,or even ignore the vast majority threads with this subject line(the stock market/investing)....and after a certain level of acceptance is reached by those involved ,inclusive of ME.....its OVER and DONE with.

We then move on....

They DONT debate these other vague and ambiguous "issues" AD NAUSEUM.

IMO...90% of your market related posts/threads are basically hypothetical in nature to begin with.... just in their delivery alone

You sound like a broken record...ALWAYS trying to stubbornly prove your side of some theoretical argument as CORRECT....when in fact there really is NO correct answer to most of your threads to begin with in BFI

I would also think these 20 page debates with YOU vs. EVERYONE else.... certainly belong in the Theory-type forums as there relevance here in BFI is ZILCH as far as I am concerned

Does ANYONE actually benefit from your threads/responses....I know I havent yet?

Its actually making me NOT want to answer or contribute to some of the other GREAT threads/questions in BFI.....as reading about someone else or myself arguing to death with you these last few days is making me numb

Stephen Feraca
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[madnak]

[ QUOTE ]
You are saying Jack's probability doesn't change because they are not independent.

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This is exactly what I'm saying. I'm looking at the question of "true value" as a math problem, and assuming that the worse "mathematician" will never have an edge over the better one. Obviously this is never perfectly correct in the real world - not even in math. And in the stock market the price probably reflects the input of finance geniuses. Because geniuses may have insights that even Warren Buffett lacks, your point is probably true in the realistic sense, yes.

But in a Joe Schmoe example I can't see it - how could Joe Schmoe's advantage not be overshadowed in every way by a genius? It seems like you're basically saying a chess master will sometimes lose to a chess amateur. I guess this analogy doesn't apply to sports betting or to stocks. I don't understand why.

[Mark1808]

[ QUOTE ]
I will try to rephrase things differently. If there are stocks where my theory isn't true and my technique is unnecessary, then it is also unnecesary to have anywhere near the 50% cushion you require, when investing in these stocks, as long as you have any sort of reasonable value assigning skills.

The above is pure logic. You don't even need to know what a stock IS for it to be true.

Obviously fulcrum stocks are the most suceptible to my techniques. But the other stocks are not immune to them and when you say that you need a 50% cushion you have implicitly agreed. Your error is the PURE LOGIC error of not seeing how your insistence on conservatism MEANS you agree with me.

But enough with the theory. Let's get back to Buffett. Forget one example. He has presumably made thousands of trades where he rated the eventual worth of a security a lot different than the market did at the time of his trade. Assuming he honestly told you his original ratings then it could be checked five or ten years later. Your contention is that if that they were done one would find that the prices averaged out to his ratings. My contention is that that isn't even close. Yes they moved toward his ratings and away from the markets. But I bet they didn't even move halfway toward them. In fact if he used anywhere near the same criteria you use (think the real value is double before investing) the proof of that is one line.

[/ QUOTE ]
I have given your premise much thought and I would agree that the market generally does a good job of valuing stocks and a value investor would be better served to try and understand why a market price is suddenly substantially different than his analysis. It seems to me that when Buffett has discussed stocks he has purchased he has sometimes explained why he felt the market was discounting the price in error. This would mean that Buffett does not select stocks without taking market price in to consideration and he attempts to understand why the market price is different than his valuation estimate.

Even if a company is selling at a low multiple to cash flow, it would not be a good buy if there were to be a future negative change in their business. The market often does a good job of forecasting these negative changes and often this is where investors may erroneously see value. A good TA investor would attempt to understand why the market’s forecasting may be wrong this time.

If one does not correctly understand why their analysis differs substantially from the collective wisdom of the market it will be difficult, if not impossible, to hold on to that position until value is realized.

If a baseball pitcher has an 80% winning percentage it would be foolish to randomly bet against him even money. If he is going up against a team at their stadium where he is hit consistently and has a 0 - 5 record, then an even money bet against him makes sense.

[tolbiny]

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First of all what I am saying is unquestionably correct in the real world. I will get to that in a minute. In the theoretical world I am saying that that if Jack is right about something 90% of the time and Jill is right even as little as 51%, then when they disagree, Jack's probability has gone down to 89.9% or whatever. If they are totally independent chances it easy to figure out the exact answer. You are saying Jack's probability doesn't change because they are not independent. He will get every question right that Jill will, plus more. If that was the case Jill's disagreement means nothing.


[/ QUOTE ]

David,
The biggest hole that I can see in your position is that you don't know what the market's "goals" are. When betting on a horse race there is presumably only one goal, and one time line. You want to win the bet and the race occurs on day X and will be over in less than 2 mins. In the market you have no idea what the average investors goals and time lines are for the particular stock your looking at. A retired person who lives off dividends has different needs than a hedge fund manager who gets his bonus check based on quarterly results. Someone who is putting away $500 a month for their child's education has a different perspective than someone who is saving up for a year to buy a new car. Buffet has his own criteria for what companies to buy, but he has no idea what the criteria of the people who researched and decided against buying Company X were using, and so that information becomes a lot less valuable to him.

[DesertCat]

[ QUOTE ]

But enough with the theory. Let's get back to Buffett. Forget one example. He has presumably made thousands of trades where he rated the eventual worth of a security a lot different than the market did at the time of his trade. Assuming he honestly told you his original ratings then it could be checked five or ten years later. Your contention is that if that they were done one would find that the prices averaged out to his ratings. My contention is that that isn't even close. Yes they moved toward his ratings and away from the markets. But I bet they didn't even move halfway toward them. In fact if he used anywhere near the same criteria you use (think the real value is double before investing) the proof of that is one line.

[/ QUOTE ]

I always buy stocks with a specific return expectation. For the first few years, my results were better than I predicted. Since then they were a little worse, and much worse so far this year. I'm not sure if it's variance, or if my easy early success led me to be less conservative in my return estimates.

Either way I don't have any data that proves or disproves your contention.

[DesertCat]

[ QUOTE ]
"Your technique actually may be valuable for fulcrum stocks, but that means it can only be used rarely, esp. by value investors."

Those last few words are blasphemous and obscene. At least for a two plus twoer. Value investors can't bet overlays at racetracks?

[/ QUOTE ]

Actually Buffett started out betting the ponies, and sold a tip sheet as a kid called "Stable-boy Selections". Typically as a value investor you want to invest at least 20% of your portfolio in your best ideas. A fulcrum typically can go to zero, so it's too risky to make that large of a commitment.

I've actually used 5% as my portfolio limits for any stock that has a real risk of going to zero. But I haven't had very good success with these picks, and it may be for the exact reason you postulate, that I'm ignoring the market's opinion that actually has value with such risky positions. But the easier solution for me is to ignore fulcrum stocks, and find clearly defined value stocks with limited downside risks, put a quarter of my portfolio into four of them, and then go play poker until their value is realized

The fact is value investors should be more anxious than others to use my techniques even with fulcrum stocks. Hypothetical(?) example:

[ QUOTE ]

I'm pretty sure there is a 20% chance of that disaster. My lawyer friends agree with me. I also think that the average investor in Phillip Morris has no taste for gambling and they will drive the stock down to about 60% of what it would be worth if there was no litigation. I'm not entirely sure about that but I invest anyway. But suppose I had Desert Cat telling me in no uncetain terms that without litigation, the stock is indeed worth almost double what I paid for it, if there was no litigation. That would confirm my suspicions that the low price was due to an overreaction to uncertainty. And I'd bet more.

[/ QUOTE ]

This is a really good example, and Phllip Morris was a value investor favorite for a long while. But I don't believe they ever thought the risk of going to zero was anywhere near 20%. Their arguments were the world needs Philip Morris to pay all those damages and taxes, so in a worst case scenario shareholders would be diluted heavily, but still retain some value.

Edit: And let me make it clear that I don't ignore the market price. I have to understand why something is so cheap and why I disagree with the market, just to be sure I've allowed for all known risks. If something is just mysteriously cheap, that's a red flag that I don't understand it properly. But I don't adjust my value estimates for it.