Why Sklansky's idea should not work

[Mark1808]

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David,

I've read your response and believe I understand it fully, but let me point out that in no way does it directly rebut my points. If your scenario is true, then you should be able to describe why mine is false. Unfortunately the converse is not true, I can't yet rebut your scenario, and I will actually be working all week so I might not come up anything soon.

Is it time for a letter to Buffett?

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If my scenario is true but doesn't rebut the points you are trying to make then I don't understand what those points are. In any case this disussion has drifted into an irrelevant area regarding randomness, neutral EV, etc. You appear to be confused about some of it but it is not worth getting into. It isn't the essence of what we wanted to ask Buffett about.

The important point is that it isn't only fulcrum stocks that are susceptible to information that routine, expert stock analysis, will mishandle. So it is valuable to to have a good idea why a stock's price is what it is. If the answer is simply "well the public usually values stocks in this industry, with this particular information, in about this way" you should be willing to bet on your disagreement if you have better insight than the public, even if your discrepancy with their price is fairly small. If you, on the other hand, think the price is screwy, you need a bigger discrepancy to bet.

However if you expected a big discrepancy and an unexpected price makes the discrepancy smaller, this is the best of both worlds. Don't pass on the bet just because the discrepancy fell below your normal threshold.

It is possible you can even make money taking this further by betting against your own opinion when you expected no discrpency and you find a moderate one you can't explain. That guess of mine Buffett need not know about.

Buffett would also be turned off by the idea that you can make money by isolating a particular aspect of a stock that you realize the public will misevaluate and making a bet without knowing anything else about the company. That method must win. But a non lazy approach would do better so he would be appalled by the lazier approach.

So please write the letter but don't mention the ideas in the two above paragraphs.

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http://www.sandmansplace.com/Mr_Market.html

Key quote:

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game. As they say in poker, "If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy."