Improving On Buffett And Desert Cat

[Allinlife]

i only read parts of this thread but I got the feeling that I can learn a lot reading this debate.

thanks mr.sklansky/ desert cat

[crunchi]

Am i the only one that doesn't understand whats going on in this thread?

[madnak]

[ QUOTE ]
One last try. The Bellagio makes a line on football games. They are the best linemakers in the world. Their line is almost always perfect. So even a professional bettor who beats his bookie 56% of the time only picks 50.1% when he faces the Bellagio.

Joe Schmo is barely break even in his opinions. But he is better than the dart board thrower. (This is an important point.)

The Bellagio says the Yankees will win 70% of the time today. Joe Schmo thinks they will win 60%. In other words the Bellagio says that anyone holding a $100 even money bet has an equity worth $40. Joe says it is worth $20. Its TRUE worth is a tad below $40. Maybe $39.50. Change Joe Schmo to Mr Market. (And I would still love to bet that Buffett both agrees with me and doesn't think his words dispute my words)

[/ QUOTE ]

The information Joe Schmoe uses to form his opinion is presumably available to the Bellagio. Therefore, the Bellagio and Joe use the same information to reach their conclusions. The Bellagio tends to reach much better conclusions based on the information available. Thus, there is no reason to pay attention to Joe. Any difference between Joe's estimate and that of the Bellagio is likely the result of Joe's error.

Where Joe is correct, the Bellagio will also be correct. Joe's opinion is worthless - unless you're betting against Joe, in which case a large discrepancy between Joe and the Bellagio will indicate that you should put it all in there!

I don't know much about investing, or when to buy and sell, but I think your example here is flawed, David. It's no more likely that the actual value is $39.50 than that it's $40.50.

Very nice thread, makes me want to learn about financial analysis.

[madnak]

Another example that I'd like to hear your thoughts on, David.

There are 31 students taking an exam. One of the students is a genius, the rest are of average intelligence. The genius gets an answer of 70 on a certain problem. The mean answer of the other students is 60.

Based only on this information, you must choose an answer. What do you choose?

[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

[DesertCat]

[ QUOTE ]
One last try. The Bellagio makes a line on football games. They are the best linemakers in the world. Their line is almost always perfect. So even a professional bettor who beats his bookie 56% of the time only picks 50.1% when he faces the Bellagio.

Joe Schmo is barely break even in his opinions. But he is better than the dart board thrower. (This is an important point.)

The Bellagio says the Yankees will win 70% of the time today. Joe Schmo thinks they will win 60%. In other words the Bellagio says that anyone holding a $100 even money bet has an equity worth $40. Joe says it is worth $20. Its TRUE worth is a tad below $40. Maybe $39.50. Change Joe Schmo to Mr Market. (And I would still love to bet that Buffett both agrees with me and doesn't think his words dispute my words)

[/ QUOTE ]

I may have a great counter example, and I think the problem is that your sports book is a poor model for the market. Give a day to digest it and see if I can come up with a succient post.

[ QUOTE ]
Meanwhile your comment about being a 30% a year winner and me being an amateur is not only flawed, but ironically in a similar way that your analysis is flawed. Because I don't claim to be able to top your 30%. I only claim that I could top it if I had a DesertCat clone working for me.

[/ QUOTE ]

I should not have said that. Your ability to synthesis ideas has nothing to do with your investing track record. That would be like a mathematician telling Andy Beal he could not contribute to mathematics because he had no track record

[ahnuld]

The bellagio example is wrong because it is set by experts who are the best in the world. Thats like if Buffett got to pick the trading price of every company every day and then trying to beat this new supermarket. Obviously undoable after vig. But its not bellagio experts setting the price in the market, its the general poorly skilled public. even the bookies opinion from your example is going to be more highly skilled than the markets because he has some talent in this regard or he wouldnt be in the business. He is similar to mutual fund managers. Yet the market is worse because while there are semi competent mutual fund managers, there are also alot of irrational joe schmo buyers who drive prices or lines way past what is neutral EV setting up +EV bets.


edit: blah, I misunderstood, nm.

[West]

[ QUOTE ]
The bellagio example is wrong because it is set by experts who are the best in the world. Thats like if Buffett got to pick the trading price of every company every day and then trying to beat this new supermarket. Obviously undoable after vig. But its not bellagio experts setting the price in the market, its the general poorly skilled public. even the bookies opinion from your example is going to be more highly skilled than the markets because he has some talent in this regard or he wouldnt be in the business. He is similar to mutual fund managers. Yet the market is worse because while there are semi competent mutual fund managers, there are also alot of irrational joe schmo buyers who drive prices or lines way past what is neutral EV setting up +EV bets.

[/ QUOTE ]

He's saying Buffett is the Bellagio and Joe Schmo is the market.

This may be a side point, but I'm not getting why Joe Schmo is necessarily better than a dart in his opinion. Obviously we should assume the market as a whole is, but why any one individual?

[ahnuld]

reading comprehension ftw [img]/images/graemlins/tongue.gif[/img]

[David Sklansky]

[ QUOTE ]
[ QUOTE ]
One last try. The Bellagio makes a line on football games. They are the best linemakers in the world. Their line is almost always perfect. So even a professional bettor who beats his bookie 56% of the time only picks 50.1% when he faces the Bellagio.

Joe Schmo is barely break even in his opinions. But he is better than the dart board thrower. (This is an important point.)

The Bellagio says the Yankees will win 70% of the time today. Joe Schmo thinks they will win 60%. In other words the Bellagio says that anyone holding a $100 even money bet has an equity worth $40. Joe says it is worth $20. Its TRUE worth is a tad below $40. Maybe $39.50. Change Joe Schmo to Mr Market. (And I would still love to bet that Buffett both agrees with me and doesn't think his words dispute my words)

[/ QUOTE ]

The information Joe Schmoe uses to form his opinion is presumably available to the Bellagio. Therefore, the Bellagio and Joe use the same information to reach their conclusions. The Bellagio tends to reach much better conclusions based on the information available. Thus, there is no reason to pay attention to Joe. Any difference between Joe's estimate and that of the Bellagio is likely the result of Joe's error.

Where Joe is correct, the Bellagio will also be correct. Joe's opinion is worthless - unless you're betting against Joe, in which case a large discrepancy between Joe and the Bellagio will indicate that you should put it all in there!

I don't know much about investing, or when to buy and sell, but I think your example here is flawed, David. It's no more likely that the actual value is $39.50 than that it's $40.50.

Very nice thread, makes me want to learn about financial analysis.

[/ QUOTE ]

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.

But that total lack of independence is obviously not the case in the stock market or sports betting. And once that is true, my contention MUST be true. It isn't even a contention. It is just an irrefutable math problem. If there are two differing opinions the true answer lies somewhere in between. On average. But closer to the guy who gets things right more often. As long as the other guy is better than random.

As to the real world, how can it not be obvious that I am right? Experts who use the Buffett-Graham-DesertCat technique make their play when their figures show they have some required big edge. When the smoke clears they are ahead, But obviously not to the extent that they thought they should be. Otherwise they all would be trillionaires. So the true price lays somewhere between their's and the market's.

Now why that should be the case is not clear. It is obviously sometimes because someone is illegally trading on inside information. But that is too rare to fully account for the syndrome.

When technical analysts say that the market will tell you where a stock is heading they are probably morons. 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.

I can't believe I'm going through all this again like I did thirty years ago in poker. You guys all need to just shut up, do what I say, and make more money.