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  #1  
Old 08-07-2007, 06:05 PM
Evan Evan is offline
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Default Too Much Information

http://www.vcconfidential.com/2007/0...ch-inform.html

Some of you may have seen this from my shared feed. I thought it was pretty interesting and somewhat counter to the way a lot of people feel about investing. It specifically made me think about someone like Barron, that chooses to use tons of data.

One interesting note is that the author talks about not only investments in small, relatively inefficient markets (venture capital), but also uses Warren Buffett as an example.

Perhaps Homer Simpson was right, "Facts are meaningless. You could use facts to prove anything that's even remotely true!"
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  #2  
Old 08-07-2007, 09:12 PM
AggroFish AggroFish is offline
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Default Re: Too Much Information

Interesting read.
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  #3  
Old 08-08-2007, 12:47 AM
kimchi kimchi is offline
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Default Re: Too Much Information

This is so true.

I concentrate on technical analysis which uses a derivative of one piece of data: price

Price is the current consensus of value amongst all market participants. It is the only really reliable piece of data available. It can't be massaged or manipulated like most other forms of data. (it can be manipulated to some degree, but this action can also be apparent in price action).

Markets tend to oscillate between greed and fear. These oscillations can be seen on hourly,daily, weekly, monthly charts.

Many TA also use too much information.They feel that the more indicators they use, the more accurate their trades will be. This is not usually the case however, as the more signals you rely upon, the greater the distance your analysis moves away from the pure data (price).
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  #4  
Old 08-08-2007, 12:04 PM
hawk59 hawk59 is offline
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Default Re: Too Much Information

I'll give an example of one of my investments, I'm going to try to keep it as short as I can so just assume the things I say are true, you can look them up if you want.

Cavalier Homes(CAV) makes manufactured homes(MH, or also known as trailer houses). Since the 60's the MH industry has followed a predictable pattern relative to total housing starts in the US; whatever housing starts are in a given year the number of manufactured homes bought is between 15%-30% of that number. Tends to be closer to 30% when the economy is bad and closer to 15% when the economy is doing better, counter-cyclical for obvious reasons. In absolute numbers the MH industry has shipped in the range 250k-500k manufactured homes per year. You can figure 20% as a normalized number.

The past several years have seen an unprecedented depression in the MH industry. There was bad lending in the late 90's and early 00's that bankrupted a bunch of lenders that made loans to buy trailer homes. That removed financing and was the first leg down. But then you had the whole subprime fiasco; a huge proportion of people who normally would be the ones buying trailer houses were now able to buy a regular house with no money down. That was the thing that really killed MH demand and kept it there for several years. MH shipments have been running at about 8% of total housing starts(half the bottom end of the historical range) and 130k units in absolute terms.

Last year there was a lengthy period of time where CAV was trading in the range of $3-$3.50/sh. This was a decent estimate of their liquidation value, plus they were running at about breakeven. So right there, without worrying about anything else(and not worrying about the stock price movement) you know you won't lose money. The stock might go down more but it's not real, a company that is not losing money is not worth less than its' liquidation value.

So you're not going to lose money, and you know the MH industry is severely depressed and shipments would have to go up 2x just to return to the bottom end of the historical range(and it seems pretty likely we will get back near the top of the range given what is currently going on). Furthermore, CAV mothballed a lot of factories when the downturn hit, they can at least double their output without incurring any meaningful capex.

If their output doubled CAV would earn somewhere around $15mm-$20mm. At $3 the market cap was about $55mm. So you are buying a company where your downside is basically nil, and the upside is that you are buying it at 2x-3x it's normalized earnings.

If you read analyst reports from the time you will see lots of detailed predictions about gross margins, industry shipments, market share, operating expenses, Katrina rebuilding, interest rates, predictions on the housing market, etc etc etc. A ton of data and lots of analysis went into making those predictions and coming up with their quarterly earnings estimates.

But you don't even need to know any of those things, you don't need to come up with any sort of estimates and you don't need to have much insight.

Calculating the liquidation value is just a math problem involving addition and subtraction. Then you can look at long range data going back four decades and see that the industry follows a very predictable trend and that we are currently in a period of time that is completely unprecedented. The only insight you need is that the dynamics of the MH industry have not been permanently altered, the unprecedented decline in the industry is a direct result of the unprecedented availability of no money down mortgages to just about anybody. You don't need to calculate when the industry will return to historical levels, you just need to know that it is going to. It's essentially impossible to say what MH shipments are going to be over the next few years but it's very likely they will be significantly higher.

When it's hard or impossible to predict exactly how something will happen then analysts tend to not focus on it, and instead focus on all the data points. Q2 shipments below estimates?? DOWNGRADE! When in reality that kind of data is irrelevant in the grand scheme. But coming up with complex models incorporating lots of variables seems smart and gives you precise numbers, while saying you have no idea what exactly is going to happen but are pretty sure the stock is very undervalued doesn't sound so smart and doesn't give you any precise numbers to hang your hat on. I guess you could say focusing on data makes you miss the forest for the trees and also makes you tend to feel too confident in your analysis because you have hard numbers to look at.(Incidentally, Berkshire is now the largest owner of MH capacity in the US, with all the assets being bought since 2003.)
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  #5  
Old 08-08-2007, 12:10 PM
SlowHabit SlowHabit is offline
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Default Re: Too Much Information

hawk59,

Coach me plz?
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  #6  
Old 08-08-2007, 12:37 PM
sebbb sebbb is offline
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Default Re: Too Much Information

this too much information thing is why I am more attracted to learning TA than FA.

FA scares me a bit because I don't even know how to proceed to find the right information. And some people will have more info than I do no matter what I do. In TA, you just have to open stockcharts.com, and you have the same information as everyone else. The interpretation is still very subjective, but I feel less disadvantaged.

I'm not the type of person who would call the CFO of a company to try to get some info. I'm more the tyoe to stay behind my screen, looking at some price data.
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  #7  
Old 08-08-2007, 01:52 PM
Evan Evan is offline
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Default Re: Too Much Information

I definitely didn't expect this post to inspire TA vs. FA discussion, but I suppose it makes some sense.

kimchi, just because you use less data than other analysts doesn't imply your data is any better. So your "one piece of data" comment is sort of loaded. I'm a little confused regarding your thoughts that "[Price] can't be massaged or manipulated like most other forms of data." What forms of data do you feel can be manipulated and how are those manipulations different than possible price manipulations. Marc Andreessen paints a pretty clear picture of price manipulation in a recent blog post about the Sowood hedge fund collapse:

"Given what we were facing and our uncertain ability to meet margin calls [we were leveraged -- we used debt to double down on our bets to juice returns, common for this class of hedge funds], we sought other buyers for some or all of the positions [all our peers on Wall Street smelled "blood in the water" and drove down market prices even further]."

Lastly, why use "hourly,daily, weekly, monthly charts" for price? Why not chart something else, like spread or volume? There's a big difference between using fewer inputs and using the right inputs, and you seem to be suggesting that one implies the other, even more specifically, that the first implies the second.


blueman, can you post an example of me writing long paragraphs to disagree with you when you were right?


hawk, "coming up with complex models incorporating lots of variables seems smart and gives you precise numbers, while saying you have no idea what exactly is going to happen but are pretty sure the stock is very undervalued doesn't sound so smart." I gave a presentation for an investment club at NYU on November 4, 2005 pitching Wynn Resorts (WYNN) as an investment idea. This was only a few months after they had opened their first casino in Vegas and there was virtually no operating data available yet. I chose not to include a valuation (I did include some statistics like win/table/day and revenue/room/night). The audience pressed me for a specific value in Q&A. This was not unreasonable because nearly all presentations in this club ended with a DCF that produced a specific dollar value of the company. My rebuttal went something like this:

"Let's say I offer you a bar of gold. You know, for a fact, that it is 100% real gold. I hand you the bar of gold, which is about as big as your phone, but you are not allowed to weigh it or in any other way attempt to determine its mass, volume, etc. Then I tell you that I'll sell you the bar for $50. Now do you care what the hell it's worth?"

Wynn got voted in by like 3 votes (25-22 or so) [img]/images/graemlins/smile.gif[/img]
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  #8  
Old 08-08-2007, 01:58 PM
DesertCat DesertCat is offline
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Default Re: Too Much Information

[ QUOTE ]


"Let's say I offer you a bar of gold. You know, for a fact, that it is 100% real gold. I hand you the bar of gold, which is about as big as your phone, but you are not allowed to weigh it or in any other way attempt to determine its mass, volume, etc. Then I tell you that I'll sell you the bar for $50. Now do you care what the hell it's worth?"


[/ QUOTE ]

Definition of what makes a great investment...
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  #9  
Old 08-08-2007, 02:13 PM
Evan Evan is offline
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Default Re: Too Much Information

[ QUOTE ]
[ QUOTE ]


"Let's say I offer you a bar of gold. You know, for a fact, that it is 100% real gold. I hand you the bar of gold, which is about as big as your phone, but you are not allowed to weigh it or in any other way attempt to determine its mass, volume, etc. Then I tell you that I'll sell you the bar for $50. Now do you care what the hell it's worth?"


[/ QUOTE ]

Definition of what makes a great investment...

[/ QUOTE ]
I'm not following. Is this sarcastic, serious, something else?
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  #10  
Old 08-08-2007, 02:23 PM
SlowHabit SlowHabit is offline
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Default Re: Too Much Information

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]


"Let's say I offer you a bar of gold. You know, for a fact, that it is 100% real gold. I hand you the bar of gold, which is about as big as your phone, but you are not allowed to weigh it or in any other way attempt to determine its mass, volume, etc. Then I tell you that I'll sell you the bar for $50. Now do you care what the hell it's worth?"


[/ QUOTE ]

Definition of what makes a great investment...

[/ QUOTE ]
I'm not following. Is this sarcastic, serious, something else?

[/ QUOTE ]
Probably sarcasm.

Also, "I hand you the bar of gold, which is about as big as your phone, but you are not allowed to weigh it or in any other way attempt to determine its mass, volume, etc."

If you hand me the gold, I can still guesstimate its weight, look at what the market is paying per ounce, and determine if $50 is a bargain or not. So of course I care how much it is worth. Maybe the analogy was just a figure of speech and wasn't meant to be taken seriously? [img]/images/graemlins/confused.gif[/img]
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