Island Economies and Risk

Island Economies and Risk

In describing a simplistic example of portfolio theory, some economists – such as Burton Malkiel in A Random Walk Down Wall Street – will refer to an example of a theoretical simple island economy.

Build a Bear?

Build a Bear?

Imagine every adult has 10% of their savings invested in “the global stock market”, and that each of them also invests 2% of their income in the stock market. 

Data Science and Alpha

Data Science and Alpha

As the investment community embraces data science, we should not be blind to the reality that many of our active-management peers are or will be devoting a lot of resource to capturing whatever informational edge they think or hope is out there. 

Hunting for Alpha

Hunting for Alpha

Technological advances have enhanced the speed of the dissemination of firm-specific information, and broadened its distribution.  In this new, post-internet paradigm, after also considering the maturity (and size) of the investment management industry, we propose there is very little difference between large and small-capitalization equities in terms of relevant information available to the marginal investor.  Consequently, we suggest that the notion that the equity prices of smaller capitalisation companies are somehow less efficiently priced than their larger brethren may potentially be stale. 

Career Risk, Alpha, and Contrarian Investing

Career Risk, Alpha, and Contrarian Investing

At our firm, one of our main goals is, very simply, to generate excess returns from equity investing without taking commensurate risks.  When we take a step back and think about it, another way of stating this is to say this: over time, we hope to generate returns that are comfortably above the returns our investors should be able to capture themselves without much work, and demonstrably above the average returns of our peers in the same business. 

Passive Flows and Wheelbarrows

Passive Flows and Wheelbarrows

A nightly sort of the most active US names is usually dominated by ETFs.  Earlier this month, we took a peek at the most heavily traded names on one particular day.

God Bless the Shorts

God Bless the Shorts

Elon Musk made a lot of news last week, refusing to answer “boneheaded” questions from “boring” sell-side analysts.  Adding fuel to the fire, he later took to Twitter and exclaimed “the 2 questioners I ignored on the Q1 call are sell-side analysts who represent a short-seller thesis, not investors.”

Sell in May, and Go Away?

Sell in May, and Go Away?

We’re not inclined to automatically buy in to perceived wisdom, and you probably aren’t either; but that shouldn’t stop either of us from at least exploring market proverbs to see if there a kernel of truth within them. With that, several years ago, we found an article that took a stab at return seasonality, specifically where stock market performance seems to be better in the winter than in the summer.

Equilibrium Happens

Equilibrium Happens

There is a great deal of discussion these days regarding the impact of passive investing (or of systematic active investing in risk factors), and what it means for active management, and perhaps for security pricing generally.  In many cases – even with an in interesting or intuitive conclusion – the premise is all wrong.

Horses and Stocks

Horses and Stocks

Further below is an excerpt from Bet with the Best: Expert Strategies from America's Leading Handicappers. We recommend reading the section from Chapter 3, by Steven Crist.  The read-across to stock-picking is tremendous.  I have highlighted my ten favourite passages below, paraphrasing slightly, and substituting  stock-related terms for any horse-related terms.

Peak Quality?

Peak Quality?

The message below is quite compelling:

“We have a quality-focused investment philosophy, and own the best companies for the long term.”

Tough to argue with that one, right?  Basically, it is the polar opposite of what must be the worst pitch of all time:

“We focus on horrible management teams and low quality businesses, and like to own the lousiest company for as short a period as possible, and then turn our portfolio over by selling one miserable business model and buying an even worse one.”

Bill Sharpe and Hank Aaron

Bill Sharpe and Hank Aaron

If we define being “right” or “wrong” as outperforming or underperforming the market, respectively, then in order to be right or wrong, we basically need to hold something different (either securities or bet sizes) than the “market”.   Bill Sharpe taught us that over two decades ago

Unwarrented

Unwarrented

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”- Albert Einstein

The Search for Excellence and the Loser’s Game

The Search for Excellence and the Loser’s Game

We’re on a continual search for the very best ideas for our concentrated portfolio.  The “best ideas” component not only requires a continuous and rigorous analysis and reanalysis of the buy case for each of our names (and a continuous monitoring of expected returns), but a similar inspection of the sell case.   With the perfect crystal ball, we’d love to know ahead of time which of our positions aren’t going to work out.

Fooled by Non-Randomness

Fooled by Non-Randomness

Students of decision-making and bias will all have seen the work by Cornell psychologist Tom Gilovich, where he reviewed the experience of London residents during World War II.  Richard Thaler in Nudge highlighted some of Gilovich’s work, and described how the English newspapers published maps showing strikes from German V-1 and V-2 missiles in Central London. 

Half-hearted is Half-minded

Half-hearted is Half-minded

After discovering the next great investment idea, why is it so easy to start with a half-sized position, watch it a bit, and then go full-sized later?  

Still Superman, but without a CAPE.

Still Superman, but without a CAPE.

I have immense respect for Bob Shiller.  We’ve never met, but he is a forefather of behavioral finance along with Richard Thaler (and he is from Detroit, which isn’t uncool). 

PEGs, P/E's AND THE VALUE PREMIUM

PEGs, P/E's AND THE VALUE PREMIUM

Several years ago, we did an analysis of companies starting with a specific starting growth rate, and assumed that they would do a straight-line ten-year fade to a growth rate equalling inflation.  We treated all the earnings as if they were free cash flows, assumed 100% equity financing, and then determined a value for each theoretical security.