We’d Rather Not Sleep

We’d Rather Not Sleep

There is a tilt in our portfolio toward value stories where we think the consensus investor is biased against processing improving fundamentals. 

Factor Timing, Should You Try?

Factor Timing, Should You Try?

These are our two cents on whether you, or we, or anyone else can pick the perfect time to increase or decrease exposure to a portfolio of factors like value, quality, or momentum. 

The Mathematics of Maintaining Bet Size

The Mathematics of Maintaining Bet Size

As we wrote in “Half-hearted is half-minded – December 2017” we aren’t big fans of dipping our toes in the water when entering a position, nor of timidly reducing when exiting.   If we are right more often than we are wrong, it might feel better to inch in or inch out of a position, but it is a suboptimal strategy. 

The Grandfather of Behavioural Investing?

The Grandfather of Behavioural Investing?

Benjamin Graham is considered by many as a founding father of value investing. Upon a re‐read of the seminal Security Analysis, which he and David Dodd first published in 1934, one learns that many of Graham’s insights were not simply confined to balance sheets and income statements. In fact, he devoted a significant effort to such topics as psychology, overreaction, under‐reaction, and the consensus view. 

On Sexual Chocolate and Semi-Annual Reporting

On Sexual Chocolate and Semi-Annual Reporting

Following on the tweet below by President Trump, there is again a lot of discussion of the merits of quarterly reporting, potential corporate short-termism, and the impact it might have on managerial decision-making.

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.