It's the time of year to make predictions. Since I am unable to write without quoting Buffett and other smart folks, I will begin right away.
"Forecasts may tell you a great deal about the forecaster, they tell you nothing about the future" - Buffett
"We ignore outlooks and forecasts... we're lousy at it and we admit it... everyone else is lousy too, but most people won't admit it." - Marty Whitman
"Guesses - just so we're clear - are merely expressions of prejudice." - Michael Chrichton
"Economists make predictions because they're asked, not because they know." - John K. Galbraith
I would extend that last one to investment strategists, journalists, reporters, talking heads, etc.
My only prediction is this: I will stick to my investment process this year as I have for the last decade. I will try to improve my skill and learn more every day. Beyond that, look elsewhere for crystal ball readings!
I recently read a fantastic article on portfolio.com about a gentleman who became a big Wall Street broker, made lots of money, grew to hate himself, and finally quit to found a firm that invests in indexes. It is written by the great Michael Lewis, author of "Moneyball". It should be a real eye-opener for anyone that doesn't know how Wall Street really works.
The broker quickly found out that he was expected to sell at any cost. The outcome of his stock picks didn't matter one bit. When he expressed his concern to his boss, he was told "you are confused about your job... your job is to turn your clients' net worth into your own." The article goes on to espouse the Efficient Market Theory, which states that no one can beat the market because everything is always priced correctly, and hence active managers can't create any value. Of course I don't agree with the EMT. If I did I would be in another line of work. But EMT disciples believe that anyone who appears to be beating the market is just lucky. As the article says, "If you put a thousand people in barrels and push them over Niagra Falls some of them will survive. And if you take those guys and push them over again, some of them will survive. And they'll write books about how to survive being pushed over Niagra Falls in a barrel."
True as that may be, Buffett recounted a similar tale in a speech at Columbia in 1984. He stated that if you conducted a coin flipping contest among the entire US population (assumed to be 225 million in 1984), that probability and statistics tells us that after 20 flips, 215 people would have called each flip correctly. These folks would probably then embark on tours around the country conducting seminars on efficient coin flipping. However, he points out, that if you had conducted the experiment with 225 million orangutans, you'd obtain the same result: "215 egotistical orangutans and 20 straight winning flips".
So even Buffett appears to be supporting the EMT. That is, until he points out that if 40 of those orangutans came from one zoo in Omaha, there might be something interesting going on. He goes on to point out that there are similar unusual patterns among investment managers that would indicate that in fact some mangers can beat the market. He describes 9 records of mangers who studied under Graham and Dodd, known as the fathers of value investing. Although each manager had different backgrounds, different styles, and different holdings, they all based their investing strategy on the concept of buying businesses for less than their intrinsic value. And all of them crushed the market over long periods. Laying the EMT to rest, Buffett states:
"I'm convinced that there is much inefficiency in the market. These Graham-and-Doddsville investors have successfully exploited gaps between price and value. When the price of a stock can be influenced by a "herd" on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical."
So what is the investor to do? Wall Street exists simply to line it's own pockets with the net worth of its unfortunate clients. Most mangers can't beat the market, and those that seem to may simply be lucky.
To that, I would say focus on process. How does the manger operate and does he exhibit consistency in practice and follow a proven strategy? I can say that I try my best to do just that - follow the teachings of Graham and Dodd. Only time will tell if I can successfully execute. However, I am thoroughly convinced that some can and do, and that the value strategy has proven itself time and time again.
Which brings to the great thing about Vestopia. The root of all evil on Wall Street is that the interests and incentives on the Street are simply not aligned with those of its clients. Yet here, we are managing our own money with no ulterior motives. It's completely transparent, no funny business. There is no hard sell or advice based on unknown motivations. Each Investment Director on Vestopia is trying to grow their own wealth by growing their personal portfolio. Subscribers get to watch how we do it, and decide for themselves if they should follow along. Our performance is tallied daily for all to see. Can some or all of us beat the market? Time will tell. But at least you know what we are doing, why, and when. Unlike Wall Street, Vestopia does not "float on bulls**t". And THAT is something to be thankful for.
Happy New Year!
"Forecasts may tell you a great deal about the forecaster, they tell you nothing about the future" - Buffett
"We ignore outlooks and forecasts... we're lousy at it and we admit it... everyone else is lousy too, but most people won't admit it." - Marty Whitman
"Guesses - just so we're clear - are merely expressions of prejudice." - Michael Chrichton
"Economists make predictions because they're asked, not because they know." - John K. Galbraith
I would extend that last one to investment strategists, journalists, reporters, talking heads, etc.
My only prediction is this: I will stick to my investment process this year as I have for the last decade. I will try to improve my skill and learn more every day. Beyond that, look elsewhere for crystal ball readings!
I recently read a fantastic article on portfolio.com about a gentleman who became a big Wall Street broker, made lots of money, grew to hate himself, and finally quit to found a firm that invests in indexes. It is written by the great Michael Lewis, author of "Moneyball". It should be a real eye-opener for anyone that doesn't know how Wall Street really works.
The broker quickly found out that he was expected to sell at any cost. The outcome of his stock picks didn't matter one bit. When he expressed his concern to his boss, he was told "you are confused about your job... your job is to turn your clients' net worth into your own." The article goes on to espouse the Efficient Market Theory, which states that no one can beat the market because everything is always priced correctly, and hence active managers can't create any value. Of course I don't agree with the EMT. If I did I would be in another line of work. But EMT disciples believe that anyone who appears to be beating the market is just lucky. As the article says, "If you put a thousand people in barrels and push them over Niagra Falls some of them will survive. And if you take those guys and push them over again, some of them will survive. And they'll write books about how to survive being pushed over Niagra Falls in a barrel."
True as that may be, Buffett recounted a similar tale in a speech at Columbia in 1984. He stated that if you conducted a coin flipping contest among the entire US population (assumed to be 225 million in 1984), that probability and statistics tells us that after 20 flips, 215 people would have called each flip correctly. These folks would probably then embark on tours around the country conducting seminars on efficient coin flipping. However, he points out, that if you had conducted the experiment with 225 million orangutans, you'd obtain the same result: "215 egotistical orangutans and 20 straight winning flips".
So even Buffett appears to be supporting the EMT. That is, until he points out that if 40 of those orangutans came from one zoo in Omaha, there might be something interesting going on. He goes on to point out that there are similar unusual patterns among investment managers that would indicate that in fact some mangers can beat the market. He describes 9 records of mangers who studied under Graham and Dodd, known as the fathers of value investing. Although each manager had different backgrounds, different styles, and different holdings, they all based their investing strategy on the concept of buying businesses for less than their intrinsic value. And all of them crushed the market over long periods. Laying the EMT to rest, Buffett states:
"I'm convinced that there is much inefficiency in the market. These Graham-and-Doddsville investors have successfully exploited gaps between price and value. When the price of a stock can be influenced by a "herd" on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical."
So what is the investor to do? Wall Street exists simply to line it's own pockets with the net worth of its unfortunate clients. Most mangers can't beat the market, and those that seem to may simply be lucky.
To that, I would say focus on process. How does the manger operate and does he exhibit consistency in practice and follow a proven strategy? I can say that I try my best to do just that - follow the teachings of Graham and Dodd. Only time will tell if I can successfully execute. However, I am thoroughly convinced that some can and do, and that the value strategy has proven itself time and time again.
Which brings to the great thing about Vestopia. The root of all evil on Wall Street is that the interests and incentives on the Street are simply not aligned with those of its clients. Yet here, we are managing our own money with no ulterior motives. It's completely transparent, no funny business. There is no hard sell or advice based on unknown motivations. Each Investment Director on Vestopia is trying to grow their own wealth by growing their personal portfolio. Subscribers get to watch how we do it, and decide for themselves if they should follow along. Our performance is tallied daily for all to see. Can some or all of us beat the market? Time will tell. But at least you know what we are doing, why, and when. Unlike Wall Street, Vestopia does not "float on bulls**t". And THAT is something to be thankful for.
Happy New Year!
