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WHY I LIKE INEFFICIENT MARKETS

March 11, 2007 | About:
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F. A. Piocos

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“I’d be a bum in the street with a tin cup if the markets were efficient” – Warren Buffett

The markets are generally efficient, except when they’re not. And when they’re not profits can be made by buying and selling the difference between the intrinsic and extrinsic value. This is what Warren Buffett refers to as “buying dollars for fifty cents” or “cigar butts” discarded by other investors with a few more puffs of value left.

I believe this style of investing is successful for several reasons. First, finding that value stock at a discounted price allows for that “margin of safety.” Second, there is no pressure to “time the market.” You simply buy when the stock is on sale and sell when it is no longer on sale. Third, it is easier to determine the present value of a company than to determine the future growth of the same company.

An investor should not buy a stock simply because it is cheap as it may stay that way. That’s why I look for a value stock with a story. In other words, a stock that’s on sale with an explanation for a move. You should be able to explain the company, why the stock is overvalued or undervalued, and why you think the stock will move before you invest in it.

The opportunities I see right now are the Rydex Currency Shares Japanese Yen Trust (FXY)--take advantage of the weak yen and the eventual correction from the yen carry trade. I also like gold and gold stocks. With the budget deficit, the housing market and the printing press of U.S. fiat currency, I am bullish on gold. And now is the time to buy due to the recent pullback. I like StreetTracks Gold Shares (GLD). And as you know from my previous article I also like ConocoPhillips (COP), which I own.

About the author:

F. A. Piocos
GuruFocus - Stock Picks and Market Insight of Gurus

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