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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1933  
Subject: Security Analysis Dead? Date: 9/25/2003 11:43 PM
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According to Malkiel it is.


And Graham himself said (you all might know this already - it's old):
"I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when Graham and Dodd was first published; but the situation has changed...[Today] I doubt whether such extensive efforts will generate sufficiently superior selections to justify their costs...I'm on the side of the 'efficient market' school of thought."

RBM


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Author: Juggernaut8 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1666 of 1933
Subject: Re: Security Analysis Dead? Date: 9/26/2003 4:36 AM
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And Graham himself said (you all might know this already - it's old):
"I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when Graham and Dodd was first published; but the situation has changed...[Today] I doubt whether such extensive efforts will generate sufficiently superior selections to justify their costs...I'm on the side of the 'efficient market' school of thought."


I don't think Security Analysis is dead. Graham was a genius, but I believe he went through periods of self-doubt. At some point, I forget when, I think just before Buffett started the original partnership, Graham advised him to get out of the market and stay out until the Dow dropped to some level he had determined was fair value. Buffett got in anyway, made tons of money with the partnership, got into Berkshire Hathaway, and made tons of money with that as well. (Although it's interesting to note that Buffett went through a similar period of self-doubt or fear of overvaluation when he dissolved the partnership and bought into BRK.) It should also be noted that Buffett and other Superinvestors have made tons of money in the decades since that quote was uttered. I think many value types think the market is fairly efficient, but not perfectly efficient.

-J8

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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1667 of 1933
Subject: Re: Security Analysis Dead? Date: 9/26/2003 10:53 AM
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Read Malkiel's book Random Walk and then let me know what you think. It makes very good arguments on why fundamental analysis (as well as technical analysis) don't really work in the practical world of the market's. Now I'm talking in general. There may be one or three people out there for whom it works. For the vast majority? I don't think so. I won't enunciate why I believe that because Malkiel does it better than I could.
OK, a few quickies:
-- valuation is a crap shoot
-- data is a crap shoot
-- estimated earnings is a MAJOR crap shoot
-- ability to use data and earnings even if they are right is a crap shoot.

People who think THEY are uniquely skilled at weeding out the information and evaluating it are most likely full of themselves and fooling themselves (and fooling others). When they are right, it's luck and it doesn't last.

RBM


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Author: hamishrose One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1668 of 1933
Subject: Re: Security Analysis Dead? Date: 9/26/2003 10:56 AM
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so why are you here?

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Author: Grahamified One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1669 of 1933
Subject: Re: Security Analysis Dead? Date: 9/26/2003 1:50 PM
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People who think THEY are uniquely skilled at weeding out the information and evaluating it are most likely full of themselves and fooling themselves (and fooling others). When they are right, it's luck and it doesn't last.

Random Walkers revoke their own rationality licenses when they make the logical leap from (a) the securities markets are largely efficient to (b) when stock pickers beat the market, it is just by plain dumb luck.

The perpetrators of this thinking try to excuse themselves by granting that there may be "one or three" people who can beat the averages over time. But their thinking sports all the subtlety and industriousness of their shot-gun stock selection methodology. That is, any success outside the mean is arrogantly dismissed as "random", no additional research required.

Although this school of thought is a slap in the face to anyone who works hard and does well by carefully selecting securities, at least it enables greater inefficiency in the marketplace for those who choose not to cling to this herd instinct magnet on the basis of experience and reason.


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Author: razorfangius Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1670 of 1933
Subject: Re: Security Analysis Dead? Date: 9/26/2003 3:39 PM
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People who think THEY are uniquely skilled at weeding out the information and evaluating it are most likely full of themselves and fooling themselves (and fooling others). When they are right, it's luck and it doesn't last.


My luck has been holding out for five years:

S&P ME

1999 +19.5 + 3.1
2000 -10.1 +26.5
2001 -13.0 -11.5
2002 -23.4 + 9.4
2003 +14.0 +42.2

A dollar in the S&P is now worth 82 cents. One of my dollars is now worth $1.79.

Shown only for illustrative purposes. Better "lucky" than "smart",
any day.


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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1671 of 1933
Subject: Re: Security Analysis Dead? Date: 9/26/2003 4:08 PM
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"so why are you here?"

Do you mean:
A. why am I here on this planet? Or...
B. why am I here on the Fool? Or...
C. why am I here on this board?

If A. I've been asking myself that for decades and still don't know.
If B. To learn
If C. I'm just quoting the father of fundamental analysis himself. He doesn't think it works any more. And I'm playing devils advocate in order to learn. If you don't question all techniques, including ones you are committed to, you don't learn.

It seems to me it would be a VERY rare individual indeed who can actually accurately estimate future earnings or cash flows or what have you. Without accurate forecasts fundamental analysis is hamstrung. Can you really claim to be able to look at a particular company and come up with what their earnings growth is going to be? The experts who publish such estimates fail miserably and consistantly.

I'm here simply to learn and get other people's opinions and experiences in order to not get bogged down in my own subjectivity and dogma. Without reflection from other people one is just staring at one's own navel.

RBM


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Author: razorfangius Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1672 of 1933
Subject: Re: Security Analysis Dead? Date: 9/26/2003 4:41 PM
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The experts who publish such estimates fail miserably and consistantly

They also fail predictably.


Think about it.



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Author: woodstove Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1673 of 1933
Subject: Re: Security Analysis Dead? Date: 9/26/2003 7:31 PM
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Hi Everyone,

First, don't lose money!

My belief is the market is so full of traps, appealing-looking ways to lose money, that any technique which reduces the number of pits fallen into is bound to help one do better than the average random walker. And security analysis helps one recognize some traps - price too high, etc.

Beyond that, does security analysis help one project future growth of earnings of a business? If the "narrow" definition of security analysis is used, typical of the subject matter of Graham and Dodd, perhaps only in a limited way. That narrow definition includes understanding the form of a security, comparing it to other securities of the business and their various entitlements to the worth of the enterprise, calculating coverages and other safety factors. As such it excludes the question of projecting future growth, though it does look at sustainability of the present revenues and profits.

In making investment choices a feel for business helps also. Maybe the broader definition - looking at what the business does, demand in its industry, trends and sales opportunities, how well the organization and its management will adapt to trends and opportunities - should be called business analysis. But there is a definition of security analysis that includes both investigations - capital structure and business operations - and that is what we expect to be covered when we read a report by a financial analyst. (It is what we expect; whether or not we receive it is a question of the quality of the analyst's work. We should not judge security analysis as a trade by notorious malpractices of the past.)

I believe that security analysis in the broader sense is useful in choosing investments and recognizing advantageous prices for purchase. It is what any prudent businessperson would do as their normal duties. Investing is most successful when it is most businesslike.

We would not expect a business manager, responsible for acquisitions or any other category of decisions, to simply hope that random selections will work out ok or at least average. Or that their competitors' and the general public's estimates of future opportunities are an accurate measurement of what should be attempted by the business organization. If we do not believe business success is a random walk, or that managing a business is not capable of producing more than average results, then it seems futile to attempt to train and employ managers. Random decision generators could do as well, claims an "efficient business theorist"?

Has security analysis helped me spcifically? Yes, I think so. But it is not possible to distinguish the benefits of reading Ben Graham's writings from the information and perspective I have gained from other writers, or from discussions at this board and the Berkshire Hathaway board, or from the detailed information from following press releases, reading annual reports, reading about economic and other trends etc. All I can claim is that Graham's intellectual framework makes sense and the results have been satisfactory. In fairness, though, Philip Fisher may have been equally beneficial and his book is more oriented to business analysis. Fisher's writings do not provide quite as explicit a method, more a number of ideas which one can combine with Graham's methods.

It's evident that the average investor cannot do better than the average of the market, and in fact will do a few precent less if he relies upon intermediaries such as mutual fund managers. But that's not a proof of a claim that the intelligent investor, one who is willing to do the work of reading Graham's and others' books and study the details of companies is on average going to do as poorly as the market. On the contrary. Life is full of contexts where only a modest effort beyond the average will be sufficient to produce pleasant outcomes. Whether one can be a top performer, one who is written up in books, is not the question for most of us.

The biggest risk I indulge in, investing-wise, is reaching for unusual returns by buying into marked-down stocks of troubled businesses. That is sometimes very nice, but sometimes it produces bad results - eg my Kmart mistake cost me 10 pct of portfolio in late 2002/early 2003. The rest of each year was good enough (so far in 2003) that overall there is a gain, but the experience was not pleasant. Hopefully instructive.

If I just stuck with sound business operations with honest and capable managements, ie Graham's defensive investing approach, I would expect to do better than random. Over the long run, good businesses throw off profits and grow into new lines which their competitors may have missed. It's not random; there are intelligent agents, the management of the firm, enhancing its value. And I believe the general investing public does not always recognize the quality of businesses and their managers, or does not on all trading days assign a correct valuation to those.

Just looking at pure security analysis in the narrow sense, what is one to make of a market which prices stock A at say $10, and yet prices B at $4 when each B includes 45 pct of an A share, plus some other holdings? That information is public, in filings of the two companies and in their market quotations. Someone is being very inefficient, and I'm grateful for it. When they wake up, I'll be happy to sell them back the B shares.

Any investing methodology which willfully discards the potential benefit of looking into the quality of the business, management, security forms, must be handicapping itself. I have no objection if enthusiasts wish to do that to themselves, but they should not be encouraged in seduction.

Woodstove

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Author: trepanne Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1674 of 1933
Subject: Re: Security Analysis Dead? Date: 9/27/2003 5:48 AM
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It seems to me it would be a VERY rare individual indeed who can actually accurately estimate future earnings or cash flows or what have you.

luckily, this isn't necessary.

there's a weird kind of gaussian hypnosis that sets in when you read too much academic finance... you start to become unable to think in terms of mathematical functions other than bell curves. all models begin to be cast in terms of means, and variance about those means. it's a great competitive disadvantage.

in the case of securities analysis, being able to determine LOWER BOUNDS of earnings or cash flows is often good enough.

too, sometimes forecasting earnings is largely irrelevant, and you can get a high degree of confidence just by looking at the balance sheet.

margin of safety.
not needing to know a man's exact weight to declare that he's fat.

you've read this stuff, right?

pegging the totality of graham's work with a grim quote from his autumnal years is like summing up jack kerouac by pointing to his post-creative bitter-return-to-orthodoxy days of drinking himself to death and vilifying hippies. being a trailblazing role model, a symbol of something, can get to wearing on a man.

do you like to pore through financial statements, and ponder the more outre chapters of "securities analysis" concerning speculative capitalization and cost structures... or are you just looking to reconfirm the wisdom of investing in index funds?

trp

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Author: Juggernaut8 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1675 of 1933
Subject: Re: Security Analysis Dead? Date: 9/27/2003 7:19 AM
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OK, a few quickies:
-- valuation is a crap shoot
-- data is a crap shoot
-- estimated earnings is a MAJOR crap shoot
-- ability to use data and earnings even if they are right is a crap shoot.


Your argument is internally inconsistent here - if you are saying that all valuation is a crap-shoot you can't say the market is efficient. I think what you want to say is that thinking one can do a more accurate valuation than the legions of others doing valuations and the market mechanisms that reflect their opinions is a crap-shoot.

People who think THEY are uniquely skilled at weeding out the information and evaluating it are most likely full of themselves and fooling themselves (and fooling others). When they are right, it's luck and it doesn't last.

I don't think anyone thinks they are uniquely skilled - they just believe that they can learn to perform valuations more sensibly than the market can some of the time and/or in certain situations. In order to believe that markets are perfectly efficient you pretty much have to believe that human beings can perfectly interpret the significance of incredibly huge amounts of complex, interrelated data and react to it rationally and objectively. Sorry - I'm just not buying it - it's a theory that's too good to be true. These are collectively the same primates that burned witches, stampeded for Cabbage Patch dolls, and who mob grocery stores anytime there's a modest thunderstorm coming.

And note that markets exhibit herding behaviors and momentum - if someone misinterprets data many others will tend to follow them. Then TA practitioners and other momentum players follow this initial crowd, moving the price even further. So what may have been a small mistake in interpreting data becomes magnified and compounded by herding behavior in the market. Peter Lynch tells the story of a large conglomerate whose stock was moving one day because one of its small divisions had come up with a technology breakthrough. Many market participants were piling on and the price was moving ever-higher. When he actually did the research he found that the amount of earnings provided by this division, even with the breakthough, weren't significant enough to really effect the future earnings of the larger conglomerate.

It seems to me it would be a VERY rare individual indeed who can actually accurately estimate future earnings or cash flows or what have you. Without accurate forecasts fundamental analysis is hamstrung. Can you really claim to be able to look at a particular company and come up with what their earnings growth is going to be? The experts who publish such estimates fail miserably and consistantly.

I think you're mischaracterizing the process. What most value investors do is take the earnings history of a company and come up with a very conservative estimate, often a stagnant or worst-case scenario, and buying securities of only those firms which are trading for even less than the valuation the conservative assumptions of earnings indicates. This process of using very conservative assumptions and only buying securities priced much less than the valuation indicated by these assumptions is called seeking a "margin of safety".

And note that most value investors cherry-pick by only looking at firms they feel they have a decent chance of estimating earnings for. This is why Buffett stays away from technology stocks for the most part - the earnings are too unpredictable.

Also, take a look at this quote from the following post:
http://boards.fool.com/Message.asp?mid=19601617

<Myron Scholes, the Nobel-winning economist, once told me straight out, "A company's stock price is the value of the firm." It is amazing that myths rise to that level. I responded, "Myron, I sit in the CEO's chair, and I can tell you how easy it is to raise our stock price in the short term. First, we can pump up the earnings. Second, we can go out and hype the stock." I remember him flinging his pencil down on the table.>

Who's fooling themselves here? Fooling others?

-J8





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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1676 of 1933
Subject: Re: Security Analysis Dead? Date: 9/28/2003 1:19 AM
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trp,

"you've read this stuff, right?"
What stuff exactly?

"do you like to pore through financial statements, and ponder the more outre chapters of "securities analysis" concerning speculative capitalization and cost structures... or are you just looking to reconfirm the wisdom of investing in index funds?"
I admit it. The latter!



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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1677 of 1933
Subject: Re: Security Analysis Dead? Date: 9/28/2003 1:23 AM
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J8,

"In order to believe that markets are perfectly efficient you pretty much have to believe that human beings can perfectly interpret the significance of incredibly huge amounts of complex, interrelated data and react to it rationally and objectively. Sorry - I'm just not buying it - it's a theory that's too good to be true."

Individually, yes, but what about as a whole? As a group? Like that story about the 10 people who had to give estimates on where a ship had sunk. No one could nail it. But if you averaged their results the ship was located.

I'll read the rest of your post later. Too tired.
Thanks. I appreciate all the thoughts from all the posts. Good learning to take other points of view; get a broader scope.

Malkiel is pretty convincing though!

RBM



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Author: woodstove Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1678 of 1933
Subject: Re: Security Analysis Dead? Date: 9/28/2003 11:46 AM
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Hi Everyone,

There are many styles of investing, and many people who do well with them. I happen to get mis-directed e-mails (because of a similarity of names) intended for a fellow who sells an investing guide. E-mails from enthusiasts who have read his book and are ready to spend their money, from upset people who have lost most of their money and wonder what they should do now, from angry people who lost their money and had to sell their motorcycle and wish I would drop dead, and from helpful people who realize I am not so-and-so and tell me they have made lots of money and I should quit my job and get with the programme.

What works for one person may not work for another. Malkiel claims that is mostly luck: "Investing is a bit like lovemaking. Ultimately it is really an art requiring a certain talent and the presence of a mysterious force called luck. Indeed, luck may be 99 percent responsible for the success of the very few people who have beaten the averages." (last page in 4th edn).

Maybe, but I think there is focus as well. Casanova was the world's best lover, many people believe. His memoirs make entertaining reading. No doubt he had talent, but I think he made his own luck - he was a serial monogamist, who frequently fell in love with new female acquaintance, and was absolutely uninhibited by convention or prior engagements in his willingness to follow his passions. As a stock speculator he would have been broke as many times as wealthy.

The ordinary person, though, is reasonably assured of finding love via a traditional method, involving introduction, courting, loyalty, marriage, compromise and commitment. And with the love comes lovemaking. Just as with successful investing one does not need to buy the whole basketful of stocks.

Juggernaut quoted Bill George, and last night I picked up his book "Authentic Leadership". It makes good reading for anyone contemplating or engaged in a management role, corporate or another organization. One of the key ideas Mr George presents is that a leader has to find his own style, "authentic", rather than role-play a style taken from some book.

As with investing. Mr Malkiel's advice in his book, chapters 10 and 11 of the 4th edn I've seen, is not bad; it just does not fit exactly with what I need. For others, it may be just the trick. For me, Graham and Fisher seem to fit better and have provided the foundation for thinking out what works for me. I think the real key is to be found in the title "The Intelligent Investor"; reading books, studying alternative methods, thinking about one's mistakes in the past and reflecting on a way to avoid those mistakes in the future - those will improve success. Sure there is randomness or "luck" involved; anything can happen and may have happened to someone. But the probabilities of success for a follower of Ben Graham's methodologies are greater than 1:99 odds in my opinion.

If a person who reads Graham's writings finds that his big idea, roughly margin of safety, or value investing and the merits of buying a dollar worth of value for say 50-60 cents, resonates with his general approach to money management, then my guess is that person will be able to use the specific material Graham presents to build an "authentic" investing style for themselves. Because their style matches their personality and is based upon sound ideas, they will both be able to stick with it and have a reasonable probability of success. I imagine the results of maybe 90 pct of "authentic" Graham-style investors are satisfactory for them. A far higher fraction than would be expected based on a luck hypothesis.

Woodstove

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Author: trepanne Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1680 of 1933
Subject: Re: Security Analysis Dead? Date: 9/29/2003 12:28 AM
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RBmunkin,

"you've read this stuff, right?"
What stuff exactly?


ben graham's books. that is, after all, the theme of this board.

"the intelligent investor" is pretty much an all-round classic that should be read by almost any investor, IMHO.
"securities analysis" is more for stockpicking geeks, like those who tend to congregate here on this board.

"do you like to pore through financial statements, and ponder the more outre chapters of "securities analysis" concerning speculative capitalization and cost structures... or are you just looking to reconfirm the wisdom of investing in index funds?"
I admit it. The latter!


well, investing in index funds is pretty dandy. i think many of the posters here are big fans of passive investing, in general. i've read malkiel's book, and john bogle's books, and some of bernstein's books. it's all pretty good stuff.

it's just that so many of us individual value investors seem to be kicking the crap out of the S&P 500 by such a wide margin - through careful selection of individual securities - that we're not entirely convinced that index investing is really the best way for us to go, you see.

speaking for myself personally, my investing track record is too short to dismiss the idea that my outperformance is due strictly to chance. probably just confusing a bear market with brains...but that's OK. like razorfangius, i'm very comfortable with getting lucky, as long as i'm lucky fairly consistently.

anyway, regardless of what you think about that, the case for strongly efficient markets is a lot poorer than some folks would have you believe.

if this topic is of particular interest to you, then you might try reading warren buffett's article "the superinvestors of graham&doddsville" which is reprinted as an appendix of certain editions of ben graham's "the intelligent investor"... which, as i've said, is recommended reading in any case.

you can also try picking up marty whitman's book, "value investing: a balanced approach", where he has some interesting passages deconstructing the assumptions of efficient markets.

that ought to keep you on your toes.

trp

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Author: solasis Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1681 of 1933
Subject: Re: Security Analysis Dead? Date: 9/29/2003 7:01 PM
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its a bit remarkable that after the 1994-2003 period anyone would still push for perfectly efficient markets........ consider that
in 1994 we experienced the worst US treasury bond selloff in history
in 1997 we experienced the worst disruption in the currency markets since bretton woods
in 1998 we experienced an unprecedented meltdown in emerging market debt and LTCM
in 1995-1999 the US stock market experienced for the first time in its history 5 years in a row of greater than 20% Y-O-Y gains
in 2000-03 the US stock market experienced three down years in a row for the first time in 70 years and only the third time in its history.
in 2001-2003 impairments of publicly traded secured debt (due to bankruptcy and reorganizations) were off the scale compared to previous recessions.
in 2001 copper and other base metals hit all time lows, inflation adjusted, lower than 1932
in 2000-2003 annual and quarterly oil and gas price volatility has reached all time highs

in summary, almost every major market segment has experienced some form of record impairment or disruption or 'crisis' in the past 10 years. if anything, the lesson seems to be that if we have smooth sailing in the markets wait around for a year and a crisis of some fashion somewhere in the markets will show up. this is hardly a case for efficiency.

several factors to consider here.
1. compensation and reward systems for professional money managers
2. highly skewed distribution of investment capital among all participants
3. varying time horizons among participants
4. varying access to information, and across time
5. varying competencies (galton)
6. complex-adaptive system managed by a bureaucracy with monopolistic charter (fed)
7. well demonstrated that certain parties do earn excess returns consistently (NYSE specialists, tort lawyers, some underwriters) in other words the vigorish must be paid by someone (marty whitman is fond of saying individual investors and fund managers pay for lunch on wall street)
8. efficiency, even in theory, relies on the notion of perfect competition (everyone must be trying to earn excess return), yet as you state, many people,like malkiel believe it is futile to even try.
9. uncertainty, not in the heisenberg sense but in terms of future estimations, make risk estimates in-precise

but in any case the zen of efficiency is this

as the number of participants that believe in efficiency increases,
the amount of capital dedicated to outperforming the averages falls,
competition for excess return drops,
the market becomes less efficient.

it is highly beneficial for those of us who do security analysis to have many other participants be price insensitive. the believers in efficiency with their dollar cost averaging and relative bond/stock weighting adjustments, will always be there to buy from us when we want to sell and to sell to us when we want to buy. having a large portion of the market ecosystem believing that it is futile to even try is a tremendous competitive advantage. it is like playing a baseball team with 3 players who will step up to the plate and never swing the bat no matter how they are pitched.

however, it is always very good to challenge ones basic assumptions now and then. i think very few here would deny that the average non-professional would be better off with dollar cost averaging into low cost index funds than a series of selective speculations. however, if you are interested in pursuing a line of questioning as to why markets may or may not be efficient, instead of delving into various methods of stock selection, financial statement analysis, acounting, valuation methods, etc, i would suggest a line of inquiry in behavioral finance as the first step in that journey. also some simple biological principles help to put matters into proper perspective. such as natural selection. note how the studies which purport to show how the majority of money managers underperform their benchmarks do not segregate performance by years of experience. why should we be surprised that the average aggregate performance be below the market? isn't that typical of most eco-systems where advantage accrues to the winners (in this case capital).

good luck.



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Author: razorfangius Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1682 of 1933
Subject: Re: Security Analysis Dead? Date: 10/1/2003 8:47 AM
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And my personal favorite,

Contrarian Investment Strategies: The Next Generation

by David Dreman

(Or any of its previous incarnations -- Dreman has rewritten the same book three times).




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Author: woodstove Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1683 of 1933
Subject: Re: Security Analysis Dead? Date: 10/5/2003 10:33 AM
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Hi Solasis,

Wow, great post! Thanks. A question and some observations...

Where do you go to get long term stats eg copper prices?

An impression I get is that there is a lot of trading in relatively few stocks, eg Nortel, the DJIA stocks - far more than makes sense for them in terms of business / industry news. I guess it is portfolio managers having too much time on their hands, maybe automated trading systems. And a further phenomenon, which I consider a probable abuse, incurring trading costs which flow to affiliated or cooperating firms, in excess of the explicitly disclosed management expenses of investment funds. A concern which has yet to make it into the mainstream press, but I wonder may contribute someday to further retail investor disillusionment with the stock markets.

An efficient market, ie retail investors acting in uncoordinated moves, should have already discounted the portfolio manager risks. But media attention seems able to focus the public's attention in non-random ways and create these surges. A person attempting to predict markets might like to try to anticipate / measure editorial and reporter confidence.

There is a market which may be efficient, the home ownership market. In the face of runaway inflation, it seems quite rational to buy things and the biggest thing most people buy is a house. The only concern I have is that purchasers should be locking in low rates for long periods, and not be led into commitments beyond their fall-back capability for cash flow. We are seeing a very rational behaviour by major companies locking in working capital in exchange for long term debts to be repaid in inflated dollars, and the same applies to households within their cash flow means and recognizing that most houses are not working capital but sunk costs. Housing structured to support a home business or shop, or a rental unit, would seem ideal.

Many people will disagree with my perception re runaway inflation, which is ok. The only point I'm trying to make here is that at least some of the retail population, some fraction of whom might share my view, seem to have made a decision to swap currency for housing. With a large group of uncoordinated investors it may be possible to have efficient markets.

With that oh-so-efficient rapid decline in silver price, I'm buying now. I think value investors help make markets efficient, by providing buyers when others are sellers, and vice versa. I'm all for efficient markets, just don't believe they exist. Sort of like good government; impossible to achieve at all times and places, but nonetheless a worthwhile goal.

Woodstove

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Author: Juggernaut8 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1684 of 1933
Subject: Re: Security Analysis Dead? Date: 10/5/2003 2:50 PM
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But media attention seems able to focus the public's attention in non-random ways and create these surges. A person attempting to predict markets might like to try to anticipate / measure editorial and reporter confidence.

I believe the way the media disseminates information contributes to inefficiencies in the market at the same time the rapid dispersion of information is thought to make the market more efficient. There are dozens of sectors and thousands of companies and maybe only two dozen opportunities for "juicy" stories. (and much of the "juiciness" is exaggerated at best and engineered by profiteers at worst)

There is a market which may be efficient, the home ownership market. In the face of runaway inflation, it seems quite rational to buy things and the biggest thing most people buy is a house. The only concern I have is that purchasers should be locking in low rates for long periods, and not be led into commitments beyond their fall-back capability for cash flow. We are seeing a very rational behaviour by major companies locking in working capital in exchange for long term debts to be repaid in inflated dollars, and the same applies to households within their cash flow means and recognizing that most houses are not working capital but sunk costs. Housing structured to support a home business or shop, or a rental unit, would seem ideal.

I'm not sure the home ownership market is more efficient than others. Almost everyone wants to own a home at one point - it is a combination necessity, right of passage, and status symbol all rolled into one. An individual, or more often a couple, wants to buy their home irregardless of the sensibility of the current local market price. (and if one partner is rational there is a good chance they can be "influenced" by the partner that may be less so) It takes a lot of faith to keep saving and renting while an individual or couple waits for a particular real estate market to become more rational. It takes even more faith, and guts, for someone to sell an overvalued home and rent until the market becomes more rational to arbitrage any discrepancy in home value. Plus you have an immense amount of friction, both financial and psychological, in selling a house and moving. So I think that the market for housing can be just as inefficient, if not more inefficient, than many other markets.

-J8

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Author: woodstove Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1685 of 1933
Subject: Re: Security Analysis Dead? Date: 10/5/2003 11:35 PM
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Hi J8,

The media... I wonder whether rapid disribution of information really contributes to efficiency. Maybe more time to reflect would be better. If we really want an auction market which uses considered opinions of value to discover a price which approximates a consensus about value, then normal auction procedures might be better. That is, let everyone examine the week's news, put in their bids and asks, and Thursday noon open the bids and settle. Then everyone can update their records that afternoon, take Friday off if they wish, and come back refreshed Monday. With once-a-week settlement we get rid of day trading, other churning, and all sorts of overheads involved in trying to synchonize and speed up the operation of the markets.

Ok, ok - just dreaming! Too many vested interests in high overheads.

Somewhat related to the media's capacity for juicy stories is the number of big-picture factors that a portfolio manager can worry about. I think most investors are willing to think hard about maybe some top 3 factors. So what about the non-top-3 factors, say the direction and effects of natural gas prices - which is important but not generally top of mind for media coverage (though it was a few months ago). My theory is that secondary factors sometimes get shelved and fewer investors than normal work out a considered opinion; they just postpone or stay away until the factor clarifies or shifts into focus or until others start to move the market. That's an inefficiency, and an opportunity to get ahead of the crowd by paying attention a bit earlier to one of those less-attended factors.

About housing... You're right about renting being cheaper than buying at present. I checked our local Ontario paper and one for an Alberta town, and generally house rents are about 0.5 pct/month of purchase price. In a rational market I imagine 0.8-1.0 pct/month would be more evenhanded.

It's curious to think about what is rented vs what is bought. Men rent a tux to get married, and women buy their wedding dress. Water heaters are a tradeoff made pretty much strictly on economic grounds. When it comes to owning a business, lots of people prefer to rent a fraction of a very good business (even if they have no idea of the sales manager's name) rather than owning a smaller business they know completely. Yet many of those same owners of rented parts of businesses might think it unsound to live in rented accomodations vs owning outright a house whose quirks they know fully.

The housing market is inefficient in terms of having high spreads for a complete buy-sell cycle. About 10 pct, I guess, considering moving is a cost. Maybe 20 pct, if probable repairs and improvements are included.

But considered in information terms, ie whether intelligent investors do careful research on value, housing may be a more efficient market than stocks. You're right about the emotional factors which can drive someone to pay more than a house is worth vs rent. Some of those factors though are genuine, in terms of the personal calculation of value of the house; if pride of ownership is satisfied, that should be worth something. In the investigative process a prospective purchaser is fairly careful, or has lots of resources made available via friends and consultants, to do thorough research; and the brokers make numerous disclosures at a level of fairness far in excess of the disclosures made in the stock markets. Also, the buying of a house typically involves a repeated bid/ask price negotiation.

So I'm not sure whether housing is really all that inefficient a market. Just high friction, long delays, and high spread costs. But that may be a contributor to stability.

A fun topic for a weekend diversion!

Woodstove


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Author: NightVision One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1738 of 1933
Subject: Re: Security Analysis Dead? Date: 3/29/2004 1:18 PM
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"I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities."

I knew Ben Graham in the early 70's. Your conclusion about what he said is inaccurate. If you do enough studying you'll find Graham's full explanation behind that statement and what he was doing at the time he made it.

Mark

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Author: TMFTomG Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1739 of 1933
Subject: Re: Security Analysis Dead? Date: 4/5/2004 1:47 AM
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Mark,

Thanks for the insights. If you feel comfortable doing so, can you elaborate on your friendship with Ben Graham. . and provide a little background on his fuller explanation. Thanks for posting. Best,

Tom Gardner

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