Bubbles

A friend recently asked me about the shape of bubbles.  He wanted to know how long the Australian property market crash would last.  (Note that the question wasn't about whether or not the Australian property market was in a bubble, nor whether or not it would crash - they were both givens.  The question was simply whether the crash would be swift and brutal, or long and drawn out).

Baskets of Goods

Bananaman lives in Barterland. Bananaman grows bananas for a living, and often travels to the Barterland market where he swaps his bananas for other goods.

Bananaman is clever. He suspects that the Barterlandians are slowly thinking less and less of his bananas, but he's not quite sure, because many of the other goods are seasonal as well, so there is rarely any consistency between the number of apples or oranges that he gets for his bananas, but lately he's feeling as though he's just not getting as many swapped goods as he used to.

Bananaman is really clever.  He devises a scheme, whereby he creates a basket of goods that he likes, including apples and oranges and other juicy things, and over time, he'll track how many bananas he has to swap to get the goods that he likes.

Making every post a winner

There is an expression in sports races: "Making every post a winner".  By trying to race to every post along the way, the racer is going as fast as they can, and it is only a matter of time before they tire, because you can't go 100% all the way - unless you are very close to the end of the race already.

In races like the Tour De France, you generally never see the cyclists going 100%.  For the most part, they wait, and wait, and wait, until the "key moment", and only at that time do you see them going flat out, and the race is won and/or lost in those very few key moments.

Similarly, in investing, the best strategy is not to make every "day" a winner, or every "week", or even every "month", "quarter" or "year".

Compounding Engines and Price Volatility

I view companies as compounding engines.

Quality companies  have consistently high returns on equity.  They have this special ability to use their retained earnings to increase their equity base, which they can then use to generate even more earnings in the future, and so on.  I don't give any consideration to low quality companies, that is, that don't have consistent and high returns on equity, so pour moi, and long term value investors alike, it holds that companies are compounding engines.

Follow the yellow brick road

Something slightly off-track this week.  I recently saw a documentary called The Secret of Oz. It suggests that the author of the original version of the Wonderful Wizard of Oz, Frank Baum, based the book on American monetary history.  In case you're confused - yes - I am talking about the book with Dorothy, the wicked witches, and the yellow brick road.

Empire Investing Strategy Review - Part 2

In the first part of this review, I looked at the first two components of the investing strategy outlined at the Empire Investing website.  These were the 1. Filter and 2. Value steps.  I'd now like to take a look at the next few:

• 3. Assign Risk - utilise a margin of safety.
• 4. Observe - Concentrate and watch the select few closely - like a hawk.
• 5. Act on Buy Signals - Purchase on every buy signal.

I've leave "6. Assign Capital" for another post, as I think that that is complex enough to warrant it's own post.

Assign Risk - ustilise a margin of safefy

I've never quite got the concept of "margin of safety".  I understand that estimations and predictions have a margin of error, and that by creating a margin of safety, one hopes to eliminate, or at least minimize, the risk of a negative outcome.  However, what I can't grasp is how this is any different to the concept of maximizing expectation value, or in layman's terms "trying to make as much money as possible", and hence why it's referred to as "margin of safety" rather than "maximizing profits".

Is there a little book that beats "The little book that beats the market"?

Recently, I looked at the little book that (still) beats the market.

Being a revised edition of the orignal (hence the "still" in the title), towards the end of the book, Greenblatt responds to suggestions for improvements to his magic formula.  Interestingly, he tried a number of these suggested improvements using his simulation tool, and despite sounding like good ideas, none of the suggestions actually improved the portfolio performance.

This reminded me of the classic iterated prisoner's dilemma competition, where the simple winner (tit-for-tat) of the first competition also won the second competition, despite all the new entrants in the second competition knowing exactly how it worked to win the first competition, and being written to specifically beat tit-for-tat.  Each of the so-called "improvements" on tit-for-tat could beat tit-for-tat, but couldn't outperform tit-for-tat on average against all of the other strategies.

So, I pose the question - can the magic formula be improved, or does it's elegant simplicity outperform any variation?

In case you missed it...

This blog is now three months old, so I thought that it might be time for a checkpoint review.

I started off by trying to talk about some tax effective investment structures, in the hope that some real and useful information would give me some online credibility.  Perhaps I waited too long between the actual setup of those structures and the documentation thereof, and so the accuracy, and hence usefulness was not quite as high as I had hoped.  I'll know better for next time.

I tried a couple of thought experiments, which I personally found very useful in drawing me to a couple of my key investment beliefs, but they were not well received - in terms of readership and participation.  Nevertheless, I will persist with these, as I have a number more to go through, and they are central to the theme of this blog - delusional investing: "These are the thoughts going through my head.  Am I delusional?"

There were a few other random posts, that don't directly relate to the theme of this blog, but that I needed to write about to understand myself.  There will be many more these, that one day, I hope to string together into a reasonably cohesive story.

The most popular post to date has been on the little book that beats the market.  I'm not sure that this is a great thing, because I haven't been able to determine if the people that search for that book are after the "quick win" investing answer, or whether they are genuinely interesting in investing strategies.  Hopefully the latter, because I'll continue to review investing strategies as I find them.

Ideally, I like to have more comments on my posts than I have been receiving so far.  I don't measure the success of this blog on the number of views, but instead, on the number of "insightful comments".  Having only received a handful of comments, I have to count this as a failure of this blog to date.  Thanks to those that have commented though.

I think that I need to get more involved with other value investing blogs, and to participate in the existing communities, to be able to get the feedback that I am looking for.  To that end, I hope to review a bunch of blogs to determine which ones are of value to me, in the hope of reciprocity.

Anyway, thanks for reading, and please give feedback.