Saturday, January 28, 2012

Slowly but surely


Around this time of the year, reflection sets in and many tend to ponder about various things in a philosophical haze. Accordingly as we approach the end on January, I have been beset by doubts about my approach to the capital markets.

What if my thoughts on the virtues of value investing, its “proven” advantage over alternative tactics of speculation and technical charting are in fact just empty theories?. Continued volatility in the market hasn’t helped either. Cheap companies have been getting cheaper, or just going nowhere, throughout 2011 and no clear upward trend to reverse this slide has yet emerged.

It was in this state of mind that I came across an extraordinary documentary/program filmed by the BBC in the summer of 2008 where the cameras followed a group of 8 non-financial types/would-be traders as they did battle with the markets over a 10-week period. The appealingly labelled experiment (funded by a generous UK fund manager) was aptly named “Million Dollar Traders” and can be seen in 10 minute mini-episodes here:

Putting aside the emotional drama of the experiment, (no doubt exacerbated by the constant presence of a filming crew), the results of the exercise were most revealing and contributed to affirm me in my convictions.

To cut a long story short, the 8 random folks, (whose only preparation for the show consisted of a check up on basic math skills and an ability to read financial newspapers) selected to trade equities (both long and short) in a sort of market neutral hedge fund strategy, actually outperformed an index of hedge funds over the 10 week period covered!.

Besides the explicit humiliation bestowed on the hyper-fast trading hedge fund community, a set of additional readings can be made:

1. Firstly, 10-weeks is a laughably short period in which to measure performance, no matter what asset class you are dealing with. (Note some of the trades were put on and subsequently liquidated, often at a loss, in 1 hour!).

2. The sheer randomness of the trade outcomes is a testament to the gambling-like nature of this approach.

3. No comment (let alone implicit reference) was made to the enormous brokerage fees incurred in this process as a consequence of the sheer level of activity. Here again, patient thought out value investing wins by a landslide.

4. Last but not least, the behavioural transformation (read: descent into a nervous wreck of the otherwise previously paused participants) indicates that a speculative approach to financial markets is at odds with basic human traits.

Returning now to life in the present (28th January 2012), as pessimism continues to hold a firm grip on collective thought, I personally find much to cheer about.

And, as a concession to those who may feel my previous statement was typically ambiguous, read on for further insights into the reason for my giddy optimism.

• Zimmer (Ticker: ZMH)
• Xerox (Ticker: XRX)
• Dell (Ticker: DELL)
• LyondellBasell (Ticker:LYB)
• BP (Ticker: BP)

Even after a hefty run up from summer ’11 lows on most of these stocks, the value on offer differential versus the price demanded continues to be most generous.

And please note, no need to read the financial press every morning at 06:00 or to chart every tick on your Bloomberg.
Just sit, watch and enjoy.

2 comments:

  1. Wow. Are these 5 still strong BUYs from the Contrarian?

    ReplyDelete
  2. hahahaha! I'd say they are more like "overweight in your portfolio" :-)

    ReplyDelete