Tuesday, 18 January 2011 00:00

New Year Musings

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Random Musings

1. Montier Words of Wisdom

(James Montier (In Defense of the "Old Always" December 2010)

"...attempting to invest on the back of economic forecasts is an exercise in extreme folly, even in normal times. Economists are probably the one group who make astrologers look like professionals when it comes to telling the future."

I just love that quote as I believe it states, quite elegantly, the folly of paying closer attention to the macroeconomic picture when it would be an infinitely more productive use of time to concentrate on company specific issues and making a purchase when their is a big disconnect between your estimate of intrinsic value and its valuation by the market.

This brings me to another quote from the same article that I feel is especially important to focus investors:

"From the perspective of mean reversion, fat tails help to create some of the best opportunities. That is to say, fat tails often create fat pitches."



2. The Rest of the Story

(Why You Shouldn't Trust Wall Street's Top Stocks for 2011, WSJ, 01/05/2011)

The author came up with a great premise for this story with the type of inverse thinking that would make Charlie Munger proud. He decided to examine not just how the stocks that analyst recommended as their top picks performed but he went one step further and decided to look at how their sell recommendations performed. I doubt any regular reader of this site will be surprised by the outcome.

"I asked them (Thomson Reuters) for the 10 stocks that analysts rated most highly a year ago. These stocks were the cool kids on the Street. The ones everyone wanted to hang out with. How did they do? Not bad. If you'd invested $1,000 in each one a year ago, your $10,000 stake would have grown to nearly $12,400 today - an impressive 24% return. By contrast, the S&P 500 overall gained just 13%."

As you suspect the losers that nobody wanted to own earned 32%. It's a great article and I recommend you head over to the WSJ and read the whole thing.


3. Portfolio Differentiation?

(Pack Mentality Grips Hedge Funds, WSJ, 01/14/2011)

The last musing to start the new year highlights another area in investing that focus investors can potentially take advantage of to outperform professional investors.

The article discusses how hedge fund managers seem to have very similar holdings in their portfolios. This example, one of several in the article, highlights the issue:

"Sometimes groups of like-minded funds pour money into the same securities. That what happened with funds connected to veteran manager Julian Robertson of Tiger Management... In 2008 and 2009, as many as 10 of those funds held large positions in MasterCard, according to filings by AlphaClone.

The Visa trade was even more popular, holding the top spot by the first quarter of 2010.

In May, the Senate voted to restrict debit-card fees... Within days, Visa and MasterCard plunged 22% and 18% respectively. The stock (Visa), which had been among the top 10 holdings of 177 hedge funds AlphaClone tracks, dropped from the top 20."

So what lesson can be taught from this article? Look for opportunity when a company goes from adored to hated. This Visa opportunity may not have been the right one but when a stock hits a bump in the road and its fall is compounded by extensive selling pressure it certainly increases the chance that a long-term investor might find a golden opportunity to take the other side of the trade.

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