Author Topic: Competition  (Read 3984 times)

Hielko

  • Hero Member
  • *****
  • Posts: 1150
Re: Competition
« Reply #10 on: May 27, 2019, 03:26:47 AM »
This is a pretty good point. I think the mean  difference between  low and the high of even large cap stocks is close to 30%. It is inconceivable that the intrinsic value of the average large cap stock changes by 30% or thereabouts every year . Hence the market canít be all that efficient.
I'm pretty sure that you can easily prove that these large swings in price are not a (big) inefficiency. If these swings wouldn't (on average) represent real swings in value you could easily generate alpha with very simple technical trading strategies were you just sell stuff that went up a lot and buy stuff that went down a lot (and it shouldn't matter a whole lot how you construct the strategy). If you agree that making money isn't that easy in the stock market the conclusion is that the observed volatility must mirror the underlying fundamental volatility in business outlook.

Business fundamentals are not changing 40-50% for large diversified businesses in any given year.
Then those businesses are on average also not going to have large swings in price.

It's really easy. If there is a big disconnect between price volatility and business value volatility there is an easy arbitrage. But I think we can agree that this arbitrage isn't there.

Value investors like to sounds smart by making stuff up about how the market is wrong and then pick one example of a large company were in hindsight it sounds ridiculous that the price went up/down while nothing really changed. But they don't realise that if the market would really be systematically wrong like that making money would be easy. So it's just BS people like to put in quarterly letters. If they would be right they would be making money hand over fist.


SharperDingaan

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 3330
Re: Competition
« Reply #11 on: May 27, 2019, 04:55:05 AM »
You do not have an informational advantage; the internet removed it.
You do not have a 'skills' advantage; there are way more CFA's today than there ever used to be.
The cost for this benefit, is that we all approach valuation the same way. Dogma.

It is well documented that crowds are stupid, individuals not so much.
There is abundant literature as to how to manipulate both
Tribalism as a tool.

Example: We all routinely use the forward strip to derive todays (market) view of future prices, & plug them into our models; if we did not, we would be fired. Yet there is lots of literature evidencing that the predictive accuracy of the strip is worse than useless. But ... it's the CFA way, it's the industry way, and it's a career limiting move - NOT to use it. Dogma.

So, bet against it; using derivative combinations that minimize cost, & pay off well - when the dogma fails. Talebs anti-fragile.
There's always a heretic that ruins the party. Taleb no longer works in the industry for a reason.
And doesn't need to.

Look at today's successess, what's common to them? They are all outliers.
All very 'smart', independent thinkers; do'ers not followers, doing things their way. Legal or illegal, and accross the world.
Perhaps ... there is your answer.

SD



 
« Last Edit: May 28, 2019, 07:22:12 AM by SharperDingaan »

Jurgis

  • Hero Member
  • *****
  • Posts: 4663
    • Porfolio
Re: Competition
« Reply #12 on: May 27, 2019, 06:38:16 AM »
This is a pretty good point. I think the mean  difference between  low and the high of even large cap stocks is close to 30%. It is inconceivable that the intrinsic value of the average large cap stock changes by 30% or thereabouts every year . Hence the market canít be all that efficient.
I'm pretty sure that you can easily prove that these large swings in price are not a (big) inefficiency. If these swings wouldn't (on average) represent real swings in value you could easily generate alpha with very simple technical trading strategies were you just sell stuff that went up a lot and buy stuff that went down a lot (and it shouldn't matter a whole lot how you construct the strategy). If you agree that making money isn't that easy in the stock market the conclusion is that the observed volatility must mirror the underlying fundamental volatility in business outlook.

Business fundamentals are not changing 40-50% for large diversified businesses in any given year.
Then those businesses are on average also not going to have large swings in price.

It's really easy. If there is a big disconnect between price volatility and business value volatility there is an easy arbitrage. But I think we can agree that this arbitrage isn't there.

Value investors like to sounds smart by making stuff up about how the market is wrong and then pick one example of a large company were in hindsight it sounds ridiculous that the price went up/down while nothing really changed. But they don't realise that if the market would really be systematically wrong like that making money would be easy. So it's just BS people like to put in quarterly letters. If they would be right they would be making money hand over fist.

I'm with Hielko here. If 40-50% change does not correspond to predicted (!) business fundamental change, it should be easily exploitable and value some kind of investors should be making 40-50% per year. OK, let's settle for 30%. Who is doing this?
"Before you can be rich, you must be poor." - Nef Anyo
--------------------------------------------------------------------
"American History X", "Milk", "The Insider", "Dirty Money", "LBJ"

benhacker

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 887
Re: Competition
« Reply #13 on: May 27, 2019, 06:57:32 AM »
I think Heilko is mostly right. We fool ourselves by saying ď30-50% changes, fools!Ē... but changes can derive from changes in liquidity preference, real/nominal discount rate rate changes, and of course the killer which is stock prices arenít business values... the are leveraged business values in most cases... so itís the enterprise value that matters.

Agree that for some businesses the changes are too much, but I think itís oversimplifying to say that a 30%+ move is inherently inefficient.
Ben Hacker
Beaverton, Oregon - USA

frommi

  • Hero Member
  • *****
  • Posts: 1215
Re: Competition
« Reply #14 on: May 27, 2019, 08:16:36 AM »
30-50% sounds like a lot, but for the average business this is just a 2-3% lower growth rate over the long term. The obvious mispricings right now are just in a different and hard to exploit part of the market. I can imagine that there are not a lot of short sellers or short funds alive today. I believe that the competition is not a static pool, but one that changes with the ebbs and flows of capital and that we will see a lot more mispricings in the lower valuation percentiles of the market in the middle of the next recession.

TwoCitiesCapital

  • Hero Member
  • *****
  • Posts: 2287
Re: Competition
« Reply #15 on: May 27, 2019, 08:47:39 AM »
People think 40-50% is a big move. But if you trade at 25-30x earnings because people expect a certain earnings growth rate, and that growth rate disappoints, it's pretty easy to see how that multiple could come down to 15x which would be a 40-50% drop even with positive earnings growth.

Google went from $700+ to $300 in 2008/2009 despite growing earnings over that period simply because the multiple re-rated from 40x to 15x. Turns out, it'd have been a great time to own the stock at either price, but the rerating down to 15x provided an excellent opportunity to increase returns.

Ultimately, I do think multiple "arbitrage" absolutely impacts returns, but it's not a true arbitrage.

SHDL

  • Sr. Member
  • ****
  • Posts: 469
Re: Competition
« Reply #16 on: May 27, 2019, 01:57:10 PM »
Iíve made good money trading large/mega caps but they havenít been huge winners in the vast majority of cases.  Normally the numbers are more like, I think the stock is worth 90-110, it was trading for a while in the 100-120 range but it has sold off recently for seemingly no good reason and now itís at 80, so I buy, wait for a rebound, and then sell at 90.  So even with a > 30% top-tick-to-bottom-tick drop in the stock price, the return I can ďsafelyĒ squeeze out of it tends to be more limited.

Spekulatius

  • Hero Member
  • *****
  • Posts: 3559
Re: Competition
« Reply #17 on: May 27, 2019, 06:45:57 PM »
This is a pretty good point. I think the mean  difference between  low and the high of even large cap stocks is close to 30%. It is inconceivable that the intrinsic value of the average large cap stock changes by 30% or thereabouts every year . Hence the market canít be all that efficient.
I'm pretty sure that you can easily prove that these large swings in price are not a (big) inefficiency. If these swings wouldn't (on average) represent real swings in value you could easily generate alpha with very simple technical trading strategies were you just sell stuff that went up a lot and buy stuff that went down a lot (and it shouldn't matter a whole lot how you construct the strategy). If you agree that making money isn't that easy in the stock market the conclusion is that the observed volatility must mirror the underlying fundamental volatility in business outlook.

Good points. The more I think about it, the more I believe you are correct. Essentially, the bet on swings is a bet on mean reversion. It sort of works, but I am not certain it works better than investing in the market using index investing. The reason is that there are periods with strong trend lines, where a lot of returns are not reversing to mean and the fact that returns turns tend to come from few stock delivering outsized returns and you are not likely to get into those using mean reversion.
Life is too short for cheap beer and wine.

nspo

  • Newbie
  • *
  • Posts: 7
Re: Competition
« Reply #18 on: August 21, 2019, 02:21:35 PM »
Munger has discussed multiple times over the years that competition has gotten so much smarter.  For example, he said this recently:

 "but the times when we had idiot competition when we were youngónow weíve got tough competition scrounging every area and little niche with massiveóno, itís way harder."

Part of me thinks, there are still idiots in large caps, that's why Apple was at $142 less than 6 months ago and now is over $210, basically a 50% move in the largest company in the world. 

But, the other part of me wonders, where are the areas where the competition might be less smart, more idiotic, like when Munger and Buffett started out. 

Any thoughts?

I really think that the vast majority of investors (including Charlie Munger) are too focused on gaining an informational advantage. This makes sense because if you've spent a formidable portion of your career utilizing and capitalizing on an info edge, and that edge has gone away, then it's understandable to lament the disappearance of this edge. But this misses a glaring edge that can still be exploited by mere mortals (i.e. those of us who are far less talented investors than the All-time First Team NBA types such as Munger and Buffett). And that glaring edge is what Roark mentions... the fact that the largest publicly traded company in the world can go up and down by $200 billion or more in market value in a matter of weeks. Basically, this edge is just capitalizing on the fact that stocks fluctuate more than values do. No, there is nothing I know more than the market does about Apple. Yet the stock traded for $90 a share not that long ago and has compounded at close to 30% annually for three years. How is that possible? Either the business value appreciated that much (which it did not), or the market wrongly discounted recent trends (possible), or simply that the market overreacted to near term noise. I think it's a combination of 2 and 3.

This happens all the time in the stock market, and it happens now more than it did in the 50's and 60's when Buffett and Munger dominated. This is because the reasons for why the info edge is gone (access to information, the speed of news, noise, etc...) is actually the reason why stocks fluctuate probably even more than they once did. Humans overreact.

I think this game is now one of capitalizing on time arbitrage and assuming that you don't have any info edge. Because even with small caps where you think you have an edge, it's very likely that you don't. I think large caps and small caps can get mispriced obviously, and small caps get more mispriced than large caps, but it's far, far more likely to be because of sentiment and emotional swings than because of information that can be obtained.

I think it's useful to keep this in mind when looking at ideas, because if you assume that the market already knows everything you're uncovering as you evaluate an idea, you'll look at it differently, and maybe (hopefully) avoid a few mistakes.


I think this is pretty spot on.. Now more than ever the first question to a sound investment thesis is "why has the market afforded me this opportunity?". If this can't be identified ie. systematic biases/overreaction I would say that the case is weak at best. Since data is so quickly disseminated and processed in the same manner by "most" value investors, the only real "edge" comes from psychological Arb.

Einhorn once said something along the lines of "when I look for investments I first start by asking why it's mispriced." That may seem obvious but I believe most of us have a tendency to start with this ideology that we're able to find data no one else is seeing (50's-70's era) which is wrong...

This reminds me of when Buffett says he knows the business beforehand so the buy decision is fairly quick (Noah didn't wait for rain to start building the ark).