Friday, January 6, 2012

Intelligent Investing

This post has nothing FLG hasn't heard before, nor anything that he hasn't mentioned at some point on his own blog.

Nevertheless, FLG is constantly amazed at the number of smart people who think they can beat the market. In fact, over Christmas during a cigar, FLG got in a friendly disagreement with his father-in-law about the potential to beat the market. He's an intelligent and successful man, but steadfastly refuses to believe the market can't be beat. Or more accurately, can't be beat by a retail investor over the long run.


Andrew Stevens said...

Surely you've read The Superinvestors of Graham-and-Doddsville by Warren Buffett, though? I'm an index investor myself because I don't have the time to spend to really diligently research investing opportunities, but I can't prove Buffett wrong and the strategy certainly seems like it's available to the retail investor. (Whether it is still available is a question that continually needs to be answered, of course.)

FLG said...


I guess.

While Graham and Dodd's Security Analysis is a book that's always on my to read list, I always felt there's something off about Buffet's analysis in that piece.

It's kinda like Tiger Woods writing an article about all the great golfers he's known and worked with over the years.

Well, we're not all Tiger Woods or Warren Buffet. Nor are all of us the people whom Tiger Woods or Warren Buffet run into in their lives.

Saying that people who worked at Graham-Newman did better than the market is kinda like saying that people who clerked for Felix Frankfurter had great law careers.

So, yes, I guess you are correct. I sure as heck ain't gonna call Buffett wrong. AND there's nothing mutually exclusive between pursuing the value investing strategy and retail investing. So, that means the market is inefficient and can be beat. But neither I nor my father-in-law is Warren Buffett.

As far as the strategy still being available, however, I figure it is. Graham and Dodd published their book back in what the 30s? Buffett has been able to use it fine for decades and I don't see a bunch of people shifting to it. At least as far as I know.

Andrew Stevens said...

Well, no question that the large discrepancies in book value versus market value that occurred when Graham was writing simply don't occur any more (or at least not often - they might have occurred in, say, March of 2009).

I'm not sure you have to be Warren Buffett to do it, though that surely helps. The nice thing about Buffett's strategy is that it's a buy-and-hold strategy so you only need a few good ideas. Find a few stocks that you're confident are very undervalued, buy a whole bunch of each stock, and keep buying for as long as they stay undervalued.

I'm not defending the Graham-Dodd strategy, by the way. I'm not convinced it works and it's a whole hell of a lot riskier than my strategy, even if it does work in the long run. I'm sure great value buys don't grow on trees either, so it's a slow strategy to get started.

It wouldn't take much to have eliminated the efficacy of the strategy. A few big-time money managers who agreed with it and they could capture almost all of the margin available on the strategy. Not sure whether this has happened or not.

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