Value Investing Forum

That seems to happen a lot. Hell, James Chanos covered AIG not long before its collapse. Of course Chanos probably didn't go long as it started to blow up either.

With regard to Charlie, I hadn't read it before so I'll post a link in case others haven't seen it.

Charlie Munger on the Psychology of Human Misjudgment

I think the behavioral finance stuff seems to jive well with value investing paradigm. I've seen a lot of value investors focus on research in that area. Good read.

Post edited 5:05 am – November 18, 2011 by somrh

Is that Tilson's investing style? I frankly haven't followed him at all though I think it's weird that he's now long NFLX. It might make for a good short-term bet but I have my doubts on NFLX long term.

Humanities degree may not be such a bad thing. Did you see Jae's recent blog? The idea of multiperspective thinking as a valuable tool for investing doesn't seem farfetched to me. Granted, I coupled my humanities degree with mathematics so what I do know?

Though as a side note, many losers do take stats. A number of people study stats because they couldn't hack it in mathematics.

Post edited 4:34 pm – November 17, 2011 by somrh

One of the anomolies in the EMH lilterature is the fact that high (low) beta stocks tend to underperform (outperform) the market. Since beta has been thought of as a form of risk, this has been a blow to the idea that taking on more risk should, on aggregate, give you a higher return.

David Cowan and Sam Wilderman have issued white paper at GMO (you have to sign up for an account there to view it but doing so is free):

Re-Thinking Risk: What the Beta Puzzle Tells Us about Investing

The author's contend (and provide evidence) that high beta stocks trade at a premium because they offer "leverage with protection". If I open a margin account and buy $200 of SPY with $100, it will magnify my returns but also magnify my losses. High beta stocks, on the other hand, are "convex" (see Exhibit 3 and 4 in the paper) in that they magnify high returns but the effect on losses is not as bad.

This kind of leverage is favorable and people will buy up these kinds of assets giving them a premium.

A similar strategy (see Exhibit 7 for example) is buying a call option which also gives the convex return.

On the other hand low beta stocks give a "concave" return. Upside potential is limited. This has similar characteristics as a put writing strategy on the market.

There's a number of other interesting relationships in the article but you'll have to give it a read and take a look at all of the exhibits. One last one is that of hedge funds. Hedge funds as a class look like the concave low beta (or put writing strategies). So their superior returns, the authors claim, is attributed to the fact that hedge funds take on more downside risk (as a class; they acknowledge individual strategies may vary). See Exhibit 24 for a comparison between hedge funds and a put writing strategy.

As a side note to the hedge funds, zerohedge not long ago posted an article showing Whitney Tilson's performance which looks more like leveraged beta:

Presenting Whitney Tilson's Performance Since Inception Relative To The S&P

So one big question to draw from this: Is your portfolio giving you good returns because you're finding "inefficiencies" or because you're taking on downside risk? That's certainly something to consider.