NomadicRiley Posted January 16, 2014 Share Posted January 16, 2014 http://www.oaktreecapital.com/MemoTree/Getting%20Lucky_2014_01_16.pdf Link to comment Share on other sites More sharing options...
Hawks Posted January 16, 2014 Share Posted January 16, 2014 Great article. Thanks for posting. Link to comment Share on other sites More sharing options...
Guest 50centdollars Posted January 17, 2014 Share Posted January 17, 2014 Thanks Link to comment Share on other sites More sharing options...
SwedishValue Posted January 17, 2014 Share Posted January 17, 2014 Thanks! Good letter. I think some of the "cyclical inefficiency" may actually have increased or at least stayed on a similar level as before. I'm mainly thinking of liquidity issues, which can be related to anything from the unwinding of hedge funds (looking at the price spreads prior to the LTCM rewinding e.g.) or just generally less liquidity within the system. One other thing. I might misunderstand or misinterpret what Marks is saying, but I don't agree with his notion that markets in general are efficient today (do I misinterpret his view here?). When looking at prices for micro caps and small caps in Sweden, I can just say that at times prices can be very much out of sync with reality. The introduction of more computational power and more readily available information has not eliminated price inefficiencies, although they might have made them more efficient than before. Link to comment Share on other sites More sharing options...
Liberty Posted January 17, 2014 Share Posted January 17, 2014 Thanks you, good one. Makes me think that the very best returns can be found when cyclical inefficiency is combined with sector inefficiency; find a sector of the economy where there's lots of inefficiency (small caps because bigger players can't go there?), and invest in it when the market is at the bottom of a cycle, overreacting to something. Of course, easier said than done, and at such time you might prefer to look at this that are normally never cheap like high quality large caps rather than small caps that get cheaper more often... Link to comment Share on other sites More sharing options...
matjone Posted January 17, 2014 Share Posted January 17, 2014 SwedishValue - are you seeing a of good bargains over there? Link to comment Share on other sites More sharing options...
Packer16 Posted January 17, 2014 Share Posted January 17, 2014 My take on his efficiency idea is that it is prudent to think that markets are efficient unless you have evidence to the contrary and it is better to be thought of as an exception versus a rule. I also think he was speaking of primarily his world - the world of institutional asset management. If you go through his list about the junk bond market and compare it to the market or segment you are looking at you can get an idea of how inefficient the market is. I also think in general it is much more difficult to find a mispriced large stock than a smaller one. Large stocks are bargains when there is a reason to hate them and the reason has a flaw (look at BAC as an example). Packer Link to comment Share on other sites More sharing options...
PJM Posted January 17, 2014 Share Posted January 17, 2014 There are obvious reasons on why certain markets/sectors may be more inefficient compared to others, however that does not mean one can easily exploit those inefficiencies. For e.g. small caps vs. large caps, illiquid assets vs. liquid assets, regulated vs. unregulated etc. Even though small caps may provide more inefficiency it may stay that way for a very long period of time, certainly much longer than the large caps (The market can remain irrational much longer than you can remain solvent). On the contrary i feel that large caps can provide more opportunities because of the large number of investors (aka more participants that are not objective and unemotional), thereby providing more opportunities to play the weak games. I'd also expect Mr. market to become rational faster for large caps compared to small caps, so the probability of luck favouring your skills is much higher. Link to comment Share on other sites More sharing options...
yadayada Posted January 17, 2014 Share Posted January 17, 2014 Another interesting fact is that investors who outperform the market pretty consistently, dont cause the stock price to go up. You could have easily ghosted buffet in the 90s with quite a delay and emulate his performance. If a guy has been right many times, and does 25% a year for a long time, shouldn't that cause the price to shoot up almost right away when the info gets out they bought a certain stock? If all the sellers would be rational, they should now charge a premium whenever someone wants to buy after this superinvestor bought it. Yet the price can stay flat or go down for an entire year. But when some stupid quarterly earnings call comes in badly, it can affect the price badly? Even though you could easily reason this is only temporarily. That looks like a pretty irrational, or at least short sighted market. Same argument goes for insiders. I saw a study where you would outperform the market by a pretty significant margin if you bought after insiders. Yet it doesn't really affect the price much. I guess ego is the biggest cause for this innefficieny. Link to comment Share on other sites More sharing options...
jouni1 Posted January 17, 2014 Share Posted January 17, 2014 Another interesting fact is that investors who outperform the market pretty consistently, dont cause the stock price to go up. You could have easily ghosted buffet in the 90s with quite a delay and emulate his performance. If a guy has been right many times, and does 25% a year for a long time, shouldn't that cause the price to shoot up almost right away when the info gets out they bought a certain stock? If all the sellers would be rational, they should now charge a premium whenever someone wants to buy after this superinvestor bought it. Yet the price can stay flat or go down for an entire year. But when some stupid quarterly earnings call comes in badly, it can affect the price badly? Even though you could easily reason this is only temporarily. That looks like a pretty irrational, or at least short sighted market. Same argument goes for insiders. I saw a study where you would outperform the market by a pretty significant margin if you bought after insiders. Yet it doesn't really affect the price much. I guess ego is the biggest cause for this innefficieny. exactly! i like buying stuff this way: 1) spot a superb business you want to own 2) wait for a super investor you have respect for, or the largest owner/insider to buy in heavy 3) wait a bit and get it cheaper Link to comment Share on other sites More sharing options...
Uccmal Posted January 17, 2014 Share Posted January 17, 2014 Absolutely great article. I especially like the being born at the right time. Another example is the oldies circuit playing stadium shows: the Who, Stones, Neil Young, Eagles, clapton etc. all from 65 to 73 years old. I think the plethora of "information" has added to inefficiencies. The London whale episode is the perfect example. JPM got hammered down at the time far worse than the actual losses were going to be making a perfect buying spot. This is repeated over and over. Bad earnings are a classic example as well. The internet, cheap trading and lightening fast trading have all contributed to make the markets more short term reactive. The prepared mind can be ready for these very regular over reactions. Link to comment Share on other sites More sharing options...
finetrader Posted January 17, 2014 Share Posted January 17, 2014 Maybe he listened to Daft Punk before writing this article.. Link to comment Share on other sites More sharing options...
boilermaker75 Posted January 17, 2014 Share Posted January 17, 2014 Absolutely great article. I especially like the being born at the right time. Another example is the oldies circuit playing stadium shows: the Who, Stones, Neil Young, Eagles, clapton etc. all from 65 to 73 years old. I think the plethora of "information" has added to inefficiencies. The London whale episode is the perfect example. JPM got hammered down at the time far worse than the actual losses were going to be making a perfect buying spot. This is repeated over and over. Bad earnings are a classic example as well. The internet, cheap trading and lightening fast trading have all contributed to make the markets more short term reactive. The prepared mind can be ready for these very regular over reactions. I love these opportunities when quality companies get hammered after a slight earnings miss. Link to comment Share on other sites More sharing options...
bmichaud Posted January 17, 2014 Share Posted January 17, 2014 Al, Ur spot on!! Why people bemoan "over followed" large caps and flock to small caps is beyond me - the more Wall Street idiots you get covering one company the more likely you get inefficient market reactions. Cramer was hammering Nike in mid 2011 because of a sales growth rate slowdown, and the stock has since more than doubled. Probably 20 analysts follow it. JPM as you pointed out, and obviously BAC and AIG are other prime examples. Link to comment Share on other sites More sharing options...
wescobrk Posted January 17, 2014 Share Posted January 17, 2014 Yesterday Cramer said sell citi and buy bac. C was below tbv and bac is north of 25 percent. Needless to say, I did the opposite. I'm glad Cramer is on the air as he helps me make money with he almost always go with the herd mentality. Link to comment Share on other sites More sharing options...
matjone Posted January 17, 2014 Share Posted January 17, 2014 I saw something the other day about stock prices from Templeton. He said, "Stock price fluctuations are proportional to the square root of the price." If that's true then you should be able to make more money on fluctuations in the lower priced stocks, which I think are more likely to be smaller companies. I always hear the objection that with small caps you are likely to have to hold longer for price to reach fair value. Has this been shown to be true anywhere? Hopefully I'm not coming across as argumentative. I'm not saying there is no study on this, just that I haven't seen it. Link to comment Share on other sites More sharing options...
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