Middle-week thoughts: there’s nothing rational, just facts…

Tags: investment, strategy, Yevhen Pentsak

The investment strategies secrets of Peter Lynch, Burton Malkiel, Jack Treynor, Markus Brunnermeier and Stegan Neigel.

  1. Peter Lynch, a legendary name in Fidelity Magellan fund management team hit 2700% of profitability for the period of 1977 through 1990 and that equaled to 29% of annual revenue. The secret of his investment strategy was just mere common sense. He paid good deal of attention to what his acquaintances were saying, or what just passers-by thought about it, and especially to his wife’s choice of her favorite brands.

Commentary: May be it isn’t a matter of common sense but of what your wife has chosen? I just want to say that a spouse can well be looked at as an investment success, or… failure? As one of my acquaintances had it: “How do you tell a guy who has made it in business from a guy who has been a failure?” It’s just as simple as that: “A successful businessman makes money faster than his wife can spend it!”

  1. Burton Malkiel (Princeton University) in his classic finance book “A Random Walk Down Wall Street” investigated mutual funds that had stayed on the market for 30 odd years. One of his discoveries was that 76 out of 139 funds lost out to S&P 500 1% on average and 4 of them were more profitable than S&P 500 (gaining 2% annually). B. Malkiel also contended that more than 80 % of the US funds that had been actively managed typically traded at market valuations lower than S&P 500 for more than a decade.

Commentary: Why then public at large do not invest on their own, but are sticking to the funds? As it appears, the investment expenses would turn to be more substantial than in case with the funds. I first of all mean transactions cost, the taxes and management fees. And secondly, there’s no such company as S&P 500 whose stock you might buy to keep pace with the whole of the index. One should be keeping an eye on the index continuously and perpetually rebalance the portfolio. That takes good deal of money and time, doesn’t it.

Interestingly enough, an average investor overplays the market less than in a half of the cases. In 60% of the cases best-of-breed fund managers can better outguess S&P 500 as long as market trends are concerned. It appears that managers, who were successful in the past, remain successful in future, too. The mutual funds history proves that more and more investors are attracted by funds exhibiting positive current results. As the mix gets more diversified, the transaction costs grow, too; so active management ceases to be in it.

Peter Bernstein in his “Capital Ideas: Evolution” wrote that one might have encountered more winners in the market if it were not for the high rate of competition there. The things the crowd is knowledgeable of have been included in the price; to think contrary to the ways the crowd is doing is quite complicated.

  1. One of decision making techniques has been shared by Jack Treynor, a founder of САРМ (Capital Asset Pricing Model), and editor of Financial Analyst Journal. Mr. Treynor discusses the potential for a given share in class, and studies carefully the listeners’ feedback to his assumptions. In case the audience are unanimously agreed upon the option, he usually sustains the buy, but if otherwise, Treynor always tends to make a more thorough analysis of the choice, and in most cases goes for it. Mr. Treynor prefers “slow ideas”, those that prove effective only in a while.
  2. Interestingly, the two shares with the tickers that looked much the same (MCI and MCIC) were traded on NASDAQ in the years 1994 through 1997. It became obvious afterwards that all through the year of 1997 the price and volume of the tickers were exhibiting identical moves, the simplest reason being just mere confusion of the investors.
  3. Markus K Brunnermeier (Princeton University) and Stegan Neigel (Stanford University) made research of “rational bubbles” to discover that irrational optimism can well pay provided one knows the right moment to close the position. As they had it, price bubble play can be found an optimal strategy by any rational investor for a certain period of time.

In my strong opinion their “Princeton” and “Harvard” authority definitely looses shine, once confronted to the miracle workers in this country who are capable of “heating up” a given stock and the market as a whole (say, realty), as well as affect the correlation of a share with the whole of the market through forfeiting the statistic analysis results (please mind that the latter has laid down the САРМ foundation). What we have in the end looks like a thrilling chess game played by many players at a time with a number of noise investors being involved.

“Fishing in troubled waters” is quite attractive for the many, and lots of Ukrainian funds are involved in it, too. Why not? To me, it’s more decent than ripping “the sick”, that spend nights behind one-hand bandits, off the last penny. Stock market supplies opportunity, big time, for trading one’s mental capacity. As one of my friends used to say, “The smart don't go begging”.


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demitsuria 02/07/2009 14:18

З 1997р. по 1990р - це як так?

Volodymyr 02/07/2009 14:42

Таки дійсно, з 1977 по 1990.

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