Jared Diamond in his book Guns, Germs, and Steel: The Fates of Human Societies provided compelling evidence on why certain groups of people manage to gain the upper hand over the indigenous people they have conquered. One of the reasons certain societies gain a competitive advantage over others comes from the environments to which they were exposed over generations. A classic example of this is European dominance over the various indigenous groups they encountered in Africa and in the Americas. Europeans had the lead in comparison with other social groups in both forging weapons into steel and enjoying immunity from certain diseases because of their close proximity to the livestock they raised. The environmental factors to which they were exposed over generations played a key role in providing them with competitive advantages, enabling them to establish colonies in the New World as opposed to being subjugated.
What percentage of students in a typical high school would be classified as part of the in-crowd? I’m confident that people’s responses to that question are dependent on where they felt they were ranked in the popularity caste system back in their school days. Former students on the outer ring of popularity (including financial advisors such as myself who advocate a value investing philosophy) probably estimate a smaller popularity percentage in comparison with the former captain of the football team or his cheerleader girlfriend. Let’s classify the cool kids in a typical brick-and-mortar high school as representing twenty-five percent of the entire student body. Many students aren’t part of the in-crowd but are eager to gain their peers’ acceptance, hoping to move up on the popularity totem pole. However, unlike high school, popularity is something to be avoided, not sought-after, when it comes to selecting stocks for a portfolio.
A Performance Summary of Previous Studies Analyzing Benjamin Graham’s Net Current Asset Value Stock Selection Criterion
The table below is a summary of various studies that analyzed the performance of Benjamin Graham’s stock filtering criterion of purchasing stocks trading below net current asset value (NCAV). The calculation involves subtracting all liabilities, including preferred stock, from only the current assets on a company’s balance sheet. The calculation is then converted to a per share figure by dividing this approximate measure of a company’s liquidation value by the total number of common shares outstanding. The table below picked through each study and pieced together a sampling of the performance data using the net current asset value criterion.
I always enjoyed magic tricks as a child, so when the movie The Prestige was released in 2006, I was eager to see it. Early on in the film, a narrator describes the three parts of every magic trick. These parts are as follows:
1) The Pledge – The magician shows you an ordinary object—say a deck of cards or a rabbit.
2) The Turn – The magician takes the ordinary item and makes it disappear.
3) The Prestige – Making something disappear isn’t enough. In the third act, the object is brought back from out of nowhere to the sounds of applause from an audience eager to be duped.
We live in a time period where the “winner-takes-all” outcome is no longer restricted to a handful of industries. Actors and professional athletes are two classic examples of this “all-or-nothing” phenomenon, where a few elites make all of the money and the rest are waiting tables. Unfortunately, through no fault of anyone in particular, this brutal business model has now moved into a number of other industries, thanks to disruptive technology. Someone who is a competent Certified Public Accountant (CPA) in a small town preparing tax returns for various small businesses has now been displaced by an online accounting package that knows all of the tax-avoidance angles and provides tax preparation for little to nothing.
During the mating season, the male Iberian emerald lizard changes color from the neck up. This transformation from green to turquoise is a double-edged sword for this tiny reptile. On the one hand, the male lizard’s vibrant colored-headdress gives him a leg up when trying to attract female lizards, but on the other hand, his loss of camouflage amidst the green woodlands of Spain and Portugal makes it easier for birds of prey roaming the skies from above to spot him.
Imagine someone who is interested in pursuing a career as a money manager. Let’s assume he’s not a rich kid from Greenwich, Connecticut, and has no family or friends in the financial services industry to help him to establish his foot in the door. Assume further that our aspiring young money manager is passed over by all of the large investment houses for an entry-level position and, as a last resort, strikes a deal with the devil. So there’s no confusion, the devil in this tale of woe is not one of the major investment firms (an easy mistake to make). Who wouldn’t want to break into an industry that, up until now, has been blessed with the financialized wind always at its back through an endless sea of quantitative easing? The devil agrees to provide the fledgling fund manager not only startup capital for the money manager’s new financial enterprise but also an investment methodology that has historically proven effective in terms of generating above-market rates of return over the long term.
The director of research at Google, Ray Kurzweil, wrote a book a number of years ago titled The Singularity. It is a point in the not-too-distant future where the fields of genetics, nanotechnology and robotics will advance to such a level that our own biological limitations will be enhanced beyond recognition. These technologies are accelerating at an exponential rate, where each stage in the progression over a fixed time interval results in a doubling from the previous level. Leaps in technological progress are moving forward not at a linear rate (1-2-3-4-5) but at an exponential one (1-2-4-8-16-32).
When the New York Stock Exchange first set up shop, stocks traded in minimum increments of 1/8 = $0.125 dollars. This system was probably a holdover from the Spanish trading system, whose largest gold coin was valued at eight escudos. If academics in finance would break apart a universe of stocks into eight different groups and rank their performance based on some rigorous filtering criterion, it would tie in nicely with our New York Stock Exchange tradition of shares changing hands in 1/8 increments. Unfortunately, these competitive publish-or-perish types seem to prefer decile categories over pieces of eight. Any last remnants of Wall Street’s Spanish roots were given the heave-ho when the SEC mandated decimilization for stock trading on all U.S. exchanges starting in 2001. So ends the pieces-of-eight legacy.
My investment advisory firm is located within a five-minute drive of the Mississippi River here in the St. Louis metropolitan area. Not long ago, I heard a tall fishing tale from an underwater welding specialist who repairs bridges along the Mississippi River. The oversized dimensions he described of a river catfish that brushed alongside him while he was doing some repair work on an arch bridge sounded almost unbelievable. There are similarities in the way a bottom feeder catfish hunts for food and in the way an enterprising investor finds undervalued securities using a selection approach that Benjamin Graham wrote about in his book The Intelligent Investor.