GME was about $2 for most of 2020, then it was $80 in early 2021. Now it’s $16.
If the markets were anything close to efficient, one of these numbers would be correct, right?
We also live a world where information is much more accessible and rapidly dispersed than when Warren made those statements. Whatever inefficiencies existed in small caps will have been whittled away by that. My guess is you’re also more likely to be trading against insiders and people with industry information in small cap transactions (e.g. employees of competitors, suppliers, or customers).
The idea that there are companies too small for hedge funds but still trade on major exchanges is kind of laughable. They’re not going to turn down a million dollars in profit just because it’s only a million dollars. Maybe this sort of thing exists on pink sheets but there’s all sorts of risks of inaccurate information or fraud risk when you’re dealing with those.
Regarding Buffett. I agree it is difficult for him to find investments that actually move the needle in terms of Berkshire’s overall value but Berkshire is a unicorn in that regard. He could easily hire analysts to assess and pitch him (or Combs and Weschler) ideas for acquire smaller companies if he was comfortable that he could train people to reproduce his secret sauce. In fact would be dumb for Berkshire not to do so. He goes on an on in his letters about Sees candies (which is like 500 million in revenue per year), why is that not too small for him?
The fact is he was incredibly lucky. Even he says in his letters that the overwhelming majority of Berkshire’s outperformance in it’s whole history is tied to about 10 or 20 decisions. He’s not someone who was routinely finding mispriced small caps. When you have a string of good fortune it is of course natural to want to attribute it to your own qualities and not to random luck.
You guys could probably convince me that it is possible to beat the market in certain situations where you can front run the news, or where you know a lot about a specific industry to the point where your opinion may be more accurate than the securities analysts following that industry for big banks. Like maybe Bored Social can predict the fates of trucking companies better than the market due to specialized knowledge, but I don’t think you’re going to do it running online stock screeners and buying foreign cement companies or whatever sort of day trading you do.
And due to the infrequent nature of the transactions, it would be the end of your investing career before you really have close to a big enough sample of data points from your own decisions to really evaluate yourself objectively. We all know from poker that people frequently posted great win rates for thousands of hands and thought they were the next great thing but then their heater cooled off or other players figured them out and they ended up losing it all back and then some. I doubt any of you will make 1000s of stock trades in your life, but you still seem willing to extrapolate your wins as results of a good process rather than of good luck.
Why can’t demand based on meme value be a part of efficient market pricing?
There were a lot of events between 2020 and today that have impacted the company’s long term value, including the whole meme stock thing. Like they obviously have a greater access to capital than would have been thought in 2020, due to all the diamond hands that want to hold their stock and this makes a turnaround success more likely. As does the influence of Ryan Cohen. I wouldn’t go out and buy the stock but I wouldn’t want an index fund with every stock except gamestop over just an index of the whole market either.
From my point of view $2 was right in 2020, because their brick and mortar business is shit and they were dying. $80 is a temporary mis pricing due to the meme stock pumping. $16 is probably a fair value today due to whatever capital they’ve raised plus the brand recognition and fandom they acquired in the meme stock era making a potential turnaround more likely.
It doesn’t have to be that for $16 to be right $2 was wrong.
No, if the market is efficient, all of them are correct.
Silicon Valley Bank filed their 10-K on 2/24. Apparently some people noticed in the report that they had a ton of unrealized losses and the equity might be underwater and shorted them. The market didn’t seem to notice. The stock was at ~ $290 on 2/23, and was still at $280 when markets opened 3/7. Trading was halted on 3/9, it was defunct on 3/10.
I don’t know what an efficient price should have been from 2/24 to open on 3/7, but I’m pretty sure it shouldn’t have been anywhere near $280.
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This whole line of thought seems to be, if you guys can just prove that with the benefit of hindsight any stock was priced inefficiently at some point in time, then it makes sense that someone can beat the market. I know it’s a clever way of Internet arguing to make a proponent of EMH be on the defensive and explain in detail for every individual scenario how the market actually was efficient, but even if I cannot do that it does not mean someone could beat the market over the long term. Most of these inefficiencies are one off events that could not be predicted based on the past. So maybe your strategy is some form of predicting black swans, but that’s really going to be subject to hindsight bias or survivor bias or whatever. Any success you ever have would not be predictive of future successes because every scenario is unique, and you guys are smart but you’re not fortune tellers.
Regarding SVB
Even if it was true that all this could have been predicted after reading the 10-k, do you think if you read the 10-K of every bank’s earnings for the next 5 years and study the footnotes that you will be able to figure out another impending collapse and short before the rest of the market, and be right about it and not tie your funds up in bad short positions?
Regarding the past few weeks, all banks are holding fixed rate government bonds from before the rates started to rise. All those assets are underwater. Do you know what is in the footnote of the other banks’ 10-Ks? Predicting SVB even 2 weeks ago would have required a lot of knowledge about how the maturities of the bonds were relative to their banking peers, how their customers might respond in a herd fashion, and how much difficulty they would have raising capital and how they and Goldman Sachs would screw it up by doing it in too small a fashion and too publicly. In hindsight this all might seem predictable or inevitable, but this wasn’t exactly how past bank runs happened and I think wasn’t actually easy to predict until the moment VCs decided they should race to be the first out the door. Even if someone would have presented a prediction of the exact events as they played out a few weeks ago, I would have probably assumed it was wrong because
- They could just get 10 billion from the Saudis for some equity who would probably love to be the bankers of silicon valley
- Why did Peter Thiel and co never get spooked and cause a bank run before now (e.g. during early pandemic or something)
- In the end the government might bail them out if it comes to that
No, obviously not. Prices can be irrational for longer than individuals can remain solvent. Knowing that an asset is mispriced is not a claim to know when that price might correct.
Isn’t it the opposite? Because the market is inefficient, and is easily manipulated, it is actually not possible to “beat” the market? (Unless you have inside knowledge about said manipulations, of course, then it’s ez game).
lol didn’t read
TW male pig content
Refreshing to finally see one of these founderpreneurs who doesn’t just so happen to look like an escort
I didn’t notice it and I’m not very good at valuing banks. So I wouldn’t even try. But some people who are very good at it did. I also don’t use traditional shorts and only use put options and even that’s rare (like my current hedge).
I’m also not saying what happened to the banks was inevitable, I’m simply saying $280 was not an efficient valuation once that 10-K was public. And I’m pretty sure there was public info regarding AVB’s clientele that made it obvious they were more prone to a run than others. It didn’t have to happen, but it was vulnerable - and even if not, their earnings were going to be disappointing.
Anyway, I mostly avoid financial companies of any kind. There are other kinds of value I’m pretty good at spotting, and so far my process to weed out the fraud/scams among the microcaps has worked pretty well.
But it takes a lot of time and effort, and the Venn diagram of people who are smart enough, people who think it’s possible, people with the time to devote to it, and people who will willingly read 10-K’s is a very small diagram.
The other thing is I think people who believe EMH are underestimating the number of people blasting away with $50K-$200K investments in individual stocks on a whim, the impact of perverse incentive structures at hedge funds and investment banks, and the impact of perverse incentive structures for sell-side analysts.
I also think they underestimate the number of people at these large institutions who don’t even read the 10-Ks or do any real research. I’ve run into more than one financial professional at the poker table who was short/bearish on META who knew less about Reality Labs than I did and thought the entire thing was the virtual world games.
This applies to shorts, not really taking long positions in undervalued stocks.
This is back to my original point, this doesn’t really matter because there’s a wisdom of the crowds factor here. All of these people trading on a whim are likely to be normally distributed around the correct price unless there is some common cause of variance in their belief that they are all wrong about (like some thought leader on WSB or some erroneous research report). Unless you know what the common cause is, you can assume they are all idiots but their should also assume their stupidity is normally distributed around a smart price so it is just noise.
Wow. Yellen, Powell, and/or Biden must have twisted some arms here.
That saying is really only for short positions. If you’re just buying stocks long there is no risk of your insolvency unless the company goes into bankruptcy. So if you’re so sure that you’re right about certain stocks being mis-priced then you must know some that are undervalued and you can easily beat the market as long as your time frame is decades. Or you could try to the buy everything in the Russell 2000 except TSLA, DASH, etc.
I have my doubts you could actually do it (beat the market over the long term with this strategy). You’ll probably be just as often wrong as you are right or even if you are mostly right you’ll miss out on some home run return and lag the market.
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Long positions are relevant because it’s not a given that a long position on an underpriced stock will beat the S&P 500 in a finite timeline in which the comparison is made.
At the end of the day there are more than 4,000 publicly traded companies in the US. A value investor just needs to find 10-20 to hold at a given time to have a relatively diverse portfolio. 99.5% can be efficiently priced, give or take.
But yes I think the common consensus of retail investors is often wrong, usually when emotion gets involved - fear in crashes and exuberance in bubbles.
At the end of the day, if tons of idiots are pumping tons of dumb money into something, there’s usually going to be some edge to be found.
Yeah but if you’re holding 10-20 of them at a time and the strategy is +EV it’s not a given, but the odds are in your favor to beat it over decades.
Right now I’ve got 14 stocks, 12 are beating the market since I bought them. One of the two losers went to zero, sort of (ADR suspended for Russian connections), but I managed to put a hedge on it that was a big win, so with that factored in, it beat the market too no matter what. It remains to be seen whether I ever get to sell it.
I’ve sold my position in eight others that all beat the market, iirc.
I still think the one that’s losing ends up beating the market over a decade or two, but I don’t expect to bat 1.000 either. I was somewhat lucky the hedge was available on the other one, so that factors in too. But I also took a much smaller position on that stock than usual, given the risk, which set me up to be able to get it all back with the hedge. So it wasn’t totally blind luck.
Edit: it’s actually 21/24 wins after checking. GOOGL is down slightly vs a flat market since I bought it, and I’m lagging the market slightly on the C trade which I’ve only been in for three days.
No. The observed risk premium of equities over bonds is consumed by the top 4% of stocks over the past 100 years.
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It’s not quite that simple, though. You’re saying if someone picks stocks and misses the top 4% they’re screwed. Well, what if they miss the bottom 10% too, and undersample the bottom 50% and oversample the top 50% while still missing the top 4%?
I’m randomly making up numbers to illustrate the point: I’d love to pick some of the top 4%, but I don’t need to in order to beat the index funds. I need to get fewer duds, and more winners at a given time. You’re also taking a 100 year sample. Well, what if someone missed the top 4% but also managed to avoid holding the bag on Blockbuster and Kodak and Pets.com while randomly sampling most of the rest of the market? There are multiple ways to beat the index.
At the end of the day if you think Warren Buffett is just the biggest luckbox of all time, it’s impossible to convince you on this. I could beat the market for 40 years across hundreds of trades and you’d just say small sample/someone had to run that hot. It seems like there is literally no evidence in the world that could be produced that you would accept to change your mind on this.
I think a lot of people who know a lot about certain fields set arbitrary barriers on what’s possible, and the barriers become self-fulfilling prophecies. I see it in poker, I think it happens in investing, and I’ve seen it in sports.
There’s nothing wrong with index investing and it’s the best strategy for 95% of people, which is why I don’t recommend to anyone ever that they pick stocks. Another 3-4% may be best doing something like boredsocial described and avoiding too much correlation to their own career and/or using expertise to pick a few winners for extra exposure. If the majority of your future wealth is in future earnings in a certain industry, maybe you want to invest elsewhere to avoid the risk of a catastrophe wiping out your career AND hurting your portfolio.
For 1-2% of people, I think it makes sense. But I definitely think it’s possible, at least for now. AI may kill it.
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