The Entrepreneurial Investor
The guys at West Coast Asset Management
Sound investment strategy is simple: invest in companies you understand, and stick to your ABCs — buy Assets for a Bargain with an expected Catalyst.
A lot of the stuff these guys talk about is fairly basic, even though a lot of people choose to ignore it. Like read and understand a company’s financial statements before you invest. And start with the footnotes. There’s no such thing as one cockroach, so if you find something particularly fishy, maybe just stay out.
Some of their insights were more controversial (in the world of economics), like how efficient markets theory (EMT) is kinda bunk. It goes like this: when you invest in a company you’re trying to beat the market — you’re betting that the company you’re investing in is currently undervalued by the market. But EMT states that at any given moment, the market has incorporated all information about every company into that company’s share price. So you can’t beat it, short of illegal insider information.
But the guys at West Coast Asset Management say that EMT has got it all wrong. EMT, like much micro and macroeconomic theory, is a model of understanding. Yogi Berra puts it best: “In theory, theory and practice are the same. In practice, they are not.” The market is chock-full of opportunities to take advantage of. That’s the beauty of it — people are not perfectly rational beings. The constructs created by people, i.e. the stock market, do not operate with predictable rhyme and reason. In short, EMT assumes everyone is a perfectly rational actor, and I’m sure I don’t need to tell you that that’s quite an assumption.
So the market is rife with opportunities for profit. Media hype inflates and deflates prices as the mob chases the latest buzz (*cough cough* Facebook *cough cough*), giving cool-headed investors plenty of edge.
And besides, if you know how to minimize your losses and maximize your gains, you can afford a hit-miss ratio of less than 1:1. It’s like blackjack. Play perfectly and your odds are just below 50%. But if you know when to cut your losses and when to cash out, you can make money pretty consistently. Speaking of which, I have a trip to the casino to arrange… and a contentious email about Efficient Market Theory to send to my old Econ2 professor…
Till next time folks. Right now I’m getting into William Blum’s Rogue State, as a refresher on how fucked up this country’s foreign policy has been, still is, and likely will be. But so much of it is essentially review for me, it doesn’t deserve too much attention — I’ll speed-read that shit before next Tuesday.