Investment

TLDR: When fractional shares (revenue by product, market shares by company, or similar quantities) are ranked and grouped in buckets, any ratio of successive bucket means >0.5 is suspect. ————– Listening to this interview with John Hempton reminded me of his forensic scepticism about the following pie chart, taken from an investor presentation about the pharma company Valeant. John wrote (in 2014, when … Read more

This article by the investor Claire Barnes of Apollo Investment Management highlights an interesting property of compound growth in any quantity which forms part of a finite whole. In summary, the point is this. Suppose urban land area + rural land area = 1 (ie a finite land area), and assume urban land area grows at … Read more

The header is a playful provocation: in truth I am probably closer to a value investor than any other type. But I place little credence on the historical superiority of value investing (which has faltered in recent years anyway), and I have little sense of affiliation or identity as a value investor.  It’s not quite that I don’t want to … Read more

Behavioural finance is a fashionable genre of academic research, and a productive strategy for writing academic papers.  But it was not mentioned as a resource by any of the interviewees in Free Capital, and I have never found it much help in my own investing.  There are several reasons for this.   Many explanations, few predictions The comprehensive menu of alleged behavioural … Read more

 “The scarcest resource for successful investors is not money but attention: how to manage the trade-off between time and rationality to best effect. There is not time in life to find out everything about every potential investment. Investment skill consists not in knowing everything, but in judicious neglect: making wise choices about what to overlook.” …that’s the … Read more

My last post drew a distinction between two classes of shares: potential “moonshots” (those with fat-tailed and/or right-skew returns), and “mundanes” (those with symmetrical returns).  I argued that when selecting potential moonshots for a portfolio, one should be more tolerant of false positives than when selecting mundanes. However, I can also see a good case that it may … Read more

The main point of this note is to suggest that an investor should have a higher tolerance for false positive classifications when selecting shares with right-skew and/or fat-tailed returns (potential “moonshots”).  Terminological preamble Statistical discussions of hypothesis testing commonly refer to “false positive” (Type I) and “false negative” (Type II) errors. The term “error” is value-neutral in statistical testing, … Read more