Fractional shares and dodgy pie charts

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

Why I am not a value investor

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

On the limits of behavioural finance

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

Optimal allocation of attention

 “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

Are moonshots too rare to look for?

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

Investment and optimal error rates: moonshots and mundanes

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

Not taking advice

From the concluding chapter of Free Capital:  “A consensus of expert opinion is often not useful in finance, because of its self-negating property: if something is widely anticipated, it is already in the price. But the investors’ antipathy towards the concept of taking advice sometimes seemed to go beyond recognition of this point. John expressed the … Read more

How important is analytical intelligence in investing?

Above a certain level, not very important.  IQ is a hygiene factor, not a discriminating factor: it helps to be reasonably smart, but above a certain threshold, further increments help less than in some other fields. The two PhD’s in the book specifically commented on this…  Sushil, Chapter 5: “…for anyone in the top few … Read more

Max, min and average payoffs

From Vernon, Chapter 7: “He drew a distinction between activities with ‘positive scoring’, where success is defined by gaining wins, and activities with ’negative scoring’, where success is defined by avoiding faults. Positively scored activities include selling, leadership, and most sports. In these activities bravery, ‘having a go’ and risk-taking give a better chance of … Read more