Fool's Bet: Amateur Stock Investing

Ok, sure there's legal information to gleaned from palaver. But is that all the 'tens of thousands of dollars' is buying?

I'm not disputing any facts of the article, I'm just pointing out that the law is quite clear that trading for profit on 'critical pieces' of 'unpublished information' from 'specific individuals' is likely illegal.

Two examples: Martha. Stewart.

I worked for one of the largest investment organizations in the US, whose analysts researched by visiting the organizations they were researching, looking at the operation, speaking with employees (gauging morale), as well as speaking with their banks, their customers (gauging service, product quality, etc.), their suppliers (do they pay on time?), and so on. None of this information is readily available in publications, but is acceptable research for them.

The individual investor wouldn't necessarily have access to ALL of this information, but could certainly visit the operation, talk to their customers, and so on.

Indeed there is a great preponderance of theory and opinion about the efficiency of markets. I remember reading Malkiel's book many years ago when I was reading everything I could find about investing. He seemed eloquent and educated but I don't recall what impression, if any, I had of his central thesis that markets are efficient and as a result nobody can consistently outperform the markets. Perhaps I missed it at the time or was unmoved. These days I reject that view wholeheartedly.

From a personal motivation standpoint, which should you allow to have a greater influence? Three great investors, Graham, Fisher and Lynch, who wrote books in great detail on their methods of investing which generated superior results for decades, or a book by a university prof explaining the theory of why this is impossible.

As it turns out, in the subsequent 20 years I have made a career out of the inefficiency of the markets as a stock picker. Maybe this has worked out because I have a very narrow focus or I am thorough in my work or I am good at pattern recognition or I am lucky. I make a good number of mistakes but I have also improved my method over the years so that my mistakes are less severe and less frequent.

But not once in the past 20 years have I ever stopped myself to say, hold on, Malkiel has proven in theory that what I do is not possible. I am pretty sure the same goes for other, more famous, stock pickers: Buffett, Lynch, Fisher, Gross, Druckenmiller, Klarman, Miller, etc.

Yes it is true that most investors, pros or otherwise, are not very good. This may be why many in the investment industry believe in the efficient market theory. It provides a good excuse for their poor performance. To go back to golf, do hacks look at the collapse of Tiger Woods' career and say that this proves that nobody can sustain a superior result in the game over the long term?

I have met only a handful of very smart institutional investors with long-term track records well above anything the random walk would predict, say 17-20% annual returns for 20 years or more. But the best investor I ever met is an individual, a private investor, who has turned his own small money into somewhere between $40m-140m over a decade or so. He started on his own just a smart guy with a unusual insight into mathematics and cash flow analysis. He pursues the independent research angle a little bit but shyness and a lack of industry expertise get in the way. His real angle is an almost genius ability to interpret financial statements and to uncover hidden jewels trading at abnormally low prices. I have watched him do this repeatedly.

There is a theory to support every point of view. But I would encourage people to aim to achieve what others consider impossible.

This has been a very interesting and enjoyable discussion. Let me try to take the discussion away from investing momentarily.

I am reading a book on an entirely different topic these days, Full Catastrophe Living, by John Kabat-Zinn. The book summarizes an eight-week course on mindfulness that Kabat-Zinn has been leading at U Mass Hospital since 1979. The course is taught to the chronically ill, depressed, suffering and otherwise pained people who can't cope with some oppression in their lives.

Can an amateur investor do well? Can a startup industry website like IPVM beat the established industry magazines? Can a new entrepreneur succeed in a crowded market like IP video? Can a patient overcome pain?

Consider this passage, which I read today:

"Our doubts about our own abilities become self-fulfilling prophecies... We effectively impose limits on ourselves via our own thought processes. Then, too often, we forget that we have created these boundaries all on our own... You might surprise yourself if you took on a new problem, just for fun, and tried something new, even if you didn't know what you were doing and even if you inwardly doubted your ability to do it... The point is that we don't always know what our true limits are. However, if your beliefs, attitudes, thoughts, and feelings are always producing reasons for not taking on new challenges, for not taking risks, for not exploring what might be possible... then you may be severely and unnecessarily limiting your own learning, your own growth, and your ability to make positive change in your life."

Forgive me for digressing. Perhaps I suffer from being too optimistic about the human spirit. All the best.