Mar

22

 I haven't read all of Mr. Mee's letter on buying the worst but let me say that I completely recant and disavow all my conclusions about buying the worst individual stocks. My conclusions were not based on a prospective files but on compustat files. They didn't take proper account of survivor bias in many different ways nor did they uncover the 1000 fold gems that Gilespie used to like to buy. Dimson has a paper saying that buying the best is better than buying the worst, and he is a very careful researcher.

Stefan Jovanovich writes: 

There seems to me one occasion when the worst are the best — when the companies' futures as enterprises are flexion calls. As Mr. Einhorn said recently, "if the market capitalization of the equity is less than half of the face value of the debt, the stock remains in an option area"; buying those options can be profitable if one knows the central bank's is about to flex its rescue muscles. Buying $1 stocks in 1939 (after Germany invaded Poland) is another way of putting it. This is hardly a plan for sustained investing; over time the worst do come last, as the Chair says; but the longshots can be worth the bet if there is a near-certainty that the jockeys on the lead horses have all had instructions to pull back on the reins.

Gary Rogan writes: 

The well-publicized "magic formula" really says nothing more than both the price and inherent quality of the business are important, and some weighted average should be used for stock selection. If you can find something that's outstanding in both, as opposed to either outstanding in one of them this will pay off.

Yesterday I finished reading Great by Choice by Jim Collins and Morten Hansen and if I were to distill what's it saying about what it takes to outperform the market by 10x is that (a) you need to be good enough inter terms of both creativity and paranoia (b) more importantly you have to pace yourself for consistency, not moving too fast or too slow almost without regard to the external environment (c) have some sort of a detailed internal recipe that you maintain but also adapt to external changes as opposed to either not having a recipe or sticking wit the present version too long.
 


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