Inefficient Market Theory - Jeff Hood

[racemize]

[amazonsearch]Inefficient Market Theory: An Investment Framework Based on the Foolishness of the Crowd[/amazonsearch]

 

Hi All, my friend and partner has just published his book, which he's been working on for the past year or so.  He's a bit of a lurker on the forum, and I thought I'd post it for him.  Here's a link to the book:

 

Summary:

Efficient Market Theory is based largely on the concept of crowd wisdom – that a large group of people casting their collective votes in the stock market produces correct stock prices and hence an “efficient market.” However, we know from experience that the stock market is not entirely efficient, and sometimes produces wildly incorrect prices. This book explores the various criteria that are required for crowd wisdom to manifest in a financial marketplace, these being: 1) incentives; 2) independence; 3) diversity of opinion; 4) decentralization; 5) knowledge; and 6) rationality. A fundamental premise of this book is that a proper understanding of crowd wisdom criteria, and the ability to detect when these criteria are lacking in the market, is a significant benefit in identifying mispriced securities. In particular, this book explores the various behavioral and psychological biases that affect market participants, what we call the “Foolishness of the Crowd.” The predictability of this Foolishness, i.e., the predictability of these biases in a crowd setting such as the stock market, produces reliable offsets from crowd wisdom, i.e., stock mispricings. This book then proposes an investment framework based in part on the investor’s “inefficient rationale” – his articulated understanding, based on the above crowd wisdom criteria, as to exactly why the market is mispricing a particular stock. The investment framework also utilizes the wisdom from a select value investing crowd to both identify and help confirm good investment opportunities. The investor who adheres to this investment framework essentially places the full benefit of crowd wisdom and knowledge into his corner, including both the wisdom of the crowd and predictable departures from this wisdom. To the investor schooled in wisdom of the crowd criteria, these predictable departures act as signposts for great investments.

[gary17]

hi Race

thanks for sharing - i will read this....  interesting i was just talking to another friend investor about crowd behaviour and confirmation bias !

  Gary

 

Hi All, my friend and partner has just published his book, which he's been working on for the past year or so.  He's a bit of a lurker on the forum, and I thought I'd post it for him.  Here's a link to the book:

http://smile.amazon.com/Inefficient-Market-Theory-Investment-Foolishness-ebook/dp/B00MMV5V3Q/ref=smi_www_rcolv2_go_smi?_encoding=UTF8&keywords=Inefficent%20market%20theory&qid=1407858085&sr=8-2-spell

 

Summary:

Efficient Market Theory is based largely on the concept of crowd wisdom – that a large group of people casting their collective votes in the stock market produces correct stock prices and hence an “efficient market.” However, we know from experience that the stock market is not entirely efficient, and sometimes produces wildly incorrect prices. This book explores the various criteria that are required for crowd wisdom to manifest in a financial marketplace, these being: 1) incentives; 2) independence; 3) diversity of opinion; 4) decentralization; 5) knowledge; and 6) rationality. A fundamental premise of this book is that a proper understanding of crowd wisdom criteria, and the ability to detect when these criteria are lacking in the market, is a significant benefit in identifying mispriced securities. In particular, this book explores the various behavioral and psychological biases that affect market participants, what we call the “Foolishness of the Crowd.” The predictability of this Foolishness, i.e., the predictability of these biases in a crowd setting such as the stock market, produces reliable offsets from crowd wisdom, i.e., stock mispricings. This book then proposes an investment framework based in part on the investor’s “inefficient rationale” – his articulated understanding, based on the above crowd wisdom criteria, as to exactly why the market is mispricing a particular stock. The investment framework also utilizes the wisdom from a select value investing crowd to both identify and help confirm good investment opportunities. The investor who adheres to this investment framework essentially places the full benefit of crowd wisdom and knowledge into his corner, including both the wisdom of the crowd and predictable departures from this wisdom. To the investor schooled in wisdom of the crowd criteria, these predictable departures act as signposts for great investments.

[Packer16]

Is he going to come out with a paper edition for us dinosaurs?

 

Packer

[Rainforesthiker]

Is he going to come out with a paper edition for us dinosaurs?

 

Packer

 

Working on it!!!

[rishig]

I posted a review for Jeff Hood's book on Amazon:

http://www.amazon.com/review/R2M6LVMOB5HALG

 

I think this is one of the most underrated books on investing out there. I highly recommend reading Jeff's book.

[John Hjorth]

Joel, please say hi to Jeffrey from me, and tell him that he is now officially an exporter to Denmark. If he had a hardcover, I would go with that, I had to settle with the paperback. This is exactly the kind of book, that I would like to read in the near future. I really look forward to the read.

[Rainforesthiker]

Joel, please say hi to Jeffrey from me, and tell him that he is now officially an exporter to Denmark. If he had a hardcover, I would go with that, I had to settle with the paperback. This is exactly the kind of book, that I would like to read in the near future. I really look forward to the read.

 

Excellent!  I hope you like it.

[John Hjorth]

Received the book today from amazon.com! [ : -P ] - No matter the weather, the weekend to come will be good, based on the recommendations for the book on Amazon.

 

I apoplogize for posting about you, Jeff, in third person before in this topic. I did not know your activity level reading the board. In the OP by Joel he called you a CoBF lurker.

 

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I tried to order the book at amazon.de [to get it faster], but the prices there were screaming to me - really odd experience -, so I backed out there and bought it at .com, directly from Amazon.

[flesh]

I read this a year or so ago and enjoyed it, worth reading, heads up.

[John Hjorth]

Just about a month ago, I received the book from Amazon.

 

I must admit, that I have severe problems with this book. I don't "like it", as posted earlier in this topic by Jeff. To me, there is a material difference between "don't "like it"" and "dislike it".

 

I have to carry back Rishi's review on Amazon to here - I hope you forgive me for doing this, Rishi:

 

Jeff Hood in his book Inefficient Market Theory goes beyond classical value investing of buying a dollar for 50c. In my opinion, it provides a solid framework for identifying great investments.In Part I of the book, Jeff describes the criteria required for a crowd to be "wise" -

 

(1) proper incentives,

(2) independence,

(3) diversity of opinion,

(4) decentralization of decision making,

(4) knowledge, and

(5) rationality.

 

In the financial markets, all of the above criteria but knowledge are not met to varying degrees. This causes financial markets to be inefficient on certain occasions. This is contrary to what has been taught in academics - the efficient market theory - which holds the proposition that financial markets are always efficient.

 

The difference between markets being frequently efficient and always efficient is night and day. The opportunity to profit arises from this difference. Furthermore, Jeff describes lack of rationality as one of the primary reasons for the inefficiency. These arises from psychological biases such as greed, fear, loss aversion, uncertainty and recency bias, affect, endowment effect, anchoring, and herd mentality.

 

In Part II of the book, Jeff lays out a framework for profiting from the "Foolishness of the Crowd" in financial markets. Buying simply based on valuation discount is not enough. This is equivalent to what Warren Buffett calls "7-foot hurdles". Instead Jeff proposes a three legged framework that makes the investing decision making equivalent to Warren Buffett's "1-foot hurdles".

 

(1) Classical value investing - buy at a margin of safety based on fundamental analysis.

(2) Identify the variant perception, an intelligent and well-informed contrary opinion to that of the crowd, and the inefficient rationale, an understanding of "why" the crowd is incorrect,

(3) Take advantage of the wisdom of a smaller truly wise crowd of respected value investors (a.k.a cloning by Mohnish Pabrai).

 

Jeff supports his framework by citing many examples from the past - American Express in the 60s, Johnson & Johnson from the 80s, Wells Fargo from 2008, Disney from 2009, AIG and Bank of America from 2011, and Berkshire Hathaway from 2011.

 

Jeff is a practitioner of this framework and many of the recent examples are from his portfolio.

 

In my opinion, this is one of the most underrated books on investing. [My emphasis, - and I'll second that!, John]

 

I highly recommend it.

 

I'm trying to express, that I consider this book - for me, about five years into this non-zero game - the lever to get to be a better investor, in a style going forward, that fits me personally.

 

It's fairly easy to read the book, I suppose, but to read it, with the intent to adopt, adapt and thereby improve as an investor, is a totally different matter.

 

It's exhausting - very, - but at the same time good!

 

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The Lady of the House has actually taken notice of the process going on with me.

 

She: "What is it with you, and this book, that is following you everywhere?"

 

She has just noticed, that if my name was Linus van Pelt, this book would be my security blanket.

 

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The quote in this topic of Rishi's review is meant as a compliment. So are my other personal comments.

 

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The next thing is that I consider the price of the book ridiculous, compared to the value it provides to the reader. - That's meant as a compliment, too.

 

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Thank you for sharing your inner thoughts about investing here - in this book -, Jeff.

[John Hjorth]

After participating in this topic in the last few days: New Essay: Evaluating Performance, I think I finally have something to add [perhaps] of value to this topic, and about this book:

 

The book contains a structured analysis and way of describing the concept of "Mr. Market".

 

 

 

 

[John Hjorth]

Bumping!

 

[Actually, not only & totally based on the book as such [the book is good - really awesome!], but more like a total judgement of what I'm provided for free here.] [Please read: Twitter.]

 

Thank you!