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Would Most Value Investors do Better if They Strictly Followed Benjamin Graham's Systems ?  

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  1. 1. Would Most Value Investors do Better if They Strictly Followed Benjamin Graham's Systems ?

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Guest HarryLong

After having Parsad erase the last thread I started, I will take the risk of wading back in.......

 

In terms of the BAC debate, (yes, the medium is the message), the good and bad of the debate, which was mostly Munger vs. the World is that it was a very, very human debate. It was quite a good parody of the human "thought" process--on both sides.

 

There was not much informational/factual value on either side of it. I totally agree that people may have had excellent private arguments, information, analysis, etc, but clearly that wasn't shared publicly in the BAC thread or in the bank capital thread.

 

So overall, here is my big picture view.

 

Computer systems are not hampered by emotion, so if one wishes to compete with them, one must become more-computer-like and less emotional (aka, prone to personal attacks, psychological distortions, etc).

 

Almost all information has value, even information or analyses propounded by those we bitterly disagree with (is there any strategic or tactical advantage in underestimating the competition?).

 

Unfortunately, whether anyone cars to admit it or not, there is a huge amount of groupthink on this board. If I had $1,000 for every person who said HPQ was point blank cheap before the recent sell-off....    ;D

(Whether or not people are ultimately right about HPQ or not, clearly their timing leaves a lot to be desired.)

 

So, where are we in the big picture here? Computer systems will continue to work well as long as they have marshmallows to compete against (emotional humans). Why make it easier for the computers by being so emotional?

 

As soon as most AUM in the market is run by purely systematic means seeking to take advantage of a diminishing supply of dumb humans, that will be the tipping point when humans have the potential to outperform again (there is long term equilibrium/disequilibrium points to computer/human success).

 

While we have seen some signs of systems cannibalistically killing each other off, we are, to my way of thinking, a long way from a human investor led renaissance, given that most humans are still too arrogant to admit, at this point, that systems can do better than they can. When the metaphorical shoe shine boy becomes a systematic quant, as Gerald Loeb might have said, then the party is over.

 

So, big picture, if you don't want to join the machines, but still be an excellent human/discretionary professional, you can't give in to the human shallowness of acting quite so, ahem, human.  8)

 

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Harry I guess in a sense you are right Big Blue was able to to soundly beat the best human chess player out there. I believe that investing is even more complex than chess and the pay offs are a heck of a lot larger than being a grand master at chess hence the incentive to build a better algo to steal a mere value investors lunch money is pretty great. I suspect however that the arms race in machine driven algo trading will rapidly evolve into the machines attempting to devour each other. In the final analysis however I do not have as pessimistic outlook as you. There are still plenty of mispriced securities out there and perhaps the misvaluation may even be

agravated by the activities of emotionless profit seeking robots. I am no way convinced that you have to join them to beat them. I think it is usfull to think about and discuss however from a regulatory standpoint the desireability of allowing the robots at the table. What would be the point of having a chess tournament where humans were pitted against machines would it not be like watching a quarter mile race between a human and a dragster the outcome is pre determined who would want to enter or watch the race. If emotionless machines are so superior then within a generation they or their owners will have most of the capital .

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After having Parsad erase the last thread I started, I will take the risk of wading back in.......

 

In terms of the BAC debate, (yes, the medium is the message), the good and bad of the debate, which was mostly Munger vs. the World is that it was a very, very human debate. It was quite a good parody of the human "thought" process--on both sides.

 

There was not much informational/factual value on either side of it. I totally agree that people may have had excellent private arguments, information, analysis, etc, but clearly that wasn't shared publicly in the BAC thread or in the bank capital thread.

 

So overall, here is my big picture view.

 

Computer systems are not hampered by emotion, so if one wishes to compete with them, one must become more-computer-like and less emotional (aka, prone to personal attacks, psychological distortions, etc).

 

Almost all information has value, even information or analyses propounded by those we bitterly disagree with (is there any strategic or tactical advantage in underestimating the competition?).

 

Unfortunately, whether anyone cars to admit it or not, there is a huge amount of groupthink on this board. If I had $1,000 for every person who said HPQ was point blank cheap before the recent sell-off....    ;D

(Whether or not people are ultimately right about HPQ or not, clearly their timing leaves a lot to be desired.)

 

So, where are we in the big picture here? Computer systems will continue to work well as long as they have marshmallows to compete against (emotional humans). Why make it easier for the computers by being so emotional?

 

As soon as most AUM in the market is run by purely systematic means seeking to take advantage of a diminishing supply of dumb humans, that will be the tipping point when humans have the potential to outperform again (there is long term equilibrium/disequilibrium points to computer/human success).

 

While we have seen some signs of systems cannibalistically killing each other off, we are, to my way of thinking, a long way from a human investor led renaissance, given that most humans are still too arrogant to admit, at this point, that systems can do better than they can. When the metaphorical shoe shine boy becomes a systematic quant, as Gerald Loeb might have said, then the party is over.

 

So, big picture, if you don't want to join the machines, but still be an excellent human/discretionary professional, you can't give in to the human shallowness of acting quite so, ahem, human.  8)

 

 

Why Harry, you've become a 'droid! 

 

 

(With apologies to the screenwriters for Hook)    :)

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After having Parsad erase the last thread I started, I will take the risk of wading back in.......

 

In terms of the BAC debate, (yes, the medium is the message), the good and bad of the debate, which was mostly Munger vs. the World is that it was a very, very human debate. It was quite a good parody of the human "thought" process--on both sides.

 

There was not much informational/factual value on either side of it. I totally agree that people may have had excellent private arguments, information, analysis, etc, but clearly that wasn't shared publicly in the BAC thread or in the bank capital thread.

 

So overall, here is my big picture view.

 

Computer systems are not hampered by emotion, so if one wishes to compete with them, one must become more-computer-like and less emotional (aka, prone to personal attacks, psychological distortions, etc).

 

Almost all information has value, even information or analyses propounded by those we bitterly disagree with (is there any strategic or tactical advantage in underestimating the competition?).

 

Unfortunately, whether anyone cars to admit it or not, there is a huge amount of groupthink on this board. If I had $1,000 for every person who said HPQ was point blank cheap before the recent sell-off....    ;D

(Whether or not people are ultimately right about HPQ or not, clearly their timing leaves a lot to be desired.)

 

So, where are we in the big picture here? Computer systems will continue to work well as long as they have marshmallows to compete against (emotional humans). Why make it easier for the computers by being so emotional?

 

As soon as most AUM in the market is run by purely systematic means seeking to take advantage of a diminishing supply of dumb humans, that will be the tipping point when humans have the potential to outperform again (there is long term equilibrium/disequilibrium points to computer/human success).

 

While we have seen some signs of systems cannibalistically killing each other off, we are, to my way of thinking, a long way from a human investor led renaissance, given that most humans are still too arrogant to admit, at this point, that systems can do better than they can. When the metaphorical shoe shine boy becomes a systematic quant, as Gerald Loeb might have said, then the party is over.

 

So, big picture, if you don't want to join the machines, but still be an excellent human/discretionary professional, you can't give in to the human shallowness of acting quite so, ahem, human.  8)

 

I like you Harry.  You make me laugh.  ;D

 

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Aaaaaa Harry, just can't help yourself huh? Hahahahahaha espousing a quant strategy on a value investment board and expecting everyone to take it seriously hahahahaha.

 

There is groupthink on this board because it is a congregation of value investors. Yes the analysis always can be improved, but largely speaking there is very valuable debate outside of Munger. You denouncing the "groupthink" on this board is like denouncing the groupthink of a Baptist church (ie Christianity). If you can't see the light (value investing or salvation) then get off the board or out of the church.

 

Buffet says that buying a $1 for $.50 sits with someone in 30 seconds or it does not sit at all. Your obvious distaste for this style of investing, IMO, indicates it has not sat with you.

 

 

 

 

After having Parsad erase the last thread I started, I will take the risk of wading back in.......

 

In terms of the BAC debate, (yes, the medium is the message), the good and bad of the debate, which was mostly Munger vs. the World is that it was a very, very human debate. It was quite a good parody of the human "thought" process--on both sides.

 

There was not much informational/factual value on either side of it. I totally agree that people may have had excellent private arguments, information, analysis, etc, but clearly that wasn't shared publicly in the BAC thread or in the bank capital thread.

 

So overall, here is my big picture view.

 

Computer systems are not hampered by emotion, so if one wishes to compete with them, one must become more-computer-like and less emotional (aka, prone to personal attacks, psychological distortions, etc).

 

Almost all information has value, even information or analyses propounded by those we bitterly disagree with (is there any strategic or tactical advantage in underestimating the competition?).

 

Unfortunately, whether anyone cars to admit it or not, there is a huge amount of groupthink on this board. If I had $1,000 for every person who said HPQ was point blank cheap before the recent sell-off....    ;D

(Whether or not people are ultimately right about HPQ or not, clearly their timing leaves a lot to be desired.)

 

So, where are we in the big picture here? Computer systems will continue to work well as long as they have marshmallows to compete against (emotional humans). Why make it easier for the computers by being so emotional?

 

As soon as most AUM in the market is run by purely systematic means seeking to take advantage of a diminishing supply of dumb humans, that will be the tipping point when humans have the potential to outperform again (there is long term equilibrium/disequilibrium points to computer/human success).

 

While we have seen some signs of systems cannibalistically killing each other off, we are, to my way of thinking, a long way from a human investor led renaissance, given that most humans are still too arrogant to admit, at this point, that systems can do better than they can. When the metaphorical shoe shine boy becomes a systematic quant, as Gerald Loeb might have said, then the party is over.

 

So, big picture, if you don't want to join the machines, but still be an excellent human/discretionary professional, you can't give in to the human shallowness of acting quite so, ahem, human.  8)

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Guest HarryLong

Kraven, Bmichaud, and Dorsia-- systems are nothing to laugh at:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

The human emotional responses from each of you are a great example of why objective systems have an advantage over sometimes illogical humans.

 

Let's break down Bmichaud's arguments one by one in a non-emotional way.

 

I. Benjamin Graham himself espoused a systematic, quantitative value strategy--two actually--one for conservative investors and one for enterprising investors. Looks like we've dispensed with your argument that you can't espouse a systematic strategy on a value investing board without being subject to scorn.

 

II. Your second argument is even more emotionally driven. In your view, this is a "church" with certain faith-based tenets, therefore, you can't be reasonably be asked to improve, because that would be an affront to your "faith"? OK, notwithstanding point I. which totally eviscerates any claim you can make that systems are not part of the "faith" or the "church" if you will (are you one of those backwoods preachers who doesn't read the holy books called "Security Analysis" or "The Intelligent Investor"?), you are essentially saying that it is unfair of me to ask you to behave logically because you are a "believer" not a thinking person.

 

III. You believe that I can't see the "light" when you yourself ignore that Benjamin Graham himself espoused systems. I guess you would throw him out of your "church" as self appointed bishop on this board.

 

Oh Enlightened One, please elevate me to your elevated plane of reasoning where you tell others that they should leave the congregation while you ignore Benjamin Graham's teachings yourself!  ;D

 

Seriously, though, value investing is not a cult, or a religion, it's a method, constantly evolving through discoveries which come from within and outside the community to improve risk/return profiles.

 

Bmichaud, your view of value investing is very naive, because it ignores Buffett's innovations and those of Charlie Munger, which moved value investing away from a more asset-based focus to one where earnings, earnings stability, growth, free cash flow and moats were examined.

 

I am almost disturbed that you have such a primitive view of the history of value investing--a field which you claim to respect. In your view, there have never been systematic approaches, and moreover, no innovation. Your view does not square with the facts. If you disagree, I would be happy to send you some books which might help you learn about the history of a field which you claim so vehemently to respect.

 

 

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There was no emotional response from me whatsoever.

I asked you what your point was, hardly an emotional response.

I then pointed out that your comment about Parsad taking down a thread was a joke considering that you always take down the threads you start anyways.

There was no emotion involved just pointing out that your post was total rubbish.

Good day sir.

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Guest HarryLong

Harry I guess in a sense you are right Big Blue was able to to soundly beat the best human chess player out there. I believe that investing is even more complex than chess and the pay offs are a heck of a lot larger than being a grand master at chess hence the incentive to build a better algo to steal a mere value investors lunch money is pretty great. I suspect however that the arms race in machine driven algo trading will rapidly evolve into the machines attempting to devour each other. In the final analysis however I do not have as pessimistic outlook as you. There are still plenty of mispriced securities out there and perhaps the misvaluation may even be

agravated by the activities of emotionless profit seeking robots. I am no way convinced that you have to join them to beat them. I think it is usfull to think about and discuss however from a regulatory standpoint the desireability of allowing the robots at the table. What would be the point of having a chess tournament where humans were pitted against machines would it not be like watching a quarter mile race between a human and a dragster the outcome is pre determined who would want to enter or watch the race. If emotionless machines are so superior then within a generation they or their owners will have most of the capital .

 

Ubuy, I respect your view. I think we should both keep in mind that we are assuming the systems are not value based. Many are, or have purely value -based factors as a large component (see AQR for a blended approach). In that view, the number of purely mispriced securities decreases. Basically, a good system designer would take Benjamin Graham's systems and build upon them.

 

I don't know if anyone has noticed, but recently it has become a lot harder to find mispriced large caps (which actually turn out to be mispriced) than nanocaps or microcaps. This is because the systems or bots often operate above certain liquidity thresholds.

 

 

So, my conclusion, which I have stated before, is that the rational discretionary value investor should be looking for securities which are ignored, rather than controversial situations such as BP during their crisis, which they may believe to be misunderstood.

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Harry, it's not your sytems that make me laugh.  It's you.

 

You remind me of a kid I went to grade school with named Fred.  Everyone has a Fred in their school.  This was a kid who probably meant well, but always did and said the wrong thing.  For example, Fred would commit crimes against humanity such as asking what airline Air Coryell was or showing up to school wearning Mork rainbow suspenders.  Perhaps the biggest offense was when the teacher sat the class down one day and said that Fred had an announcement.  Going forward he no longer wanted to be called Fred, he wanted to be called Fritz.  You see his father had been stationed in Germany for a year or so and that was where Fred was born.  So even though they weren't German and his given name was not Fritz, he wanted to return to his roots I suppose.  Perhaps today in these more enlightened times this would be seen as a true testament to his spirit, but in those less enlightened days in the 1970s he might as well have walked in with 2 heads and announced that he only followed communist ideas.

 

So what does this have to do with you, Harry?  Periodically you espouse some philosophy of yours and expect everyone to bow down to your brilliance.  When there is opposition, both to the ideas and the way you present it, you get upset, take your ball and go home.  People are neanderthals, they're bullies, etc.  They just don't understand you and how enlightened you are.  After all, you can seemingly discuss value principles, so why can't everyone just discuss your computer-based systems?  Harry, just as you don't walk into a room of grade schoolers and announce you would like to be called Fritz instead of Fred, you don't come onto a value investing board and tell people they don't get investing since they won't discuss your computer systems in a way you find appropriate.  It's both the message and the medium.  Food for thought, Harry. 

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Guest HarryLong

Ok, we've dispensed with the illogical faux "value investors" who have not studied the systematic origins of their faith and the innovation within it--so moving forward, what is the conclusion?

 

Here is my prediction, and I am happy to be proven right or wrong going forward:

 

I. There is a probability that discretionary value investors could be right about seemingly mispriced large-caps--or they could be eviscerated the way many were with HPQ.

 

II. It is naive for discretionary investors competing against bots to assume that the bots do not use value based methods. Many do, which narrows mispricings and the margins of safety in many securities.

 

III. Many of the bots are only let loose on certain universes of securities meeting certain size/liquidity thresholds.

 

IV. This means, rationally, that discretionary value investors, if I am correct that bots are often only let loose on securities meeting certain size/liquidity thresholds, should be focusing most of their time on nano-caps and micro-caps where the level of bot competition is minimal.

 

Conclusion: we should search for securities that are wholly ignored--not securities which are widely followed and we believe to be mispriced. In other words, while one could make money from large caps which are surrounded by controversy, the easier money will be made in micro and nano-caps which are not even followed and are wholly ignored. This is why it is dismaying that the board keeps working over the same old, tired, well worked over situations, rather than discovering something new.

 

I am happy to be proven wrong here. What I am doing is taking you through my thought process so you can decide for yourself. Even if any given large cap situation ends up being profitable, overall, the odds in the large cap space are probably stacked against us, and if they are not right now, will increasingly be over time.

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Guest HarryLong

Harry, it's not your sytems that make me laugh.  It's you.

 

You remind me of a kid I went to grade school with named Fred.  Everyone has a Fred in their school.  This was a kid who probably meant well, but always did and said the wrong thing.  For example, Fred would commit crimes against humanity such as asking what airline Air Coryell was or showing up to school wearning Mork rainbow suspenders.  Perhaps the biggest offense was when the teacher sat the class down one day and said that Fred had an announcement.  Going forward he no longer wanted to be called Fred, he wanted to be called Fritz.  You see his father had been stationed in Germany for a year or so and that was where Fred was born.  So even though they weren't German and his given name was not Fritz, he wanted to return to his roots I suppose.  Perhaps today in these more enlightened times this would be seen as a true testament to his spirit, but in those less enlightened days in the 1970s he might as well have walked in with 2 heads and announced that he only followed communist ideas.

 

So what does this have to do with you, Harry?  Periodically you espouse some philosophy of yours and expect everyone to bow down to your brilliance.  When there is opposition, both to the ideas and the way you present it, you get upset, take your ball and go home.  People are neanderthals, they're bullies, etc.  They just don't understand you and how enlightened you are.  After all, you can seemingly discuss value principles, so why can't everyone just discuss your computer-based systems?  Harry, just as you don't walk into a room of grade schoolers and announce you would like to be called Fritz instead of Fred, you don't come onto a value investing board and tell people they don't get investing since they won't discuss your computer systems in a way you find appropriate.  It's both the message and the medium.  Food for thought, Harry.

 

In as objective a way as possible, I am going to see if I can help you understand your thought process:

 

I. You Kraven are cool and I am not--so I should recognize your coolness and respect you.

 

II. You had a typical middle-class upbringing which was hostile to anything different--perhaps hostile to someone who had spent time abroad such as "Fritz". To you, Fritz had a foreign-sounding name, and hence, he was fair game. I should understand that your are used to showing hostility towards people who are different since you grew up middle class in the 70's, since you clearly don't know any better by upholding your Fritz example as an enlightened way of treating others.

 

III. You've never heard that Benjamin Graham developed two systems which were publicly espoused in books. Since you don't like reading Benjamin Graham, or at least chapters in which he discussed systems, you get to throw stones at people who enjoy reading all of Graham.

 

IV. You grew up in the 70's, so you are the cool one. Computer systems are bad, and bell bottom pants and polyester are good. Now I get it  ;D

Thanks for teaching me about you and cool kids from back home in a time and place far far away.

 

Kidding aside Kraven, we all have inherent worth, dignity, and value. Do you gain anything from underestimating the competition? Do you disagree with my conclusion that going forward, the big gains will be made in the micro and nano cap space? Your Fritz story just shows your own warped perception how to treat people who are different from you. Thank God Gandhi, Einstein, et al didn't follow your mediocrity ethic or go to your school.

 

As Bill Gates has often said, be nice to nerds. One day you'll work for one. Do you work for Fritz?  ;D

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I am perfectly fine with system - you just don't like the value investing system, you like a QUANT strategy as I said. You put the word "system" in my mouth.

 

Regarding the church - you are coming into a Baptist church trying to preach Buddhism, and NOT trying to improve on Ben Graham's system. I love trying to improve on the value investment system - ie I believe a value investor can rationally buy gold shares with a margin of safety in order to protect capital against the current macro backdrop. Your accusations regarding my knowledge and respect of the value investment system are assinine.

 

 

Kraven, Bmichaud, and Dorsia-- systems are nothing to laugh at:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

The human emotional responses from each of you are a great example of why objective systems have an advantage over sometimes illogical humans.

 

Let's break down Bmichaud's arguments one by one in a non-emotional way.

 

I. Benjamin Graham himself espoused a systematic, quantitative value strategy--two actually--one for conservative investors and one for enterprising investors. Looks like we've dispensed with your argument that you can't espouse a systematic strategy on a value investing board without being subject to scorn.

 

II. Your second argument is even more emotionally driven. In your view, this is a "church" with certain faith-based tenets, therefore, you can't be reasonably be asked to improve, because that would be an affront to your "faith"? OK, notwithstanding point I. which totally eviscerates any claim you can make that systems are not part of the "faith" or the "church" if you will (are you one of those backwoods preachers who doesn't read the holy books called "Security Analysis" or "The Intelligent Investor"?), you are essentially saying that it is unfair of me to ask you to behave logically because you are a "believer" not a thinking person.

 

III. You believe that I can't see the "light" when you yourself ignore that Benjamin Graham himself espoused systems. I guess you would throw him out of your "church" as self appointed bishop on this board.

 

Oh Enlightened One, please elevate me to your elevated plane of reasoning where you tell others that they should leave the congregation while you ignore Benjamin Graham's teachings yourself!  ;D

 

Seriously, though, value investing is not a cult, or a religion, it's a method, constantly evolving through discoveries which come from within and outside the community to improve risk/return profiles.

 

Bmichaud, your view of value investing is very naive, because it ignores Buffett's innovations and those of Charlie Munger, which moved value investing away from a more asset-based focus to one where earnings, earnings stability, growth, free cash flow and moats were examined.

 

I am almost disturbed that you have such a primitive view of the history of value investing--a field which you claim to respect. In your view, there have never been systematic approaches, and moreover, no innovation. Your view does not square with the facts. If you disagree, I would be happy to send you some books which might help you learn about the history of a field which you claim so vehemently to respect.

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Harry,

 

I think you bring a lot of good information to the board, so I'm happy you post here. I also like your differing opinion on things. I think we can all learn by challenging the "certainties" in life. I know I've asked you this in the past and if you replied and I missed it, then I apologize. If you didn't see it, well, I'll ask again. What are your long term returns with your quant strategies? Maybe it's because my background is more value investor oriented, but I can name many good value investors. What are some good quant guys, besides Renaissance? I know there Medallion fund is legendary, but from what I recall, one or two of their other funds does not have great performance.

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Guest HarryLong

I am perfectly fine with system - you just don't like the value investing system, you like a QUANT strategy as I said. You put the word "system" in my mouth.

 

Regarding the church - you are coming into a Baptist church trying to preach Buddhism, and NOT trying to improve on Ben Graham's system. I love trying to improve on the value investment system - ie I believe a value investor can rationally buy gold shares with a margin of safety in order to protect capital against the current macro backdrop. Your accusations regarding my knowledge and respect of the value investment system are assuming.

 

 

Kraven, Bmichaud, and Dorsia-- systems are nothing to laugh at:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

The human emotional responses from each of you are a great example of why objective systems have an advantage over sometimes illogical humans.

 

Let's break down Bmichaud's arguments one by one in a non-emotional way.

 

I. Benjamin Graham himself espoused a systematic, quantitative value strategy--two actually--one for conservative investors and one for enterprising investors. Looks like we've dispensed with your argument that you can't espouse a systematic strategy on a value investing board without being subject to scorn.

 

II. Your second argument is even more emotionally driven. In your view, this is a "church" with certain faith-based tenets, therefore, you can't be reasonably be asked to improve, because that would be an affront to your "faith"? OK, notwithstanding point I. which totally eviscerates any claim you can make that systems are not part of the "faith" or the "church" if you will (are you one of those backwoods preachers who doesn't read the holy books called "Security Analysis" or "The Intelligent Investor"?), you are essentially saying that it is unfair of me to ask you to behave logically because you are a "believer" not a thinking person.

 

III. You believe that I can't see the "light" when you yourself ignore that Benjamin Graham himself espoused systems. I guess you would throw him out of your "church" as self appointed bishop on this board.

 

Oh Enlightened One, please elevate me to your elevated plane of reasoning where you tell others that they should leave the congregation while you ignore Benjamin Graham's teachings yourself!  ;D

 

Seriously, though, value investing is not a cult, or a religion, it's a method, constantly evolving through discoveries which come from within and outside the community to improve risk/return profiles.

 

Bmichaud, your view of value investing is very naive, because it ignores Buffett's innovations and those of Charlie Munger, which moved value investing away from a more asset-based focus to one where earnings, earnings stability, growth, free cash flow and moats were examined.

 

I am almost disturbed that you have such a primitive view of the history of value investing--a field which you claim to respect. In your view, there have never been systematic approaches, and moreover, no innovation. Your view does not square with the facts. If you disagree, I would be happy to send you some books which might help you learn about the history of a field which you claim so vehemently to respect.

 

Graham's systems were quantitative systems. They used ratios. Period the end.

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Guest HarryLong

Harry,

 

I think you bring a lot of good information to the board, so I'm happy you post here. I also like your differing opinion on things. I think we can all learn by challenging the "certainties" in life. I know I've asked you this in the past and if you replied and I missed it, then I apologize. If you didn't see it, well, I'll ask again. What are your long term returns with your quant strategies? Maybe it's because my background is more value investor oriented, but I can name many good value investors. What are some good quant guys, besides Renaissance? I know there Medallion fund is legendary, but from what I recall, one or two of their other funds does not have great performance.

 

The only way to objectively measure the returns of systematic funds is to study an index containing all of those which choose to voluntarily report. Barclay (not related to the bank) keeps an interesting index of them:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

By looking at the index, as opposed to 1 or 2 funds, we can dispense with the responses that "well, maybe 1 or 2 funds using these methods are ok, but most are awful."

 

But again, Graham's methods were quantitative and systematic. Many services, such as Validea, track his systems' returns.

 

More importantly, what's your opinion of my conclusion that the real money to be made by discretionary investors is in the micro-cap and nano-cap space?

 

 

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Harry there is an old joke about 2 people walking down a forest trail and coming upon a grizzly bear who makes every indication that it is about to make lunch out of both of them. One guy starts backing away and nervously looks over at his friend who is calmly taking his sneakers out of his back pack and exchanging them for his hiking boots. What are you doing you fool he exclaims dont you know you cant out run a grizzly? I dont have to out run the bear he replies I just have to out run you. I decided long ago that I was not the smartest investor plying the markets there are many who are better equiped in many respects I do not need to finish first to achieve mkt beating returns which is all I strive for.

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Harry,

 

I think you bring a lot of good information to the board, so I'm happy you post here. I also like your differing opinion on things. I think we can all learn by challenging the "certainties" in life. I know I've asked you this in the past and if you replied and I missed it, then I apologize. If you didn't see it, well, I'll ask again. What are your long term returns with your quant strategies? Maybe it's because my background is more value investor oriented, but I can name many good value investors. What are some good quant guys, besides Renaissance? I know there Medallion fund is legendary, but from what I recall, one or two of their other funds does not have great performance.

 

The only way to objective measure the returns of systematic funds is to study an index containing all of those which choose to voluntarily report. Barclay (not related to the bank) keeps an interesting index of them:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

By looking at the index, as opposed to 1 or 2 funds, we can dispense with the responses that "well, maybe 1 or 2 funds using these methods are ok, but most are awful."

 

According to this, http://www.moneychimp.com/features/market_cagr.htm, the S&P 500 had a better overall return through the end of last year. Now, I do think the negative correlation and lower volatility could certain be a value add for a lot of folks.

 

Thanks for that, Harry. Are these returns after fees? Since Jan 1987 the return is 9.19%. Maybe I'm wrong, but isn't the S&P 500 better than that? I would imagine it has to be close. Harry, I didn't see an answer to my question of your returns. Thanks!

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Guest HarryLong

Harry there is an old joke about 2 people walking down a forest trail and coming upon a grizzly bear who makes every indication that it is about to make lunch out of both of them. One guy starts backing away and nervously looks over at his friend who is calmly taking his sneakers out of his back pack and exchanging them for his hiking boots. What are you doing you fool he exclaims dont you know you cant out run a grizzly? I dont have to out run the bear he replies I just have to out run you. I decided long ago that I was not the smartest investor plying the markets there are many who are better equiped in many respects I do not need to finish first to achieve mkt beating returns which is all I strive for.

 

I love that joke. You're right.  ;D

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In a few years we can see how the MSFT bet goes.

 

Harry's system is shorting it.

 

Will the computer be "eviscerated"?

 

I was short, I covered. How did you like the "short" thread?

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Semantics. You know exactly what I am talking about. You're espousing using a computer-driven model that takes all human thinking out of the equation. This is an "enterprising" value investment board where investors discuss individual ideas found through narrowing down the investment universe via a "system" of looking for out of favor, unloved, undervalued companies based on particular "ratios". As enterprising investors, we crave the challenge of finding 50-cent dollar bills and battling Mr. Market - it is this challenge that keeps us all in the game, NOT finding a strategy that allows us to take all emotion out of the equation, sit back, and let a computer do the work for us.

 

 

 

 

 

I am perfectly fine with system - you just don't like the value investing system, you like a QUANT strategy as I said. You put the word "system" in my mouth.

 

Regarding the church - you are coming into a Baptist church trying to preach Buddhism, and NOT trying to improve on Ben Graham's system. I love trying to improve on the value investment system - ie I believe a value investor can rationally buy gold shares with a margin of safety in order to protect capital against the current macro backdrop. Your accusations regarding my knowledge and respect of the value investment system are assuming.

 

 

Kraven, Bmichaud, and Dorsia-- systems are nothing to laugh at:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

The human emotional responses from each of you are a great example of why objective systems have an advantage over sometimes illogical humans.

 

Let's break down Bmichaud's arguments one by one in a non-emotional way.

 

I. Benjamin Graham himself espoused a systematic, quantitative value strategy--two actually--one for conservative investors and one for enterprising investors. Looks like we've dispensed with your argument that you can't espouse a systematic strategy on a value investing board without being subject to scorn.

 

II. Your second argument is even more emotionally driven. In your view, this is a "church" with certain faith-based tenets, therefore, you can't be reasonably be asked to improve, because that would be an affront to your "faith"? OK, notwithstanding point I. which totally eviscerates any claim you can make that systems are not part of the "faith" or the "church" if you will (are you one of those backwoods preachers who doesn't read the holy books called "Security Analysis" or "The Intelligent Investor"?), you are essentially saying that it is unfair of me to ask you to behave logically because you are a "believer" not a thinking person.

 

III. You believe that I can't see the "light" when you yourself ignore that Benjamin Graham himself espoused systems. I guess you would throw him out of your "church" as self appointed bishop on this board.

 

Oh Enlightened One, please elevate me to your elevated plane of reasoning where you tell others that they should leave the congregation while you ignore Benjamin Graham's teachings yourself!  ;D

 

Seriously, though, value investing is not a cult, or a religion, it's a method, constantly evolving through discoveries which come from within and outside the community to improve risk/return profiles.

 

Bmichaud, your view of value investing is very naive, because it ignores Buffett's innovations and those of Charlie Munger, which moved value investing away from a more asset-based focus to one where earnings, earnings stability, growth, free cash flow and moats were examined.

 

I am almost disturbed that you have such a primitive view of the history of value investing--a field which you claim to respect. In your view, there have never been systematic approaches, and moreover, no innovation. Your view does not square with the facts. If you disagree, I would be happy to send you some books which might help you learn about the history of a field which you claim so vehemently to respect.

 

Graham's systems were quantitative systems. They used ratios. Period the end.

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Semantics. You know exactly what I am talking about. You're espousing using a computer-driven model that takes all human thinking out of the equation. This is an "enterprising" value investment board where investors discuss individual ideas found through narrowing down the investment universe via a "system" of looking for out of favor, unloved, undervalued companies based on particular "ratios". As enterprising investors, we crave the challenge of finding 50-cent dollar bills and battling Mr. Market - it is this challenge that keeps us all in the game, NOT finding a strategy that allows us to take all emotion out of the equation, sit back, and let a computer do the work for us.

 

 

 

 

 

I am perfectly fine with system - you just don't like the value investing system, you like a QUANT strategy as I said. You put the word "system" in my mouth.

 

Regarding the church - you are coming into a Baptist church trying to preach Buddhism, and NOT trying to improve on Ben Graham's system. I love trying to improve on the value investment system - ie I believe a value investor can rationally buy gold shares with a margin of safety in order to protect capital against the current macro backdrop. Your accusations regarding my knowledge and respect of the value investment system are assuming.

 

 

Kraven, Bmichaud, and Dorsia-- systems are nothing to laugh at:

 

http://www.barclayhedge.com/research/indices/cta/sub/sys.html

 

The human emotional responses from each of you are a great example of why objective systems have an advantage over sometimes illogical humans.

 

Let's break down Bmichaud's arguments one by one in a non-emotional way.

 

I. Benjamin Graham himself espoused a systematic, quantitative value strategy--two actually--one for conservative investors and one for enterprising investors. Looks like we've dispensed with your argument that you can't espouse a systematic strategy on a value investing board without being subject to scorn.

 

II. Your second argument is even more emotionally driven. In your view, this is a "church" with certain faith-based tenets, therefore, you can't be reasonably be asked to improve, because that would be an affront to your "faith"? OK, notwithstanding point I. which totally eviscerates any claim you can make that systems are not part of the "faith" or the "church" if you will (are you one of those backwoods preachers who doesn't read the holy books called "Security Analysis" or "The Intelligent Investor"?), you are essentially saying that it is unfair of me to ask you to behave logically because you are a "believer" not a thinking person.

 

III. You believe that I can't see the "light" when you yourself ignore that Benjamin Graham himself espoused systems. I guess you would throw him out of your "church" as self appointed bishop on this board.

 

Oh Enlightened One, please elevate me to your elevated plane of reasoning where you tell others that they should leave the congregation while you ignore Benjamin Graham's teachings yourself!  ;D

 

Seriously, though, value investing is not a cult, or a religion, it's a method, constantly evolving through discoveries which come from within and outside the community to improve risk/return profiles.

 

Bmichaud, your view of value investing is very naive, because it ignores Buffett's innovations and those of Charlie Munger, which moved value investing away from a more asset-based focus to one where earnings, earnings stability, growth, free cash flow and moats were examined.

 

I am almost disturbed that you have such a primitive view of the history of value investing--a field which you claim to respect. In your view, there have never been systematic approaches, and moreover, no innovation. Your view does not square with the facts. If you disagree, I would be happy to send you some books which might help you learn about the history of a field which you claim so vehemently to respect.

 

Graham's systems were quantitative systems. They used ratios. Period the end.

 

I am going to try to help you engage in fact-based reasoning:

 

http://www.validea.com/registration/newusersignupj.asp

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