Asymmetrical Information
As some of you may already know, Burton Malkiel's A Random Walk Down Wall Street really fucked with my head. I do not believe in perfectly efficient markets, but I have come to believe that alpha is not generated through reading the Wall Street Journal, watching Bloomberg, slaving away over 10k's, building financial models, or by acting on the email you received about the new miracle cancer drug. I truly believe that in order to generate alpha, you need to go out in the field and get dirty.
Examples include:
-Insider trading. Hypothetically of course. Not encouraging others to engage in it, but it does obviously remove unknown variables from the equation and gives you a leg up on the rest of the crowd.
-I'm pretty sure Jim Rogers is the guy I'm thinking of, but can't seem to find the article now, but I remember reading a while back, about a major hedge fund that actually sent a team of analysts to Brazil to make their own projections of coffee production yields, in order to determine if the market mispriced current information.
-Doing some serious investigative work (out in the field with a pair of binoculars) to figure out which penny stocks are frauds and short them to hell.
-The Scuttlebutt: Keep calling other analysts and investor relations, until someone screws up and tells you something that hasn't been priced into the stock yet. From what I've read, Warren Buffet was particularly good at this, even during his college years. He said the key to remember is that most analysts love talking about themselves and their brilliant ideas.
I don't mean to sound condescending here, but am I the only one that feels tinkering around with excel models all day isn't generating alpha? Does anyone know of any funds that are more concerned with doing detective work than building financial models?
I think just about every firm claims to do serious investigative work on companies, but not that many really do. One of my old firms hired former FBI interrogators to come train the analysts and portfolio managers how to question people to get the maximum amount of information from them and how best to detect 'deception' (aka - lying). One of the best ways to get more information is to just ask 'what else?' (or something similar) after the person you are questioning finishes their answer. Most people are very uncomfortable with silence.
Einhorn is a good example of a HF manager that actually gets his hands dirty. See the last part of the below presentation on GMCR or pick up his book Fooling Some of the People All of the Time.
http://online.wsj.com/public/resources/documents/EinhornGMCRpresentatio…
Good q. But if you read Einhorn's book quite a great deal of finding targets for investigative work come from twiddling with excel.
Essentially in order to do investigative work you need:
Figuring out assumptions, i.e. buy, hold or sell (via excel, DCFs, etc.) -> investigate through contacting members of staff or sifting through 10ks, records, etc., -> then reconfigure your results via excel and present it along with your analysis.
It's essentially his formula throughout the book. He's not the only one, it's a tried and true method that you kind of feel as the pattern on the "investigative" investors from Jim Slater on to Rogers and Soros. Rogers did a massive amount of quant stuff, but as he even argues in his own book and in television in the 1990s, you need to figure out your assumptions empirically, and then go on to check the confidence levels of the people in the firms. Soros' method was similar, in that he used Rogers on the equities side and often spoke at a very high level to cabinet ministers after figuring/auditing their monetary and fiscal problems.
Hope this helps.
I think given the vast number of companies and markets out there, you need to do a bit of both. The excel can narrow down the companies to a manageable list and then you can get your hands dirty (I love this btw). then come back and plug it back into the excel to identify the mispricing and the risk vs. return calculations.
T
Thanks for the quality responses guys.
It seems that many of the all-time greats have have a record of going out into the field and getting dirty. I'm just surprised when I read these boards and other websites about what analysts do and it seems like most of them spend the majority of their time slaving away at excel models and do very little dirty work.
PS: If I was in a position of power I'd really like to experiment with hiring former FBI investigators, rather than former IB analysts. I can think of a number of odd jobs that can produce asymmetrical information. Especially with pink sheets.
I feel like, deep down, being an actual detective would blow being a hedge fund guy out of the water, in terms of being stimulated intellectually and actually getting your hands dirty. Figuring things out, human interaction, using your brain to solve all sorts of different and complicated problems, dealing with asymmetrical info, seems like it'd be awesome.
Do I need to start Detective Oasis?
Consequuntur itaque aut dolorum. Dolorem natus deleniti ipsa quasi. Laborum voluptatibus rerum nulla quo facilis. Quaerat qui facilis eum sunt sed.
Dicta voluptatem est et odio deleniti aliquam. Consequatur fugiat nihil ut enim magnam. Pariatur architecto neque aut nostrum est.
Expedita amet dignissimos qui consequuntur labore velit sed. Molestias eaque consequatur nihil et veniam nostrum voluptatibus consequatur. Corrupti ullam voluptatem sed ab.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...