Stocking picking PQ randomly distributed?

Somewhere earlier in this blog or in an article, I speculated that the great investing success of Peter Lynch, Warren Buffett, John Templeton and a handful of others is not due to them being lucky stock pickers/coin flippers (as the Efficient Market Theory would have to claim), but neither does their success refute the Efficient Market Theory.

According to EMT, it's extremely difficult to beat the market on a long term basis -- but not necessarily.

I speculated that the ability to beat the market long term was made up of a number of personal qualities which were distributed randomly through the human population. So, quite by randomness, those individuals were born with and had the opportunity to develop the qualities that made them able to beat the market.

Therefore, the ability to beat the market still adheres among money managers, pension fund managers and mutual fund managers to a normal distribution, where only a small percentage do in fact beat the market long term.

Yet it's not due to luck in stock picking, but "luck" in the sense they were born with the ability (or, most likely, combination of abilities).

Anyway, in reading CAPITAL IDEAS by Peter Bernstein, he says something to the same effect, calling this beat the market long term ability "Performance Quotient" or PQ and speculates that only a tiny percentage of the population has the genius-level PQ.

He brings up an idea I didn't think of -- that most people with PQ do not manage money for others. They prefer to keep their talent (which still has to be coupled with hard work, just as people with high I.Q.s still have to work hard to come up with genius level ideas) and their investing results to themselves.

I'm not so sure of that -- successful money managers can make a lot of money by managing other people's money. Yet it's also true that the most successful managers are probably just as good or better at selling themselves than at their long term results. And many people with a high PQ may not be good at selling themselves -- it's a separate talent, after all.

Yet Warren Buffett started out forming a limited partnership with friends and relatives.

So who knows -- it's one thing to have a high PQ. It's another thing to have enough money to invest with it so that you can get rich.


Stock Picking
Stock Picking

Profit taking is dis-respecting capital gains - good!

According to the news, stock investors have spent the last few days "taking profits." Years ago I read a sour comment by a trader that they wished they were taking profits, but in reality was simply trying to get out at less of a loss.

Still, since the overall market did reach record highs early this week, I'm sure that many people did have profitable positions.

So if holding onto stocks for long-term capital gains the optimum procedure, why do the traders who know the market best always rush to convert their capital gains to cash? Could it be they value cash in their hands today more than the nebulous prospect of future capital gains -- capital gains which exist only on paper and which could go up in smoke tomorrow.

$7 trillion in capital gains vanished in March 2000. Today's Dow record could turn into the high water mark of a flood -- a record, but the water's receded. Capital gains come and go.


profit taking
profit taking

Harry Dent's latest bubble boom predictions

I just got through skimming the latest update from Harry Dent. Dent is the demographer/forecaster who uses demographic information to make stock market predictions, and has an enviable record of calling bulls and bears not based on company info, but on where in the lifestyle spending cycle the baby boom generation is.

In his most recent book, THE NEXT BUBBLE BOOM he predicts that the downturn from 2000-2002 would be followed by another bull market that would dwarf what we saw in the late 1990s -- with the Dow reaching 32,000 to 40,000 by 2010!

What's he saying now? I'll give you a hint - he's found another long-term cycle, the Geopolitical Cycle, which also affects results. And a look at today's headlines make it clear it's not boosting stock market results, although we're having a bull market despite the world's problems.

Dent still calls for a boom but has modifies its extent - and you better know when to get out. Because he's still calling for it to be followed by a long, extended bear market until 2022.

To check out the report, go to:

Harry Dent latest bubble boom report


Dent new forecasts
Dent new forecasts

New Dow Jones Industrial Average Record High

The Dow Jones hit a new record high yesterday, and as I write, it's higher for the day today.

Should you be cheering? If you're about to sell some stocks, yes. Otherwise, why bother?

If you're still buying stocks for your retirement, why would you cheer? The amount deducted from your paycheck will buy fewer shares of stock than before. More shares of stock are good.

True, the total market value of the shares of stock you have already bought is higher, and that makes you feel good . . . but so does cocaine, and it's not good for you in the long run.

Ideally, you should want stock prices to remain very low until right before you sell them -- then have them shoot up.

Of course, in real life they go up and down in unpredictable fashion and don't try to please you, me or anyone else.

The first quarter 2007 GNP is the lowest in 4 years. Will that bring the market down? Maybe.

Northwest Airlines emerged from bankruptcy. Will that bring the market up? Maybe.


stock market records
stock market records

Read CAPITAL IDEAS by Peter Bernstein

Last week I felt the need for a organized, comprehensive, textbook-ish explanation of Modern Portfolio Theory and other related modern financial concepts. I found several in Amazon that looked, but are expensive so I delayed ordering them.

But Sunday I checked out the book CAPITAL IDEAS by Peter Bernstein, thinking it was a history of Wall Street, and from reading the first 50 or so pages last night, it's obviously the comprehensive look at Modern Portfolio Theory I've been looking for, though written in a more interesting way than most textbooks, and organized in a way that makes sense to me, as a history or chronology of the events. Plus, he goes into what he knows of the personal lives of the people involved, helping to humanize the events.

I remember seeing glowing reviews of his book on risk, but didn't realize before the value in his earlier books. This is the first one of his I've read, and now I know I'll be reading the rest.

Burton Malkiel's A RANDOM WALK DOWN WALL STREET is good but doesn't explain these things in the step by step order of their historical development. So if you've read that book but you're still fuzzy on how the pieces fit together, CAPITAL IDEAS seems to be the solution.


Capital Ideas
Capital Ideas

Dividends and immediate gratification

In thinking about the usual need of people for immediate gratification, I'm surprised that so many people are hypnotized by the prospect of future capital gains versus immediate dividend or income income.

Increasing stock prices is one reason why companies buy back their own stock is to increase share value.

However, you can't spend any of this money until you sell the stock.

But apparently people feel an immediate gratification just from seeing a rise in the price of their stocks, even though they can't spend that money until they sell, and when they do they'll have to pay a hefty percentage to the government for capital gains tax. People get immediate gratification just from seeing the market value of their portfolio increase.

Plus, it's also true that, depending on when you buy the stock, it may be months before you receive that first dividend check. The market price can go up right after you buy it. But you actually have to wait a while for the dividend checks.

And, admittedly, the dividend yield on most stocks is so low that you have to buy a large amount of stock to get any kind of substantial check. And if you can afford to buy $20,000+ worth of stock at one time, the small percentage of current dividends still must not seem like much money to you.

The numbers for bonds and some other investments are larger than for most common stocks, but admittedly still don't seem a large return relative to the value of the money used to buy the security.

So, the magnitude of the numbers involve twist reality to make people think that they have big capital gains even though can't spend them, but dividends aren't worth waiting for, even though that's the current and ongoing reward for owning stock, which you can spend.

If you're going for capital gains and mistake market value for money in the bank, you think you still have all your original money plus the capital gains which could be much larger than any dividends.

financial immediate gratification
financial immediate gratification

Chinese stock market boom times

The AP today carried an interesting story about the stock market boom in China. The Shanghai Composite Index has gone past the 4000 mark. And it could go past 5000 in a month. This, on top of a 130% increase last year.

One broker was quoted as saying that 6 months ago they opened 4-5 new accounts a day - now it's 40-50 a day.

This trading is called, "chao gu" -- stir-frying stocks.

And people are mortgaging their homes and dipping into retirement funds to buy their shares of stock. Trading volume in Shanghai and a smaller exchange in Shenzhen recently exceeded all other stock markets in Asia -- including Tokyo.

A 60-year old cleaning lady doubles her initial investment of 20,000 yuan in two months -- and is celebrated in the media.

P/E ratios are around 30 to 40 -- still well below 1999 Internet and high tech stock pinnacles in the US.

Yet the article concludes with the observation by a Chinese woman that, "We hear that before 2008, the government won't let the prices fall. We're not afraid."

Personally, I think somebody ought to be afraid. True, China's economy is growing at about 10%, an incredible rate. But so much of what the article describes sounds like 1999 all over again.

Apparently bank accounts pay just 3% dividends. I don't know if there's anything equivalent to American certificates of deposit or CDs, but the Chinese want higher growth.

I'd think the Chinese government would also be frightened of this boom. If everybody panics and wants to sell, how are they going to keep prices up, whether the 2008 Olympics have taken place or not?

China's huge push for growth comes out of a need to employ millions more people every year. Plus, there is a lot of unreported unrest in the countryside. If millions of Chinese people see their retirement savings vanish or lose their homes due to a stock market crash, that could cause a lot of damage to the economy, and pose a threat to the authority of the government.

It could soon be interesting times, investing in China.


Chinese stock market boom
Chinese stock market boom