investrhc: Quite a neat idea.
Two points. The first is that one of Moore's original assertions in The Gorilla Game is that these beasts are undervalued according to any practical valuation method by their very nature at the very point in which you should be pulling the trigger. So accordingly, using valuation to decide a buy/no-buy is biased in the wrong direction. One's estimate of "worth" - for a gorilla - is low.
The second and contrary point is that just like a Gorilla is more valuable than a chimp, a ten dollar bill is unarguably more valuable than a one dollar bill. But, not by any more than nine dollars. Paying $20 for a $10 bill just because it was on sale last week for $50 doesn't make it a "bargain". One should only buy this valuable bill at prices at or below $10. Paying any more than something is worth is asking for trouble.
I don't believe it is possible to simultaneously satisfy the principles of these two points. So the balance between them becomes a matter of personal bias and investment style. Like other issues of style, there is probably an entire spectrum of valid positions, which all depend on circumstances.
For example, if I am faced with strong positive cash flow, decades of productive expected work life, and dim prospects of a social safety net on retirement, perhaps it is better to gamble on some of the 100:1 bets - particularly if the odds of payoff are better than 1:100.
Although the expectation value of winning is high, the odds are low. So while a 2:100 * 100:1 bets applied across 100 fortunes will result in a doubling of the fortune of the group, 98 members will lose their fortunes. So if I had limited access to the tools to build a fortune, my bias would shift towards the sure bet.
Reflecting back on the late 90's, we had the bulk of the baby boomers of this first mindset. I know I went there. Why not? The world to gain and not much to lose. And the nature of the game is that we all need to seem to win in order for all but the few to lose.
I also think that a lot of folks read the Gorilla Game. And in the back of everyone's mind was the axiom that everyone else was under-valuing these stocks. With the net effect that they were bid up and up and up. A classic lesson in practical game theory.
But that was behind us and we are now suffering the consequences. Some people are back where they started, or maybe even further behind and thus can pick themselves up and dust themselves off and try again. After all, expectation value says it's a winning play, executed often enough.
Others who took their fortunes off the table will behave completely differently.
I do think that valuation belongs in the investing toolkit, but whether it occupies top, middle or bottom rung in the decision ladder, well that is probably a matter of style.
So right now I'm very biased towards the sure bet. Some would say "overcautious". So far I'm kinda glad, but I know deep inside me that the day will come that I will watch enviously as others with more guts reap new fortunes.
John. |
