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Strategies & Market Trends : Value Investing

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To: Jurgis Bekepuris who wrote (56457)	12/30/2015 2:06:14 PM
From: Graham Osborn	Read Replies (1) of 78748

I don't mind math, and if Sharpe ratios/ volatility/ tail risk and all the other q-measures managers tout made useful predictions I'd be spending my time here (such as it is) over on one of the quant threads. That said, I find qualitative/ categorical versions of the Sharpe ratio a useful way to organize my thinking (say a 3x3 grid with high, moderate, and low for probable upside vs probable downside). This way of thinking is closer to the Graham arbitrage formula. The prevailing theory of how to quantify the Sharpe denominator is pretty much useless IMO - there is no exact way to measure an uncertain future. Since I don't invest in almond farms I can't speak to their margin of safety as an investment. However, for the S&P based on the debt ratios and (unadjusted) EBITDA multiples of the blue chips I think we are in risky territory indeed. You didn't say below what the point was when the 2009 valuations for the S&P recovered to the point where they became risky. For me, 2009 was one of the few times since over the past 30 years where valuations have been close to their historic averages. Not something a Sharpe ratio will tell you by the way. I think Mike absorbed the viewpoint of the times he was in much as Graham did. And no, losing 30-50% of your portfolio value is not the end of the world - but it still hurts. I don't make market calls and this market may rally as it has many times before and keep going for 10 years. It's like knowing someone on the freeway had a heart attack vs predicting who or what he will hit when his brain finally runs out of oxygen. Hey, he might even make it off the road and to a hospital and get a cath and live another 10 years. But if I was driving behind him and knew what was happening I'd leave a wider margin of safety than usual. I would not say, "it's impossible to predict exactly where or when disaster may strike" and go my merry way. Happy new year! Graham

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