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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Pirah Naman who wrote (48104)	10/20/2001 8:37:14 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 54805

Hi Pirah, a few comments Yes you are right. All I meant to say with my "Vanilla vs Gorilla" comparison is that if one underestimates the value of a gorilla then one will set a lower price for it than one should. The easiest way to do that is to use non-gorilla risk (higher than appropriate) or non-gorilla profits (lower than appropriate). After all, I suspect we are agreed that valuation is a GIGO science at best. I like your use of the term "pricing inefficiency", and your observation that it can be as much in the purchaser's favor as against. Very clear. As for the basket approach, and can we profit? I'm with the thread that it is both an opportunity and a trap. But my reasoning is different. My counter-thesis argument is much the same on a meta-level as to snaring the Gorilla. Although the waters get much muddier here because we start to smear across impure boundaries. But it goes like this. And I am admittedly oversimplifying and skipping steps. But a detailed treatment would be indigestible. It starts with the same premise: just as the market cap of a single company is equal to the market's estimate of discounted future returns, so too would be the sum of the market cap contributions of all competitors struggling to dominate a patch add up to the market's estimate of the discounted future returns from the entire patch. Therefore for the basket strategy to fetch outsized returns either (a) the market must get the estimate of the patch size wrong, or (b) the gorilla must win more than what the rest of the basket loses. For (b) not to imply (a) we must have selected our basket from a subset of the patch. Which implies a criteria for winnowing out winners from losers before the market can do so. And if there is indeed some reliable formula for discrimination, then our theory must rest on this same prickly "I'm sustainably smarter than the market" idea that I have so much difficulty with. So where basket investing does work is where the market really does get the patch size wrong. Which can be cause or effect of the rise in a Gorilla. I think that the theory is "both". Which leads to a kind of derivative concept of "Gorilla Patch" investing. . But as a sustainable high-return strategy? Seems the patch is subject to the same laws of risk/return as a single company, and of course this rolls up into a larger basket, say the entire NASD. One can see at the very top level that basket investing delivers average returns by definition. So for long-term sustainable "beat the index" returns, then somewhere between individual stock, market basket and index the rules must change. Or maybe the logic is broken. John