Well, maybe that’s because Brealey isn’t a good statistician. OK, I’m being cheeky here!

But there can be disparities between what a “frequentist” statistician would conclude and what someone using Bayesian analysis would conclude.

By something of a coincidence, lecturer Allen Downey wrote a recent blog article about these differences headlines “Statistical inference is only mostly wrong”. “p-values banned”

http://allendowney.blogspot.co.uk/2015/03/statistical-inference-is-only-mostly.html

Chapter 1 of the book “Probabalistic Programming and Bayesian Methods for Hackers”, the author notes “For small N, frequentist estimates have more variance and larger confidence intervals”.

I also took a look at some of the issues in my own page “Fund Manager performance” here: http://pdf.markcarter.me.uk/bayfund.html .

]]>I once followed M. Pabrai and when he invested in Exide Batteries saying it was a franchise, I knew that he was in for trouble. Sure enough two years later he sold but below its tangible assets or thereabouts, so I bought–the most marginal seller had sold. I am not knocking Pabrai because he uses volatility for his purchases, but he was buying heavily levered (operationally and sometimes financially) businesses.

]]>Sometimes it pays to take a contrarian position to the greats. News of the accounting scandal was around that time, but unlike Enron, there was little danger that Tesco faced imminent banktruptcy.

When Buffett bought, Tesco was a disappointment. When he sold, Tesco was a disaster. It’s a good example of why investors are likely to be better off buying into deep value, rather than shallow value.

My hat goes off to your reader that had a position in Tesco. I’m sure he has done well out of the purchase. Unfortunately, I let the opportunity slip by me completely.

Thanks for the pricedingold chart – it’s very illuminating.

*“Recall, if you will, the pundits who six years ago bemoaned falling stock prices”* Unfortunately, it wasn’t just pundits, but some investing legends. I didn’t note their name at the time, so I can’t name names. Buffett was one of the few who was optimistic.

Quick questions on the Financial Analysis Lab. Can you share a bit more on how this website helps our cash flow analysis?

http://scheller.gatech.edu/centers-initiatives/financial-analysis-lab/

]]>To recap, Toby presents his statistical analysis of the Greenblatt “magic formula” approach and Toby then sets out evidence that the ROIC component does seem to add much to the results. As to the latter, Toby’s statistics show that using a naive selection model based on EV/EBIT alone produces results which are marginally better than his version of the “magic formula”. The chapter then goes on to explain the success of the EV/EBIT criterion by reference to the published research relating to reversion of the mean, etc.

There are a few things that bother about Toby’s thesis. To summarise:

1. It doesn’t make sense to me that the success of the EV/EBIT criterion alone is referable to the reversion to the mean phenomenon. You see, I have observed many situations in which companies suffer setbacks which require them to go through various degrees of restructuring before they can get back to their prior levels of profitability. Those sorts of changes typically involve a fairly lengthy process, often spanning several years. The problem here is that Toby’s back-testing on the EV/EBIT criterion assumes ONLY a 12 months holding period. I haven’t expressed this very well. Essentially, what I’m try to say is that Toby’s back-testing is based on a such a very short holding period that I don’t think there is enough time for the typical corporate turnaround to make much progress, so I have some doubts that his results can be explained by reversion to the mean.

2. Toby’s figures suggest that EV/EBIT works only slightly better than his version of the “magic formula”. The point that he seems to gloss over is that the “magic formula” would usually select companies which have a fairly good ROIC to begin with. Those companies would normally be scoring an ROIC better than the average company. Putting aside the back-testing for a minute and just focusing on the logic, I think it is hard to accept that the success of the “magic formula” is attributable to a company’s recent poor results improving to former levels, when the “magic formula” tends to select high performing companies to begin with. By the same token, since the EV/EBIT criterion produces results that are roughly similar to those of the “magic formula”, I just don’t see how Toby can say that it is reversion to the mean which explains the success of the EV/EBIT selection criterion.

I can’t prove this but I suspect that the main driver behind the success of the “magic formula” or EV/EBIT alone is that they identify stocks which have been subject to “overshooting” as Haugen would call it (or “reflexivity” as Soros grandly titles the effect).

I may be completely wrong on the above. Happy for anyone to set me straight !!!

Cheers,

]]>Like Odysseus and his crew, either we must be tied to the mast of discipline of well thought out process, squirming against the constraining ropes or we must just stop our ears with wax and row on in an index fund.

Bloody boring that, but necessary. Those Sirens will have you on the rocks like a whiskey.

]]>This leads to some interesting results. We have one small miner on our local stock exchange which is coming up to the end of its mine life. The funny thing is that over the last few years it’s production has been fairly steady, but the company’s sales have fallen off a cliff – basically the company is stockpiling gold bullion – it shows the gold bullion as inventory on its balance sheet, booked at the lowever of cost or market, but the footnotes show that the market value of the gold is much more. One way of looking at it is that this company is a gold miner which is turning itself into an ETF! The way this company is going it will pretty soon have a negative EV, based on my unusual way of calculating EV.

Does anyone think that I’m nuts?

]]>The background is that I bought some shares in a little gold miner and, due largely to dumb luck, I bought the shares shortly after the most recent nadir in the USD gold price. Since then the USD gold price has enjoyed a little bit of a resurgence and our local currency has fallen substantially against the USD. So, the market price of my shares has shot up much quicker than I could have expected. I’m now struggling with the problem of whether to sell or whether to let the price run a little more.

The problem is that practically every time Janet Yellen opens her mouth, the USD gold price seems to drop!

Something tells me that I should take my unrealised profit and head for the hills. The problem is that with commdodity companies you are fighting against two levels of speculation – one level of speculation at the commodity level, which in turn feeds into the second level, namely, the speculation in the shares. That can lead to some opportunities because there are two levels of “reflexivity” (as Soros would call it) to take advantage of. But it makes for wild ride and the share prices can fall away pretty quickly.

Any thoughts?

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