chk999 (99.98)

But The Light Is So Much Better Over Here

October 31, 2007 – Comments (4)

Which is the punchline to a joke, the setup for which we will get to in a minute.

One thing that has puzzled me since I started investing is the fascination with  price changes. The TA people look for patterns in charts of price data that they think have predictive power. The CAPM people have an entire model that makes prices change random with a mean and a deviation, that gives you that return is only related to beta. When prices are going up people get eurphoric, when they go down, they get depressed.

So what does this have to do with the title? Well, the joke is about the drunk looking for his lost keys under the street light. A passerby asks if he lost the keys here, and the drunk says no, over there. So when the passerby asks why the drunk isn't looking for his keys over there, the drunk answers "But the light is so much better over here".

And I think that is the reason for the focus on price data. We can get it.

Now look at all the things that actually make for a good investment. Profit margins and return on invested capital can be gotten, albeit with some work at re-working the financial reports. But other stuff like competetive position, capability of managment, R&D breakthroughs, changes in public taste, fads and new ground breaking products are all hard to get information on. Even deciding if a company has a moat and if so, how deep, requires more judgement than science.

So the fascination with price data isn't that it is so useful, it is that it is about the only thing that is easy to get, so people look at it. You can get info on stock prices going back to the 1800's, but try to get hard info on competetive landscape going back only a few years.

Since so many people are looking at price data I am going to try to ignore it more and try to learn more about what really makes companies tick so that I can spot the great ones stuck amid the great quantities of mediocre ones. 

As the old saying goes, "Quantity isn't a substitute for quality, but it's the only one we have".