“Get that cheap tramp out of my house!” The physics of long term investing
It wasn’t so bad that my mother was thinking it, but to say it out loud to me in the presents of my latest cheap tramp girlfriend was, well… a bit direct. Clearly my mother was a long-term investor and I was just ridding the spread of some hot volatility so to speak.
So who was right? My mother of course was right. I preface my remarks by stating that I am a bona fide three dimensional special genius, physicist / mathematician / heavy equipment operator. So obviously reality means something to me. So to answer the question I had to decide whether equities investing followed a linear or sinusoidal or some crazy pattern of randomness. Are we all guessing at stocks? Are we all guessing when we pick a mate? [not me, I was picking cheap tramps]
The activity is not random, the choices are finite and the methods of selection while flawed and often irrational are not random. For example if you have a turkey sandwich you are advised to put it into the refrigerator if you intend to eat it a day or two later. Is the act of putting it in the refrigerator random? No not by a long shot. And leaving it out is ergo simply irrational. In other words there is some underlying belief, while true or not that has made the act of putting it into the refrigerator non-random. The reason for this is that we slow the vibration of the molecules down in the refrigerator so as to slow entropy which is the inverse of probability of an event occurring. Ultimately if we cool the sandwich to absolute zero and the molecules stop vibrating, the sandwich never rots. It just so happens that everything can be explained in terms of entropy.
What are the odds for example that the sun will come up tomorrow AM when you get up? They are very high. Thus the probability of the event is very close to 100% and entropy created is very low. Imagine for a moment that the sun fails to rise that the earth was somehow shifted out of the solar system. What is the probability of that event occurring: almost nil but if it did occur, the entropy created would be gigantic and of course all life forms would be dead in a few mintues. Entropy is the law of the universe that states that all matter goes to a greater state of disorder in a container that is increasing in size at the rate of the speed of light in all directions ie our universe. GM's collapse was a lot of entorpy.
Thus, entropy affects everything. It is why we age and die. Without going into the actual proof take my word that procreation and the act of wealth accumulation are the systems attempt to nullify the effects of entropy. Money gets you the face lift; it gets the fabled “younger woman” which really causes a lot of entropy in your spouses life. Thus that explains your mother’s aversion to the “tramp” you brought into her home.
So far so good: We have now resolved that the activity is not random. Is it sinusoidal or linear? To determine if it is sinusoidal, one must assume that all benefit, and all are disrupted in a predictable pattern of even distribution. So you and your friend load one bullet in a six-shooter. You then play Russian roulette. What are the odds of the gun discharging? The odds are 1 out of 6 not 1 out of 5. If the chamber is spun what are the odds for the second player? 1 out of 6. As long as the chamber is spun the odds remain the same 1 out of 6. What about if you decide to play 100 rounds of Russian roulette in which you spin the chamber. The odds of a fatal blow remain the same. What if you decide to play the game until the gun absolutely discharges? The odds remain the same for each player.
What are the odds of your beloved wife getting in touch with her inner tramp with some other guy if she spins the chamber each day of her life? About 1 in 7. Thus the real question is whether you play Russian roulette, not whether the odds change.
For example a guy who never invests in equities will never have the gun discharge at his temple. Thus, the game is not sinusoidal because the odds are predictable but the moment of discharge is not predictable. Sinusoidal prediction would assume the odds of discharge would increase or decrease with the discharge of the weapon. But that is fallacy. This is VIX which is a fallacy. So is a stock’s PE a fallacy. There is no correlation between either to predict the return on stocks, though both are widely accepted as factual determinates.
So by process of elimination the process is in fact linear. To analyze how this would help you predict stocks is how CAPs works. CAPs is a linear predictor it is also the method by which you should select your mate. If a sampling of CAPs players say that your girlfriend is a one star tramp v. a 5 star long term companion, though their individual criteria is different, the perturbations smooth out and form a nice linear curve with an increasing slope. Some are using fallacy criteria like VIX or PE but with enough sampling, the Caps becomes a five chambered gun loaded with stars and the outliers cancel.
If one was to look at the long term slope of the Dow, one would see a macro linear line increasing over time with some perturbations for events such as the great depression etc. But the linear grade is unquestionable long term and rising.
This however would not work to pick a mate because you would have to resort to polygamy. Since diversification is implied in this model, it is a useless model for those that must find one mate or one winning stock that can go the distance.
How about flipping stocks? That fails due to overhead. Fist flippers assume the false sinusoidal theory. So the mate that has been through 100 relationships more or less buying and selling and moving on becomes unsuitable as both a mate and as a stock selection process. It is cost ineffictive and gives more weight to the pertubations than the linear trangression. So it is flawed.
Besides great wealth is never achieved through diversification. Look at Gates and Buffett. Diversity? What diversity? Their core wealth derives from one stock.
So how do you pick one stock for the long haul? People still find mates that last a lifetime that are trustworthy and reliable. Assuming that my mother could pick a tramp out of any crowd of women, she was an expert at finding the short sale. But what kind of qualities could she find that would last a lifetime without regrets?
For example, should I select a boozehound? I don’t think so. A boozer is a bad choice. So is a dishonest person. So is a stupid person. So is a filthy person. So is an unmotivated person. So is a liberal but that is only in my book.
So the characteristics you look for are the opposite: reliability, fidelity, trustworthiness, intelligence above the mean, decency, cleanliness etc. And there is the intrinsic factors of whether that person can contribute to your wellbeing or only concern themselves with themselves.
So that is how you pick a stock:
1) Look for a company with an understandable business plan. Hot new ideas are off the wall and unproven they are a cash burn not a business plan. Some great plans are not flashy but done in basic black with a string of pearls.
2) Look for exceptional quality; this does not mean well-rounded. Well-rounded people in my experience are patent morons. A company has to do at least one thing exceptionally well and should be able to get marketshare.
3) A company has to be good to shareholders, not just to the directors. If the directors just bilk the shareholders then you have a gold digger and you are in trouble. So look for shareholder return.
4) Spending money on wall hangings and adornments is a waste. It tells you management doesn’t understand the use of capital.
5) Management must be smart. How is this measured? Look at who runs the company. Look at the people the biographies. How many of you own companies where you have never even looked at the management team? Look at the insider trades. John Chambers is smar. Smart and cleaver are not the same trait.
6) Find young companies that are at the cusp of growth. Even companies like Microsoft come to a standstill over time. But my what a great choice that would have been in the 1970s! Or IBM in the 50’s. Do I include GE? No way. It is a boozer company. Every function they have, they serve booze. I walked into a bar where the GE people, including secretaries were doing shots! This was a "meeting." A number of years ago I had a friend that was engaged to a girl. He was a very decent nice fellow. In fact he worked for me. His girlfriend ended up at a hotel with some dirtball from GE. My friend broke off the engagement went on with his life. Over time I discovered that GE was a place where an alcoholic could be happy and where moral conduct was shall we say “flexible” and non-existent. Internal corruption is nuts. Microsoft serves caffeine which is good for the brain. Smart people are not boozers so you have to know the culture of your company.
The bottom line is that my mother was right. I need to order the tramps out of my portfolio and only let the real jewels compete for my affection.