Friday, May 20, 2011

New Schools of Investing

The author of Stableboy Selections did a post a while back (which seems to have disappeared) about how a new-school of more intense value investors is replacing the long-only, old-school investors like Marty Whitman, Bruce Berkowitz, and Warren Buffett.

He noticed that there have been a series of head-to-head contests between the old-school and new-school, and each time the new-school has won. Marty Whitman was wrong about MBIA and Bill Ackman was right. Buffett was wrong about USG, newspapers, and the ratings agencies, and the new-school was right. I would guess that Berkowitz is wrong about JOE and Einhorn is right.

Stableboy observed that this is true in chess as well, where the old-school players gradually get outdone by newer, more aggressive players.

It is an idea very much like my concept of investor genotypes in an investing ecosystem. Evolutionary theory predicts that selection will operate whenever variants differ in characteristics that are transmitted through some form of retention or differential culling of variants and whenever these characteristics are consistently related to performance of the entities in which these variants are expressed. The investors whose styles produce the best results are selected in favor of those whose styles produces inferior results.

Credit Bubble Stocks correspondent Taylor Conant points out that

"the new school guys are totally ignorant about economics, many believe in the fed/bailouts, implictly if not explicitly (look how many have invested alongside govt bailouts in insolvent financials!) And don't really understand/respect the role of the entrepreneur, either. New-new school: rational, contrarian, thoughtful, hardworking, intellectual, value-oriented, nimble, economically educated, skeptical of govt and authority... and libertarian!"
Yes, I think that having a functional theory of economics will start to matter more and more. If Paul Krugman dared to invest actively (and notice, you never hear him mention any trades) he would get his account taken away from him. The guy thinks that the Japan earthquake could be bullish for Japan, that WWII ended the Great Depression, that the Iraq war was a good allocation of resources.

Having a theory of stock market cycles will matter more, too, and that is the value in Prechter and socionomics. The bull-market only investing genotype is going to be an evolutionary dead end.


getyourselfconnected said...

Well full disclaimer, I am a molecular scientist so asking about genotypes means some serious work via RFLP or SNP DNA analysis.

CP said...

Ha. I hope I am not butchering the metaphor, at least.

CP said...