Knowing the Unknown

We have been writing about things that waste your time recently and have started to focus on things that don’t waste your time. To summarise, the things that waste your time included:

  • PowerPoint presentations.
  • Click Bait.
  • Media talking heads. We are not clairvoyant.
  • Anyone injecting urgency into the investment process.
  • Warren Buffett emulation.
  • Correlations. Doing research on stocks highly correlated to a driver like a commodity price.
  • Human emotions.
  • The price you paid.
  • Economists and strategists from big institutions.
  • Macro crap.
  • Broker research.
  • Consensus estimates.
  • Stock-market gossip forums.


Then we started to look at things that don’t waste your time. So far they have included:

  • Watching what the best stock picking fund managers are buying or selling.
  • Concentrating on small and mid-cap stocks – because if you’re going to bother to devote time looking at the stock market there is little point these days building a diversified portfolio that tracks the market. You can get that exposure in a myriad of listed and unlisted products like ETFs and LICs which are a lot less hassle, risk and effort.
  • Understanding that sentiment plays a huge part in share prices and it is not all about “value” as some would have you believe. Some of the best gains will be made through timing sentiment. You are looking to identify (1) quality stocks, not any stock, that falls into a sentiment hole – wait for the share price to bottom and buy into the rally. Or (2) identify when a stock you hold is in a sentiment bubble – wait for the share price to top out and sell into the fall. It is about gauging the mood of the herd and exploiting it, rather than simply getting swept along with the consensus mood. An example of (1) is CBA at the moment – it’s a quality stock in a sentiment hole, and an example of (2) is Domino’s Pizza which found itself in a sentiment bubble until recently.

And here is something else that won’t waste your time:

FOCUSING ON THE UNKNOWN

Focusing on the unknown and not wasting your time on the known. Every year the top and bottom performing stocks are not the stocks the market predicts most accurately, those stocks will hardly move, the big money is always in the stocks that the market gets most wrong. In other words you will not make money knowing what everyone knows. You will not make money listening to an adviser telling you about consensus forecasts, PEs and yields, or calculating valuations based on accurate forecasts. All that is valueless, because it is in the price. The only thing that will make you money is knowing what is not in the price and that means working out what assumptions the market has got wrong, not right. Perversely enough the most money will be made in the stocks that the analysts get the most wrong – Think about it. You have to know what everyone else doesn’t know. Focus on that, and you will not find that written down anywhere. You have to deduce it or imagine it. Imagine what others haven’t.

Your own inside information. There is a saying, “If you are not on the inside you are on the outside” and some people think the stock-market is a Machiavellian plot against them and that the only people making money are those with illegal inside information. Laughably I used to work with a stockbroker who would exploit the desire for an inside edge by whispering everything on the phone like it was a secret. The fact that we had all heard the same story in the morning meeting was irrelevant, his clients thought they were special. Very effective. But let me tell you, by the time you hear what purports to be inside or illegal information you are probably the bunny at the end of the chain. What sounds like inside information is often fabricated to serve a purpose, to move the share price and as one seasoned stock broker once said to me resignedly, “If I’d never been told any inside information in my life I’d be a million dollars better off”. So best you find your own and on this front I have always believed that a lot of people don’t realise they have their own (legal) inside information and don’t bother to exploit it. So this one is up to you. What industry do you work in, who do you know that is thriving, what business are they in? It’s all out there in plain sight if you bother to look and ask. What do you know? Ask yourself that. Ask around. Keep your eyes open. Read. You’ll be amazed what you know that the stock market doesn’t.

Taking the time to think outside the square. One way to generate your own ideas is to stop reading, to pour yourself a cocktail and lie back and imagine. As an example of what you are looking for, imagine if you can that you could go back a year and leave yourself a stock market tip or two written on a Post-it note plonked anonymously on your own trading screen, what would it say? Two or three themes in the last year would have delivered you a great edge. Like “The government will attack the banks to get votes”, “China will not drop in a hole and resources will bottom”, “Amazon will kill retail sentiment”. Now ask, what would next year’s Post-it notes say?’ What themes and events can you think of that will appear or persist beyond the expectations of investors this year, themes and events that will surprise the market and make you or save you money? They might be things like “Interest rates will rise and REITs and Utilities will be a graveyard”. Or “Amazon will actually arrive and retail sentiment will not improve”. Or “The banks will outperform as rates rise, margins expand and sentiment turns”. That’s where the money is. In Post-it note predictions. The answer is in that cocktail. But you have to take the time to think about it. Walk away from your screen, get outside the stock market zone, be the man in the moon for a moment, look down and see what everyone else is missing.

Think in themes rather than stocks. Speaking of the man in the moon, we used to have a client who had “vision”. He was an Australian living in Asia who saw Australia somewhat more objectively than the rest of us. In 2004 to 2007 he made a fortune. Stocks he bought were getting taken over, had better than expected results, landed contracts. He was always ahead of the game. In the end he developed a following (without knowing), all the advisers on our broking desk were you hanging on his every move thinking that he must have some sort of inside feed. But there was no magic, all he had done, from his position as the “Man in the Moon” looking at Australia from Asia was to realise a year after it got going that China’s infrastructure build would need a lot more Australian iron ore and coal. So he simply trawled the Australian market for the highest quality coal and iron ore stocks and bought them. That was all he’d done. The theme came first, the stock selection was secondary. All the other stuff that happened, the takeovers, the better than expected results, the success, were simply a function of the theme and of those stocks being in the right sector whilst that big theme played out. The profit upgrades and takeovers we thought he knew about were simply a consequence of getting the big theme right. Good things happen in good sectors. Get the themes right, the stocks will pick themselves and the rest will follow.

I have eight other things that don’t waste your time.