My Investment Style

In reponse to my blog entry titled "A Hand on the Pulse of U.S. Economy," one of my friendly readers (Ralph H.) asked about my investment style. Here, I reproduce what I wrote at the tail end of our exchange.

A couple of years ago at Haas School of Business, I took a course on investment strategies and styles with Robert O'Donnell, who I believe manages a mutual fund and sits on the UC Berkeley's foundation board of trustees. My own approach was affected by what he said and the diverse reading material for the course.

First, I should say that even before I took the course, I knew something was very fishy about the CAPM (Capital Asset Pricing Model) because it assumed that equity markets (e.g. stock markets, etc.) were "perfect" in the sense that they captured (in prices) all the information and signals which can determine the value of an asset. This is a rather circular argument. It doesn't explain why some make money while others lose money in the market. If CAMP was true, its worth should have been proven in the market, and all should be using the principle, and if all are using it, it is impossible for anyone to lose and for anyone else to win. So, CAPM, by definition is wrong. Another flaw of CAPM is that it advocates the large index approach to investment. Well, all I can say is that the readings in Robert O'Donnell's class, including those on behavioral economics (say Richard Thaler's Winner's Curse: Paradoxes in Economic Life) totally disillusioned me regarding the "information model" of prices. There were others who wrote more hopefully about other, different styles. George Soros' contrarian style of investment and Benjamin's Graham's motto (markets vote on stocks while intelligent investor weight them) affected me. The simply pointed that the "market" was often wrong. O'Donnell also showed that the optimal investment portfolio (of "long"-s as opposed to "short"-s)) probably consists of a dozen or less stocks. A smaller number of stocks prove easier to track and manage. The management actually pays off—hopefully for the better. CAPM just doesn't make sense.

In my own private investment, I cleaned up the number of stocks I held. I got out of investment that mimicked too closely my own stock options in the company I work for and tried to diversify by holding a small number of stocks in industries I knew something about, say the telecom industry. I bought into telecom in 2001 and 2002 and made out very well in 2004. I've bought almost nothing in 2005. (Mutual funds analysts that came through Haas in 2001-2002 academic year were down on telecom stocks but I paid no attention to what they had to say. They seemed to be too narrow and too vested in their own world to understand other influences on price movements. Some of them seemed to be among the "voters." ) I've narrowed my portfolio down continuously, partly because CAPM makes no sense, partly because life expenses have kept me away from large number of stocks and partly because I found one or two or three which had good pay-off and never lost value. I stayed with those. Surprisingly, one of them is a very attractive dividend-paying stock, probably very much like the ones you use. In investing, I also try to be aware of macro-economic trends and stay away from quick turn-around speculation although it looks like doing a bit of the latter may also be useful, at least occastionally. As far as my dislike for CAPM is concerned, I also try to stay away from indexes in my 401(k) and stick to mutuals with a smaller number of stocks under their management. I also choose mutuals that avoid investing (as much as possible) in types of stocks which I personally dislike to own.

Hope that helps.

Comments:

Thanks Masood for an extremely interesting post. As I suspected, you have a more extensive background than I do, and seem quite capable of making decisions based on your "investment style." In the end, may be all prosper and be healthy. Ralph

Posted by Ralph Hannon on September 27, 2005 at 11:23 PM PDT #

Ralph,

Don't get me wrong. I think I still can learn quite a bit from you. You said something about MorningStar chat. How do you use it? In what ways do you find it valuable? How do you choose your value stocks, other than the dividend paying ones and how do you discriminate among the dividend paying ones?

See, I have lots of question, which I hope will find their way to you through this comment column.

Posted by M. Mortazavi on September 28, 2005 at 03:37 AM PDT #

Masood, Morningstar (M\*) is at http://www.morningstar.com/ If you go down to the bottom, there are lists of newletters they publish. I get the Dividend Investor ($79/yr) on-line. I also, at one time, got the Stock Investor. These provide, for me, the best value I can find. For the chat groups, click on the Discuss folder (top right or bottom). Between the Newsletter(s) and the Discussion groups, I probably am wasting my time reading (and buying) all the other items out there. I should tell you that I buy many of my stocks as DRIPs and save a bundle in broker fees. (Full Disclosure) -- My son-in-law's brother is a lawyer at M\*. Based on his behavior and what I've gained from M\* over the years, I use their information to guide me in all my investments. If you want a little more detail, send me a private post. Ralph

Posted by Ralph's Birthday on September 28, 2005 at 03:57 AM PDT #

Masood, As soon as I re-read my post, I realized the part that said: [(Full Disclosure) -- My son-in-law's brother is a lawyer at M\*. Based on his behavior and what I've gained from M\* over the years...] sounded a little funny. I should have said [...his integrity ...] rather than "behavior". Ralph

Posted by Ralph Hannon on September 28, 2005 at 04:11 AM PDT #

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