My Investment Style
By MortazaviBlog on Sep 27, 2005
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.