Friday, February 7, 2014

The fallacy of exposing ideas

If it hasn't happened to you yet it's just a matter of time.  Right now you read my blog and love to see some of the strange stocks I profile.  That is until I profile something you like, and something you "found".  Then my site goes from an enjoyable read to an unmentionable.  Everything is great except for that one post that you wish I'd rescind.

This shouldn't be a surprise to anyone, but I don't believe that keeping ideas secret, or not sharing ideas is the best course of action.  By writing this blog I've established for myself that I find value in giving ideas away for free, and I don't believe talking about investments or potential investments is bad.

The fallacy of exposing ideas is the name I give to the idea that great investment ideas should never be shared, especially shared publicly.  In this view a great investment idea should be hoarded and kept to the person who found it.  I believe this desire derives from the fact that investors fear that once an idea is shared it will suddenly appreciate in price and they'll never be able to purchase another share.

There are no hidden investments.  As Proverbs states "There is nothing new under the sun", or the more modern expression "what was old is new again."  Every investment is known by someone, if a company has shares it also has shareholders.  Sometimes the group of people is small who know about an investment, and other times the group is large.  Sometimes what is a hidden investment to us is really well known to a variety of people, it's just not known by us yet.

If discussing and exposing ideas were such a bad thing we wouldn't be happy to tell friends about value investing.  Why not hoard the knowledge in Security Analysis to ourselves?  Maybe Seth Klarman tried to put the cat back in the bag when he took his book Margin of Safety off the market.  The problem is if an idea is compelling we can't help but share it with others.

Value investing secrets have been shared by a variety of authors over the years, and the methods discussed and exposed to a broad audience still work.  Graham told the world about net-nets and cheap stocks, both which can be found today.  Seth Klarman and Peter Lynch discussed mutual conversions, an idea that still works.  Joel Greenblatt talked about spin off and special situation investing, a style still working today.  Paul Sonkin has done a lot to spread the word about micro cap investments, an area still ripe with opportunity.  There is a spokesperson for almost any potential investment.  Want to learn about buying distressed debt?  There is someone talking about it.  Want to buy liens?  There is someone talking about it.  If you look hard enough there is someone talking about everything.

When an idea, even a great idea is shared it doesn't suddenly appreciate to fair value.  Even for the most illiquid stocks a little sunlight and exposure isn't a negative thing.  Some stocks are illiquid because there is no buyer interest.  There might be sellers, but no one to buy shares.  When an illiquid company is highlighted and buyers appear sellers sometimes appear as well and liquidity improves.

The main reason that exposing ideas is a fallacy is that markets aren't driven by perfect information, they're driven by emotions.  This can be seen throughout this blog.  I will post about a company that I think is a great investment and invariably I will have people commenting that I've lost my mind and made a mistake.

The investor's largest enemy is themselves.  We doubt ourselves, we second guess ourselves, we lack confidence and conviction.  Other times we're over confident, or careless and miss important information.  Different investors have different time horizons and different levels of acceptable risk.  What is a great investment to one person is risky and reckless to someone else.  As long as investors continue to have emotions they will continue to have differing opinions on the attractiveness of potential investments.  And as long as differing opinions of value exist there will be a fluid market.  Even when a market sage like Warren Buffett comes out and proclaims a stock is cheap there is dissension and disagreement.

Some readers have accused me of using my blog to promote my portfolio holdings.  I write about holdings because they're ideas I'm convinced are good. I'm excited about them I want to share them with others.  This site wouldn't be fun to read if I had no passion for the companies I wrote about.  Oddball Stocks would become as exciting as reading a student's dispassionate essay on a topic a teacher assigned.  I write about what I find interesting, and as an investor I find my own holdings interesting.  I also find other companies I might pass on interesting as well.

Sharing ideas allows us to connect with others who might have more or better information.  Sharing ideas also allows us to connect with people who disagree with our sentiments.

10 comments:

  1. Interesting insights in a matter that's been discussed on Swedish blogs lately. Blogger ideas have caused trading in illiquid stocks to rise drastically (including my own shared ideas). I think you're right down to some micro cap level where the liquidity is so poor that whatever you do, you affect stock prices.

    Putting those practical size limits aside, I think you're on to a lot of things here. Freely sharing ideas is rewarding in itself and a completely unknown publicly traded share does not exist.

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    1. Nate: Loved your idea on Winmill and Co "WNMLA." I think it could be worth $8-10 and backed up the truck.

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  2. Nate - thanks for blogging. I am a keen reader and find tremendous value in your posts.

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  3. Even the articles I've written on Seeking Alpha that have gotten 1000+ page hits barely moved the stock. People are too absorbed with their own thoughts, opinions, strategies, projects to bother stealing yours.

    Cheers,
    Evan

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  4. post whatever you want. no need to write a big article justifying it...

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  5. "Nothing new under the sun" is in Ecclesiastes.

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  6. Another good post. Thanks for blogging. I look forward to your next shared idea. I would comment more often but I have problems with the "prove you're not a robot" words. I usually only get one of the words right.

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  7. If you are managing money, I think there are two risks: 1) general solicitation - can be misconstrued as marketing, which is frowned upon. I recognize that the direction of the HF world is to discuss their books publicly, but I think they are at the edges of what's legal and not. 2) Your investors - granted you are not revealing all your ideas and no one knows position sizing, but your existing investors (who you are charging fees to) may not appreciate you sharing ideas to others who are not paying your fees. Additionally, you run the risk of them falling your advice on individual names without the knowledge of your whole portfolio, and should something go wrong with the name, then they are probably not too happy. This can obviously be mitigated by your choice of investors.

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  8. Nate,

    Another great blog article. One question - have you on average noticed any change in stock prices after you blog so that the stock is no longer in your buy range? I have not thusfar but I deal in micro-caps not nano-caps like yourself. TIA.

    Packer

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    1. I haven't noticed a pattern, but at seemingly random some stocks I write up will jump. It seems the worst ones have the biggest jumps, and the decent ones stay flat longer.

      I don't think there has been any company I've written about that I couldn't have purchased lower after the post.

      Nate

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