Cynical Trader has worked in both the asset management and institutional brokerage sides of the investment business. While you would think this would give insight into how the "experts" allocate capital efficiently and prudently to achieve superior risk adjusted returns, this experience has left him more jaded and sceptical of the asset management profession. The notion of institutional smart money is largely a fallacy.
The objective of this blog is to highlight absolute return strategies with solid risk/reward characteristics that provide some margin of safety against capital loss. These ideas are independently derived and free of institutional bias, analyst recommendations, grandiose economic conspiracy theory or divine intervention. I receive no compensation as part of my analysis. I also encourage anyone who considers a recommendation to thoroughly investigate an opportunity for themselves.
The prudent way to approach investment analysis is bottom up absolute value. Too often traders make decisions based on macro developments that do not fully understand, largely because they are too complex to grasp the full implications. Suppose an investor, sitting in his air conditioned office, determines that there are coal shortages in China. What are the best ways to play this theme? If you want to buy coal companies, what is the appropriate price to pay, 15x earnings? 20x earnings? Suppose the stocks fall 10% over the next week, is the trend over or do you buy more? If it goes up 10% is the story now fully discounted? Are my companies most levered to this trend? How much do you really know and how many assumptions are you using about the dynamics of the Chinese coal business, energy substitutability, demand forecasts, reliability of data, etc...? Often this information is biased or unavailable. Plus, there is likely someone out there who understands these dynamics better than you because their livelihood is tied to that business, so they will see inflection points way before you do.
History shows us that people often delude themselves about the strength and duration of a trend. Peak oil has been called more than a handful of times stretching back over 100 years. Reinhart and Rogoff's "This Time is Different" show that the world is in a perpetual state of asset bubbles, currency devaluation, inflation, and default, but there are very few who are able to spot the inflection point. You don't have to. Markets are not efficient so deals pop up all the time provided you are diligent and disciplined. Investements should represent a good risk/reward characteristic in and of themselves without having to make a multitude of assumptions on macro or industry trends, assumptions that are ultimately crucial to the gain or loss on investment. It is the intention of this blog to point out these inefficiencies as they are recognized.
