Hypothesis of the day

Hypothesis I thought of the other day daydreaming:

A test of lows or highs is similar to how when you break up with a lover you always go back for a second try to probe to see if you made the right decision. Both parties are usually willing (bulls/bears and man/woman or etc/etc. If test falls short, low/high rejection a new trend is formed or new high/low is formed and trend is resumed. If two partners give it a second try either their relationship moves to new deeper levels of intimacy or they split up and look for new partners.

Of course break out failures and failed failures happen, but at least the scenarios can be confined to a limited set of outcomes.

Was Benjamin Graham Skillful or Lucky?

Last weekend’s Intelligent Investor column looked at the extreme difficulties of disentangling skill from luck when you are evaluating investment performance. It’s the topic of an excellent new book by Michael Mauboussin and a subject of endless fascination – and frustration – to investors.

We tend to think of the greatest investors – say, Peter LynchGeorge Soros, John Templeton, Warren Buffett, Benjamin Graham – as being mostly or entirely skillful.

Graham, of course, was the founder of security analysis as a profession, Buffett’s professor and first boss, and the author of the classic book The Intelligent Investor. He is universally regarded as one of the best investors of the 20th century.

But Graham, who outperformed the stock market by an annual average of at least 2.5 percentage points for more than two decades, coyly admitted that much of his remarkable track record may have been due to luck.

In the Postscript chapter of The Intelligent Investor, Graham described “two partners” of an investment firm who put roughly 20% of the assets they managed into a single stock – a highly unusual departure for the conservative managers, who normally diversified widely and seldom invested more than 5% or so in any one holding. (more…)

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