The Inefficient Market Hypothesis.
After sitting through my first year of MBA coursework and having the EMF crammed down my throat like trying to eat a spoonful of cinnamon, my gastrointestinal reflexes have had enough. Wikipedia puts it best: “The efficient-market hypothesis (NYSE:EMF) states that it is impossible to consistently outperform the market by using any information that the market already knows, except through luck. …Empirical analyses have consistently found problems with the efficient markets hypothesis, the most consistent being that stocks with low price to earnings (and similarly, low price to cash-flow or book value) outperform other stocks.”
I’m the guy that sat through upper level psychology courses and disproved a significant quantity of their best-practices by showing that indeed their preferred treatments were statistically insignificant from the placebo. You may think I’m nuts, suspicion always was the signature of incompetence. There has always been room for these type of tipping-point broad-scale logical conundrums. For example, the world used to be flat. Even when proven otherwise, it took years to get to a spherical world.
Empirically disproving a hypothesis normally pushes them into oblivion, but the EMF is one that has been chosen for mindless perpetuation throughout MBA schools across the United States, as evidenced by my curriculum questioning at various MBA Case Competitions.
If you want it… Go get it. Period.
1. Figure out what works
I started with the most successful investor and worked backwords. An overview of what ideas I’ve traversed across can be found here. I would like to add that this works in every market and that I believe that every market average can be beaten through due diligence. Do note that settling for average shouldn’t always be frowned upon as it may be satisficing.
2. Do it
Find people that are doing what you want to be doing and start imitating. This is where most people go wrong and lose scope of the fact that if compounding interest isn’t working for them or they don’t know what it is --- it is most surely working against them. If it’s not working, you might be doing it wrong.
3. Kaizen/Continuous Improvement
The goal here is to continuously redefine your decision making structure in order to continuously improve your definition of what works to align with what actually happens.
3 New Chinese Microcap Picks as Potential Empirical Evidence Against The EMH
Further, I've attached my current radar. XING and QXM are at the top because they are trading at a significant discount to their book value.
- Sell less than Cash – Total Liabilities
China Agri-Business (OTCPK:CHBU) is currently selling for less than net cash, is making money, and is growing. It’s really tough to complain about this kind of opportunity. That said, my mom is selling this company because I’ve made her a lot of money on it. I personally think that’s bad logic --- because I’d rather sell it at Cash-Total Liabilities. This type of "trading end game" behavior or selling out before something obvious hits a realistic value is what gives people like me an edge. I don't see a need to sell something because it went up 20% if it's down 90% over the last 2 years. I also don't see a need to buy it either --- unless my calculated intrinsic value supports buying or selling behavior.
China Energy Corp (OTC:CHGY) is down over 50% from where we were a week or so ago. This bad news is that they closed down to increase the safety of operations. In my opinion, the long-term good news is significantly overpowering the bad news --- especially at this bargain bin price. I have its earnings pegged at $0.15 a share and huge catalysts on the horizon that are simply not priced into the company’s market cap. After the huge increases in capacity and stupid roadblocks of 2008 beat down this stock, I can see why investors are getting anxious and trying to sell out. Good news for me. I'm a net buyer.
- Sell less than what you’ll make the rest of this year.
Oriental Paper Inc (OPAI) has taken a beating even though it’s making more money than it’s going to make for the rest of this year ignoring that it made money this first quarter. This is one of my top holdings at the moment.
That wasn’t so bad.
Not everything is worth knowing. The person speaking the loudest may have the least to say. Optimistically bounding uncertainty drives aggressive ignorance and the market boom/bust cycle. High power defective reasoning will continue to come from empty suits. Short-sightedness will always weigh in on long-term decisions. The point is this: blindly accepting what other people tell you works to their advantage and not yours. You will only get ahead by being better than average. To be better than average, you must do something different. Keep in mind that this isn’t for everyone. The first step to getting what you want is determining exactly what it is that you want.
I’m the kind of guy that questions everything and is willing to take a stand until empirically proven otherwise. I’m not a scientist --- I’m an engineer. I am not interested in learning how things work except for knowing the best way to make them work advantageously. No matter how seemingly self-evident something may be, people still may not understand. Never underestimate the predictability of stupidity.
Disclosure: Glen and his investors own CHBU, CHGY, OPAI, GHII, NWD, AKRK, CNOA, LTUS, CNO, LPIH, CNEH, CKGT, CYXN, CHCG, GNPH, CAEI, XING and through XING: QXM.