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Lady Gaga And Investment Strategy

By The Noble Contrarian on July 12, 2011 in Other

According to the endless emissions of several forms of local media, the four most important things in the universe are – in order – Twitter, Lady Gaga, what Gen Y thinks of the Baby Boomers, and your say on what Lady Gaga twittered about yesterday’s breakfast.

Maybe I’m just out of touch, but it’s still safe to say that relying on media could give you a distorted view of the world. You should treat the business press with similar caution, although business examples tend to be less outlandish, generally-speaking.

In short, just because it’s in the business press doesn’t mean it deserves your attention. Similarly, the things that do deserve your fullest attention are probably not in the press.

This is not intended as a putdown of the media (although it regularly deserves one), it’s their job to report the ‘news’ and we’re the clowns that go gaga for certain topic matter. But investors need to be aware that once the story is on the front page of the newspaper, it’s probably already factored in to the price you are being asked to pay.

A canny investor focuses on developing insights that others haven’t discovered yet. By default then, you need to beat the journalists to the exciting stories, or find stories so utterly boring that it’ll put any editor to sleep.

Your edge might come in the property market, small business or valuing antiques. Mine is in the stock market and, even there, my portfolio is filled only with stocks where I have a perceived ‘edge’ over other stock market investors. That edge most often comes from having a longer-term outlook than others, an area filled with opportunity that we might refer to as ‘boredom arbitrage’.

At times past or present, I’ve also found an edge in various other areas: a willingness to consider situations with tainted management but light at the end of the tunnel, ignored microcap stocks, stocks with hidden or uncertain assets, cyclical stocks battered by genuinely cyclical doldrums, stocks with a motivated seller, and – another favourite – situations with free or very cheap optionality.

Here’s an example: I currently own units in an ASX-listed property trust that itself owns US commercial property. The portfolio consists of four different groups of offices. Two are conservatively financed and will provide today’s buyer with reasonable returns over the long term. The other two have as much debt against them as the assets are worth. They are in the books at close to zero net value and that is the most likely outcome. The debt is limited recourse, though. That means if the prices continue to fall, we can just hand the keys back and keep the ‘good’ part of the portfolio. If the US economy returns to health and commercial property prices recover, we get to keep the upside. It’s not the most likely outcome, but it is a potentially valuable possibility that is not being factored in to the current share price at all.

Of course, an investor’s edge will only be an estimate at the time of purchase, whereas ultimate returns will be driven by reality. But thinking about your edge in any investment situation – What do I know that others don’t? What do others know that I don’t? What can nobody know that might add or detract substantial value? – and focusing your bets on areas of maximum estimated advantage is a crucial tool for minimising risk and maximising returns.