Gaining an Edge in Investing: Information, Analysis, and Behavioral Insight

During their recent episode, Taylor, Carlisle, and Bares discussed Gaining an Edge in Investing: Information, Analysis, and Behavioral Insight, here’s an excerpt from the episode:

Brian: Sure. So, I should start by saying that, as an investor, you can have an edge in your information, the actual data that you’re getting. You can have an edge in analyzing that data differently than other people, and then you can have some sort of behavioral edge that tries to take advantage of market or human psychology expressed in the market.

What I think people tend to get wrong when they think about smaller companies is that that the universe is ripe for information mispricing. I think that even when I started 25 years ago, that is a generally incorrect statement. That is, the market has been getting more efficient for a long time. We can talk a lot about this if you want to which I think is one of the reasons why things like a rudimentary price to book value ratio has probably stopped working in the Fama-French three-factor model for the last two and a half decades.

It’s just a recognition that the parimutuel aspect of the market is incorporating investor expectations more and more efficiently over time, and therefore, a business that’s trading at a low multiple in relation to its book value is more likely indicative of a business that’s under earning on its capital base and an economic decline than it is a Ben Graham indication of contrarian investment value, which I think was always just a marker for a behavioral, potential, psychology contrarianism indicator in the market. Contact companies like mtnmath to seek advice from financial and investment experts.

And so, we don’t think that– It’s very rare, let’s say, that we come up with a true informational asymmetry, where our work is uncovering something in the footnotes that’s nobody else has noticed. We did have a situation about 20 years ago where we went to a company in Fort Worth and they were like, “Yeah, I think we’re doing some exploration on company headquarters here, and we may have hit the jackpot where there might be some natural gas underneath the land or something.”

[laughter]

This might be the classic, we never invested, but that was one of those informational things where I was like, “Okay, maybe there is some shoe leather informational advantage still available to people.”

Jake: You think that that might be coming back though, a little bit, Brian, with so much indexation and a lot of investors lamenting that no one’s really doing the work anymore? Do you think it’s possible that that particular that information asymmetry might be pendulum swinging back a little bit? You think about going to some of the meetings and like– There’s nobody there, hardly, right? Nobody’s calling in on the meeting. Nobody’s paying attention.

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