Wednesday, June 29, 2011

Low Price Anomaly: Cryolife

Here's another stock I liked so much that I bought it because it fits with my low price anomaly theory.  The company is Cryolife, which makes medical devices, is a leader in tissue preservation methods, and has developed other products such as surgical adhesives and foams.  It's low priced and, while in a competitive industry, it is a growth market.  It also has significant intellectual property.  I'm willing to wait until it is in the right place at the right time.

Wednesday, June 22, 2011

Investing in Lawsuits

Ted Frank is what you might call a "professional objector," which means he is in the business of objecting to class action settlements. Ted had an interesting investment angle leading up to the outcome of the Supreme Court's decision in Wal Mart v. Dukes -- a massive class action case against Wal Mart alleging gender discrimination. Here was his premise:

Over the years I've been surprised when the stock market strongly reacted to judicial decisions that seemed like obvious outcomes. This surprises me: I don't have inside information; institutional investors have the ability to process the same public information that I do; the efficient market hypothesis predicts that this public information should already be reflected in the stock price; thus, if I can predict a ruling, the market can, too, and shouldn't treat it as a surprise when, say, the Illinois Supreme Court reverses a multi-billion-dollar judgment against Philip Morris, which bounced over 5% that week in December 2005. But apparently, the trial lawyer strategy to artificially depress stock prices to pressure defendants into settlements has an effect of creating market inefficiencies.

I'm very confident that Wal-Mart v. Dukes will result in a reversal of the class certification in the enormous multi-billion dollar class action against it. But the things that make me confident in that result—the briefs, the tenor of the oral argument, the language in AT&T Mobility v. Concepcion about the importance of protecting the rights of unnamed class members—did not produce movement in the market price of Wal-Mart stock. This leads me to suspect that the market is undervaluing the probability of reversal, and will be surprised when the Supreme Court does reverse later this month.
It's always bothered me when economists make clever predictions but aren't willing to bet on them, Julian Simon a notable exception. Here's a hypothesis that won't take twenty years to resolve; if I'm right, aren't I stupid if I don't make a quick profit on this predicted market inefficiency. So I've put my money where my mouth is: with the dip in stock prices last week, I invested a bit over 10% of my net worth in a leveraged bet that WMT stock will bounce this month when the Supreme Court releases its decision through purchases of July and September out-of-the-money call contracts.

How did it work out?  Not very well.  According to Ted:

In the stock market, you can be wrong and make money, and right and lose money. It's better to be lucky than good. I'll liquidate today, and take a loss of over half my bet. C'est la guerre. I've made bigger financial mistakes in my life; I've had single trips to Las Vegas where I made more money than I lost on this three-week bet. (Heck, I'm an economist who understands opportunity cost. I lose more money than this every year I devote to the Center for Class Action Fairness instead of being a for-profit lawyer.)

Monday, June 20, 2011

An Individual Investor's Advantages

I was moved recently to think about where an individual investor's advantages might lie against his professional counterparts. The spur was a James Altucher interview on investing, in which he suggested that you think about where your edge lies against the pros (and other investors) before you make an investment. Put aside for a minute the case of an individual with very particularized knowledge about an industry who very well might know more about a certain market than pros with access to professionally produced information. I'm talking about the individual who picks up Smart Money and sees a stock recommended in an industry he knows very little about.
It seems to me that the individual can (but may not have) an edge in the following areas:

1. Courage to stick with an investment (pros have to show performance over shorter time frames)
2. Longer time horizon to stick with a stock and for it to realize it's assigned potential (same as number 1)
3. Greater powers of imagination in terms of visualizing what a stock and its industry's potential are
4. Higher risk tolerance

These are general advantages, to be sure, but not at all trivial. The first two, standing alone, might be an argument against turning your money over to "pros," as they very well could outweigh any disadvantages the amateur investor has.

Wednesday, June 15, 2011

Low Price Anomaly In Practice: Quantum (QTM)

Here's a report on a low-priced stock I bought which paid off. Anecdotal to be sure but I've become an adherent of this so-called anomaly and will continue to report in on results.

Stock: Quantum (QTM)

Purchase Price: $2.79
Sale Price: $3.42
Holding Period: 54 days

Return: 22.58%

Tuesday, June 14, 2011

Avocados and Demographic Investing

I can't take credit for this idea but read it in a Value Line special situations newsletter. The premise is that you look for growth. Where does the U.S. have a lot of growth: its Hispanic population. So look for investments that will prosper as the Hispanic population grows. Value Line suggested avocado growers, since Hispanic food incorporates avocadoes to a greater extent than European-derived American cuisine.  Come to think of it, Sushi in the U.S. seems to use a lot of avocadoes and Sushi restaurants also seem to be on the rise.  Take a look here: