Random or repeatable?

Yep mostly smaller companies. Not a specific decision because of historical factor type statistics or anything like that but just because I needed to understand the businesses and financials to follow my playbook and the big stuff is generally too complicated for me.

 

Well of course you (and most the regulars here) already know this, but if ~50% of investment managers can outperform the average in small caps (per the SPIVA reports) then why wouldn't you be one of them! Also noting that small caps should themselves should outperform the broader market over the long term. I don't see any cognitive dissonance here. I think it's perfectly rationale to assume that the bulk of the market is reasonably efficient (particularly at the top end, especially over time) and the same time believe that in the smaller, dustier corners, opportunities abound for those with talent, convicent and a higher risk tolerance. Of course that doesn’t guarantee you’re be as successful over the next 20 years, but who’s to say you won’t be twice as successful? Anyway, you've already won the main game and clearly know how to manage risk, so you can now choose which fields to compete on or ignore.

And thanks for sharing - I'm sure I'm not the only one that, in a very minor way, enjoys tagging along

 

These are only theories, but there is must be a point where too much FUM has a detrimental impact on performance. It makes more sense for a gifted individual to invest in their research ideas themselves without sharing as they will make more than the fees for a fund they manage. If you knew of a limited supply of gold, you are not going to tell other people how to find it if what they pay you is less than the value of the gold you can extract yourself.

This is why I never believe in someone selling a get rich quick scheme.

 

With regard to market efficiency and behavioral biases, an interview with Professor Hersh Shefrin. A significant point he makes is why most investors should act as if markets are always efficient, even though that's (clearly?) not always the case. Plus much much more. Another great episode.

Episode 167: Professor Hersh Shefrin: Fear, Hope, and the Psychology of Investing — Rational Reminder.

@dunno worth listening to if you haven't already and very relevant to this conversation I suspect.

 

Market efficiency (no arbitrage) is an important assumption on asset pricing models a la Black Scholes. It is not 100% efficient but close enough for the assumption to produce reasonable results. Akin to Game Theory's assumption that your opponent has all available information and will play the perfect game.

 

So that's where I'm going wrong!

But if you can't use the big psychological questions that drive all those other needs tied up with investing to justify alcohol and a mid life crisis, whats the value of behavioral finance?

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