Thursday, August 18, 2011

Mark Cuban on Investing

Mark Cuban channels Keynes when he says diversification is for idiots. Keynes thought similarly:

As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one's risk by spreading too much between enterprises about which one knows little and has no reason for special con fidence. [...] One's knowledge and experience are de nitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confi dence. (letter to F. C. Scott, 15 August, 1934)

Keynes's pre-Markowitzian view is regularly dismissed, but Cuban makes an intriguing point about sitting in cash until you see an opportunity, as opposed to simply being fulling invested all the time. The longer it takes the market to reach prior peaks, the more markets may begin to think a P/E of 12, not 20, is the status quo. It would be a good thing if investors thought less about trying to make money in the abstract market, where they have little control or responsibility. Market timing is improbable, so the key is not to think staying in cash is waiting for some market bottom to jump in, rather to wait until something more unconventional like a chance to invest with some acquaintances in a franchise or something where alpha is more conceivable.

The idea of getting paid to take some 'abstract risk,' is becoming more quaint every year.


r2d2 said...

I think diversification is good as long as it is limited to stuff you know enough about to form a long term view. Completely passive diversification for the sake of it is the starting point of a lot of trouble. Implicitly you rely on the collective judgement of others about the price of these things, somehow assuming that they have done a really good homework for you (efficient market stuff). I think having many people rely on the opinions of a limited number of others can quickly lead to a lot of trouble. The market can turn a mistaken view into what looks for a while like a self fulfilling prophecy, and eventually ends up bad. My favorite example is this one where you can replace the weather-man with the security analyst. (or the rating agency, I guess). The more people rely in their investment decisions on the assumption that markets are efficient, the less efficient they get.
Staying in cash is good as long as you can assume it is safe. Not sure about this last point.

shane.wilson said...

hey, wait a minute...just the other day you said you were "buying here" because "there's no double-dip on the horizon"...isn't that "market timing" rather than "something where alpha is more conceivable"?

Eric Falkenstein said...

I'd be buying...if I invested that way, which I don't. I know I can't time the markets...I just think we aren't in for a double dip recession, which I think is priced in.

D said...

the fundamental premise behind long term investing (and diversification) is that we will have consistent capital formation over the long run.

what "is" deflation?

it is capital destruction at the structural level. what is capital formation then and why does it relate to a general increase in the equity market?

if you look at the correlation of S&P500 stocks you might skip past diversification right to index trading and market timing based upon a capital formation and liquidity preference framework.

i found you after your mention of patinkin in 2008 came up in a google search.