Market Outlook Part 3: How To Be Successful Post the Speculative Movement

This post explains what is required to be a successful investor in the current market and well into the future. It is part 3 in a 3-part post. Part 1 is The Rise of the Speculative Movement and Part 2 is The End of the Speculative Movement.

A Return To Basic Principles. The End of the Speculative Movement and the momentum-investing fad means we are entering an environment more conducive to value investing or, more specifically, an environment where skill in assessing the true economic profitability and valuation of companies will determine the success of stock-pickers. As I have stated before, I believe very few money managers can rival New Constructs’ ability to assess profitability and valuation. My belief is based on:

1. Few Competitors: As detailed in Brian Bushee’s survey in The Rise of The Speculative Movement[1], there were very few value investors in 2004. I believe even fewer survived the last three to four years of the recent Speculative Movement (2003 to 2007).
2. Competitors Skills Have Atrophied: My personal experience in attempting to market New Constructs’ research to hundreds of professional money managers has not only led me to believe that there are very few people who believe in the relevance of profitability and valuation to stock-picking, it also suggests that the analytical skills of those who once believed in that relevance have atrophied considerably. In a world where it simply did not pay to be a value investor, a large number of money managers have lost touch with how to perform the most basic levels of analysis.
3. Higher Barriers To Entry: As companies continue to shift more and more information from financial statements to footnotes, it is increasingly difficult to determine the true profitability of companies. As the analytical rigor of money managers atrophied, companies (aided by Wall Street’s financial innovations) were finding new ways to boost reported earnings, regardless of the performance of the underlying economics of the business. In summary, even if investors want to start analyzing profitability and valuation, they have a lot of catching up to do, and many of them may not be up to the task.
4. Singular Focus On Applying True Value Investing Principles: Over the last fifteen years, I have dedicated myself to developing expertise, sophisticated technology and data-processing tools, and patented processes for executing what I believe to be a state-of-the-art^[2] value-investing strategy. Maintaining my focus on assessing the true underlying economic profitability and valuation of companies during the boom times of the Speculative Movement requires a fairly high level of discipline and conviction, two attributes that I believe are important to successful money management.

The rare combination of expertise in accounting and finance[3], information-processing technology, and discipline embodied in New Constructs position us to continue to be successful in picking stocks for the foreseeable future.

If the stock market is cyclical and we are returning to more of a value-investor environment, then we expect New Constructs out-performance to be even better than it has been to date. If not, we expect to continue to outperform by the wide margins that we have so far. Proof Is In Performance shows how we have performed since inception of the Most Attractive and Most Dangerous Stocks. And if you are looking for independent assessments of our stock-picking ability see our stock-picking accolades.

Source: New Constructs, LLC and Ibbotson

* “Large Cap Stocks” as defined by Ibbotson are the best comparison for the S&P 500, which did not exist in 1926 as it does today.

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[1] Source: Brian Bushee, “Identifying and Attracting the ‘Right’ Investors: Evidence on the Behavior of Institutional Investors,” Journal of Applied Corporate Finance, Vol. 16, 4, Fall 2004, 28-35.

[2] I have a patent for the “SYSTEM AND METHOD FOR REVERSING ACCOUNTING DISTORTIONS AND CALCULATING A TRUE VALUE OF A BUSINESS”; patent #7,752,090

[3] David Trainer, “Modern Tools for Valuation” in The Valuation Handbook – Valuation Techniques From Today’s Top Practitioners, (Hoboken: John Wiley & Sons, 2010), 182