Benjamin Graham said, in perhaps his most famous words:
"In the short run, the market is a voting machine but in the long run it is a weighing machine."
Those words are true genius in the way they concisely define the way the financial markets operate. The voting machine is behavioral finance, high frequency finance, money flows, demographic trends, statistical arbitrage and trading on the news, among other things, all rolled up into one. The weighing machine is the pure essence of the reason financial markets exist: to accurately assay the worth of financial securities, or in a nutshell, to assess the present worth of discounted future cash flows. There is a waiting queue for the weighing machine, but eventually, everything is assessed it's true worth.
Graham's understudy Warren Buffett built a fortune by mastering a focus on the weighing machine part of the market, accurately weighing assets prior to their turn at the weighing machine. Graham and Buffett have largely ignored the voting machine part, except where it presented them with golden opportunities to rearrange their holdings. Buffett is the undisputed master of the weighing machine. The Super Quants, on the other hand, tend to pay a lot more or sometimes all of their attention to making money off the voting machine part of the market. By all accounts, many of the Super Quants produce returns rivaling Buffett, albeit over a shorter history. Bringing up the rear are the Efficient Market Hypothesis believers seem to think that there is no voting machine (other than a random walk) and the weighing machine is 100% functional, a concept which Buffett has long thought absurd, and no doubt the Super Quants do as well.
CASTrader development thus far has been squarely focused on the voting machine aspect. It's not that I don't believe in the Graham and Warren Buffett way - quite the contrary. Most of my investing successes so far can be attributed directly to Buffett's teachings. More importantly, some of my investing blunders can be attributed to not heeding his teachings. The bulk of the rest of investment successes can be attributed to variations on the Shannon Method, perhaps the simplest way imaginable to milk some profit from the voting machine. The Buffett stockpicking method is conceptually easy, but implementation is harder, in my opinion. One of the hardest parts is the patience involved in finding suitable investment candidates. Quantitative Buffett stock screeners I have seen pick many stocks Buffett wouldn't touch and often discard those he would, in my opinion, but they aren't a bad place to start. There's quite a lot of judgement involved that simply cannot be replicated by a machine - at least not yet or anytime soon. Despite what Buffett says, even very few humans ever achieve the same success by emulating him, though many try very hard. Chalk it up to Buffett's personality, perhaps (note: contrary to the article, many think Buffett is ISFJ).
Anyone trying to make money off the voting machine should be well-versed in the concepts of the weighing machine, in my opinion. To the extent I can, I want to program Buffett into CASTrader.
Comments