Thursday, March 17, 2011

Why Talk My Book?

Gray, Wesley R. and Kern, Andrew E., Talking Your Book: Social Networks and Price Discovery (February 22, 2011). Available at SSRN: explores the outperformance of ideas posted on the Value Investors Club site.  I enjoyed this article more for the exploration and summary of research on their “Talk Your Book (TYB)” model than the analysis of outperformance.  The discussion of TYB gives me a good chance to explore the reasons I blog or talk my book, which is not the same as their model suggests:

A simple example illustrates how investors utilize TYB in the marketplace. Consider a fund manager who, on the basis of her private information, identifies a stock that is selling for 50% of its intrinsic value. The manager will deploy her capital to the fullest extent possible, stopping only when her capital base is exhausted or she reaches a mandated portfolio position
risk limit (e.g., 10% of net asset value). Notwithstanding the price pressure exerted by the manager herself, the stock may remain considerably undervalued. Because the fund manager has no further ability to increase the size of her position, she faces limited costs in sharing her information. She therefore shares her private information with other arbitrageurs in her social network. These other arbitrageurs verify the private information and, by deploying capital of their own, ultimately drive the price of the asset closer to intrinsic value.

TYB benefits all parties involved: The sharer experiences a gain as her portfolio increases in value, the arbitrageurs who receive the shared information obtain access to a profitable trading opportunity, and prices slowly approach intrinsic value. In the end, prices reach intrinsic value, but market efficiency is a multi-stage process because information must travel through a social network before it is fully reflected in asset prices.

I blog to

1) record my thoughts with a timestamp and no benefit of hindsight

2) improve the thoroughness of my thoughts through the Hawthorne Effect.  If I publish something for all the world to see, I am going to make absolute sure that my references are correct.

3) get feedback to improve my thoughts.  Please criticize and bash what I write.  The markets hurt my feelings all the time and do far more damage than your thoughts ever will.  Please share them.

Markets have humbled me far too greatly to believe that I can or will move markets.  Only the established trend of the market can attract enough attention to move the market meaningfully in my favor.  Markets are not efficient, and I have no private information.  I simply need to be an diligent, honest, and humble observer of the market, and I will do well.

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