Where is Rumble?
Our golden retriever Rumble is a stealth dog! Can you find him in the photo above? Here’s a hint – he’s doing what he does best – sleeping on the couch! The way that dog sleeps you’d think he was working 3 jobs! 😀
Camouflage and stealth are nature’s great equalizers. You’ve probably read of the zebra researchers who tagged the flank of some of the zebras with a bright colour to be able to keep track of them in the herd. Turns out the researchers still couldn’t track the tagged zebras because the lions made quick work of eating them once they stood out from the rest of the herd! Oops!
In the investment world everyone imagines themselves as lions. Too often we’re unaware that we’ve had a target painted on our butt! You see, things aren’t always as they seem.
By definition investing is a game of survival of the fittest. There is a nuclear arms race of researchers and analysts utilizing the most sophisticated statistical and AI based tools to identify the most tasty investments in the jungle! The probability that any single individual investor will be able to consistently outperform those pros is delusional. But what if, like lions, individual investors hunted in packs?
Imagine a herd of zebras roaming on the plains of Saskatchewan (bear with me 😀). Those zebras are all of the companies that trade on the Toronto Stock Exchange. From a distance they all look the same. Researchers have to sort through the herd to identify the strong and the weak. The strong are bought and the weak sold. Darwinian natural selection within investment portfolios.
This process is repeated by every investment manager and a consensus forms around what companies are prey. You and I can’t possibly compete with all that talent. Happily, we don’t have to. We can simply research what holdings top managers own (there’s a reporting lag).
So now, rather than looking out at a vast field of zebras, we’re stalking a subset of that herd – the ones the researchers have tagged with a bright fluorescent marker on their flank. Our hunting just got easier!
This is the concept behind a technique that has been used for years – buying securities that the best managers own. I’ve been playing with a derivation of that technique. Rather than buy all the tagged zebras, we built systems to try to identify the best of the best. For instance, imagine we limit ourselves to buying just the top 10? That’s a technique that I’m currently playing with. Early results are promising and more importantly, the process can be automated and repeated.
I like to think of this approach as the Lazy Lion approach. Essentially, we’re co-opting the best research of the best investment managers in the world (while accepting a reporting time lag). The combined list of securities ought to represent the best consensus buy list that we can find. Our task is to sort that list and own the “Best of the Best”. It’s exciting research!
Every once and a while I catch Rumble looking out the patio door – the Lion King of his backyard jungle. An interloping squirrel is just feet away, but on the other side of the glass. While the bossy squirrel chatters away, Rumble stares intently and perfectly still – he’s doing the math, calculating his angles.
So are we!
Glen
