A Canadian on Wall Street

I’m reading The Predictors, after wolfing down The Eudaemonic Pie, Thomas Bass’s earlier work on Doyne Farmer and Norman Packard’s excursions into money-making schemes. The latter is his earlier book about the pair’s scheme at winning roulette, which entailed using physical models and shoe computers to improve the odds of winning, while the former is about the apparently successful use of their chaos theory work to make money in the financial markets. Both books are pretty breezy reading, although if you know a little about either field Bass does a pretty good layman’s job of touching all the bases. He even makes mention of the Mandelbrotian usage of fractals and the fat tail stuff that folks like NN Taleb love, which I wasn’t expecting. There are some choice disses of technical analysis, likening chartists to astrologists and entrail-readers, and a quote from Farmer referring to that time as like the Middle Ages, with said “astrologists” co-existing with the patrician, institutionalized view, akin to the old establishment viewing the world as flat, who hold strong to efficient market theory. I’ll have to quote some of it when I get the time.

David Olive on Abitibi and his belief that they’re on a delusional road. And yes, I realize I’m posting articles from elsewhere and not so much my own original commentary, but frankly I’ve had little on my radar lately.

Very comprehensive profile of Loblaw with some good points about its 80s-era resurrection, a nice anecdote-filled breakdown of the supply chain and logistics bungle that is Loblaw now, comments from Dave Nichols and some notes on Galen Jr, the untested ex-dauphin. It’s possible that Wal-Mart may not be the juggernaut that people seem to think, but I imagine it’ll be a few years before this all plays out and the weight on Loblaw’s stock lifts (or not). And it’s not like other food retailing competitors are standing still, either:

Other supermarkets have made their own moves in response to Wal-Mart’s advance and Loblaw’s drift. Sobeys Inc. and Metro Inc., the second- and third-biggest national players, respectively, have bolstered their fresh food offerings. And Metro became more of a force in 2005 when it scooped up A&P and its subsidiary Dominion chain in Ontario. Now these supermarkets, alongside Safeway and Overwaitea in Western Canada, are harvesting disgruntled Loblaw customers.

Overwaitea owns the Save-On Foods chain in BC and Alberta, and I wish they were public because they are, in my mind, an ideal mix of low prices and high quality products.

This letter from Bill Miller reminds me of something I was thinking about earlier today and wanted to write about. He writes:

Buying tech was not something value investors did back then. That was because tech was not thought to be predictable in the way something like Coke was, for example, since technology changes rapidly. But we had learned from Brian Arthur at the Santa Fe Institute about path dependence and lock in, which meant that while technology changes rapidly, technology market shares often don’t, so they were much more predictable than they looked. We bought them and got lucky when tech values turned into a tech mania in 1998 and 1999.

The result was we did well when first-rate value investors such as Mason Hawkins and Bill Nygren did poorly. They had almost no tech, and if you didn’t have it, you had almost no chance to outperform.

This reminded me of a thought I had this morning that I’ve had before, one which is about the concept of non-constant strategies. People tend to want to follow strict formulas when investing in equities, but the reality is that one must be adaptable. Sure, over the period of time that Warren Buffett has been investing, the concept of value investing has been one of the most sensible because over that span of time, it was. But over the span of time in the tech explosion, it looked like a bad strategy. Could it be possible that over an even longer span of time, Buffett’s strategy may also be “incorrect”? Or put another way, is there a way to augment the value investing strategy to incorporate the ability to shift away from it when need be, to take advantage of more abrupt changes in stock values? (Maybe this is already done a bit by investors like Joel Greenblatt, who mix their value investing with attention paid also to special situations like spinoffs, buyouts and derivative plays in those situations?) What is the exact benefit of maintaining an unchanging strategy — it seems like a recipe for an inflexibility of mind, one that treats the market like a routine cash machine and less like the unpredictable and shifting animal that it is.

Good thread on Google Groups about the breakdown of distributions from income trusts. I’ve rarely held income trusts outside an RRSP, although I had no idea that the return of capital affected the ACB — I had a real estate trust that I’ve since disposed of that probably would have been affected by this if I had known. Maybe I need to use an accountant, eh?

This Wikipedia page on the Baby Bells that were created after the breakup of the original AT&T in 1984 is fascinating, from a business standpoint. There’s so much jockeying in the telecom industry, especially in the US, that it’s hard to keep track of who’s who, but I didn’t realize how many of the old names I’ve heard have been subsumed into these newer companies, names like NYNEX, Bell Atlantic and GTE that remind me of the old BBS days. If it weren’t for BCE’s misguided forays into publishing (web and print) and television (both production, as CTV, and distribution) under Jean Monty, they might actually be a serious competitor on the world stage and a potential investor in foreign telcos. Or maybe I’m just dreaming. Well, I guess they had that failed investment in Brazil, but they pulled out of there if I recall correctly. It still amazes me how big companies like that have so much inertia that they can continue operating, poorly, and just due to sheer size stay alive, like elephantine zombies. It’s often hard to tell if a company is actually still “living” — is GM, a nice short play for me in late 2005, in the midst of a legitimate turnaround? Or is it just in a slow-motion death spiral? That last link seemed prescient at the time, but lately seems a little bit like James Kunstler predicting a return to hard, rural living from imminent oil shocks while prices settle in the low-to-mid-$50s. (Interestingly, David Olive, one of the few business columnists I usually find truly insightful and not prone to punditry, seems to think $150 barrels of oil might be in the offing; I still don’t really feel that comfortable investing in oil due to the complexity of the environment surrounding it and felt kind of like a dilettante investing willy-nilly in oil sands stocks early last year and I’m not even sure a situation that induced an oil shock like that would be investable, anyhow, unless you were really good at getting out of every other sector that would suffer.)

Not that long ago, I investigated getting a degree in financial mathematics, even though as a Vancouver-based investor, I’m nowhere near the major equity and option markets of New York, London and Chicago. Browsing the list of hedge fund jobs, I had daydreams of joining one of these firms, living some fast-paced life with long hours and big money. However, with my computer science and physics background coupled with my abhorrence of the MBA and wealth management programs offered (which seemed more about salesmanship than skillful investment), it seemed like financial mathematics would be more up my alley. After auditing a few courses at SFU in Risk Management, I realized ultimately that the MFin and MA in Risk Management programs, as Emanuel Derman points out in his book My Life as a Quant, are chockful of new immigrants and foreign-born students with educations emphasizing mathematics. In fact, the more glamorous jobs of portfolio manager were often plucked not from the ranks of the risk managers (the actuaries of finance) but from those same MBAs and wealth management programs I didn’t find appealing, the ability to gladhand and socialize often paramount — like most things in life. The few exceptions to this hierarchy include the “quant hedge fund” epitomized by Renaissance Technologies, whose founder, the ex-SUNY Stony Brook professor Jim Simons, has quite vocally derided the poor math skills of North American students. He tends to hire foreigners, instead.

In the end, I decided I didn’t really like any of those options, and so, in my haphazard way, continue to work towards some vaguely stated goal of being an independent investor, like the folks at Contra the Heard. One of the founders of Contra is a software designer, which I find unsurprising, somehow. Why are so many people in the software industry drawn to the markets? Is it a belief in trading systems and algorithmic methodologies that is most easily tested against the markets, with the various APIs and tracked statistics available making it probably one of the most comprehensive and consistently updated data sets available? The ex-physics majors often prefer the options and bond markets, with more quantitative factors that can be used to create mathematical models; physicists are much more numerate than the average computer science person and they take solace from that fact, thinking that it gives them an edge. (They may be right.)

In my earlier investigations, I had looked around to see if there were hedge funds in Vancouver; the majority of Canadian hedge funds are obviously situated near Bay Street. There are a few here, like Asset Logics, KCS Funds and BluMont Capital (not strictly based here, but likely their resource arm is). That first fund lists Ian St. Martin as a manager, one of the successful investors at Marketocracy, his Optimal Risk Reward fund increasing its NAV about 7 times since May 2001 (convenient, no? It’s an excellent return, but top-performing funds that were started after September 11th haven’t been around long enough to determine long term performance, in my opinion). His bio reads: “After a successful career in software consulting, research, and development, Mr. St. Martin has turned his analytical eye to the US equity markets, spending the last five years developing a system-based approach to trading.” Is it the analysis aspect of software design that crosses over with market analysis? The hodge-podge of business requirements and more technically-minded introspection required when creating software probably maps quite nicely to investing in equities. I come from a software background, career-wise, and I know that my own personality is well-suited to design and analysis; many of the other people I’ve worked with have taken an inordinate interest in investing, too. Just something to think about, I guess.