Manifesto

A humble attempt to put our motives and philosophy to paper.

You can beat the market, we can help...

For much of the last 25 years, most of the investment management world have promoted the idea that individual investors can't beat the market. To beat the market stock pickers have to discover persistent mispricings in stocks, but the Nobel-acclaimed Efficient Market Theory claims that the market is a ruthless mechanism acting instantly to arbitrage away any such opportunities, claiming that the current price of a stock is always the most accurate estimate of its value. What hope is there for stock pickers?

But, as Warren Buffett famously quipped, "I'd be a bum on the street with a tin cup if the market was always efficient". In practice, there have been plenty of individuals who have managed to outperform the market consistently over the decades by buying stocks. Many of these investors, such as Buffett or Benjamin Graham, have followed the value discipline, aiming to buy stocks for less than their intrinsic value, stubbornly refusing to get caught up in fashions and market whims, and sticking almost puritanically to their creed. Others, such as George Soros or Bill O'Neill, have been nimbler, believing the market acts in predictable cyclical fashion from under to over exuberance, testing investment theses by pyramid-ing their trades and swinging for the fences when entirely confident in the outcome.

But it's not only the professionals, recent publications12 have shown reams of small private investors that have been consistently beating the market year in year out. And just as we've seen that individuals can beat the market, there's now plenty of evidence debunking the Efficient Market Theory amongst academic circles. Just some of the papers include...

  • Work in behavioural finance initiated by Kahneman and Tversky and developed further by Bondt and Thaler has shown that the premise of rationality underlying EMT is a seriously flawed one. Robert Shiller showed back in 1981 that stock price volatility is far too high to be attributed to new information about future real dividends34.
  • Mordecai Kurz, a Stanford University economist, proposed a theory5 that while the market may be rational, most of the time equities are wrongly priced, systematically over and undervaluing assets - a theory that is gaining strong backing.
  • Research by Abarbanell and Bernard6 at Michigan University has shown that companies that surprise with higher than expected profits do not instantly get repriced. 25 to 30% of the repricing happens up to six months after the initial news.
  • Even the father of efficient market theory, Eugene Fama, has cast doubt on its validity by showing that small cap stocks and low price to book stocks outperform the efficient market model7.
  • Josef Lakonishok, Joseph Piotroksi and David Dreman in many different studies have shown that value stocks based on low price to book, low price to earnings and other metrics significantly outperform glamour stocks8.
  • As just one of several identified momentum effects, research by George and Hwang9 found that stocks near their 52-week highs tend to be systematically undervalued (investors use this level as an “anchor”, so they tend to be reluctant to buy a stock as it nears this point regardless of new positive information).

Of course there are also common sense reasons why smart investors can win against the professionals in the game of investment. Many of these reasons are precisely the same reasons that the average fund manager (in spite of the above) cannot beat the index. The vast size of their funds, the uncertainty of the timing of investment inflows and outflows, the fees/commission they charge and other factors discussed here mean that they are actually at a huge disadvantage to a motivated share-owner with less capital. More generally, both the Tech Bubble and the Credit Crunch show that the market is subject to fads and periods of irrational exuberance (and despair) which can be exploited by the patient long-term investor.

The point here is that, if you don't overtrade, have the discipline to hunt where others don't look, invest time and money in good tools, and have a self-critical learning process that allows you to overcome your natural behavioural biases, then you can beat the market. Of course, that's not the same thing as saying it's straightforward. Our goal however is to help you discover inefficiencies in the market more easily by providing you with superior quantitative tools and first class data. We'll leave you with another inspiring quote from Warren Buffett in Business Week10:

If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.


  1. Guy Thomas, Free Capital 

  2. Matthew Schifrin, The Warren Buffets Next Door 

  3. Werner F. M. De Bondt and Richard Thaler, "Does the stock market overreact?" 

  4. Shiller, Robert, "Do Stock Prices Move Too Much to be Justied by Subsequent Changes in Dividends?", The American Economic Review 

  5. Kurz, Mordecai, "Rational beliefs and Endogenous Uncertainty" 

  6. Bernard, Abarbanell (1992), Tests of Analysts' Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior 

  7. Fama, Eugene F.; French, Kenneth R. (1993), "Common Risk Factors in the Returns on Stocks and Bonds", Journal of Financial Economics 33 (1): 3–56 

  8. Dreman (2005), Overreaction, Underreaction, and the Low-P/E Effect, Financial Analysts Journal 

  9. George and Hwang, "52 Week High and Momentum Investing"

  10. Warren Buffett (5th July 1999), Homespun Wisdom from the Oracle of Omaha 


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