Investment Backwater

Milken, as you probably know, turned junk bonds from a financial backwater into a national mania

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These are still not fully formed thoughts & still very fragile & still could be obvious to the rest of you.

Here goes:

To make large out sized returns in key markets:

1) The rest of the world, should consider it as a backwater i.e. most people should consider the market small or not lucrative enough or too speculative or some XYZ reason

2) Because the world thinks its a backwater, nobody invests in the right tools & data sources to do the proper research i.e. it takes a lot of work to do a decent enough job in understanding what the investment opportunities are

Take value investing: In the 1920’s & 30’s & 40’s, most people thought that the stock market was the speculative backwater of the financial world. To make a value investing decision, you had to pull all the companies financial information, do painstaking research & cash flow analysis to find an opportunity. It was outside the reach of the common man. But now with advanced stock screeners, “anybody” can do the job, they just need the temperament i.e. its not actually an effort barrier, its only a psychological barrier. There is plenty of research if Value investing performs other forms of investing or not. But, what is un-arguable is that value investing is not what it used to be in terms of returns during the days of Graham, Buffett etc.

Could it be that the returns are no longer there because value investing is 1) No longer the backwater 2) Has enough data & tools to do “easy” research & therefore increases competition which compresses returns?

You could follow similar examples in: Junk Bonds, Mortgage Backed Securities, CDOs & whatever else.

So perhaps- to make outsized investment returns in the investment world, you can’t just say “My Data Interpretation Skills are better than yours so therefore I think Apple/ Netflix/Pfizer is better than yours”. You could make money doing that but its unlikely to beat the market substantially.

You have to pick entire investment categories that: That the rest of the world thinks is a backwater

How do we see signs that the rest of the world thinks that an investment category is a backwater:

  • Words like “oh, that is risky/speculative/hazardous…”
  • When you dig deeper, you find that the data/tools to make even decent investment decisions are not adequate & is done in a haphazard manner
  • What else?

Comments on:

  • Does this line of thinking make sense? (if its obvious to the rest of you, please send me links etc on what prior thinking makes it obvious)
  • What investment classes fit into this “backwater” thesis? (For e.g. Angel Investing could fit this criteria)
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