Math isn’t an Edge

Love this – How many times have you heard an analyst or market commentator base a thesis around something so obvious and apparent that even a child could see it.  I always say “great, and then what?”

Nicholas Colas, ConvergEx Group chief market strategist, has an even better answer:

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One of the more instructive portfolio manager-analyst interactions I ever witnessed took all of about 14 seconds, but left an indelible impression on me.  Picture a typical morning meeting, with the PM sitting at a round table and listening to his staff pitch him ideas.  We pick up the conversation about half way through the meeting:

Analyst: Boss – I think we should go big into XYZ Corp from the long side.

PM: It has made a new low three times in the last month.  What’s your edge in making that call?  Looks like it wants to go to zero.

Analyst: It’s cheap enough to buy now.  It is trading at 5x forward earnings.

PM: What does that mean?

Analyst (befuddled): It is the price of the stock divided by the average of the Street’s earnings expectations for next year.  Five is really cheap.  The stock is cheap enough to own now.

PM: Did you calculate that 5 P/E on a calculator?

Analyst (more befuddled): Umm…  Yes…

PM: Do other people own calculators?  I think I’ve seen them around the desk.  They’re pretty popular.

Analyst (now realizing he has essentially called his boss stupid AND pitched a lousy idea):  Umm.  Yes. They do.

PM:  Right.  Math isn’t an investing edge.  Go find something that doesn’t come out of a calculator.

The meeting resumes, with every other analyst starting their pitch with “My edge in this call is…”

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Josh here, in other words – tell me something I don’t know.

Source:

ConvergEx Group