Newsletter December 8, 2001 Newsletter December 8, 2001

Updates since last Newsletter

5 companies were updated. (Power Financial, Bombardier, Celestica, JDS Uniphase, and Clemex). Duke Energy was added to the Site as a new listing.

I expect to be adding more new companies soon.


Please continue to recommend the Site to others. Such third party recommendations carry a tremendous amount of weight. Mention the site to your broker or advisor if you use one, I’m always interested in getting feedback from others in the investment community.

Also feel free to contact me with general investment questions and suggested stocks. I can’t cover all the suggestions but I do add some picks suggested by members.


The Efficient Market – Friend or Foe?

The efficient market hypothesis holds that if information tens to spread extremely rapidly throughout the investment community then all of the available information about any stock has already been taken into account in arriving at the market price. In reality markets are somewhat but not perfectly efficient. The market for large heavily traded stocks in New York is likely to quite efficient while the market for obscure small cap stocks can be expected to be quite inefficient.

The bad news about efficient markets.

If markets are very efficient then you simply cannot “win” through any form of stock picking (value, growth, momentum – none of them will work). In this case the expected return from any given stock will be about the same as for any other stock, on a risk adjusted basis. In reality of course some stocks will turnout to be much better investments than others. But in a very efficient market the stocks that out-perform are completely random and not predictable by any method. The only way to beat the market in this scenario is to select higher risk stocks. Your return will be volatile but should out perform the market over the long term. Under this scenario when you pay for portfolio management you are paying someone to try and beat the market, when that can’t be done (assuming very efficient markets). If markets are truly efficient then, when you pick an historically successful portfolio manager you are basically picking someone who “got lucky” and you are paying for luck.

The good news about efficient markets.

The good news is that under this efficient market scenario you can forget about all the hard work of analyzing and picking stocks. The only logical strategy would be to buy index type funds that simply track various markets and segments of markets and which have only small management fees. You will not make a spectacular return, but you will make an average market return, which in fact can be very lucrative indeed over the long term.

More good news is that efficient markets can mask a multitude of sins. When you try to pick winners, on average you won’t beat the market, but you also won’t likely under-perform the market in the long term. If markets are efficient you can trust the market price and simply buy any stock safe in the knowledge that the stock is not over-priced given all the available information about the company and its prospects. In essence with efficient markets, “you get what you pay for”, nothing more and nothing less.

Reality check

Stock markets are in fact relatively efficient. It is hard to beat the market. But markets are not perfectly efficient. If we work hard at analyzing companies we should be able to come out ahead on average. It seems logical to assume that markets for smaller and more obscure stocks are much less efficient that the market for heavily traded blue chips. So, when it comes to beating the market through any type of analysis (value, growth,  momentum, charting) it’s much more likely to work for smaller thinly traded issues than it is for the biggest blue chips.

But even the big stocks occasionally seem to trade irrationally. When we see valuation bubbles we can come out ahead by avoiding those stocks.

The bottom line is that there really is no easy money in the market. Those who make a fast fortune are probably just lucky. But there is enough inefficiency in the market to allow a hard-working analyst to do better than the average.


Given that markets are at least somewhat inefficient and do offer some opportunity to beat the market, should you attempt to pick your own stocks? Link to my short article on this subject.

Given that value investing is arguably a reliable method to beat the market over the long term, Are You Ready To Take The Value Pledge? Link to my short article on this subject.

Research for sale:

In November, for the first time, I offered a new research report for sale. The response was very encouraging. I don’t have anything new for sale yet, as I prefer to wait until I have a new “strong buy” company. If you have not already purchased the report and are interested in doing so, link to For Sale.

Be assured that most of my research will continue to be posted free of charge. My main goal at this point is to continue to build the membership.


A goofy management award goes out to Major League Baseball. Apparently they have a special license in the United States to act as a monopoly. They are allowed to collude and set prices and are exempt from anti-trust legislation. Yet they report that 25 teams lost a total of just over $500 million last year.

The problem is that they are held hostage by the players. The star players fill seats and attract viewers. Start players are undoubtedly quite valuable. But team managers havestupidly bid up the price that they pay these players to a point that is demonstrably well beyond their value. The teams mindlessly compete for players to the point where all of the potential value in a player and more is paid out to the player. The team owner is left with nothing but losses. And this is in spite of their monopoly and in spite of playing in stadiums that are usually subsidized by tax-payers.

I can only describe this as colossally stupid management. Smart team owners (if such exist) will sell their teams and exit this business.


This email is kept brief and usually only sent once each two weeks. I hope that you will all stay on the mailing list of this site. However, you can unsubscribe by simply replying with the word “unsubscribe”. I would appreciate knowing the reason.

Regards and thanks for your interest,

Shawn Allen