Precisely Inaccurate.

I just finished reading renowned investor Joel Greenblatt's latest book - The Big Secret for the Little Investor - on which I have a few comments.

First, this book is quite short and very easy to follow. There are some simple equations explaining financial such as discounted value, but the book is mostly a discussion on basic value principles. Appropriately, Greenblatt quotes Ben Graham and Warren Buffett  multiple times. All things considered, the bulk of the book is a pretty solid summary of J.G.'s investing strategies communicated very clearly with all readers in mind.

The Big Secret also serves as a very good introduction to the world of indexes. Greenblatt spends a good portion of the book detailing what indexes are, how they are weighted, their relation to market sentiment, and how their historical returns differ from other passive or 'hands-off' strategies for the small investor - such as mutual funds.

Where I believe this book holds it's true value to the small investor, though, is in the discussion of the illusion that financial models, in all of their complexity, are to be heralded as the crystal ball of the investing world. While it is true that the analysts on The Street are experienced 'professionals' who spend days working on a comprehensive financial model, with multiple spreadsheets linked together and daunting equations, it does not guarantee a more accurate prediction of what this company is worth or more importantly what the market will be willing to pay for it in the future. One reason, Greenblatt notes, is that a more complicated model with more segmented information and forecasting will certainly be more precise, but not necessarily more accurate. Ultimately, any model/valuation that is forecasting future earnings, cash flows etc is making some serious assumptions about what the future will bring. No analyst can predict the price of oil 10 months from now, let alone an earthquake in Japan or widespread political uprising in the Middle East. These things all affect uncertainty which humans naturally associate with fear and thus investment risk, and they are completely unpredictable. Again, precise assumptions don't guarantee accurate ones.

To illustrate the fragile nature of these models, Greenblatt discusses the valuation of a hypothetical company, whereby he changes growth rates by only one or two percent. When forecasted out 10 years, these assumptions can change the 'value' of said company by 80 percent in either direction. Wile Greenblatt himself, I'm sure, uses excel  and builds forecasts for future performance, he does not hold this practice to be most important. What he details as most important in investing (as does Buffett) is a thorough understanding of the business, it's industry, and a common sense approach to forecasting growth and market returns. Only then is building a complex model a justifiable use of time and energy.

An investor should therefore be cautious not to purchase any securities on the basis of a buy/sell/hold report coming from their local brokerage. Indeed, the analysts who create these forecasts and price targets are experienced and hard working, but likely this quarter's earnings forecast is just a prefabricated template which has been updated with the most recent financial results. Often, the price target and buy ratings will be adjusted according to the new output of the model. In my view, this is reactionary decision making and will not help keep you one step ahead of the market.

The bottom line is that seemingly comprehensive financial models can be misleading. While they are a great supplement to the investing process, they are by no means primary. An independent investor should take it upon his/her self to read up on the business, understand how it makes money, try to get a grasp on growth prospects, take a look at the financials and - most importantly - make sure it is cheap.

http://www.amazon.com/Big-Secret-Small-Investor-Investment/dp/0385525079/ref=sr_1_1?ie=UTF8&qid=1311165340&sr=8-1

Red Sky at Night, Investor's Delight

At work the other day - when CI Financial was doing their Q1 earnings call - I came across this new start-up capital management firm/hedge fund called Red Sky Capital Management (RSCM). The shop started in September 2010, has one fund called the "Red Sky Partner's Fund" and roughly $50 million in Assets Under Management. Putting aside an impressive 19 percent return since inception, there were two major things that grabbed me about the Partner's Fund.

First, is the investment style. The fund is headed by Tim Lazaris, who along with most of the rest of the team, worked as a portfolio manager at GMP before starting Red Sky. What he has brought to the table is in my opinion a very interesting blend of investment philosophies which (so far) are working very well. The team has managed to build an investment strategy which first focuses on long term fundamentals. Looking for deep value plays through a bottom-up analysis is a strategy that Benjamin Graham, Warren Buffett and the likes advocate. This serves as the core of the portfolio; the platform on which greater risks can be taken, if you will. To compliment (and contrast) this strategy, they also perform top-down macroeconomic market analyses. Where the first strategy focuses on finding long term investment prospects which may be out of Mr. Market's favour, and therefore cheap, the latter is based on market momentum and technical indicators. These types of trades generally have a much shorter life and as such require more constant attention. It appears that utilizing two near opposite strategies in the same fun might be a sign that the Red Sky team biting off more than they can chew, but the undertaking is noble, and it is clearly working thus far. In my opinion, this is a very interesting approach to portfolio diversification and risk management. If you want to read more follow this link: http://www.redskycm.com/pdf/Red%20Sky%20Investor%20Presentation.pdf. Red Sky outlines their investment strategy in this PowerPoint.

Second, mutual fund giant CI Financial owns a 35% ownership stake in RSCM. Since the early 2000s, CI has veered away from the hedge fund business and focused on building its equity, fixed income, and balanced funds. While the size of this investment compared to the size of CI is almost immaterial, the fact that it has invested in this start up hedge-fund-like firm exemplifies their faith in the team at RSCM.

Ultimately, Red Sky started up in the heat of a bull market coming out of the biggest recession since the great depression. Clearly the market has been on their side since inception. While they've still managed to beat the big indexes (see above), the real test of their creativity and investing skill will be through good, bad, and uncertain markets. So far, they certainly appear to be on the right track.

Author Disclosure: I do not have a position in any Red Sky products and do not intend to initiate one in the next 72 hours.

First Post! Review of Driven, by Robert Herjavec.

Wei Ji

I didn't know how I would start this blog, or even what I would write about, but as a business student I haven't been able to write much in the past year and that has bothered me. I admit that when Christopher Hitchens said one of life's greatest pleasures is the vindication of your thoughts and words, I couldn't have agreed more. Ultimately, I want The Growth Project to be a testament to change, evolution, and adaptation for and of the world around us. Whether it be social, political, economic or otherwise I believe that without change there is no growth. There are forces at work that are far beyond our personal control, so pack light. Stagnation is abomination. I am writing to help expose those who are driving change in all of it's forms. In accordance with this philosophy, I will review books or articles that I have read, propose investment ideas, and comment about contributions to our advancement as I see fit.

It seems appropriate to start by talking about a personal hero of mine. Robert Herjavec. Here is man who understands the importance of constant change and improvement, and rejoicing in life all the while. There is nothing which says that impatience and the unyielding desire to improve cannot coincide with happiness. In fact, I think that in time they are mutually dependent. I admire Robert Herjavec because he embodies this so well. In his recent book, Driven, (available at fine bookstores everywhere) he addresses change, crisis, and chaos as stimulants not deterrents of growth. While the book also tells a lot about his business principles and ascendence from a poor Croatian immigrant into the elite rich, I want to focus on one persistent theme which is, as he notes:

"Chaos breeds life. Order breeds habit."

To Mr. Herjavec, this is the greatest joy in being an entrepreneur. There is no time clock or defined skill set, but the requirement is to always think critically and solve problems as they arise. Learn on the fly. He is what he does, and loves it because of this. Embracing constant change has helped Mr. Herjavec reach heights most only dream of.

Not previously unfamiliar to me but also discussed in this book, is the Chinese character for 'crisis' - Wei Ji (both first tone). As is common in many Chinese phrases, there is a slight philosophical undertone to Wei Ji. Wei is the first character in many words, such as Wei Xian, which almost all refer to danger. Ji on the other hand, is the first character in words such as Shi Ji, almost all of which denote some form of opportunity. In crisis there is opportunity, but opportunity cannot exist without danger. Reward cannot exist without risk. Understanding this is a fundamental necessity for life, love and business. I believe this to be one of the primary messages in Driven.

I highly recommend this book to anyone who finds themselves twitching their knee while sitting on the train (as I am now) or does not see themselves wanting to be home at 5:30 every night for dinner. One of the most important things I took away from this book is that you cannot be afraid to shake your world when you feel the need to change; it might be the best decision you ever made. After all, in 1519 after landing on the Yucatan from Cuba, Cortez ordered his men to burn all their own ships. "If we are going home," he said "We are going home in their ships." Sometimes, as Mr. Herjavec notes, it's necessary to burn the ships, make the situation do or die and trust yourself to adapt.

Author Disclosure: I am long on change