Saturday, December 3, 2011


Moving Averages bad for Magic Formula

An interesting article appeared on Turnkey Analyst on 27-Nov-2011. It has noted that MA (Moving Averages) rules have worked historically. Applying MA to a simple quantitative value actually destroys performance, including Magic Formula.

Bizarre, because it seems to overturn a lot of what I've been hearing about combining value with momentum.

Strategic logic

The ever-excellent csi (csinvesting) blog has run two articles on strategic logic, using Kodak as an example.

Part 1

Don't follow market mavens off a cliff [a point that Jim Chanos made at the recent Value Investing Conference, too].

csi says that Bill Miller probably got caught up in the turnaround story, the CEO, etc., but they didn't ask a simple question: "what competitive advantage would Kodak have in its new endeavour?"

There are only 3 types of competitive advantages:
  1. Supply - it's a low-cost operator - maybe coming from privileged access to crucial inputs, but more commonly through proprietary tech. that is protected by patents
  2. Demand - usually the result of network effects or customer captivity. csi dismisses the idea of product differentiation or branding [a view shared by Greenwald], because all competitors are able to differentiate their brands.
  3. Economies of scale
Morningstar categorizes economic moats in 5 ways:
  1. efficient scale - the market is limited, so there is no incentive for competitors (e.g. WD-40)
  2. network effect - large networks are more attractive to users, making it difficult for upstarts to penetrate
  3. cost advantage - usually in a commodity industry
  4. intangible assets - patents, tradcemarks, copyrights, government approvals, brand names
  5. switching costs
Part 2

The death of traditional photography was recognised as far back as 2003. Faced with such a problem, Kodak seems to have a straightforward strategic solution: enter in digital photography. But that wont work. Digital photography is not as commercially attractive as chemical photography, and Kodak has no competitive advantage in digital photography.

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