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.
The ever-excellent csi (csinvesting) blog has run two articles on strategic logic, using Kodak as an example.
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:
- 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
- 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.
- Economies of scale
- efficient scale - the market is limited, so there is no incentive for competitors (e.g. WD-40)
- network effect - large networks are more attractive to users, making it difficult for upstarts to penetrate
- cost advantage - usually in a commodity industry
- intangible assets - patents, tradcemarks, copyrights, government approvals, brand names
- switching costs
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.