Consistency is the Hobgoblin of the small mind

Yes, we sold a bunch of RIMM today and I am not going to be inconsistent on my blog. I must thus inform you that I remove my fictional long in RIMM. It’s something to do with an ageing consumer portfolio; at high multiples things have to be pretty perfect, super-duper DCF or not. I think the stock will make money in the next 12 months but I fear in the near term I will be wrong, estimates will come down and those multiples contract.

This inconstancy would appear embarrassing to normal people, however it is in fact the mark of an investing genius, I assure you. Certainly Spinoza would not persist in error.

However I maintain my AAPL short! Replace my RIMMs with Nokias. 2x short AAPL 2x long Nokia.


5 thoughts on “Consistency is the Hobgoblin of the small mind”

  1. Hey.. that’s *my* trade. Confound you.

    Going back to the old comments at there are two issues: poor Bill Sharpe’s back-of-the-envelope ratio and RIMM. On the latter it seems we now agree: the market properly is valuing RIMM as a binary option (1 if it’s really a mobile-email monopolist, 0 otherwise). When probabilities change a little bit, binary options move hard. You could be right on the business *and* right on the trade. I am still interested to hear why you think RIMM is the likely winner here, and not NOK/AAPL/Samsung/someone else smart (my personal bet is on the latter). I can spit out DCFs on the way to brushing my teeth in the morning. Real insight into their market is a lot more valuable.

    As for Sharpe ratios, I don’t get the ire. Beta is free and leverage is cheap. In such a world, return per volatility is a decent thumbnail. It’s a lot easier to have predicted RIMM’s volatility on both up- and downside than it has been to predict much else. Ignoring what volatility tells you about your positions strikes me as.. odd. Still, I’m always open to argument. Did yours involve any more than the broker for whom I first calculated a risk-vs-return chart in my feckless youth? Yeah, his portfolio blew up, but I assert I’d have been right even if he’d ended up lucky: he was taking on a lot of risk. Risk matters.

  2. Wcw, I prefer my return as risk free as I can get; but I do not subscribe to standard deviation based nostrums. I do not think real risk can be calculated that way. A Sharpe Ratio that is based on a historical volatility may not be a good guide to the future risk-weighted returns of a stock from one period to another. The ire comes from people grading my performance on something I think is largely fictional, like astrology.

    RIMM may be a winner in mobile email, as it has the largest installed base and is gathering scale, while bringing pricing down itself before others can. It is the winner right now and the game is theirs to lose. I don’t think it is a binary outcome, there are many gradations between being a monopoly or a total loser. Nokia may be another winner. Someone else may make it, too; if I had to bet on someone getting 100m users in 2015 at USD10/month, most probable right now would be RIMM.

    DCFs are too hard to get right if you only do one or two, dependent on parameters like risk premia blah blah, but mine are better, trust me.

  3. Does anyone do an old-style, single-input model of any sort any more? I don’t dispute that your DCF is better than mine, but your business insight into RIMM is substantially more interesting to me. I can improve any model with a little thinking and effort.

    On RIMM, it seems we’re more on the same page than not. They’re winning now, they may continue to win in the future, and they’re the current most-likely bet to. However, when their market cap is north of $50B, expecting a measly $12B topline in a competitive market by 2015 makes the stock a sell. I still see the situation as binary: either RIMM continues to own the market, which will be more users at better margins — or they’re a mere competitor, earn a billion or two more in profits than they do now, and trade at a very similar capitalization, a three-quarter decade hence.

    I’d really like to know which, and right now, I have little conviction.

    Back to Bill Sharpe, realized volatility is a very poor measure of risk. It is, however, a simple proxy, and not too bad over time for something like your long-only tech fund. Calling it astrology is a mite unconvincing. If your portfolio returns saw volatility, then your investors saw the liquid market value of their assets swing, full stop. If your portfolio returns have seen 3x the variance of your asset-weighted sector’s returns, I’ll happily bet dollars to donuts that you take on more risk than your benchmark, and that you future vols will continue to be high.

    And while your +NOK/-AAPL has eaten a good 5% in the last week, that beats +RIMM/-AAPL by a fat 15% or so. Take what you can get, I’d say.

Comments are closed.