January 30, 2007 – Many people have asked me what exactly is the long tail of investment strategies because that is what I advocate as the best and safest way to make huge gains in the stock market. I have started to update resources on our website, including some new pages soon that will contain illustrations that explain how I developed the proprietary long tail maalamalama investment strategies we teach in our online curriculum. In the meantime, let me explain more here.
The long tail of investment strategies involves heavily right-brained concepts. Today, left-brained strategies dominate stock picking. People think that the more book smarts they have, the more success they will have in stock picking, so they take all kinds of courses with limited utility such as intensive corporate valuation classes, accounting classes. I used to work at a Wall Street firm with a guy that graduated from Harvard that would always tell clients to trust him with their money because he was smart.
Well, just being smart doesn’t cut it in today’s investment world. In fact, being much “smarter” than the next guy doesn’t even guarantee that you’ll be able to achieve better returns than a high school graduate. I finished advanced calculus by the time I was 14 years old, achieved a perfect score on the Math portion of the SATs and could perform complicated statistical calculations in my sleep, but all of that never once helped me become a better investor later in life. Success in investing lies in the creative arena of the right hemisphere of the brain.
Anybody can crunch numbers so that will never give you an edge against your neighbor or Wall Street broker when it comes to performance. Although the information world is “flattening”, at the same time, it is ironically becoming increasingly non-linear. Yet investors and big-shot analysts at Wall Street firms continue to approach this non-linear world with a linear process. Numbers in, numbers out yield the pool of stocks that they choose to invest in. You can take two people with almost the exact same position in life — similar job, similar salaries, similar material wealth, similar leisure time — yet one will view the glass half-empty while the other will view the glass as half-full. Why is that?
It has to do with how one processes information.In the vast sea of information that exists today, how an investor processes information will be the difference between gaining 6% annual returns and 30% annual returns. No longer does the average investor have to wait to read the Wall Street Journal or the Bloomberg Report to learn what is happening in the investment world. He or she can grab this information long before it hits the pages of the Wall Street Journal or the television screen. But just grabbing this information long before it reaches the masses is just a tiny fraction of the entire picture. You have to know what information to grab that has a strong correlation to achieving 25% or better gains in the stock market.
When I look at how Wall Street and how the largest global investment firms process information, I see an outdated, inefficient process. They take large pools of stocks and then use linear statistics like P/E to growth ratios, earnings growth, working capital, dividend growth, etc. to funnel down the pool into a stock portfolio. The technological advancements that have allowed advanced software programs to whittle down a pool of thousands of stocks to just a handful based upon the above parameters is irrelevant. It is irrelevant because when you are using the wrong, inefficient linear parameters as your information funnel, the output though highly efficient, is still going to produce garbage.
A new information funnel, one that is right-brained, and depends upon identifying non-linear relationships that are highly predictive of stock performance is what is needed. The best portfolio managers in the United States, hands down, year after year are the most powerful U.S. Senators that head up important committees and have access to some of the best information in the world. Do you really believe that these U.S. Senators are using some silly, number crunching information funnel to make their decisions about what stocks to buy are do you believe that they are using other highly predictive factors of stock price appreciation instead?
A cynic may say, sure these Senators have inside information and that is why they can outperform the average investor by 20% a year (this is the actual outperformance of U.S. Senators of the market index in a five year study performed by Brigitte J. Ziobrowski, Alan J. Ziobrowski, Ping Cheng, and James W, Boyd between 1994-1998). I would argue that what makes an average investor average is his or her lack of vision.
The average investor may not have access to the exact high level of information that U.S. Senators have and this information may not be handed to him or her as freely, but comparable information highly predictive of stock price appreciation is available. If the average investor just knew how, when, where and why to look for it, he or she could find it, and would no longer be an average investor.
If it seems like I’m still a little bit vague about exactly how to do this, it’s because I reserve the very specific information for subscribers to the maalamalama curriculum. After all, it took me five years to perfect many of my proprietary strategies, including an information funnel that is very similar to the ones U.S. Senators employ, and at least one of my strategies was not even possible to use until just last year! In any event, I hope that you understand that given the evolution of our information age, that those that apply non-linear, right brain strategies will achieve returns that will leave the returns of those that continue to apply traditional, linear strategies in the dust.
J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.