Flipping coins and the share market

[skc]

A little lighthearted piece from a always colourful Marcus Padley

http://www.smh.com.au/business/achieve-a-flipping-headsup-20091204-kaz4.html

Achieve a flipping heads-up
MARCUS PADLEY
December 5, 2009

I have stolen the concept for this week's article unashamedly from Warren Buffet and have given it an Australian tilt.

He expounded the US version in a speech in 1984 commemorating the 50th anniversary of the book Security Analysis by Benjamin Graham and David Dodd, the bible of value investing.

He called his speech: "The Superinvestors of Graham-and-Doddsville". I'd call it "Orang-utans". Let me explain.

Imagine, if you will, a daily coin flipping contest conducted across the whole of the Australian nation. Everyone's in. On the first day 21 million Australians flip a $1 coin. The rules are that if you flip heads you stay in, if you flip tails you give your dollar to the ones who flipped heads.

Every day the losers drop out and the $21 million pool of money is shared among fewer and fewer people. After day one there should be about 10.5 million people left in the game and each will have won a dollar. This process goes on and every day the value of being in the game grows and the stakes rise for those left in.

Assuming the honesty of the losers, after 10 days of flipping there will be about 20,500 people left in the game and each will have won more than $1000.

At this point there will be 20,500 people walking around Australia feeling pretty chuffed with themselves and their ability to turn $1 into $1000 in 10 days. Pretty impressive.

And no doubt some of them would begin getting a bit of mileage out of their position, dropping it into the conversation at nightclubs, expounding their theories on how to throw heads at dinner parties and generally making hay. The media would be stirring and the water coolers abuzz with talk of the local hero still in the game.

Five days of flipping later there would be 640 people left, each worth $330,000. Another five days later and there would be just 20 people left.

By this stage, each flipper would have thrown heads 20 times on the trot and each would have cracked the magic sum of just more than $1 million each. From $1 to millionaire in 20 days. Wow.

Stop the contest and Australia would be swarming over the 20, the flipping "elite". The "smartest" flippers in the nation. And they would make global headlines. And they would write books.

"Flip for Success". "20 Top Flips". "The Psychology of Flipping". "Flipping for Dummies". "Rich Flipper Poor Flipper". "The Way of the Flipper". "Common Flips and Uncommon Profits". "The Intelligent Flipper". "Mastering Flipping". "The Flipping Way" and the most recent record busting bestseller of them all, "Coin Flipping Secrets" by Marcus "The Big Flipper" Padley.

Others would arrange motivational seminars on how to own a flipping massive portfolio in Queensland starting with just one dollar.

The investment banks would launch capital guaranteed leveraged flipping products that charge you a hidden 16 per cent before you make a dollar. And we would buy them.

We would trade online with E*Flip and CommFlip for a fraction of the cost of a full service flipper and the unsuspecting would trade highly leveraged "Contracts for Flippers". And we'd buy 10 CD Flipping Courses plus steak knives in three easy payments from the late night infomercial.

The irrefutable proof of the benefits of flipping would be the 20 people left in and their results. Flipping can clearly transform your life. Of course, the results would have been the same had 21 million orang-utans been doing the flipping, but then orang-utans aren't very good at marketing.

Footnote: The stockmarket is not the same as flipping coins and if you think it is it's perhaps a reflection, not on the market, but on the way you approach it. If you need proof of that look no further than Warren Flipping Buffett and his uncanny knack of flipping heads.

 

[bellenuit]

Re: Flipping coins and share market

Imagine, if you will, a daily coin flipping contest conducted across the whole of the Australian nation. Everyone's in. On the first day 21 million Australians flip a $1 coin. The rules are that if you flip heads you stay in, if you flip tails you give your dollar to the ones who flipped heads.

I think he needs to revise the rules. I'm sure he means to say "if you flip tails you give your dollar AND THE DOLLARS YOU HAVE WON SO FAR to the ones who flipped heads". Otherwise, each winner only wins an amount equal to the number of flips he has made.

Nevertheless, the article does make a lot of sense.

 

[ROE]

Re: Flipping coins and share market

But he miss the main message of Warren, if out of those 20 flip winners
10 comes from a certain background with the same teacher and practice the same principles, wouldn't you want to know what these guys doing differently?

Most investors Warren mentioned dont pick the same stocks but they have similar return and beat the market every time now would you be interested in the core principles of them picking those stocks

 

[Wysiwyg]

Re: Flipping coins and share market

Most investors Warren mentioned dont pick the same stocks but they have similar return and beat the market every time now would you be interested in the core principles of them picking those stocks

Yes I am interested in the core principals. What are they please or is that line a bit of a tease?

 

[Garpal Gumnut]

Re: Flipping coins and share market

Its as good a way as any of picking stocks.

However to profit you need money management, an exit strategy and particularly stop losses.

gg

 

[ROE]

Re: Flipping coins and share market

Yes I am interested in the core principals. What are they please or is that line a bit of a tease?

Core principles is easy but hard in practice each people do a little differently, this is where you need your own brain..unless your are independent you wont have the guts to go against the herd

* Margin of Safety ....a 30 Tons bridge you want to drive a 15 ton truck across.

* Buy stuff below its intrinsic value, I'm not talking about next year
it's 5 to 10 years from now but most good company deliver well before that but prepare to wait for 5-10 years...

* Know what you get yourself into else don't get involve and if you don't prepare to hold for 5 - 10 years don't hold it for even 10 minutes.

* Hold no more than a dozen or so stocks but that dozen you know it inside out and you pound on it when people bail out.
and get out when it's sell way above its intrinsic value..

* Have the courage to admit when you make a wrong move and put steps in place so that you don't repeat the same mistakes.

Read Intelligent Investor by Ben Graham and Common Stock and Uncommon profit and Phil Fisher that lay the foundation for the core principles and don't just read it practice it..

if you are true to those principles, decent return isn't rocket science
it required patient and consistency and stick to your conviction.
and by conviction if some ten stock analyst slap a sell stickers on a stock
and you know better than those suckers you go and load up and you ignore them...they provide good indicators of when you buy cheap stocks
and when to sell over price stocks

I give you examples going back a few years you wont see many analyst put a buy sticker on
DMP or SUL or NVT yet these stock not only prosper in the worse of financial crisis but kick some serious ass and dividend return keep rising .....they all slap on the buy stickers now when it share rally like crazy

 

[Wysiwyg]

Re: Flipping coins and share market

Core principles is easy but hard in practice each people do a little differently, this is where you need your own brain..unless your are independent you wont have the guts to go against the herd

Thanks for the explanation ROE.

 

[ROE]

Re: Flipping coins and share market

Thanks for the explanation ROE.

Here is some tips you can learn from Uncle Walter Schloss

http://www.gurufocus.com/news.php?id=72536#72675

He use Assets I use earning and I have my wrapper around the earnings to cover for my error in predicting earning

He's the old school of Ben Graham who love asset, I'm the school of Phil Fisher and Warren where Earning and Brands is the keys..

 

[Wysiwyg]

Re: Flipping coins and share market

Here is part of the original transcript if anyone is interested.

http://www.gurufocus.com/forum/read.php?1,71264,71264#msg-71264

 

[Wysiwyg]

Re: Flipping coins and share market

Here is some tips you can learn from Uncle Walter Schloss

He use Assets I use earning and I have my wrapper around the earnings to cover for my error in predicting earning

He's the old school of Ben Graham who love asset, I'm the school of Phil Fisher and Warren where Earning and Brands is the keys..

Checked Walter Schloss and from what I have read he started out with 100k of "other people's money" and invested it in stocks. Now 100k in 1956 would have been a small fortune and no doubt would have moved stock prices. Then there is the self fulfilling prophecy where the crowd follows the big money or the name (Ben Graham connection etc.).

Not all obvious on the surface but with financial weight and "connections", people do make things happen in their favour.

 

[skc]

But he miss the main message of Warren, if out of those 20 flip winners
10 comes from a certain background with the same teacher and practice the same principles, wouldn't you want to know what these guys doing differently?

Most investors Warren mentioned dont pick the same stocks but they have similar return and beat the market every time now would you be interested in the core principles of them picking those stocks

Completely agree with you there. Having a go at Warren was probably not warranted. But the survivorship bias does apply to a great majority of gurus who can't stand the test of time.

I think he needs to revise the rules. I'm sure he means to say "if you flip tails you give your dollar AND THE DOLLARS YOU HAVE WON SO FAR to the ones who flipped heads". Otherwise, each winner only wins an amount equal to the number of flips he has made.

Nevertheless, the article does make a lot of sense.

That was an omission but implied... trust the poster who likes to post logic/iq/probability questions to point that out

 

[brty]

Considering that flipping coins is as equally non random as the share market, then what is the point of this article and thread??

brty

 

[schnootle]

Considering that flipping coins is as equally non random as the share market, then what is the point of this article and thread??

brty

Your good fun brty

Of course, according to classical mechanics the outcome of coin is purely deterministic based on a very large number of factors. The number of factors are so large however that in an uncontrolled environment, flipped by a human it is incredibly random. Then there is Quantum effects, but we have been there before

If your game, i take coin flipping bets at 1.99:1 heads and 1.99 tails.