Do Geeks Make Better Investors?

What’s the true meaning of geek? Well, we’ve absolutely no idea, but one definition may well be that a geek is the type of person who is able to cut out all the extraneous emotional factors and concentrate exclusively on the facts.

And IF this is a reasonable definition, then it should be that geeks make better investors.

Various studies over the years have been able to demonstrate that a numbers-only approach to investing works better than an approach based more on one’s ideas.

A well-known study by Tweedy Browne, for example, carried out over many years  demonstrated that what works best in investing are the following factors:

Firstly – a low price in relation to the underlying asset value. In other words, seek out companies valued at less than their net tangible assets, such as cash and property etc. You’ll tend to do better this way.

Next, look for a low price-to-earnings ratio – the number of years a company will take to get back its share price in earnings per share after tax. The lower this is, the better you’ll tend to do.

Thirdly, try and find companies where directors (or other company insiders) have been buying shares in significant quantities.

And finally, find companies which are relatively small by market capitalization and where the share price has declined quite a bit in recent times – as the share prices of companies with the above characteristics tend to revert to mean.

These factors work best – and have been proven to do so – when it comes to investing in equities, but what about other forms of investing?

Well, the Daddy of them all, the market that dwarfs all other markets put together, is the foreign exchange market. A bet on the forex markets is, therefore, limitless in its possibilities, in both directions.

Some of the aforementioned principles of investing in equities are very helpful. In particular, the reversion to mean may be helpful – but only where this is based on the quality of a country’s economic prospects. Simply put, in the long term, the stronger a country’s economic prospects, the stronger its currency against other world currencies. If you’re able to decipher this kind of economic prospect, you should be able to profit in the long term. Just don’t get too distracted or scared off by short-term currency fluctuations.

So, for example, the Canadian dollar and the Australian dollar have both fared well against most other international currencies over the last few years. This was largely because of the overall strength of these economies. But it was also down to the boom in commodities, and particularly natural resources. Over that time, both Canada and Australia are generally rich in natural resources, despite the impacts of the dropping price of oil, for example, so their economies have done well – and their currencies have tended to follow suit.

But in recent times there has been a sharp reversal in the price of many commodities and a roughly matching reversal in, for example, the price s of the Aussie Dollar versus the American Dollar. This is a classic example of a reversion to mean and the wisdom of being contrarian.

The contrarian’s position right now would, of course, be the opposite if you’re feeling brave enough – or perhaps simply a recovery in the price of oil, for example.

Anyway, the point is well made. If you’re a geek and can concentrate on the numbers only, take the emotion out of things, and don’t be afraid to let the numbers do the talking for you – you may be able to profit. The trick is to try out your theories in a safe “virtual” mode only before risking any of your real cash.

More on Geekweek


Sign in to comment with your TypePad, Twitter, Facebook, Google, Yahoo or OpenID.