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11/06/2005
Briefly Speaking: Leaf and Price Shapes; Retailer Propagation

The shape of leaves is determined by a million interrelated variables, including the relative effects of evaporation, transpiration, convection and photosynthesis, and the position of the leaf in the edge and the height on the canopy. A general principle is that the greater the amount of rain, the larger the leaf; and the warmer the temperature, the smoother the leaf. Paleontologists use these two classifications to date fossils according to contemporary climate.

A similar classification would seem to determine the shape of prices in individual stocks during the year. The extent of teeth and the closely related variables of lobes correspond to my favorite variable: the ratio of absolute deviation to total algebraic change. The leaf size corresponds to total magnitude of the price move.

I have taken preliminary steps to quantify these variables, as their relation would seem to be the underlying dynamic of Value Line's "Technical Analysis" ranking system, said by esteemed forecaster S. Eisenstadt to perform at least as well as the "Timeliness" ranking.

All these hypotheses on the shapes of leaves and the shapes of prices during the year have to be tested and predictive relations ascertained. We will be working on this at my shop, and hopefully the Minister of Non-Predictive Studies will not have the last say on this.

Two major qualitative regularities that I have discovered in the course of my extensive business career are that the best and most profitable businesses are the ones that sell expendable products like razor blades, ink cartridges, welding rods, drill bits and inks. It would be interesting to develop an investment screen that classifies companies according to the extent of repeat business that they gain relative to their initial sales. Another regularity recently hit home as my significant others made inordinate profits many times my own with their holdings of Whole Foods. In their initial phases of expansion, retail businesses have the ability to replicate their success by copying the initial success, much like am epidemic is propagated or evolution proceeds. The information cost of replication is relatively low relative to other costs for building a business. And in the case of a good retailing concept like Starbucks or Krispy Kreme or McDonalds or a hundred others that my friend the master retail investor Larry Leeds holds, the stock benefits not only from expansion into regional areas and niches but also from new potential investors in the stock who patronize the stores, as is the case in my family.

Larry Leeds is always partial to New Age concepts like Chico's and the Guitar Supermarket and such that are ready to go from 10 stores to a million in just a few days. In addition to his success with his hedge fund and the research firm he's part of, he carries one other distinction with me. He's the most young-hearted personage above 60 I've ever met, and at this moment it's likely he's playing tennis and gold at least twice each weekend day.

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