Feb

17

"One of the things I look for in DVD reviews on Amazon is extreme and opposite reviews. That is, where the DVD is completely loved by some and hated by others. With such a movie, the chances are that you too will either love it or hate it. However, if you are afraid of losing $15 on a bad movie, you will also miss the great movies. Examples of this are the reviews for the movie "The Thin Red Line."

For what it's worth, I think the movie is amazing. It just popped into my head that perhaps there is an application to the markets. Here it goes:

In my first job out of college, I invested in deep-value and distressed situations. Typically, nobody ever had mixed opinions on these investments. Anyone with any opinion on them typically loved or hated them.

From this came big losers, but big winners also. One could not, in my opinion, have had the big winners while also having some big losers. I considered the big losers to be the price of the big winners, and since so many investors won't pay that price, there is a fair amount of alpha to be had in those strategies.

Back to the Amazon reviews: Now that Wall Street analysts occasionally tell the truth and put out negative opinions on stocks, might a good way to screen for ideas to be to search on stocks that only have very positive and very negative opinions on them?

Perhaps this could be done using a measure of earnings estimates divergence (one would have to adjust for financial and operational leverage to compare estimate divergence across companies, i.e., a 30 cent divergence on a utility might say more than a 40 cent divergence on a tech company).


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