Portfolio manager Eddie Elfenbein seeks an edge by focusing on high-quality but obscure companies, like tow truck or aircraft part manufacturers. With few or no analysts following them, it's easier to understand the business deeply and identify mispricings before the broader market does.
The common phrase "healthy correction" wrongly personifies the market, suggesting a downturn is a necessary rest that helps it long-term. This is a flawed analogy. The market isn't a marathon runner that needs to catch its breath; a price drop is just a price drop, not an inherently beneficial or "healthy" event for investors.
Launching and running a fund like an ETF involves two distinct and often conflicting skill sets. While many start as stock pickers who love research, a significant portion of their time is consumed by the business side: fundraising, investor relations, and compliance. Aspiring managers must be prepared for this dual role.
To combat emotional decision-making, Eddie Elfenbein’s strategy mandates replacing exactly five of 25 stocks each year. This rigid structure forces patience and prevents impulsive trades, even when he feels tempted to sell a poorly performing stock. This system prioritizes long-term strategy over short-term reactions.
Unlike physical sciences where observation doesn't change the subject, the stock market's behavior is influenced by participants watching it. A market can rise simply because it has been rising, creating momentum loops. This "self-awareness" means price and value are not independent variables, a key distinction from more rigid scientific models.
Counter to conventional value investing wisdom, a low Price-to-Earnings (P/E) ratio is often a "value trap" that exists for a valid, negative reason. A high P/E, conversely, is a more reliable indicator that a stock may be overvalued and worth selling. This suggests avoiding cheap stocks is more important than simply finding them.
Extraordinary long-term investment returns often come from seemingly boring, overlooked companies. Eddie Elfenbein points to examples like Lancaster Colony (croutons) and Nathan's Famous (hot dogs), whose stocks have crushed the market over decades. This highlights the power of consistent, high-quality businesses that don't attract speculative hype.