posted by: Lucky Lucan
for: spy vs spy
2011 · 08 · 05
What are Ratings? How and why do we do them? What is their Purpose?
What are RATINGS? How and why do we do them? What is their purpose?
For me these are not difficult questions as I was born to frame markets and in essence RATINGS are all about intelligence work.
We live in a relative world and I make ordered lists where 1>2>3>4 etc…
Suppose I compare two objects A & B – what I need to investigate is the difference or space between them!
There can only be one and my highest framework in order is this:
Give me a horse race, debt / credit market, stock market or any collection of comparative real objects and I will rate them!
Why?
So that I can put probabilities or odds on them (Lucky Lucan is a self confessed Bookie type).
If RATING a movie or a filly’s butt a RATINGS SCALE like FIVE STARS would be fine; but if I want RATINGS to contain more information I would use a % scale where 50% == evens or 2.00 decimal odds.
So note a RATING SCALE like AAA, AA-, etc is not the most useful.
RATINGS should also have a rating period. If I rate the 2.30pm at Randwick after the race is won we can all judge the quality of the ‘Great Work’! Rating periods that might be useful for financial markets would be 1, 5, 10 years.
Charles Munger (NYSE:BRK.B) on RATINGS:
To us investing is the equivalent of going out and betting against the pari-mutuel [tote/TAB] system. We look for a horse with one chance in two [evens or 2.00 dec. odds] and which pays you three to one [4.00 dec. odds]. You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.
It’s not given to human beings to have such talent that they can just know everything all the time. But it is given to human beings who work hard at it (who look and sift the world for a mispriced bet) that they can occasionally find one.
Munger likes a business where the excess cash does not have to be reinvested; his Name Value Pair is Capitalisation.
He also pinpoints for us that the purpose of RATINGS is to find a mispriced bet (gamble).
To sum up if a set of RATINGS are not useful enough to potentially find you mispriced bets they are just ‘Rodeo Tip Sheets.’
Lucky Lucan is a journalist and not a licenced securities advisor.