The Only Three Questions That Still Count: Investing By Knowing What Others Don't, 2nd Edition

Supply and Demand . . . and That’s It

This book is partly about how to know something others don’t—by processing information others find unfathomable and creating capital markets technology to do that. If information can’t be processed well by our brains one way, reframe it in another more useful way, like our P/E-to-E/P flip. Or cut it in half and look at it anew. Or ask: “What does it correlate to?”

The news is full of useful information, if you can use Question Two to connect the dots. Just be creative and ask, “I wonder if that could mean anything? Wouldn’t that be nuts?” One phenomenon that pops up occasionally is increased merger and acquisition activity. It’s normal for mergers and acquisitions to increase in an economic expansion. Firms with improved balance sheets awash with cash look to acquire additional valuable market share, parallel product lines, vertical integration, new core competencies, new product categories or just simply diversify. In one way, this is unremarkable and mundane.

But can it mean anything for the stock market? Conventionally, market lore says merger manias lead to poor stock market results. Partly that is because mergers happen after the economy has been improving for a while—and after that, at some time, comes another recession. So it’s easy to see why folks see merger manias leading to bad times. Look at the late-1990s mergers coinciding with the Tech IPO craze. After a wave of deals like the Time Warner takeover of AOL, we were rewarded with ...