The Action Gap - It Works!

I recently noticed something intersting that confirmed a past example regarding the Action Gap.

In August, in the article ‘The Action Gap - An Introduction - Application to the Stock Market’, based on my Action Gap philosophy, from principles found in Asian thought, I identified a stock opportunity - Bombardier (BBD.B - TSX), noting that this stock was undervalued.   Since the time of that article, this stock has risen by 18% (in the space of about one month)  as compared with the overall market change (S&P 500)  of about 3.4%.  So, it seems that these philosophies are not merely abstract ideas, but practical and effective strategies for real world success. 

In that article, I noted that simply knowing in theory that you should do something is often not very useful in knowing how to actually do it in real strategy and particular circumstances.  I also discussed the idea that popular trends and  ideas can harm our abilities to spot opportunities.   Popular ideas that are ‘trendy’ and followed by ‘the mob’  can act on us just like hollow theories - prescribing actions that do not apply directly to real and changing situations.    In the case of Bombardier, I noted that the fact of the economic recession had the effect of influencing many not to look for opportunities in the market.  Although many people intellectually knew that being a ‘contrarian’ investor is theoretically a good idea, when it comes to actual application, there were well known fund managers on television on the very week of that article, recommending against Bombardier, blinded to its potential over time, blinded by the impact of the recession in the short term.

There are two lessons found within this observation.  The first is how to observe strategies, circumstances and opportunities in a fresh and objective way.  The second is an insight into creativity - that sometimes creativity is really clarity of thought, even though it seems like just the opposite.

When we look at things ‘in themselves’ we seek to see their true nature, objectively and un-influenced by bias, emotion or pre-conceived ideas.  When we look at strategic options or ideas, we should look at our circumstance and opportunities with fresh eyes whose perceptions are not disturbed such influences.  This is one reason why Taoism often uses the example of a baby or child, whose innocence gives them a purity in perceptions.  Through the innocence of a child’s eyes, we can look at a situation in its pure objectivity.  Bombardier was an undervalued opportunity, but this opportunity was obscured by the prevailing trends of caution in a recession.  To spot the opportunity it was necessary to rid oneself of the influence of the trends of popular opinion.

In this way, going against the trend, thinking outside the box and creatively has an interesting quality.  On one hand, such thinking is unusual.  At the time of my identification of Bombardier, many experts were warning against it.  However, at the very same time, such ‘out of the box’ thinking is not a wild flight of fancy, but is actually a more accurate observation than those that are popular.  We often think of creative thought as being a pure flight of fancy or sheer breaking of boundaries.  Sometimes this may be the case, but very often, it is a form of clarity, where the boundaries being broken are the mistaken ideas blowing this way and that on the winds of popular thought.

Lorne

© Copyright Lorne Gross, 2009

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Note: Mr. Gross is not a certified investment advisor, examples of stock analysis herein is for discussion purposes only.