txitxo
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Posts posted by txitxo
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As are you, my friend. First, I don't disparage the insights people get with old age. Not at all. You are right. He may have woken up after 50 years of believing in the possibility of individual security analysis and realized it was all a big waste of time. That is quite possible. I have never once said he didn't believe what it is he said. I think he did. My contention is simply that I don't think Graham circa 1974 is better support for mechanical investing vs Graham from approximately 1917-1960 being support for individual analysis. We will never be able to definitively know for sure which is right.
You say you look at the facts. So do I, you just don't see them as facts. But let's turn it around a little. You contend that he achieved superior results in net nets. The entire value world has based this on a single statement Graham made to the effect that he "must have earned" about 20% a year on them. Let's imagine a different conversation:
Interviewer: Mr. Ackman, what is your most successful approach to investing?
Bill Ackman: Well, when we build a big position and take an activist role. We must have earned around 20% when we do that.
Or,
Interviewer: Mr. Einhorn, what do you attribute your success to?
David Einhorn: Taking a large short position and publicizing it has done wonders for us. We must have earned around 20% when we do that.
Facts, right? It IS a fact that Graham said he must have earned around 20%. But we don't know for sure whether it is a fact that he obtained those returns. To my knowledge no one has audited his financials and determined exactly what his returns in net nets were. Do I doubt they were superior? No. Do I think your argument is fact while mine relating to his position in life is not? No again.
I am not speculating as to his different interests. This is a fact, just in the same way you use his own words to prove his returns. He stated on several occasions that he no longer was interested generally in the market. He also remarked about having the "standard pessimism" of an older individual.
I have never speculated as to his beliefs. Those are your words. I have said repeatedly he believes what he said. My point is simply that it isn't good support for mechnical investing because a few random quotes late in life don't impair a lifetime of work. Maybe it can. I just don't believe it in this case based on the facts as I know them.
Dear Kraven, I think we have reached a point where we have to agree to disagree. These are more or less the conclussions.
Let's state again the plain facts:
- Graham said that he had an experience of 30-odd years buying net-nets and that he estimated that they yielded 20% during this period.
- He was so convinced of the formulaic approach working better than classical Graham and Dodd that he actually made it his main strategy.
Words and actions match, they are consistent. He literally put his money where he put his mouth. So my interpretation is to take them at face value, and assume that they were true.
Correct me if I am wrong, but you think that he was tired and burn out of investing and that he was just rationalizing his laziness, because you implicitly assume that Graham and Dodd investing must necessarily produce better results that applying a mechanical formula.
We would really need an audit of Graham's returns to know who is right.
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It was the turnkey analyst blog that tried to recreate the magic formula results and couldn't: http://turnkeyanalyst.com/2011/06/909/
If I recall the guy is a finance professor and researcher. It's slightly troubling that he couldn't replicate the results. If anyone's interested in the magic formula there's a yahoo newsgroup with members who have been trying to replicate Greenblatt's numbers since 2007 if not earlier. I say possibly earlier because I joined in 2007 and they've been discussing it ever since, I never searched the archives.
The magic formula yahoo group is worth a read if anyone is interested in quant strategies. For how simple the magic formula is in real life most of these people got absolutely slaughtered in 2008, and they haven't come back yet. The ones who've done well have integrated technical analysis, or simple scoring systems. The ones who followed exactly what Greenblatt mentioned have done the worst.
As far as I know, nobody has been able to replicate the magic formula results. It got a lot of publicity from Greenblatt's book, but if you backtest it you see that it is actually a pretty mediocre strategy. There are plenty of screens which work better, for instance Graham's criteria (enterprising, defensive and net-nets). Of course the better a screen works, the smaller the basket of stocks it produces. That is why you need several of them. But remember that screens work blindly, by definition. You measure the performance of all the stocks. I have never seen a backtest of a net-net screen using only the "stocks which look good to a Graham and Dodd investor".
The 2008 debacle was widespread, many people with value small cap portfolios got creamed that year, remember what happened to Pabrai. In fact, the main advantage I see to Graham&Dodd investing is psychological. You get to know your stocks, you develop an attachment to them, so when they tank you have enough confidence to keep buying them and survive something like 2008. With mechanical screens as soon as things go down by 20% most people look at the junk they are holding and sell in a panic. And that is if you are a retail investor. Imagine having to explain your portfolio to the customers. To be able to do mechanical investing and keep a steady hand you need to understand very well what you are doing from a mathematical point of view.
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If required, I am sure that your assertion that he made 20% a year "for decades" was made by auditing his financials for each of those years, yes?
Kraven, it is not my assertion; It is Ben Graham himself who says that he made 20% a year with net-nets for decades: "We used this approach extensively in managing investment funds, and over a 30-odd year period we must have earned an average of some 20 per cent per year from this source". Later in the letter he says: "I consider it a foolproof method of systematic investment--once again, not on the basis of individual results but in terms of the expectable group outcome". I am very reluctant to doubt his word on this unless I see strong evidence to the contrary.
If I am not wrong, Ben Graham average returns were 15% during his career. So one hypothesis which fits very well the empirical information we have is that he used different investment strategies and with the years he realized that the one which worked best was, precisely, mechanical or formulaic investing. In addition, it left him spare time to womanize. Win-win.
Txitxo,
Sure, of course I know that Graham reported his 20% returns in net nets. Of course, it always troubled me slightly that the number we all rely on as the possibility for a net net portfolio was stated by Graham as "we must have earned", that is, it isn't as specific as I would have liked, but I don't doubt it either. You are right. If it isn't 20% then it's 15% or something. When I asked whether you had the numbers audited, I said that a bit tongue in cheek. You relied on a statement by Graham, his words. So did I. It may not be as exact, but remember we don't need to know a man's weight to know he's fat or a woman's age to know she is old enough to vote. You implied that I could not know his interests and such changed because you had not been there to analyze him and interview him. However, he was interviewed enough for the words to be there. Certainly there are more statements he made that his interests were different than that he returned 20% in net nets.
I have never made the statement either that he didn't believe it when he said late in life that a mechanical investing approach was preferable. You may be right. After a lifetime of investing he may have decided against individual security analysis in favor of the mechanical. However, my point was that while he changed his view, his interests and place in life had changed. Surely you know of this.
To take a step back for a second, until around the mid 1950s investing, while perhaps not his primary interests, certainly took up the bulk of his time. During this time he had 3 editions of Security Analysis and the first edition The Intelligent Investor. While he talks about more mechanical approaches for defensive investors, for more enterprising or aggressive investors he believed in individual security analysis (as well as net nets of course). But net nets were more or less the sole mechanical approach he recommended in those days to those analyzing individual securities. Even then, while it was certainly a basket approach, he didn't advise just purchasing them "blindly" as he did to some extent late in life.
So his investment career ends, he moves to LA and more or less disappears from the investing community. He teaches a class at UCLA, but that seems to be about his only tie to investing. During this time other than GEICO he generally only owns bonds. More than 10 years later, in 1968, Buffett organizes the first "Graham Group" at the Hotel Del Coronado in San Diego. At this meeting is not only his prize pupil, but all his other favorites and various other brilliant investors and past employees. He shows up, gives some kind of odd quiz and leaves early. He then spends the next few years shuttling between France and La Jolla with his mistress. He seems to become interested again in investing as an intellectual pursuit (in interviews during this time he still maintains he doesn't generally invest in stocks any more and his money is in bonds) and does some interviews and prepares to update The Intelligent Investor. At his 80th birthday party, with all manner of friends and family about, he reflects on his life and doesn't mention investing at all.
At this time he now, for the first time, begins to argue that the mechanical approach is superior and he no longer believes in individual analysis. My contention isn't that he didn't believe what he said, but that given the changes in his life, his advanced age, etc that it isn't good support for the assertion that a mechanical approach is superior. If it is, then everything Graham did before is worthless. There is no point in reading Security Analysis or The Intelligent Investor. All one needs to do is buy a basket of net nets that appear on a screen. Note too, it wasn't just net nets he suggested, but combinations of low p/e and low equity/assets and so forth. For me, given his actions and place in life, I cannot view this as sufficient support especially as weighed against the body of his life's work. If Mick Jagger gave an interview and said he's thought about it, but sex, drugs and rock n' roll is no way to live a life, would that be good evidence or simply the fact that he's closing on 70 and in a different place? One could argue of course that he considered the issues and has changed his mind, but I guess it wouldn't be enough for me.
Kraven, it is a pleasure to read you, but the facts are what they are. I try to look at them and be as little speculative as possible. You say "all one needs to do is buy a basket of net nets that appear on a screen". Well, try it. Have a look at that garbage. I can't bring myself to invest that way, so I have to use other screens which produce better looking stocks. You need the absolute rationality of a Mr. Spock to put a big fraction of your money on net-nets.
And I would not disparage so easily the insights that you get with old age. I have seen people in their 60's realize that they have fought all their lives for a religious or political idea which was stupid. And they were absolutely right. It is not just that they were old. They just woke up.
Same thing could have happened to Ben Graham. After all those years perhaps he realized that most of what he had done was worthless. That is why he did not even bother to speak about his investment achievements when he was 80...
...you see, the problem with speculating about what other people truly think or feel is that we can fit any hypothesis.
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If required, I am sure that your assertion that he made 20% a year "for decades" was made by auditing his financials for each of those years, yes?
Kraven, it is not my assertion; It is Ben Graham himself who says that he made 20% a year with net-nets for decades: "We used this approach extensively in managing investment funds, and over a 30-odd year period we must have earned an average of some 20 per cent per year from this source". Later in the letter he says: "I consider it a foolproof method of systematic investment--once again, not on the basis of individual results but in terms of the expectable group outcome". I am very reluctant to doubt his word on this unless I see strong evidence to the contrary.
If I am not wrong, Ben Graham average returns were 15% during his career. So one hypothesis which fits very well the empirical information we have is that he used different investment strategies and with the years he realized that the one which worked best was, precisely, mechanical or formulaic investing. In addition, it left him spare time to womanize. Win-win.
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This stuff has been rehashed here in various threads numerous times. By the time Graham was near the end of his life he no longer believed in individual security analysis and felt that baskets of securities bought via various screens would outperform. By the time he retired from the investment business in the mid 1950s he had essentially burnt out on investing. It was a new chapter in his life. He had moved to Southern California and while he was still teaching classes at UCLA he no longer cared about the business really. He spent his time on various other pursuits - everything from translating various works from Greek to English, to working on inventions, etc. His primary pursuit during this time was his newfound affair with his dead son's significant other. Graham ended up splitting his life between his third wife and his mistress and between Los Angeles (later La Jolla) and France. He had never really cared that much about money once his needs were met and he didn't care at all by the later stages of his life. It's always been my contention that those who want to attribute to Graham support for EMT and the like are barking up the wrong tree. He was old, tired and had completely different interests.
Perhaps. I did not have the chance to interview Ben Graham at that stage in his life and analyze him to see whether he meant what he said, or whether he actually was old and tired, and just rationalizing his distaste for reading balance sheets. But we should also consider the possibility that perhaps we are the ones rationalizing. The facts are that he was making 20% a year with real money, using a basket of net-nets, and that those same net-nets apparently keep generating similar performance nowadays. There are very, very few, pure Graham and Dodd value investors which match those numbers. So maybe he was on to something. Specially if making 20% for decades left him time to enjoy other pursuits.
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I found this treasure of scanned articles/interviews on Ben Graham on Matt Paul's web site- I hope he does not mind me posting. -http://mattpauls.com/assets/BenGrahamJournalScans.pdf
I just started reading his site http://investinginknowledge.com/.
Appears to have a lot of good stuff.
I was surprised to read in the first article of a 1976 interview that he kind of believed in EMT and that in depth researching (reading all the SEC filings of the company plus all its competitors as advised by one of our old posters) an investment in a specific stock maybe a mistake (waste of time), because of the intense research done by others it is unlikely that you will have an advantage. Good for us that he believed that individuals can have an advantage over institutions
Edit: second article(stuff you guys all know) clarifies re EMT- the market has access to knowledge and knows all that is knowable. The difference for us value investors is judgement and if market prices fully reflect underling value. i.e we re still not likely to get an edge from reading all the 10K's. Just pick high quality predictable enterprises at a discount (margin of safety)
Sorry I am trying to speed read + sometimes my reading comprehension is lacking.
So after a life of investing and of thinking about investing, what did Ben Graham advocate?: Buying baskets of stocks selected through relatively simple stock screens, a foolproof method "not on the basis of individual results but in terms of the expectable group outcome".
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The Brooklyn Investor writes about deep value investing and Richard Pzena's PZN:
http://brooklyninvestor.blogspot.com/2012/09/the-deep-value-cycle-and-case-for-value.html
http://brooklyninvestor.blogspot.com/2012/09/pzena-investment-management-pzn.html
He first described this deep value cycle in depth on the conference call held in February 2012. This is what he said:- Cycles are long, 10 years on average with deep value outperforming in 7 of those years.
- Over the past four value cycles, deep value outperformed by 480 bps/year.
- Recent experience is consistent with these past cycles.
- Last peak was 58 months ago (as of February 2012) and deep value is 11.8% behind the S&P 500 index, almost exactly the same as the average in past cycles.
- The recent deep value upcycle started in December 2008, but was interrupted for six months in 2011, but this too is consistent with past cycles.
- There is significant pent up opportunity in the value category due to flight-to-safety and across the board, indiscriminate selling of cyclical businesses.
I guess this might be good "news" for Francis Chou and Pzena.
The article includes Pzena's study on 10-year holding periods for bonds, stocks, commodities and hedge funds:
http://www.pzena.com/heading-our-research/pzena-white-paper.php
Personally, I like to invest in what I believe are high-quality companies. I still find basket cases such as RSH, SVU, NOK, and RIMM attractive. I'm just not able to buy them like e.g. Francis Chou.
BAC and AIG seem to be the favorites on this board. What other deep value stocks do you find attractive right now?
Very interesting reading. As they say, just buying a basket of stocks in the lower 20% in terms of P/B will beat the indexes by a few percent over the cycle. Guaranteed. Dreman showed that it worked many decades ago, then Eugene Fama published a paper as if he was making a big discovery with the same result, and as Pzena shows, it keeps happening. That anomaly does not go away. What value investors do is exploit the same effect in a more convolved way.
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And what better chance for the UE and the national governments to pass all the legislation and measures required to implement the Draghi plan to save the euro: the ECB prints away all the legacy debt and things are arranged so that this does not happen again (bank supervisions+budget controls) and certainly neither Germany nor any other country has to transfer money on a continuous basis. Those transfers will probably have to be curtailed even inside states (Scotland, Catalonia, Veneto).
txitxo,
my greatest contention with the whole Euro project is that FIRST you do what you have written, then, IF AND ONLY IF you have been successful in doing so, you establish a common currency. A common currency is the easy part, all the rest is what really matters and what is really difficult to implement. Start with the easy part, in the hope that the hard part will follow?!?! So much (southern) European… And never a good idea!!
As far as Mr. Charles Gave is concerned, I think his thesis has merits. He affirms that France will be the last domino to fall, and also the one most dangerous to the Euro survival. Why disagree? France is actually in very bad shape and is behaving like a socialistic country of the past, scaring businesses away. If you find yourself in a hole, stop digging?! Well, it seems in France they have decided to do the exact opposite! It gets worse: the IMF forecasts Debt/GDP for France exceeding 200% by 2040, even assuming “radical restructurings”. Radical restructurings that won’t occur, unless a crisis unfolds…
giofranchi
Giofranchi, I am not discussing how the UE should ideally be, but how it actually is. For the Draghi plan to work, all governments involved have to get very painful measures approved. Footage of the poor Greeks queuing at pharmacies or gas stations and a huge drop in the stock market would help convince both German and Spanish voters that more sacrifices are required.
I have no doubts that France is in pretty bad shape. The French have been living for the last 20 years as if the Berlin Wall had not fell down and China did not exist. That's fine if you can afford it, but they are reaching the limits of their system. However, I disagree with Gave: the euro will fall apart well before the fire reaches France. The first option is Germany, Finland and the Netherlands getting fed up and leaving, so that the rest of Europe can print as much money as they want, devalue and solve the problem the traditional way. The second, if the current austerity madness continues, is big countries like Spain and Italy leaving the euro, with the remaining countries forming a tighter, more homogeneous union. I really don't see any scenarios in which France is left alone and has to reintroduce the franc.
I don't know how things are in Italy, but the possibility of Spain leaving unilaterally is real. There is a powerful fraction in the government who want to reintroduce the peseta if the UE demands much stricter budget cuts. They see how Greek Economy and even Democracy are being destroyed by austerity and they do not want to suffer the same fate.
That's why I think that there is going to be a strong attempt to implement the Draghi plan soon, the situation is much more unstable than it looks. We are in the eye of the hurricane. If the ECB loses its credibility, the situation can degrade very fast.
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For anyone who might be interested.
giofranchi
I think he is wrong in his assessment of the crisis. Spain had a much lower public debt/GDP than Germany when all this started. Our problem has been a huge housing bubble, funded by the same "idiots in Dusseldorf", i.e. the German regional banks with 50.000€/yr analysts who bought all that subprime debt. Spain kept a balanced budget for years, but suddenly the Spanish tax receipts went down by almost 7% of the GDP, whereas all the social expenses shot up because of the unemployment benefits. We certainly need lots of reforms, as many other European countries, and it was dumb as hell to let the bubble inflate so much, but this is not a story of profligacy versus thrift. This is a story of going of trying to survive one of the worst asset bubbles in the world while keeping something similar to a gold standard. Look at what happened to Germany, the US or other countries which tried it in the 30's. That's why Ray Dalio always mentions us as a textbook example of ugly deleveraging. If Spain or Italy had their own central banks they would not be much worse than the US of UK in terms of dealing with this situation.
The short term costs of a euro breakup for Germany are much lower than usually considered. All those TARGET transfers are basically numbers in a computer, and a new, independent Bundestag could erase them with a click. The real issue is the huge mass of Spanish and Italian euros in the German banks. But Germany could solve that by converting to the new DM only the euros of German residents. And bailing out the German banks will be cheaper, and politically easier, than paying the ESM contribution.
The real problem for Germany (and the reason why BMW, Siemens and all the big German companies are desperately lobbying to keep the euro) is that the new DM would shoot up like the Swiss franc with respect to the dollar, whereas French, Italian and Spanish manufacturers would see their currency devaluate strongly. So the southern countries would go through a few months of turmoil, debt restructurings, etc. but suddenly they would be selling stuff 50% cheaper than their German competitors.
In the short term I think we are getting close to the endgame. Strange things are happening. Spain was ready to ask for the bailout but Germany told us to wait, apparently they want to pass all requests (Cyprus, Slovenia) through the Bundestag in one go. Now German ministers are saying that we actually may not need a bailout, which obviously means that we will get one soon. Greece is hanging in midair like Wile .E. Coyote, but nothing happens. I have the impression that after the US election Greece will leave the euro (Samaras has said that the Government will run out of cash before December). Obviously that will create a huge Lehman-style crisis. And what better chance for the UE and the national governments to pass all the legislation and measures required to implement the Draghi plan to save the euro: the ECB prints away all the legacy debt and things are arranged so that this does not happen again (bank supervisions+budget controls) and certainly neither Germany nor any other country has to transfer money on a continuous basis. Those transfers will probably have to be curtailed even inside states (Scotland, Catalonia, Veneto).
If that does not work (and there is a significant probability it won't), then the euro is toast and we will soon see those single-digit Shiller's P/E...
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"4. You have to buy the whole screen, or select stocks randomly from it, not keep what looks good and throw away what looks bad. I know that here, that sounds like heresy, but value investors do generate their own Mr. Market in some corners of the stock Universe, that's why screens work."
not saying this is scientific evidence, but an interesting current day demonstration of a mechanical net net screen performance that is superior to a hand picked net net strategy would be the 26 net net index performance (+36%) versus the graham ncav bargain portfolio (-4%) (only gurufocus members have access)
http://stocksbelowncav.blogspot.fr/2012/09/cheap-stocks-26-netnet-index-first-year.html
the practical challenges of rule 4. above become evident very quickly when looking at the individual picks in the 26 net net index, there are plenty of names that would psychologically be very challenging to pick for the human mind......
walter schoss seems to be again unique, in the sense that he outperformed the mechanical screen, yet he definitely hand picked his stocks.....
regards
rijk
I have to confess that although I am sure that buying all the stocks in a net-net Graham screen would produce wonderful results, I cannot bring myself to use it. It just is too painful. Most of the outperformance is concentrated in a few stocks ("rockets"), whereas a big fraction of the stocks in the screen do badly. Screens which are based on P/E, P/FCF, P/TBV + financial soundness indicators provide samples which also contain some nasty stuff, but which are more palatable in general.
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walter schoss seems to be again unique, in the sense that he outperformed the mechanical screen, yet he definitely hand picked his stocks.....
In my view, the key to Schloss's success was patience. Embedded in that is ignoring the noise, keeping his head, etc. His genius wasn't in technical skills or superior analysis. I say this as one of the world's biggest fans of his. I owe him a tremendous intellectual debt. But he would be the first to admit that he wasn't a better securities analyst than many others. In a too self-deprecating way he often said he wasn't "too bright", which of course is ridiculous, but I think it reflected his view of what he did.
His true genius was in patience, time arbitrage to the extreme. As Oddball mentioned above in a great post, Graham and Schloss advocated fishing in a pre-selected pond with large, slow fish. I know that many value folks believe that past pricing means nothing. Ironically, Graham, Schloss, Cundill, etc all mentioned past pricing as providing certain guidance. I think that people miss the point. It's not that a past price determines a future price, but past multiples will demonstrate what the market might be willing to pay in the future. I have never ceased to be amazed at how much prices truly do move from one extreme to the other on almost a yearly basis. Allan Meachum had a great line about this in an article a while back. He said that each year the price of most stocks will move about 80% from high to low. I have no idea whether 80% is an accurate number or not, but the gist is very true.
So the point is that if you fish in the right pond, buy cheap and have patience, at some point you will have a positive outcome. That is Schloss's genius. He fished correctly and was willing to wait for a good result, whether that was 1 year, 4 years or more. He has said after about 4 years he would think about selling, but he really didn't like to sell. Most of the selling was probably forced by Edwin. Walter liked to hold on. He knew that in the real world (and Graham says this in Security Analysis) there are very few public businesses that actually disappear. Most survive if not thrive and so long as the future looks something like the past, the stock will do ok.
Holding longer than a year hurts the performance in the backtesters, but probably not that much in practice, because of friction every time you sell and buy a stock (which may be a high as 5% with micro caps). Another very good idea is looking at deviations from the long term averages of the company. That's better (but more difficult to implement) than setting an overall threshold in P/B or P/E like Graham did in his screens.
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It always saddens me to see Graham reduced to the notion of a statistical approach. In my reading of Security Analysis I'd say that's the farthest thing from what he advocated. Even in the famous chapter on net-nets Graham discusses how careful analysis and research needs to be undertaken to avoid the "bad" ones. Companies where NCAV or book value had been shrinking over the years etc.
The truth is to get rich you need to concentrate, but I'd say throw out any idea of doing it in the market. You need to build a business and pour all of your wealth and time into it. Look at the Forbes 400 list, how many people on that list are people who sit at home in their slippers reading ValueLine and finding undervalued companies? Extreme concentration is the path to success.
I don't care to be wealthy, or the richest man on the block, and being a minority shareholder seems to suit my personality, so investing is it for me. What Graham and Schloss really advocate is by starting to fish in pre-selected ponds where the fish are big, slow and easy to catch. Sure they might be carp and not tuna, but all that matters at the end of the day is return, and now the company you owned to get there..
We have already discussed this issue in another thread (I don't remember which), but a "lazy screen" method does work in practice, however it will never do so well as in theory, you will lose several percentage points because of friction and execution problems. These are a few practical rules:
1. You need several screens like those of Graham, so that you can at least have 25-50 stocks in your portfolio at all times. The returns are not homogeneously distributed, some stocks will tank and others will be rockets and you want to be sure you average over enough stocks to reduce the noise, even if diversification costs you in average performance (which it will).
2. Many of those things will be small or micro caps, so you cannot be managing lots of money (which is probably the reason why you don't see many people with a public record of investing in that way) When you start moving to larger caps, the overperformance of the screens are much smaller, a few percent of alpha at most. That's why Buffett cannot invest like that. He has to search for much more subtle market inefficiencies.
3. You have to be very disciplined with the buying and selling and careful with spreads and commissions. That is harder to do that it sounds
4. You have to buy the whole screen, or select stocks randomly from it, not keep what looks good and throw away what looks bad. I know that here, that sounds like heresy, but value investors do generate their own Mr. Market in some corners of the stock Universe, that's why screens work.
Investing like that kills the mystics of the solitary investor-warrior, but for most people it would be much cheaper to get their emotional kicks from something else. This is a way of managing money for people who want to spend their life doing things other than reading balance sheets (not that there is anything wrong with it:), which by the way, was Ben Graham's style, he started developing screens in part because he was interested in writing theater, reading classic poetry, chasing women, etc.
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I am glad there are others interested in Walter Schloss' performance during the last part of his career. I saw a talk that Munger gave where he said the Ben Graham way doesn't work anymore, and that now you have to be a super smart businessman to get rich investing. When I first read this I was kind of bummed out. I had been sitting there thinking that I was going to get rich using the Ben Graham method and now I was wondering if it was still possible. I doubt I'm ever going to be half as smart as Munger/Buffett are about business. But if what you guys are saying is correct it looks like the old way still works, or at least it did till 2002.
Graham approach keeps working, it has never stopped doing so:
http://www.ndir.com/SI/articles/1111.shtml
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txitxo,
remember that you are talking to Americans and Canadians! They haven’t experienced a depression since the ‘30s!! But I am Italian, and you are Spanish: we know much better what depressions really are!!! ;D ;D ;D
Ok, just joking! Anyway, I agree with all you have written.
giofranchi
Oh yes, we are world powers in that area :)
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Prem and his people show an exceptional understanding of how terrible this historical period is for investing. Have a look at this plot:
http://www.gurufocus.com/shiller-PE.php
Grass is green, the sky is blue, and in all major bear markets the Shiller P/E got close to 6 before the next bull market started. We are into the 13th year of a secular bear, with the US Shiller P/E at 22.7. Just do the numbers. Even with inflation it will take a long time to increase the denominator significantly, so stock prices will have to come down by 60-70% before this is over.
If you've read Ray Dalio or Richard Koo you know that it is extremely difficult to generate inflation in a major deleveraging like this, even creating lots of new money. The tendency is to have deflation. But imagine that at some point the Fed prints so much cash that they do provoke inflation. Even in that case stocks will still go down sharply for a couple years (like in 73-74) before they start to rebound and act as an inflation hedge.
So you can stay in cash, earning 1%, waiting for stock Armageddon, but in mortal fear of inflation. Or you can put a significant chunk of your portfolio into FFH, knowing that they will keep making you money due to their float leverage and investing abilities, and if the sky does fall down, they will know better than anybody when and how to change their long/short exposure. FFH is just the best hedge I know of against a next major >50% crash, specially in an environment with inflationary risks where you can't just sit on cash for years.
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Norway is a bit of an outlier because of their oil - all the other top countries have considerably lower tax rates, which is interesting. And it should be said that HDI as a measurement is considerably biased towards more equal socities. All ways of measuring are flawed and nothing can capture everything (like p/e, p/b, ev/ebitda etc) so we should be aware of that.
Very thoughtful and interesting post, alwaysinvert. Yes, as a Spaniard I am pretty aware of the difference that "cultural equipment" makes, in Spain you can have almost a factor of 2 difference in GDP/person or in the unemployment rate between North and South. For instance the highest PISA math score in Spain is that of Castilla y Leon (north of Madrid), 514, above that of Germany (513) and Sweden (494). However, and although you'll find many Castillians in managerial posts in Madrid, its GDP/person is slightly below the Spanish average (and significantly lower than that of Germany or Sweden), probably because there is not a widespread entrepreneurial and risk taking culture in that region.
I am nor arguing whether it is better to have a 26% or a 42% tax/GDP ratio. That is something that each country has to decide by itself. My point is that discussions about taxes in the US often have apocalyptic overtones, full of hysterics, as if the US is going to sink in the ocean as Atlantis if you immediately cut spending or, god forbid, you raise taxes by the smallest amount. And experience shows (the Swedish example you mention is excellent) that you could probably increase taxes 1% per year for the next 15 years, e.g introducing a VAT, and you would still have an amazing standard of living, be a economic powerhouse (look at Germany), and fully pay off the current public debt. At that point you could worry, as Sweden does now, about having too much state (which can certainly become a problem) and lower the tax burden.
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folks i don't think any disagree that we need taxes
the question is how much
OK, so we agree that a civilized country need taxes. The question is how much. As value investors, we should avoid the ideological crap and go straight to the numbers. These are the top 10 countries in terms of Human Development index, a measure of the "standard of living" or the "quality of life", and their tax revenue as a function of GDP
Country Tax revenue/GDP
1. Norway 43.6%
2. Australia 30.8%
3. Netherlands 39.8%
4. United States 26.9%
5. New Zealand 34.5%
6. Canada 32.2%
7. Ireland 30.8%
8. Liechenstain ? but probably very low
9. Germany 40.6
10. Sweden 47.9
You see very little correlation between standards of living and taxes. The tax rate in the US is probably average in the world. Sweden's is one of the highest. You could increase taxes in the US by 50-80% and still live as well as people do in Germany, the Netherlands or Sweden, some of the most civilized, free, humane, economically developed and innovative societies in the world. Those are the facts. And given those facts, saying that a country like the US will be destroyed if you increase its taxes is just not true.
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The vast majority of the people I meet in the hedge fund community are liberals (in the modern sense of the term; i.e., Democrats). Hedgies tend to be smart people who can act against the crowd if the facts warrant such a position. However, I am having a difficult time understanding why so many smart people (that no doubt understand the power of incentives) support social welfare programs and other freedom-limiting actions of the federal government. It seems like liberals (and I include establishment Republicans under this label) either have not thought through their positions or are operating on loose principles.
Although I wholeheartedly disagree with his politics, I try to heed Charlie Munger's warning about falling into a specific ideology without thoroughly examining the counterpoints. If you have the inclination, I would appreciate a defense of modern liberalism and the reasons why we are better off living in a collectivist society rather than one that promotes freedom of the individual. Book recommendations in lieu of an argument are also appreciated.
Imagine that Warren, Charlie, Paulson, Simmons, Klarman and Soros had been born in a hut in the middle of the Congo rainforest ~70 years ago. The difference between the life they would have had there and the one they have had in the US is called civilization. The price of civilization is called taxes.
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Gio,
I believe they're hedged on both the up and downside (no net exposure) on equities. Can you help clarify on your statement that they will benefit from their investing wisdom?
Frank,
I think txitxo explained it very well:
1) Mr. Watsa is locking in the spread between the best stocks he can find and the worst. Furthermore, he has float, which enables him to leverage the return from this strategy.
2) He will know when to remove the hedges better than almost any other investor.
3) If a correction in market prices is coming, Mr. Watsa will have a huge amount of capital to deploy in very good investment opportunities.
4) While waiting, FFH can concentrate on underwriting profitably: it won’t be easy, but with Mr. Barnard at the helm of all insurance operations, I think it can be achieved.
Anyway, I am aware of the fact that book value won’t shoot up in the near term… and probably you will have plenty of time to get on board later!
giofranchi
Actually you have explained it much better :)
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Reasons to buy FFH:
- The american stock market has a Shiller P/E of 22.7. Even in 2009 it never hit a Shiller P/E close to 10 as it usually happens with secular bottoms (Europe got to P/E ~11 this year). The "expensive crap" indicator I use indicates there is high probability of a major crash within a year in NA, give or take, there is too much optimism in the market. The numbers are telling us that NA markets are very risky right now. And if we look at the situation from the political point of view, strange things are going on, the situation in Greece is terrible, but nothing happens, politicians in Spain act as if there is no big rush to solve anything, Israel is obviously preparing for war with Iran but does not pull the trigger. I am starting to get the impression that world problems are on hold waiting for the US elections. After November we may see a lot of bad news hitting at the same time most of the world major economies.
- FFH is hedged, both against a major crash a la 2009, and even against a repeat of the Great Depression of the 30's. They will keep growing their book value despite the hedges, because of their investing skills, and will know when to remove them better than almost any other investor. People who do not like FFH's strategy should have a look at the Nikkei 225 chart since 1990.
- Of course Prem Watsa is key to FFH, but there are a lot of smart people working there, you'll need a really nasty case of food poisoning at one of Parsad's dinners to eliminate the company's ability to produce alpha and navigate the market storms.
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This is a paper on the Finnish stock market but they mention references for other markets as well. Even dumb selection based on just P/B benefits from relatively long holding periods:
http://www.eurojournals.com/jmib_8_05.pdf
This blog also shows a well know effect among value investors: every time you buy something it immediately goes down:
http://www.blogvesting.com/2010/09/29/on-the-optimum-holding-period-for-value-stocks-2/
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I was thinking about buying a basket of low P/E european stocks. Haynes Publishing was one I looked at.
What broker are you guys using to buy these? Especially the small ones?
If you are going to use screens, I'd recommend a few things
1. Combine P/E, which is a good criteria, with some other value ratio. It will significantly improve the performance and help you avoid a few typical pitfalls of screens.
2. Add some financial soundness criteria. That will significantly reduce the number of companies which blow up and also increase the performance.
3. You could try adding a momentum indicator, but it is not clear how much that helps in practice. If a company shows up in a momentum screen on Friday, it will tend to go up in price on Monday, so you'll probably buy it at a slightly higher price than the screen shows.
3. Diversify. A lot. If you buy the top 20 companies and 2 of them implode (and sometimes they will), you will lose 10% of your investment. If you buy the top 50, you will lower your return a bit, but it is much more likely that you will stick with the system.
4. Do not overtrade, and do not buy things with too little liquidity or slippage will kill you. Do not pick and choose. Check out thoroughly all the numbers and do you d.d to make sure that there isn't anything really wrong which the ratios are not reflecting, but try to buy nearly all the companies which comply with your criteria. Remember that you'll make money even if those companies are crap; it is enough that they are not as crappy as a depressive Mr. Market thought them to be.
Interactive Brokers is a good broker for European stocks.
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I like your posts very much tixtxo.
As you spend much of your time trying to understand what dark energy is, I spend considerable time trying to comprehend what gray matter is and related subjects. :)
Warren hasn't permanently changed his style. His shift to buying and holding large caps that are great businesses (think Coke) coincided not only with the growth in assets managed, but also with a change in the US tax code in the 1980's that made it inefficient for corporations to buy and then flip stocks two or three years later after they went up.
Warren, has continued to use the go anywhere buy a basket of apparent bargain stocks strategy that you describe. In 2000 and 2001 he put most of his personal portfolio into Us REITS that were yielding about 10% after 1999 when the large cap great businesses in BRK's portfolio had earnings yields of about 3%.
Then, in 2002 - 2003, he rotated much of his personal holdings into a market basket of beaten down Korean value stocks. Just before the financial bubble popped in 2008, Warren put most of his non BRK holdings into short term US Treasuries.
:)
I think that Warren Buffett's genius lies in always choosing the best possible investing strategy given the circumstances. ¿Little money to invest? Buy cigar butts, Korean or otherwise ¿Lots of money, unfavorable tax environment? Buy outstanding business with outstanding managers which you never have to sell ¿Absurdly huge amounts of money? Buy business which absorb large quantities of cash flow: Burlington Northern.
Thanks for your comments, twoc. I read with pleasure your postings. Good luck understanding grey matter. That's way more complicated that Dark energy...
Spaniard Ortega Tops Buffett With Zara Fortune of $53.6 Billion
in General Discussion
Posted
One of the biggest "failures" (if it may be called so) of García Paramés, the best value investor of Spain (and one of the best in Europe) is that he never saw Inditex's potential. Inditex has returned 350% in the last 10 years vs 64% for Bestinfond, the flagship product of Bestinver, and 0% for the Ibex35.
http://www.bloomberg.com/news/2012-10-31/ortega-tops-buffett-with-zara-fortune-of-53-6-billion.html