Ackman vs Dalio

[ccplz]

http://dealbook.nytimes.com/2015/02/12/ackman-and-dalio-two-hedge-fund-titans-size-each-other-up/

 

Seemed like an interesting talk.

[ni-co]

Dalio is so right in asking him this question. Ackman doesn't even think about the fact that nearly all his bets would be off if we were to enter a second Great Depression.

[berkshire101]

Is your wife a computer?  Now that's funny.  I wonder if there's a video of their conversation.

[philly value]

Dalio is so right in asking him this question. Ackman doesn't even think about the fact that nearly all his bets would be off if we were to enter a second Great Depression.

 

Well, that's the case with anyone who is a value investor, isn't it? One of the core principles of value investing is to focus on micro factors and ignore macro factors. Given the extreme difficulty of predicting the macro economy, this is one of the strengths of the strategy IMO.

[ni-co]

Dalio is so right in asking him this question. Ackman doesn't even think about the fact that nearly all his bets would be off if we were to enter a second Great Depression.

 

Well, that's the case with anyone who is a value investor, isn't it? One of the core principles of value investing is to focus on micro factors and ignore macro factors. Given the extreme difficulty of predicting the macro economy, this is one of the strengths of the strategy IMO.

 

Yep. But look at it this way:

I think the trillions of dollars that are pumped into the system by central banks are  making sure of that. Most of these professionals have no alternatives, so equity markets it is. Worst case you get only a few % long term. You can't leave it all in cash.

 

When you have zero inflation cash is inexpensive. I certainly don't agree with your worst case scenario. Take a look at this long term "S&P 500" chart in real prices: http://www.multpl.com/s-p-500-price/ from 1912 until 1954 your real return was zero. That's 42 years. No wonder people were giving up on equities. Same thing from 1929 until 1959 (30 years) or even 1983 (54 years; also interesting to think about the point in time when Buffett started his partnership). When you look at real prices there are very, very long stretches in history where you would have made zero return if you were fully invested at all times.

 

Therefore, to me Buffett's success story doesn't mean that it always has to be this way. He's talking about how lucky he was to be born at the right place and in the right time. I think this is more than false modesty. Don't get me wrong. I think he is a genius – his success certainly isn't pure luck. But the time period in markets he's lived through has very much to do with it.

[philly value]

It's a legitimate point, no doubt. The investment gurus that we base our philosophy of investing on and look to for advice are themselves biased by having lived during an unbelievable bull market. The future seems unlikely to provide returns as strong as what we have seen over the past 30 years.

 

The key is, what can you actively do with this "hunch" to improve performance? That's the key to me and why I'm inclined to stick with micro-level investing and accepting that the macro economy will affect my investments in some way.

[ni-co]

It's a legitimate point, no doubt. The investment gurus that we base our philosophy of investing on and look to for advice are themselves biased by having lived during an unbelievable bull market. The future seems unlikely to provide returns as strong as what we have seen over the past 30 years.

 

The key is, what can you actively do with this "hunch" to improve performance? That's the key to me and why I'm inclined to stick with micro-level investing and accepting that the macro economy will affect my investments in some way.

 

I think cash is becoming much more valuable. You have to be more active in a classical value investor way but maybe throughout all asset classes. Dalio is predicting lower returns across all asset classes for the coming decades, though.

 

Btw: I forgot to include dividends though, yadda rightly called my out on that in the other thread.  ;)

[giofranchi]

Dalio is so right in asking him this question. Ackman doesn't even think about the fact that nearly all his bets would be off if we were to enter a second Great Depression.

 

I don't understand why you say this.

 

Imo great businesses are not very much affected by recessions or even depressions: Carnagie Steel increased its earnings during each year of the depression in the 1890s, Standard Oil weathered the Great Depression very well, Berkshire sailed through the 1970s as a walk in the park, with its stock price which always kept increasing, Apple didn't even notice the Great Recession... Etc.

 

Imo what matters today is looking for those businesses which might be very well positioned to take advantage of any dislocation in the markets that might come our way: high quality businesses, which generate healthy levels of free cash flow no matter what the economy does, with little or no debt, and lots of cash at hand to take advantage of opportunities. It seeems to me that's the kind of companies Ackman is focused on, with the added benefit of implementing changes required to make their operations more efficient!

 

Gio

[ni-co]

I think with his question Dalio is implying that Ackman is not diversified enough – and I completely agree. He doesn't mean that Ackman only holds positions in 10 different businesses – he's talking about independent revenue streams. Ackman could reduce his equity positions to 5 very good businesses and would still be reasonably diversified within equities. The problem is that in a hostile global economic environment this is essentially one single equity position. Ackman doesn't even realize that he's implicitly relying on an environment in which credit is expanding, the economy is healthy and companies are making nice profits. In such an environment you only need one really good business.

 

Now, in 2008, you could see for a few months what it meant being 100% invested in equities. But you've only had to survive a few months and markets recovered because the FED kept the economy from collapsing. How would such a portfolio have performed if that 2008 environment had continued for 15 years? Most people think we "survived" 2008 because markets have been going up since 2009. But we haven't. The deleveraging process has only started and the FED counterbalanced its impacts with exceptionally monetary measures. This was certainly good but now it ran out of ammo.

 

You're talking about Standard Oil as if Ackman had a portfolio composed of monopolies – which would be allowed to produce healthy profits going forward. In the 1930s, however, almost all businesses – good and bad ones (!) – got crushed. It was a complete redistribution of wealth from the haves to the have-nots. This is what's happening in a deleveraging. What I'm saying is that Dalio will have protected his capital in a Depression environment while Ackman most certainly won't because he isn't diversified enough. He doesn't think about currencies, commodities, gold and credit because for the last 80 years it didn't matter.

 

What Dalio's saying is: Watch out, it's going to matter much more in coming years than it did in the past 80. I think not being aware of this is simply naive. Seth Klarman and Prem Watsa, for example, have realized this but Ackman hasn't.

[giofranchi]

Thank you ni-co,

What you meant is now clearer, to me at least!

 

Let me ask you a question: is yours a financial worry, or is it a "true business" worry? I mean: I am very well aware of the fact stock prices could get crushed in the next 2 to 3 years, but what about the revenues and the earnings of a business that generate lots of cash today and is debt free? Do you see them decrease dramatically in a long recession? Take Allergan, for instance, do you think people might stop spending for their beauty?

 

Gio

[giofranchi]

Moreover, who are the haves and who are the have-nots today? I would put both Klarman and Watsa among the haves, wouldn't you? Yet, I believe that in a market crash they would benefit enormously... Similarly, I would put Marks among the haves today... But he too in a market crash would benefit a lot! Biglari is another that would benefit in a market crash: people would go back to eat more cheaply, therefore fast-food operations would do very well, and he has lots of cash to take advantage of opportunities.

As you see, I am concentrated in 3 equities, which as you say might behave like a single equity in a market crash... But from a purely business perspective I believe all 3 will thrive in a difficult environment.

So, would you say because I am all in equities I don't realize what I am doing like Ackman?

 

And what if Ackman chooses his investments the same way: the haves of today, which will have even more, should a market crash come?

 

Gio

[Guest]

gio,

 

Assuming another Great Depression happened, you really think people would eat out more?

 

I really, really doubt that. People would lose their jobs (and have plenty of time to make meals). Making food at home would become much more common than it is now. Fairfax, Oaktree and Biglari would also suffer. I can just about promise that none of them would thrive.

 

[Jurgis]

What I'm saying is that Dalio will preserve his capital in a Depression environment while Ackman most certainly won't. He doesn't think about currencies, commodities and credit because, for the last 80 years, it didn't matter. What Dalio's saying is: Watch out, it's going to matter much more in coming years than it did in the past 80. I think not being aware of this is simply naive. Seth Klarman and Prem Watsa, for example, have realized this but Ackman hasn't.

 

This is the usual macro bear argument that people have been repeating from 1980s and possibly before (I have not been around before that). There are couple issues with that:

- By being in cash/etc. you are horrendously underperforming for couple years now. So it might not matter that your portfolio will drop only 30% in a crash compared to 50% of someone who is 100% in equities. Your long term result will be worse.

- You are assuming that Dalio will perform better in a crash. So far a lot of algorithmic shops collapsed during the crashes because their models were not crash proof. Pretty much no value investor every collapsed during a crash. Or they recovered.

- You have a mental model of what will happen. This is very dangerous. I can almost guarantee that you don't know what will happen and pretty much nobody else does. Hey, Buffett has been wrong about inflation for 20+ years.

 

That being said, I am fine with people holding Graham-like portfolio of having 20-50% money in bonds as long as this is not a market call, not a macro call, but forever philosophy independent of the market/macro etc. Just don't expect the 100% equity returns.

[giofranchi]

I can just about promise that none of them would thrive.

 

Never promise! ;)

 

The point is: if they won't thrive, no one will. If they won't make sound judgments with their cash, no one will. Or, if you know someone who will, well then invest in his/her company!

 

What else are we talking about?

 

Gio

[Guest]

I can just about promise that none of them would thrive.

 

Never promise! ;)

 

The point is: if they won't thrive, no one will. If they won't make sound judgments with their cash, no one will. Or, if you know someone who will, well then invest in his/her company!

 

What else are we talking about?

 

Gio

 

Really? No one will make sounds judgements? I wouldn't be so confident.

 

Investors in BH and FFH have underperformed the S&P 500 the past 3-5 years vs the market (though FFH's upswing since late last year has gotten investors back near the S&P 500). BH shareholders have fared far worse. Sure, valuations look better now...but that doesn't change the outcome for those that got into BH after it became BH.

 

Now, when the market turns, perhaps they'll do better (I think shareholders of FFH will...I can't say I feel the same about BH). I think saying these companies will "thrive" in a terrible economic climate is fanciful thinking.

[giofranchi]

I think saying these companies will "thrive" in a terrible economic climate is fanciful thinking.

 

Paul,

Insurance and fastfood franchising are two wonderful businesses to own in a recession, and the ones I have are led by opportunistic entrepreneurs who might take advantage of a difficult environment and will have the cash to do so.

 

This is all I can tell. Will they thrive? Who knows, right?

 

But that's not the point, the point is: find the companies and the entrepreneurs you think might do well in a difficult environment and invest in them. Hold cash if you can find none.

 

Cheers,

 

Gio

[Guest]

gio,

 

I agree that they may very well hold up better in a recession. I was referring to Great Depression like scenario. People will scale down depending on severity of a recession. High end restaurant - good times. Fast food - middling times. At home - terrible times.

 

To be fair, my dislike of Biglari alters my judgement of the company. :P

[ni-co]

Thank you ni-co,

What you meant is now clearer, to me at least!

 

Let me ask you a question: is yours a financial worry, or is it a "true business" worry? I mean: I am very well aware of the fact stock prices could get crushed in the next 2 to 3 years, but what about the revenues and the earnings of a business that generate lots of cash today and is debt free? Do you see them decrease dramatically in a long recession? Take Allergan, for instance, do you think people might stop spending for their beauty?

 

Gio

 

It's a true business worry. Just to be clear, until last year I considered myself a long only concentrated value investor, interested in special situations. So I'm relatively new to the classic global macro bear argument but Ray Dalio made me think about it a lot.

 

I agree that there is a difference between recession proof and prospering in a long term low growth environment with credit contraction. I like to own things people have to buy and therefore generate very predictable cash flows. Therefore I own LBTYA and DVA for example but I mostly hedged it against market risk for the time being. I also own Prem Watsa's India SPAC since I think India could be one of the bright spots in the next decade or two.

 

I don't know that a deleveraging will happen, it's already happening. With regard to equity price declines I regard them as the logical conclusion. I don't know it for certain but I think it's highly probable and I won't lose money if it doesn't happen.

[TwoCitiesCapital]

What I'm saying is that Dalio will preserve his capital in a Depression environment while Ackman most certainly won't. He doesn't think about currencies, commodities and credit because, for the last 80 years, it didn't matter. What Dalio's saying is: Watch out, it's going to matter much more in coming years than it did in the past 80. I think not being aware of this is simply naive. Seth Klarman and Prem Watsa, for example, have realized this but Ackman hasn't.

 

This is the usual macro bear argument that people have been repeating from 1980s and possibly before (I have not been around before that). There are couple issues with that:

- By being in cash/etc. you are horrendously underperforming for couple years now. So it might not matter that your portfolio will drop only 30% in a crash compared to 50% of someone who is 100% in equities. Your long term result will be worse.

- You are assuming that Dalio will perform better in a crash. So far a lot of algorithmic shops collapsed during the crashes because their models were not crash proof. Pretty much no value investor every collapsed during a crash. Or they recovered.

- You have a mental model of what will happen. This is very dangerous. I can almost guarantee that you don't know what will happen and pretty much nobody else does. Hey, Buffett has been wrong about inflation for 20+ years.

 

That being said, I am fine with people holding Graham-like portfolio of having 20-50% money in bonds as long as this is not a market call, not a macro call, but forever philosophy independent of the market/macro etc. Just don't expect the 100% equity returns.

 

In all fairness - Dalio was up 14% in 2008 relative to the massive drop most indices, assets, and funds experienced...the man knows what he's doing.

[Jurgis]

In all fairness - Dalio was up 14% in 2008 relative to the massive drop most indices, assets, and funds experienced...the man knows what he's doing.

 

It is possible that Dalio will be successful. But then you have to invest with him. :) Since I doubt that people on this board can successfully replicate Dalio in toto. They might hang onto one of his ideas, but that's not necessarily what makes his results good.

 

Compare this to someone who listens to Buffett talk about inflation all the time and then invests as if inflation will happen. They would likely underperform both market and Buffett.

[theasiareport]

I thought it was a great discussion but how far are we going to take the "Great Depression Thesis". We had two major incidents including the GFC. Why not extrapolate the Great Depression further into a a meteorite storm that wipes out half the world. Than just about no one will do well. 

 

I've always found the doom-day scenarios to be fascinating, but it just seems that you can create any kind of factual situation (that sounds plausible too) to justify whatever you want to prove.

 

Secondly, I just like to note that the principles which underlie our craft were borne out of a man who survived the great depression. Admittedly Ackman has a much more optimistic view of the world, but so did Buffett when he started out in the 1970s. I think Walter Schloss did an interview where he remarked that Graham's failing was that he was always looking at the rear-view mirror.

 

Arguably, in the great lens of history, the problems we face now don't seem to more serve that the problems that humanity has overcame. Call me an optimist, but we are living in an era that has never had it this good... especially if you take into account that we were worried that we were going to nuke each other out of existence only 30 years ago.

[Jurgis]

Good post theasiareport  8)

[ni-co]

I know that this sounds tin-foil-hatty. But there are quite a few great macro managers out there who expect exactly what I'm referring to, including Ray Dalio, Stanley Druckenmiller, Paul Singer, Kyle Bass and Crispin Odey or straight value guys like Seth Klarman. If you're willing to listen they all tell you different aspects of the same story.

 

It's difficult to replicate Bridgewater but that doesn't mean the best thing might to be to ignore it.

 

Another piece of the puzzle is China. Read Michael Pettis' book on China and you're going to realize that what they did is simply postpone the impacts of the financial crisis with massive credit expansion. Since 2008 they've intentionally produced a huge investment boom to counterbalance the foreign lack of demand, thereby crating huge imbalances in their economy. Now, guess what, they have their own real estate bubble and credit crisis and their domestic demand is vanishing rapidly. That's why the prices of most commodity of which China has consumed close to 50% have been falling like rocks. There is no "other China" to rescue them this time. Nearly the whole world is on zero interest rates. How on earth do you want to stimulate the world economy in this kind of environment?

[Guest JoelS]

I think there are good valid points here as to the "big picture" - high global debt, extended bull market in stocks, beggar thy neighbor currency policies etc but Peter Lynch's "bigger picture" is more important. The "bigger picture" is that stocks are the place to be for the long term, if bought at the right price.

 

Take the great depression as your worst case example. It took four and a half years to return to the 1929 peak after the low in 1932, in real terms. Sooner if you had reinvested dividends.

 

http://www.nytimes.com/2009/04/26/your-money/stocks-and-bonds/26stra.html?_r=1&

http://www.joshuakennon.com/it-did-not-take-25-years-for-the-stock-market-to-recover-from-the-peak-of-the-1929-crash/

 

Is positioning yourself as if the next great depression is around the corner the appropriate response? I don't think so. Not after a huge financial crisis that has led to very well capitalized banks, and risk aversion.

 

Of course, none of this means that you can't take your foot off the accelerator and put yourself in a defensive position to take advantage of the next market panic, as Howard Marks advises. But you must have the stomach to reinvest into despair and outlast the panic.

[yadayada]

I dont think China is going to be bad. First of all they have huge savings, and their debt to gdp is still much smaller then the US, and they are still growing more then 7%.

 

And the Chinese work like horses. They seem to have good work ethic and a lot of motivation, they will be fine. Im much more worried about southern Europe to be honest. People protesting for 35 hour work weeks and pension ages of 60 years. They obviously don't like to work, and their debt levels are more troubling.

 

I really like Macau currently, some companies there are so cheap right now, and demand is likely to be incredible for the next decade or so. Values have collapsed there after a bad 2014. If I can buy a growth company with high return on capital for 10x earnings or less, with a bunch of assets on the balance sheet to protect me, I will do fine whatever happens.

 

I think it is best to focus on cheapness first, and demand second. If you can buy a cheap company in industry that is likely to do well regardless of what happens, then you can't really go wrong. But if you buy something in a industry that will have a lot of headwinds, you won't do as well, and they probably turn out to not be that cheap after all.

 

 

@joel, to be fair if you started out in 1929, and cashed out in 49, you would have done terrible. You would have lost money the first 10 years.

http://dqydj.net/sp-500-return-calculator/

 

And a 0.5% return in 15 years, and 1.3% over 20 years. But if you would have waited it out untill 1932 or 1933 your return would have been much better.