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Horizon Kinetics - Q1 2015 Commentary


Pretium
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So, we’ll talk about the portfolios. And we might talk about performance, but it won’t be about short-term perfor-mance, because—forgive a perhaps incendiary statement—it’s meaningless.

 

As soon as I read that I lost a lot of confidence in these guys.  I get how you will underperform but it seems like there are more excuses with each commentary and then suddenly short-term performance doesn't matter.  I'm sure if they outperformed by a wide margin in the short term they would also say it is meaningless?

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So, we’ll talk about the portfolios. And we might talk about performance, but it won’t be about short-term perfor-mance, because—forgive a perhaps incendiary statement—it’s meaningless.

 

As soon as I read that I lost a lot of confidence in these guys.  I get how you will underperform but it seems like there are more excuses with each commentary and then suddenly short-term performance doesn't matter.  I'm sure if they outperformed by a wide margin in the short term they would also say it is meaningless?

 

Isn't that basically the same thing that a number of people have been saying forever, including Buffett?

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They raise a valid question: when do you fire a portfolio manager, when do you sell the company?

It's easy to say with 20/20 Monday-morning-quarterbacking vision that we would not have fired Munger or Buffett (yeah, when BRK shares fell over 50%, when it was investigated by SEC with potential of Buffett being barred from investing business, when WPO almost went BK, when GEICO almost went BK, etc.). But with all honesty how many people would not have fired Munger and Buffett?

 

Even on this forum, I doubt that many people have held a position in BRK/FFH/MKL for 10 years plus. And even the ones who held them for 10 years plus, how many had much larger positions in stocks that they sold/bought/etc. in effect maybe not "firing" Buffett/Watsa/etc, but at least not hiring them either. ;)

 

So it is a very valid and very hard question: when do you hire and when do you fire your investment? How long underperformance would you suffer?

 

On the other hand, I agree with Picasso. They are whining a bit too much for my taste. And page 4 is IMHO worthless. Should an investor care that they zig on the days when SP500 zags? It seems that they are marketing themselves to investors who care - and that's not really my crowd.  ;) If I could pick them outperforming SP500 or zigging-while-zagging or active share, I'd pick outperformance. Especially since zigging is such a short term measure...

 

I could raise some issues with their kudos for Texas Pacific and Royal Gold, but I believe these have been discussed on this forum in the past, so I won't repeat. :) Also, they might be right and these might be great investments. I think their presentation of them is questionable though. Why would they show tables that have irrelevant info pretty much in all lines? Who cares how many ETFs hold the stock or past appreciation or sales / employee? Do any of these really affect your investment in a company? (I guess past appreciation does affect investments into "investment" companies such as BRK or FFH in some sense... but in general past appreciation is rather worthless number).

 

I guess they are trying to do something different. And I still kind of like it. But I wonder if "different" at some point is also not an irrelevant measure.

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Unless I'm missing something, this is a market commentary, not a shareholder letter, so of course they're going to talk about all kinds of stuff that is not always directly related to the performance of their funds, such as market structure and such.  I think they talk a lot about ETFs because they are trying to build their own kind of ETFs with owner managers  and other unusual selection criteria.

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it's funny about the Munger partnership returns. I knew almost on reading the numbers that it probably was Munger.

 

If I had just invested with him without knowing Munger well, I probably definitely would have withdrawn my money.  4 years of under-performance, starting the year I invested? No I would not have had the fortitude to continue, in all probability.  The only way to last through that is to believe in Munger and his process.  Had I been a new investor, that would have been tough.

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The whole investment business is a point in time issue. Studies show that when funds have bad quarters roll of their 3 and 5 year returns that their marketing efforts increase dramatically. I've seen hundreds of funds oscillate from top decile to bottom decile for 5 year return numbers. Today's top performing funds (based on 5year numbers) were mostly in the gutter in 2009. No investment consultants even considered choosing these funds. Instead, they were recommending funds that had low downside capture during 2008. The exact opposite is happening today. Recommended funds all have stellar 3, 5 year track records. Why? Well it's an easier sell to clients. It's much safer to be with the crowd if your goal is retaining clients.

 

Bill Miller's Legg Mason fund beat the market every year from 1991 to 2005. In 2005 people thought of him as a legend. 15 years of beating the S&P 500 seemed like a good enough sample size. By 2009 the fund had completely lost its outperformance against the S&P. After all the hoopla around Miller, a grandma buying the Vanguard 500 Index would have done just as well after almost 20 years. And guess what, grandma probably spent 5 minutes on investing while Miller likely worked 45,000 hours (300 working days per year * 10hr/day * 15 years).

 

Who really knows what is luck and what is skill? I think we can all agree that Warren Buffett has skill. The level of returns over 40+ years is enough evidence for sure. We can all agree that Elon Musk is brilliant. Nobody builds companies, rocket ships, or cars with pure luck. Investing is at its core a marketing business. I've sat through hundreds of product pitches. And everyone always talks about these "Geniuses" from Harvard, Wharton, etc. that have 20 analysts working for them all with their CFA. They talk about sophisticated software with advanced risk controls and proprietary quantitative screens. They hand you 5 white papers on rising rates and how they are uniquely positioned to handle it. At the last second they show you the performance. If they underperformed, there is always an excuse. My favorite is “the market acted unusually during xyz period”. Oh really? I thought the only reason why active management exists is to take advantage of inefficient (unusual) markets?

 

I logged into Yahoo Finance a while ago and noticed a virtual portfolio I made back in 2006. I was in high school then and made a portfolio of 10 or so stocks. It included some well-known names like AMZN, AAPL, UA, HD, IBM etc. I absolutely crushed the S&P 500. I knew nothing about financial ratios or balance sheets. I just liked the products these companies had. I can almost guarantee you that if I had logged in with any frequency and managed that portfolio, I would of done significantly worse.

 

I kind of went on a rant here and maybe drifted away from the Horizon commentary a bit. But I guess the bottom line is, it typically takes decades for any track record to hold statistical significance.

 

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Pretium----I don't actually know that Bill Miller would classify as a value investor.  He seems to look for growth first and not invest with the same margin of safety some others such as Meacham---Arlington or Greenberg---Brave Warrior would. 

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Pretium----I don't actually know that Bill Miller would classify as a value investor.  He seems to look for growth first and not invest with the same margin of safety some others such as Meacham---Arlington or Greenberg---Brave Warrior would.

 

I guess Bill Miller was the most famous example I could think of with respect to the "Point in time" concept of performance evaluation. Besides, isn't growth part of value?

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I would agree with you that he is probably the most famous example.  While I would say that growth is part of value and vice versa---he seemed primarily focused on the growth component and (in my judgment ) did not give enough credence to the value component.  Just my two cents.

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  • 4 weeks later...

They raise a valid question: when do you fire a portfolio manager, when do you sell the company?

It's easy to say with 20/20 Monday-morning-quarterbacking vision that we would not have fired Munger or Buffett (yeah, when BRK shares fell over 50%, when it was investigated by SEC with potential of Buffett being barred from investing business, when WPO almost went BK, when GEICO almost went BK, etc.). But with all honesty how many people would not have fired Munger and Buffett?

 

Even on this forum, I doubt that many people have held a position in BRK/FFH/MKL for 10 years plus. And even the ones who held them for 10 years plus, how many had much larger positions in stocks that they sold/bought/etc. in effect maybe not "firing" Buffett/Watsa/etc, but at least not hiring them either. ;)

 

So it is a very valid and very hard question: when do you hire and when do you fire your investment? How long underperformance would you suffer?

 

On the other hand, I agree with Picasso. They are whining a bit too much for my taste. And page 4 is IMHO worthless. Should an investor care that they zig on the days when SP500 zags? It seems that they are marketing themselves to investors who care - and that's not really my crowd.  ;) If I could pick them outperforming SP500 or zigging-while-zagging or active share, I'd pick outperformance. Especially since zigging is such a short term measure...

 

I could raise some issues with their kudos for Texas Pacific and Royal Gold, but I believe these have been discussed on this forum in the past, so I won't repeat. :) Also, they might be right and these might be great investments. I think their presentation of them is questionable though. Why would they show tables that have irrelevant info pretty much in all lines? Who cares how many ETFs hold the stock or past appreciation or sales / employee? Do any of these really affect your investment in a company? (I guess past appreciation does affect investments into "investment" companies such as BRK or FFH in some sense... but in general past appreciation is rather worthless number).

 

I guess they are trying to do something different. And I still kind of like it. But I wonder if "different" at some point is also not an irrelevant measure.

 

"Even on this forum, I doubt that many people have held a position in BRK/FFH/MKL for 10 years plus. And even the ones who held them for 10 years plus, how many had much larger positions in stocks that they sold/bought/etc. in effect maybe not "firing" Buffett/Watsa/etc, but at least not hiring them either. ;) "

 

A couple points.  I'm not exactly sure I understand what your full point is above but I can say I have held BRK for well over 2 decades.  Added to it several times.  Sold a bit on a couple occasions.  It has been my largest position in any single stock.  I thought I would personally outperform it but generally I haven't, except for being mostly cash in 2008/09 and then buying back in in early 2009 - in fact adding BRK a day or so from its Mar 2009 bottom - when everyone was firing, or at least not hiring, the Buffett-Munger team.  However when I first bought into Berkshire Hathaway I viewed it as more likely to generate a interest deposit like return because Buffett has already long been saying that his outperforming days we're numbered. 

 

 

Why would they show tables that have irrelevant info pretty much in all lines? Who cares how many ETFs hold the stock or past appreciation or sales / employee? Do any of these really affect your investment in a company? (I guess past appreciation does affect investments into "investment" companies such as BRK or FFH in some sense... but in general past appreciation is rather worthless number).

 

I'd say the passive investment in a company via ETFs etc.) is important to be aware of because it indicates that it's pricing may be very susceptible to market greed and fear.  The gold market drops and the big index components go with it as people sell out of their gold ETFs flooding the market with shares.  ...and past performance is a bit of an indicator of the future in that it might reflect the durability the company and its franchise or resource base.  Sales per employee is just another metric but employees come with costs like 'benefits' and pension liabilities.  The nice company has high sales (and margins) per employee, per dollar of capital employed, etc. 

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